Blogs & Comment

Flaherty leaves us more puzzled on the iPod tax: Mike Moffatt

End use certificates still unseen.

Last week Finance Minister Jim Flaherty made a well-publicized appearance at the Standing Committee on Finance (FINA) where he discussed a number of issues, including the possibility of having a national securities regulator. Given the great deal of attention the so-called iPod tax has received, it is not surprising that Liberal MP Scott Brison made it the focus of a question. Unfortunately, the Minister’s response has left us with more questions than answers.

This exchange takes place at the 22 minute mark of the webcast of the FINA meeting:

Scott Brison: You’ve said that iPods will remain exempt from tariffs under tariff item 9948 but CBSA [Canadian Border Services Agency] is now telling importers that products under item 9948 require end user certificates to be eligible for the tariff exemption. Importers are telling us that collecting these end user certificates is not practical. Can you confirm if the tariff exemption for iPods under 9948 will depend on a requirement to collect end user certificates? Yes or no?

Jim Flaherty: You’re talking about a process problem. Substantively there is no tax on iPods and end user certificates have been required for a long, long time on a long range of projects. Some vendors have obeyed the law and some haven’t. And some who haven’t obeyed the law have found themselves in some difficulty. That’s what happens.

(No official transcript yet exists, so I have transcribed it as best I can)

Minister Flaherty’s response, on the surface, makes a great deal of sense. There are, however, at least three issues to be reconciled with this answer:

  1. The ongoing dispute between the 9948 Fair Treatment coalition and the CBSA, where the coalition accuses the CBSA of informing importers that end use certificates were not necessary.
  2. I have yet to find a single retailer who has asked for or collected end use certificates from consumers. I have called at least a dozen retailers, all of which have no idea what I am talking about. Are any of these vendors that the Minister mentions retailers?
  3. The collection of end use certificates by retailers serves no obvious purpose.

Some history of the 9948 tariff exemption is helpful. Back in the 1980s computers entered the country tariff free, but computer parts did not. This put Canadian assemblers of computers at a disadvantage, because they had to pay tariffs on the parts they used, whereas companies importing whole machines did not. The 9948 tariff exemption allowed Canadian assemblers to compete on a level playing field with their overseas counterparts.

Having end use certificates makes sense for computer assembly. An importer brings over a few thousand speaker systems on behalf of an assembler. These speaker systems could be used either for the assembly of computers or for individual sale as stereo equipment. The assembler signs a single end use certificate for the entire shipment of speakers, stating the company will use them as computer equipment. The assembler then passes that certificate along to the importer. The CBSA can easily audit the importer to ensure they have the certificates and audit the assembler to see that they are using them as computer equipment and not selling them for other purposes.

This is a far different scenario than MP3 players and televisions sold to retail consumers. When an importer brings over MP3 players, they either sell the shipment to the retailer directly, or to a wholesaler who then sells them to a retailer. Retailers sell the MP3 players to a consumer, each of which signs an end use certificate attesting how they will and will not use that MP3 player. All of these certificates are then somehow passed along from consumer to retailer to wholesaler to importer. The importer then collects these thousands of certificates and creates an iPod registry that the CBSA can then audit, if it so chooses. In order to ensure compliance, the CBSA would also have to audit the individual consumers to ensure these MP3 players are being used in a manner that does not violate the end use certificate. I cannot imagine the CBSA ever auditing consumers. In that case, what possible purpose is served by this end use certificate requirement?

Given all of this, Minister Flaherty’s response has left me with more questions than answers. My questions to the Minister are as follows:

  1. Have any Canadian retailers collected end use certificates on sales to Canadian consumers?
  1. Is it true that the CBSA informed importers that end use certificates were not required for televisions and other consumer electronics? If so, why?
  1. What is the purpose of end use certificates for consumer electronics sold at retail?
  1. How will the CBSA audit end use certificates for consumer electronics sold at retail? Will those audits involve the CBSA contacting individual consumers?

Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business, University of Western Ontario.