Why a “Netflix Tax”, in the form of GST, might be coming no matter who becomes Prime Minister

A Conservative Party video suggests Liberal leader Justin Trudeau (left) and NDP leader Thomas Mulcair (right) are eager to impose a "Netflix Tax". But does the application of GST, which the incumbent government expressed interest in, count?

A Conservative Party video suggests Liberal leader Justin Trudeau (left) and NDP leader Thomas Mulcair (right) are eager to impose a “Netflix Tax”. But does the application of GST, which the incumbent government expressed interest in, count?

During an election campaign, one gets used to hearing all kinds of absurd, over-the-top rhetoric from the professional manipulators otherwise known as party leaders and their campaign staffs.  So, when Conservative prime minister Stephen Harper vowed on the campaign trail this past week to block Liberal leader Justin Trudeau and NDP leader Thomas Mulcair from imposing a “Netflix tax”, it was fairly easy to brush it off initially as yet another bit of daft nonsense one can expect from a mid-summer election campaign.

Out of curiosity, though, I decided to look up “Netflix Tax” on Google to see if any other jurisdiction had ever imposed one. Sure enough, just last month, the City of Chicago announced a nine-percent tax on “electronically delivered amusements” that many are referring to as a “Netflix Tax”. It comes into effect Sept. 1, and is intended to improve the dreadful state of the city’s finances.

Then another case caught my eye, this one from Australia, whose conservative Liberal-National governments under prime ministers John Howard (1996-2007) and Tony Abbott (2013-present) have long been a source of ideas and advice for the Conservative Party here in Canada.

This past May, the Australian federal treasurer, Joe Hockey — a man whose name alone would make him a star here in hockey-mad Canada — announced that Australians will need to begin paying 10-percent GST on international digital purchases beginning in 2017. As the Australian media company News Limited reported:

The move, dubbed the “Netflix tax,” would see the GST expanded to cover digital purchases from overseas companies, potentially raising the price of Amazon e-books, Steam online games, Tidal music subscriptions, and apps from Microsoft and BlackBerry by 10 per cent.

The scheme would not begin until July 2017, however, and would not affect international companies already collecting the GST from Australian consumers, including Apple and Spotify.

Federal Treasurer Joe Hockey said the move would “level the playing field” for Australia-based businesses delivering digital content.

“It is unfair that overseas-based business selling services into Australia may not charge GST when local businesses have to charge GST,” Mr Hockey said.

“A local business that employs Australians, pays rent in Australia, pays tax in Australia, and helps build our economy is disadvantaged by the current system.”

Similar issues have been raised here in Canada in the recent past. The Canadian government’s own 2014 Budget pledged to look into “cross-border tax integrity issues, such as ensuring the effective collection of sales tax on e-commerce sales to Canadians by foreign-based vendors.”

As the Globe and Mail reported in January 2015, one of the vendors that could be among the targets of this 2014 budgetary vow could be Netflix, which officially is not “carrying on business” in Canada and is therefore not compelled to collect GST.

But there is a difference between not being required to collect GST and being GST-free. As the Globe and Mail report went on to note:

In theory, when foreign companies don’t charge sales tax, it is up to each consumer to self-report digital purchases from abroad and pay HST or GST, though virtually no one does.

“These digital supplies are already taxable,” Rogers writes in a submission to government, decrying “the competitive disadvantage in the digital economy for Canadian domestic suppliers which must charge GST/HST to Canadian consumers.” Rogers, for example, recently launched a streaming service called Shomi, which costs $8.99 a month, plus tax.

And it is an idea that has had its fans within the incumbent government:

The Organization for Economic Co-operation and Development agrees the best solution is to compel companies to register and collect sales taxes in the countries where they make sales. Such measures are part of a larger OECD tax plan presented to G20 finance ministers in the summer of 2013, aimed at combatting tax-base erosion and profit-shifting.

In Canada, the notion of taxing digital sales from abroad gained traction with the government in the fall of 2013, under then-finance minister Jim Flaherty. But it burst onto the European Union’s agenda more than a decade earlier over fears that companies might move offshore to stay competitive.

The notion of expanding GST to include digital services such as Netflix is not necessarily a bad one. Like many affluent nations, Canada has a growing population of pensioners, in absolute numbers and as a percentage of the population, who will become more reliant on costly government services at the same time as their income tax and sales tax payments drop significantly.

For instance, Statistics Canada data shows that in households where the key financial decision-maker was between the ages of 55 and 64, the average household income taxes paid were $16,189 in 2013. In households where the key financial decision-maker was aged 65 or older: just $8,097.

Other wholly or partially taxable household expenditures that were, on average, more than $1,000 lower in 2013 among the 65-plus group than they were among the 55-to-64 group: total food expenditures (-$1,668), shelter (-$3,838), household operations (-$1,028), clothing and accessories (-$1,286), transportation (-$4,624), recreation (-$1,483) and education (-$1,088). Overall, total household consumption was on average $16,810 lower among the households where the key financial decision maker was aged 65-plus than it was when that decision-maker was aged 55 to 64.

