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The mystery of the Budget, the iPod and the tariff code (Paul Sakuma/AP)
The mystery of the Budget, the iPod and the tariff code (Paul Sakuma/AP)

The mystery of the budget, the iPod and the tariff code Add to ...

Editor’s note: This blog post replaces an earlier version by Mike Moffatt on the same subject.

 

In delving into the murky world of Canada’s tariff codes, it appears I have ruffled some feathers.

On Thursday, while exploring the implications of the federal government’s tariff changes that were announced in last month’s budget, I made what I believed to be a shocking discovery. It appeared to me that one of the most popular consumer products out there – the iPod – would be subject to tariffs of 5 per cent to 6 per cent, up from zero, effective Jan. 1, 2015.

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So I talked about my discovery on Twitter. Then, as interest among my followers surged, I blogged about it in my regular spot in globeandmail.com’s Economy Lab. Media across the country took an interest, and the federal NDP put out a news release scolding the government.

By the end of the day, though, the Department of Finance had issued an advisory to media saying that, in effect, I was wrong. After talking with Finance officials, I’m still not convinced. At the very least, I think I have exposed a grey area in the tariff codes that make it unclear whether iPods will face the tariffs.

So, allow me to lay out how my analysis was built, as well as address the officials’ position. When I first discovered that the tariff rates were changing on three models of the iPod, I was sure that I had been mistaken. I thought there was no way the government would allow this to happen. I called everyone I could think of to get their opinion on the tariff changes, including a former student of mine who worked at the Canada Border Services Agency, as well as contacts at Apple, Canada Post and UPS. No one could give me an official ruling that my classification was correct, but the responses I received suggested my conclusion was probably correct.

Later I discovered that Canada Post has a website where consumers who wish to ship goods to Canada can obtain Canada Post’s recommended tariff classifications. I asked it for the tariff classification for an iPod that was being shipped to Canada and was given 8519.81, the same code I had for the iPod Shuffle. An employee at Canada Post was then kind enough to verify this interpretation on Twitter. While this is not authoritative, it would be surprising if Canada Post, as a shipper of imported goods, is recommending incorrect tariff classifications.

I felt that was not enough to go on, so I then spent two hours digging through every source I could find, including CBSA Advance Rulings for Tariff Classifications and past Canadian International Trade Tribunal decisions. I found nothing that would indicate my findings were incorrect, so I published my findings. Here’s an excerpt from what I wrote:

“Not too long ago, the federal Conservatives were accusing opposition parties of wanting to implement an iPod tax . This supposed iPod tax was cited as evidence of the NDP and Liberals’ ‘high tax agenda.’ In Budget 2013, however, the Conservatives have abruptly changed direction and introduced a hidden iPod tax of their own.

“One of the estimated 1,290 tariff increases in Budget 2013 is on tariff code 8519.81.29, which includes a number of digital music players. Products that fall under this code, from the 72 countries that are losing their General Protective Tariff status (which include China, South Korea, Malaysia and Indonesia), will see their tariffs rise to 5 per cent from zero on Jan. 1, 2015.

“The complicating factor is that this tariff increase only affects some digital media players, because not all devices that play digital music fall under this code. A BlackBerry, for instance, while it can play digital music, would be considered a cellular phone under the tariff code and not be subject to the tariff increase. A device such as an iPad that plays videos as well as music would also fall under a different category.

“Apple has four iPod products, all of which are made in countries losing their GPT status. Three of the four products will face tax increases from this change. Apple has helpfully posted the Harmonized Tariff Schedule (HTS) code for all of its products. These codes are for use in the United States, but it is relatively straightforward to translate these to Harmonized System (HS) codes for use in Canada. The three models of iPod that will experience tariff increases include the iPod Shuffle (tariff code 8519.81.29), which will be assessed a 5 per cent tariff where none was charged before. The iPod Nano (8521.90.90) and iPod Classic (8521.13.90), which were previously tariff-free, will now be charged a 6 per cent tariff.”

At 7:30 p.m. on Thursday a statement was released by Finance Minister Jim Flaherty’s press secretary, Kathleen Perchaluk, which included the following:

“Music devices like iPods are imported into Canada duty-free under a long-standing special tariff classification from 1987. That special tariff classification was in no way altered by recent changes to the General Preferential Tariff foreign aid program.”

The special tariff classification 9948.00.00 provision allows for special tariff treatment of items that enhance the use of computers and video game systems (among other things).

The 9948.00.00 is a form of waiver, which allows a good to be imported under this code rather than its normal HS code. I had previously considered the possibility that iPods and MP3s could be imported tariff-free under 9948.00.00, but dismissed it due to a lack of evidence. There are no public rulings allowing for the use of this provision and the public evidence I could find suggested that 9948.00.00 does not apply.

The “for use in” test in 9948.00.00 has two parts, the first of which is that it must have the ability to be physically connected to a computer. An iPod or MP3 player certainly passes this test.

But the test does not end there – almost any car on the road can be plugged into a computer with the use of OBD diagnostic software. I can only imagine how the Canadian Border Security Agency would react if you tried to import a South Korean car duty-free because it can be plugged into a computer.

The second part of the test is that the item “must enhance the function of the host unit.” This part of the “for use in” standard was tested in the Canadian International Trade Tribunal case Jam Industries Ltd. v. President of the Canada Border Services Agency. The case involved a company importing musical instruments that had the capability of being plugged into a computer. Jam Industries’ position that these items should be allowed in duty-free was rejected. Greg Kanargelidis of Blake Cassels & Graydon LLP summarized the decision as follows:

“In this case, the tribunal ruled that the musical instruments do not ‘complement’ the functions of a computer by virtue only of their connection to that computer. Instead, the tribunal noted that the reverse appears to be true, in other words, that the connection to a computer enables the musical instruments to acquire additional capability”

My reading of the Jam Industries case is that the same standard applies to MP3 players and iPods, that iPods are plugged into computers to make the iPod more useful, not the other way around.

I spoke with Finance officials Friday morning and they have assured me that the CBSA does not interpret the second part of the test in the same way that I do, and that they already grant 9948.00.00 status to these devices. Unfortunately, the decision to allow the use of this tariff code 9948.00.00 cannot be made publicly available. Nor can the government offer any data on how often this code has been used in the past for MP3 players.

I take the Finance Department at its word that iPods have been imported using the 9948.00.00 code, but am uncertain how the CBSA came to this decision in light of the precedent set by the Jam Industries case.

It is hard to believe that on further scrutiny – especially given the potential future tariff implications that didn’t exist before the budget announcement – the CBSA would be able to justify a 9948.00.00 classification for iPods. This certainly warrants further review and clarification by the government, so that importers and consumers can have greater comfort about where they really stand.

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.

Editor’s note: This blog post replaces an earlier version by Mike Moffatt on the same subject.

 

Follow on Twitter: @mikepmoffatt

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