CBSA lawyer: Government was “perpetuating a fraud” on iPod tax: Mike Moffatt

How are importers supposed to comply with tax regulations when the government sends mixed signals?

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Sad-ipod by Pedro Vera, creative commons attribution license

(Pedro Vera)

On the afternoon of April 4th, 2013 I published an article (no longer available online) at the Globe and Mail detailing how changes to the 2013 Budget created an iPod tax, placing a tariff on MP3 players manufactured in China where one did not exist before. Minister Flaherty’s office, the Finance Department and the Conservative Party would all claim that these items could come in tariff free using a provision in the tariff code, 9948.00.00 (9948), which allows for the duty-free importation of computer equipment through the use of end-use certificates, where the “end user” of the item could attest that they would use the item as a computer part. Documents obtained this weekend through the access to information reveal that these arguments were being made despite the vehement objections of the Canada Border Services Agency (CBSA), the agency that enforces tariff regulations. One CBSA official went as far as describing the government’s 9948 argument as “perpetuating a fraud”.

At 5:19 PM, a few hours after my original piece was published, Andrew MacDougall, the then Prime Minister’s Director of Communications was kind enough to send me an e-mail detailing Finance’s position:

As an FYI, Finance officials say that iPods are exempt under this tariff classification:

http://www.cbsa-asfc.gc.ca/publications/dm-md/d10/d10-14-51-eng.pdf

Since the iPod plugs into a computer, Finance says, it falls under the following exemption:

“Only goods that were committed by design to enhance the functioning of computers and other high-tech products cited in tariff item 9948.00.00 were afforded customs duty-free importation under this tariff item.”

A few minutes later Conservative MP Michelle Rempel made a similar argument on CBC’s Power and Politics. Later that evening, Kathleen Perchaluk, Press Secretary to the Minister of the Office of the Minister of Finance issued the following press release:

Subject: NO IPOD TAX

Hi,

I am sure you have heard some rumblings today about a potential Ipod tax. I want to clarify that there is no ipod tax. Please feel free to pass this information along to your colleagues.

“The NDP are alleging that changes to the General Preferential Tariff – which removes preferential access to our marketplace to countries like China – is similar to the iPod tax proposed by the NDP. This is absolutely false.

Music devices like iPods are imported into Canada duty-free under a long-standing special tariff classification from 1987 (http://www.cbsa-asfc.gc.ca/publications/dm-md/d10/d10-14-51-eng.pdf). That special tariff classification was in no way altered by recent changes to the General Preferential Tariff foreign aid program.”

What was written in the below Globe and Mail article is incorrect and this has been confirmed by Department of Finance officials.

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/ipods-face-new-tax-under-budget-tariff-changes/article10772959/

The Globe and Mail responded to the press release by first pulling the iPod article, then replacing it with a statement that read:

An article published earlier at this URL incorrectly stated that the recent Canadian federal budget imposes a tax on iPods. That article was incorrect and has been withdrawn.

Documents obtained from the CBSA through Access to Information show that the CBSA, the agency responsible for enforcing the tariff code, strongly disagreed with Minister Flaherty’s office. The next day, Anne Kline, Director General of the Trade Programs Directorate would write:

As per the telephone conversation that I had with Ken and the PO nearly an hour ago, Mr. Moffat is actually quite bang-on in his interpretation of the tariff provisions.

Rod McKenzie, the Senior Program Advisor of the Tariff Policy Unit at the CBSA would later write:

I think Mr. Moffatt really hit the nail on the head. His analysis is practically flawless.

The documents contain an e-mail at 8:11PM on April 4th from Ms. Kline to Patrick Halley, the Senior Chief of Tariff and Trade at Finance Canada, the CBSA had issues with Finance’s statement that MP3 players were being brought into the country tariff free using the 9948 provision.

We know that SOME iPods (and other MP3 players) have been imported (albeit incorrectly) under the duty-free provisions TI 9948.00.00. It is also very likely that some iPods and other MP3 players have been imported duty free by virtue of having been manufactured in a GPT country. And others still may have been duty-paid at the applicable MFN rate…

That said, I already feel quite confident that it cannot be purported that ALL iPods are being imported duty-free under the provisions of TI 9948.00.00, as that is really unlikely.

If someone from your department is actually making that statement, you might want to correct that misinterpretation. [Emphasis added]

Byron Fitzgerald,  Manager of the Litigation Section of the CBSA would later characterize the argument made by Finance and the Conservative Party that iPods could come into the country tariff free under 9948 using end use certificates is “perpetuating a fraud”:

from my perspective the message should be that if the end user doesnt have it joined to a computer it dont qualify. Just like the tv issue. And suggesting end use certificates is perpetuating a fraud because the vast majority of folks don’t use them with computers.

Its up to finance to clarify 9948. This might be the catalyst forcing them to do so.

The next day, Doré Charbonneau, then Manager of the Beyond the Border Communications Team at the CBSA would e-mail her colleagues a draft version of a media response:

The CBSA would like to clarify the tariff classifications for iPods as well as other electronics:

It’s important to clarify that iPods do not qualify for the provisions of tariff item (TI) 9948.00.00. In order for goods to qualify for importation under TI 9948.00, they must be for use in computers and enhance the functions of the computer. Further, the actual user of the goods must certify that they are being used in a computer. [Emphasis in the original e-mail]

To my knowledge a final version of this media release was never issued to the public.

The Globe and Mail asked me to write a replacement article with my findings on the iPod tax issue, with the Globe‘s public editor weighing in the next week. Ms. Kline would express her displeasure at the replacement article:

It is really unfortunate that he [Moffatt] has been led to believe that the Agency is somehow interpreting things differently and is dismissing jurisprudence arising from a case that upheld the CBSA’s position!

An hour later, she would add:

I remain concerned that readers are being led to believe that TI 9948.00.00 applies and it really does not.

This episode should raise a number of red flags. Why was Minister Flaherty’s office, the Department of Finance and the Conservative Party claiming that the 9948 provision applied over the objections of the CBSA, the agency tasked with enforcing tariff regulations? Furthermore, how are businesses supposed to comply with tax and tariff regulations, when different arms of the government cannot agree on what the rules are?

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. Follow him @MikePMoffatt