If Canada is going to have a prosperous economy in the future, it also needs a healthy and well-educated workforce; it needs transportation systems that gets goods to market and both imports and exports to where they need to go promptly; it needs a border that is secure against various threats, but at the same time not delaying harmless people or goods needlessly; it needs local roads and public transit systems that get employees to and from work and customers to and from businesses; and it needs places where people can leave their children while they work, even if this is evening or weekend work. All of that is going to require government spending to at least some degree.

At the same time, as the fierce response to even a modest one-point rise in the Manitoba provincial sales tax in 2013 showed, there are high political costs to be paid for raising the rates that show up on the sales receipt.

Therefore, much like the airlines, governments have high fixed costs and yet struggle to exert pricing power. Thus the path of least resistance to raising the revenue that is needed to pay the bills for the services that people won’t tolerate being deprived of is to move sideways instead of tackling the issue head-on: by eliminating exemptions and giveaways, charging more fines, unbundling the core product, packing people more tightly into existing space, and replacing less complicated forms of human labour with technology wherever possible.

As the population ages, making the revenues add up to what is needed to pay for the bills that Canadian governments cannot easily get out of paying will only get more difficult. Whether this October’s election produces a Prime Minister Harper, a Prime Minister Mulcair or a Prime Minister Trudeau — or, though the odds are extremely long, a Prime Minister May —  the urge to apply GST to Netflix and other foreign-based digital services might be virtually impossible to resist.

Travel the world and avoid the GST! (Sorry, domestic travelers, you’re S.O.L.)

This was supposed to be a quick lunchtime comment on the absurdities of airline promotional pricing. It’s a controversy you’ve probably already heard about: airlines advertising bargain fares that sound too good to be true, until you add on all the fees, taxes and surcharges. Then you find out that the bargains really are too good to be true.

I was going to take a shot at the airlines for cynically not rolling up fuel surcharges (which they have control over) into their advertised prices, while conceding that the airlines were justified in not wanting to do the same with regard to money that they’re merely expected to collect and then hand over to others, such as taxes, airport improvement fees, Nav Canada surcharges and the like.

However, something else caught my eye.

To try to demonstrate the absurdity of not including fuel surcharges in the advertised price, I went to Air Canada’s web site and looked up the price for flights from Winnipeg to London Heathrow, departing Oct. 7 and returning Oct. 14. As expected, Air Canada’s advertised bargain price of $264 each way turned into a total price of $1,026.96 once you added on:

  • The base fare for the return trip (another $264)
  • The Canada Airport Improvement Fee ($36)
  • The Air Travelers’ Security Charge ($17)
  • The U.K. Passenger Service Charge ($40.24)
  • The U.K. Air Passenger Duty ($75.92)
  • Air Canada’s own Fuel Surcharge ($328 — boo!)
  • Canada Goods and Services Tax ($1.80)

“Wait a minute!”, I thought. “The GST on a trans-Atlantic flight is just a buck-eighty — the cost of a small Second Cup coffee, give or take a few cents?!”

Winnipeg to London Heathrow, total GST: $1.80, leaving Oct. 7 and returning Oct. 14 (Source: aircanada.com)

Winnipeg to London Heathrow, total GST: $1.80, leaving Oct. 7 and returning Oct. 14 (Source: aircanada.com)

Indeed it was. It appears that the GST on a Winnipeg-London Heathrow flight only applies to the Airport Improvement Fee! ($1.80 divided by 0.05 = $36)

Well, how about that! Either Air Canada is holding a “We Pay the GST” sale, some poor soul at head office in Montreal (who will forevermore hate my guts if CEO Calin Rovinescu ever reads this post) made a boo-boo, or the GST doesn’t apply to overseas flights.

Curious, I decided to check out whether or not GST applied to a domestic flight to Vancouver and back on those same dates. Sure enough, the GST on those domestic flights came to $23.42, which meant that it applied to everything: the fare (2 flights @ $189 ea.), surcharges ($46), airport improvement fees ($35) and the Air Travelers’ Security Charge ($9.33)

Winnipeg to Vancouver, leaving Oct. 7 and returning Oct. 14 (Source: aircanada.com)

Winnipeg to Vancouver, leaving Oct. 7 and returning Oct. 14 (Source: aircanada.com)

Why the difference between domestic and international? If it’s due to government policy, is it really such a good idea to penalize people for travelling domestically by taxing domestic flights more heavily than international flights, especially when the total price for a short-haul trip to the West Coast is already nearly half the price of a long-haul trip to the U.K.?

The Canadian tourism industry probably wouldn’t think so. Hopefully for them it’s just a glitch in Air Canada’s reservation system.

(Update, July 9, 7:40 a.m.: Apparently this difference between domestic and international trips is due to Canadian tax law. International air travel, except to the U.S., is GST-exempt, even when purchased within Canada by Canadian residents.  Travel within Canada and to/from the U.S. is not exempt.)