Last week, I wrote that the federal government's changes to tariffs in Budget 2013 would result in new import duties on models of MP3 players and three of four models of Apple iPods. The tariff changes involve changing the tariff status of 72 countries, so music devices manufactured in China, Indonesia and Malaysia will pay a 5 to 6 per cent tariff rather than their "preferential" rate of zero, starting in 2015.
The article caused quite a stir, and the government denied it was true. A spokeswoman for Finance Minister Jim Flaherty said the article was wrong. "Music devices like iPods are imported into Canada duty-free under a long-standing special tariff classification from 1987," she wrote. That classification, which was unaltered by the recent budget, is known by its number: 9948.00.00. (We'll call it 9948 for short.)
That was Thursday evening. On Friday, The Globe published a more detailed analysis by me on the issue.
Meanwhile, the Canada Border Services Agency, which enforces the rules around imports, issued its own statement appearing to back the Finance position. "Importers of MP3 players continue to be eligible to apply for tariff relief under Tariff Item 9948.00.00. Customs duty will be relieved on those imported goods that meet the requirements of tariff item 9948.00.00."
In my view, the CBSA's response far from closes the issue. The evidence, I believe, shows that higher import tariffs on iPods are on the way.
The CBSA release states that if importers of iPods and MP3 players can meet the requirements of 9948, the tariff increases will not apply to these items and there will be no new iPod tax.
The 9948 tariff applies to goods that "enhance the functioning of computers and other high-tech products" and has stringent requirements in order for a product to qualify. Under the CBSA's existing enforcement, I am convinced they cannot meet those requirements.
I have obtained two documents that, until now, have not been made public. The first, which I will refer to as the verification letter (click to download pdf), is a six-page communication from the CBSA dated December 13, 2012. The letter refers to the importation of televisions that, in the CBSA's view, were incorrectly classified under 9948.
The second document, which I will refer to as the 9948 enforcement memo (click to download pdf), is an internal CBSA communication detailing the agency's enforcement activities. These appear to be two of the documents referred to in a recent Canadian Press article. I am making both documents available so you can judge them for yourselves.
My position that importers cannot meet the requirements of 9948 rests on three straight-forward premises:
1. It appears that sellers of iPods and MP3s are required to collect "end use certificates" from the final consumer on each sale, and be able to present these to the CBSA if audited.
2. The 9948 requirement for "end use certificates" appears to be actively enforced by the CBSA.
3. Retailers cannot reasonably collect these certificates from consumers when they buy an iPod.
These three, put together, make retail sales of iPods and MP3 players ineligible for 9948 and therefore subject to an iPod tariff. What follows is my evidence.
Premise 1: iPod importers require 'end-use certificates'
The 9948 enforcement memo states that importers of certain kinds of televisions are to provide end-use certificates in order to be imported free of tariffs.
"This compliance verification initiative will require importers of televisions who have claimed the benefit of tariff items 9948.00.00 to provide the substantiating certification that is required by law."
It goes on to add:
"However, it is likely that these importers may not be in compliance with the related record-keeping requirements as set out in the Imported Goods Records Regulations, which is a condition that must be met in order to benefit from the provisions of conditional tariff items such as 9948.00.00."
This goes well beyond televisions. The verification letter describes the record-keeping requirements under Section 3 of the Imported Goods Records Regulations for "imported commercial goods that have been released free of duty or at a reduced rate of duty because of their intended use."
When sold for their intended use, the importer is to obtain "a certificate or other record signed by the user of the commercial goods that shows the user's name, address and occupation and indicates the actual use made of the commercial goods." The user here refers to the end consumer, so the importer would need the retailer (if they are not the same entity) to collect that information on their behalf and pass it up the supply chain.
Further clarification was provided by the CBSA's Memorandum D10-14-51, which states "importers are expected to provide end-use certificates" and was illustrated a recent CBSA communication on the iPod Touch that was obtained by the Canadian Press.
In my view this clearly establishes that, to be imported duty free under 9948.00.00, end-use certificates are required for iPods and MP3 players sold in retail stores to consumers.
Premise 2: The CBSA enforces collection of those certificates
The very first paragraph of the 9948 enforcement memo, dated March 9, 2012, clearly states the purpose of the memo is "to provide information concerning the launch of a series of compliance verifications that will likely result in a significant amount of customs duty being reassessed, and will not be well-received by the importing community."
It goes on to add:
"A recent risk analysis has identified $16-million in duty at risk for the 2011 calendar year alone, all of which is expected to be recovered through this verification initiative. Although some of the selected importers have been the subject of past compliance verifications, the scope of those audits has never included diversions to non-qualified uses, nor did they include a request for certification attesting to the actual use of the goods as is required."
This enforcement action goes well beyond televisions. "Further, plans are now underway to examine other consumer goods that are also accounted for under tariff item 9948.00.00, such as CDs, DVDs, and computer speakers, in order to ensure that all importers that are making use of this particular tariff item are being treated equally."
The CBSA has also publicly listed tariff item 9948 as a target priority in 2013 for the organization.
Premise 3: Retailers won't be able to collect the certificates when an iPod is sold
To qualify for tariff item 9948, retailers would have to take the unusual step of requiring their customers to fill out a form upon purchase, as indicated by the Imported Goods Records Regulations:
"A certificate or other record signed by the user of the commercial goods that shows the user's name, address and occupation and indicates the actual use made of the commercial goods."
This is unrealistic in practice. While there is a legal obligation for the importer to collect this information, there is no legal requirement placed on the consumer to provide that private personal information. When the importer and retailer are not the same entity, the importer is forced to trust the retailer to properly compile, collect and pass along private information on their consumers.
Assuming the retailers would agree to collect and transmit this information (and it is unclear in my mind why they would ever agree to this), the importer would use this information to develop a database of owners (an iPod registry?) which they make available to CBSA inspectors upon request.
Unsurprisingly, the verification letter is skeptical of the ability of retailers to collect these certificates:
"As the vast majority of the end-users of these products are consumers, it is expected that the required certification will not be available as the onus is on the importer to have the required certificate completed by the consumer, typically at the time of sale."
The CBSA's Memorandum D10-14-51 requires that consumers attest that they will use the iPod in a manner in which it is "physically connected" to a computer (though not necessarily permanently so, according to the memo) and will "enhance the function" of that computer. The consumers must attest that their devices will be "solely used for the purpose for which they were imported."
If a consumer uses a device in a manner not covered by 9948 during the first four years of ownership, the importer is required to "make a correction to the declaration of tariff classification and pay any applicable duties and taxes."
This rule is not trivial. CITT Appeal No. AP-2008-023 discusses the need for sellers claiming the tariff reduction (here Code 2101, the predecessor to 9948.00.00) to show that the end consumer is using the goods in the manner described on the certificate.
But there is no practical way an importer could possibly verify and ensure that that the retailer's customers have not changed how they are using iPods and MP3 players.
Putting it together
In my view, all three premises hold, which means retail sellers of MP3 players are ineligible for tariff item 9948.00.00. As such, they will be classified under other classifications, such as 8519.81 for the iPod Shuffle. The tariff for these classifications, which apply to three of the four models of iPods, is set to rise in 2015 up for the 72 countries losing their GPT status (including China).
My conclusion is that the iPod tax is alive and well. If anyone has any evidence to the contrary, I would highly encourage them to pass it along.
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.