Liam Dann: Taxing of online purchases may be unpopular but it's a fair call

As the internet embeds itself in more retail sectors this scenario will only worsen. Photo / Thinkstock

John Key's decision to weigh in on the debate about taxing of foreign online purchases seemed to come out of left field last week.

But it was timely as a number of local retailers are struggling to make decent profits and competition is heating up in the online entertainment sector.

It seems reasonable to assume the Prime Minister has been lobbied by some major corporate players. If he hasn't he probably should have been.

Certainly it seemed quite a coincidence that his comments came just as Spark and its streaming TV service Lightbox kicked off a scrap with Netflix about the US player's lack of plans to charge GST for its service.

Spark has good grounds for complaint, the idea that a New Zealand listed and domiciled company should have to compete directly with a big US player that doesn't have to charge GST is ridiculous. It highlights just how wrong the set-up has become.

Rules around GST on foreign purchases are complex and formed largely by pragmatic estimates about the cost of enforcement.

It is often said that GST is not payable on goods valued under $400. But this is extrapolated from rules which don't require payment of GST or duties of less than $60. If only GST applies then the $400 figure is correct, if as is the case with clothes and shoes, duties must be factored in then the figure can be much lower than $400.

Regardless, it seems few shoppers are paying much attention. Local retailers and the government coffers are missing out.

As the internet embeds itself in more retail sectors this scenario will only worsen. Without law reform the logical solution for Spark is to register Lightbox offshore and try to establish the same tax-free status as Netflix.

Australian retail chiefs have threatened to do just that .

Clearly from any government's perspective this is an untenable solution for levelling the playing field.

To that end the OECD is working on a plan to deal with what is technically Base Erosion and Profit Shifting. But like all multi-lateral negotiations it is a slow process.

The tax experts are quick to point out it would be extremely difficult for the New Zealand Government to enforce any kind of unilateral tax rules without an OECD agreement in place.

But South Africa hasn't waited. It has introduced a sales tax which applies to all digital purchases. John Key has now hinted he is impatient, too.

Laws serve a purpose beyond their enforceability. They send a signal about what is acceptable and moral for citizens. A tightening of local rules wouldn't be popular with consumers and probably wouldn't stop those who want to avoid the tax from doing so. But, while we wait for the OECD's machinations, it would be a step towards creating a culture which respects the need for fairness and the importance of paying tax.

Liam Dann is the Herald's business editor.

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