Recent years have been very hard for Canadian retailers, with closures including not just high street stores, boutiques, and small businesses but even major retail chains like Target Canada (and Zellers, who sold their stores to Target first), Sony, Jacob, Laura, Smart Set, Danier Leather, and Mexx. A major reason for their distress is fierce online competition, especially from giant U.S. online retailers.
This has been happening since the dot-com boom, when entrepreneurs discovered that online-only retail outlets could offer lower prices and larger profits when freed from the overhead of retail staff wages, the logistics chain between warehouses and storefronts, and the high cost of prime retail real estate. Traditional bricks-and-mortar stores have been struggling ever since. The problem has been worsened by globalization and the availability of cheap, worldwide shipping that has facilitated the entrance of low-priced Asian competition through marketplaces such as Alibaba, which recently surpassed Walmart to become the world’s largest retailer.
Goods purchased overseas and imported into Canada are subject to import duty and taxes. The import duty valuation is a Free on Board (FOB) system, which means that import duty is calculated exclusively on the value of imported goods. Rates vary between 0% and 35%, with an average duty of 8.56%. If the goods originate in a country with whom Canada has a free trade agreement, and can produce a certificate of origin if valued over $1,600, then preferential duty rates can apply.
Imports are also subject to taxes, including 5% Goods and Services Tax (GST), provincial sales taxes (PST) that vary by province, or a combination of both, as in Ontario, levied as a Harmonized Sales Tax (HST). Commercial importers are only subject to GST, but private importers pay all applicable levies. Taxes are paid based on the residence of the importer, not the entry point into Canada. Alcohol and tobacco products are also subject to an excise fee, based on FOB but also on quantity measurements and, in the case of alcoholic beverages, the alcohol content.
Levying duties, taxes and excise on every single item that enters Canada would be very expensive in terms of the bureaucracy and infrastructure required, so a floor is set for the value of imported goods below which no duties or taxes are collected. This is the De Minimis rate. Currently, it is set at $20 in Canada; goods valued at less than $20 do not provide a substantial incentive to shop online or a substantial threat to Canadian jobs and businesses, so this level makes sense from the perspectives of optimizing government expenditures and in terms of safeguarding the Canadian economy.
Large U.S. retailers are lobbying the Government of Canada to raise the De Minimis threshold to $200. They claim this would only be fair, as the United States recently increased their threshold to $800, but the playing field for U.S. and Canadian retailers is not level. U.S. retailers are in a much stronger position in their online retail space. Only 22 per cent of U.S. customers purchase from non-U.S. retailers online, while 67 per cent of Canadian consumers purchase goods online from non-Canadian retailers.
U.S. online sales are also not subject to state and federal sales taxes. The U.S. Supreme Court has ruled on multiple occasions that a state may only force a retailer to collect sales tax if the retailer has a physical presence in that state. Some state governments have contested this, with Arkansas, California, Connecticut, Georgia, Illinois, Maine, Minnesota, New York, North Carolina, Rhode Island and Vermont having passed so-called “Amazon tax” legislation which requires online retailers to collect sales tax even if the retailer has no physical presence in the state.
Amazon and other online retailers have sued to have them overturned with varying success – the Illinois law was struck down, so Illinois residents pay no state sales tax on online purchases, while the New York Court of Appeals – the highest court in the State of New York – upheld them, and the Supreme Court of the United States declined to hear the case. Shoppers are supposed to declare the purchases and pay taxes anyway, but many don’t. The Marketplace Fairness Act of 2015, which would allow states to levy taxes on retailers with no physical presence, has been introduced but has made no further progress yet; previous versions of the bill died in Congress.
In Canada, of course, sales taxes are levied on all online purchases no matter where they came from, based on the province that the goods are going to. The tax levy on Canadian retailers which Americans are not subject to makes Canadian retail less competitive, so a lower De Minimis in Canada makes sense as a compensatory measure.
At a $200 De Minimis, there would be an enormous increase in cross-border purchases for items such as apparel, footwear, books, toys, consumer electronics and housewares, most of which would be priced below $200 and are easy to ship. This would be very hard on Canadian retailers offering these products, already facing difficulties against online retailers and cheap imports.
The Niagara Workforce Planning Board reports that wholesale and retail trade is the single largest source of jobs in Niagara by far, employing almost 35,000 people in 2015. Raising the De Minimis would cause closed businesses and lost jobs in this hugely important industry.
The GNCC is working with our partners in the Windsor-Essex and Sarnia Lambton Chambers of Commerce to try and head off this potentially destructive change in Canadian tax and duty law. We are bringing this issue to the Ontario and Canadian Chambers of Commerce to recruit their lobbying power, and engaging our federal representatives to oppose the change. We will continue to advocate for a level playing field and a fair, competitive business environment for Niagara’s retailers.