Government officials and cultural groups in Quebec have been banging the drum for much of the past year for the imposition of digital sales taxes on services such as Netflix. The debate is often framed around the notion that Netflix and other Internet companies should be collecting sales tax like any other service provider. Supporters argue that other countries have begun to levy sales taxes on digital services and Canada should do the same.
My Globe and Mail op-ed notes the federal government has sent mixed signals to date, with Prime Minister Justin Trudeau rejecting new taxes on the grounds that Canadians “pay enough for the Internet”, Canadian Heritage Minister Mélanie Joly seemingly keeping the door open to new taxes, and Finance Minister Bill Morneau committing to studying the issue while international standards develop.
Without a firm federal commitment, last week the Quebec government decided to go it alone, unveiling plans to require out-of-province and foreign companies to collect and remit sales taxes on digital services starting in 2019. The province anticipates collecting approximately $30 million a year in revenues from out-of-country digital sales, a relatively small amount in a province that generates approximately $17 billion in sales tax revenues annually.
The Quebec government admits that the current situation already allows for collection of digital sales tax, albeit with poor results. Consumers can self-report the applicable, uncollected sales taxes for online goods and services with their annual tax filing but few bother to do so. Moreover, characterizing digital sales taxes as a “tax on Netflix” is misleading, since consumers – not companies – pay sales taxes. Companies such as Netflix merely act as intermediaries, collecting the tax and then remitting it to the government.
Yet despite assurances that digital sales taxes are relatively easy to implement, the Quebec plan demonstrates the complexity associated with requiring thousands of online companies around the world to implement dozens or even hundreds of new tax requirements.
The government plans to establish a lightweight registration system for foreign companies to ease the administrative burden associated with signing up for provincial sales tax collection. But while the basic framework is relatively straightforward, enforcement will present an enormous challenge as tax authorities try to persuade online businesses with no presence in the province to register, collect, and remit the applicable sales tax. The government says it will work with businesses to assist with compliance in the first year, but thereafter “the penalties provided for in the existing tax legislation will be imposed on non-resident suppliers that have not complied with the new obligations.”
For some businesses, the cost of compliance with the provincial requirements will far exceed the actual tax payments. Without a global standard, the Quebec government has arbitrarily set the threshold for sales tax registration and collection at C$30,000 in provincial revenues. That is low compared to many other countries that have adopted digital taxes: the Japanese threshold is over C$120,000, the Saudi Arabian threshold is over C$340,000, the Swiss threshold is over C$135,000, and the New Zealand threshold is over C$55,000.
Many businesses may also have to rework their customer relationships in order to collect increased personal information. For example, some digital services may not currently gather detailed geographic information on their subscribers, but the Quebec tax rules will effectively mandate the collection and use of location-based information.
With a 9.75 per cent tax rate, the low threshold sets the bar at less than $3,000 in annual sales taxes for some businesses, meaning compliance costs alone could easily exceed the tax revenues and cause some companies to rethink providing service in the province. That points to at least one tax trade-off: the benefits of increased tax revenues set off against decreased consumer choice as some businesses exit the Quebec market.
The enforcement challenges extend to consumers, some of whom may try to avoid paying provincial sales taxes by claiming residency elsewhere. The government has already identified measured to target sales tax evaders, with penalties of $100 or 50 per cent of the applicable sales tax. In order to identify instances of sales tax evasion, the government says it will collect customer information from out-of-country operators such as Netflix, though it is unclear how it plans to compel those companies to hand-over subscriber lists or other relevant data.
As governments race to catch up to the growth of e-commerce, there has long been a seeming inevitability to the imposition of digital sales tax. However, Quebec’s decision to move ahead without a clear international standard and federal government participation demonstrates that for the moment shifting sales tax to a global Internet environment remains easier said than done.