Trinidad’s 7 percent online sales tax bad for the economy

Trinidad’s 7 percent online sales tax bad for the economy

Trinidad and Tobago's new online sales tax repeats Japan's mistake and will ultimately harm consumers and the economy, and will cut government revenue.

POS
Red House

TRINIDAD AND TOBAGO, November 25, 2016 — Trinidad’s government recently announced a 7 percent online sales tax in hopes of recouping some of the government income lost from falling oil prices.

The People’s National Movement (PNM) won 23 seats in Trinidad and Tobago’s last general election, taking the reigns of government from the United National Congress and the People’s Partnership.

That victory was accompanied by sharp, unforeseen changes in oil prices, which fell from $100 a barrel to around $33 per barrel. That drop brought with it the plague of economic instability, stemming from an over reliance on oil revenues in the national budget.

Oil Prices
Crude Oil Prices

As a remedy, Deputy Prime Minister and Minister of Finance Colm Imbert announced in his Midyear Budget Review the online sales tax. While Imbert says the tax will help balance the budget, opponents say it will encourage residents to leave the island to shop. 

The internet sales tax is a bad idea; it discourages commercial activity. It will reduce GDP growth. Given the current economic climate, it is an option that the nation can ill afford. It would produce negative economic effects like those created by Japan’s recent sales tax hike. 

The general purpose of any tax policy is to establish a stream of revenues that will help in accumulating public goods—roads, bridges, schools—and providing public services like trash pick up and emergency responders.

Taxes fall into two main categories: general purpose and user specific. Sales tax is in the former; everyone pays the tax whenever they make purchases within the economy. It is unlike a luxury tax on furs, or a sin tax on cigarettes, that applies only to specific users of that particular good and who are only a segment of the general public.

The flaw in Imbert’s proposal is significant: How does government determine where an internet sale originates? When the shipping and billing addresses are the same, that isn’t hard, but that is not always the case. 

Can government monitor every internet sale? How would you differentiate an online sale from a phone sale? When would the tax become due: at the moment of purchase or upon the transfer of title?

In the world of brick and mortar enterprises, jurisdictional presence is definite. Even a single entity with multi-jurisdictional presence with distinct locales is taxable. On the internet, however, transactional locations are infinite. That makes online sales tax problematic for two reasons: legal authority to collect the tax on enterprises outside of Trinidad and Tobago; and establishing that a taxable transaction is due to the government.

An example of the latter would be a transaction launched from another island with help from a friend or relative, with the items shipped to Trinidad and Tobago. Or a resident might visit another tax free island to do online shopping. All government could collect is an import duty, making the online tax virtually irrelevant.

An online sales tax might be beneficial if it brings foreign currency into the domestic economy. Were Trinidad host to a large number of online retailers that sold goods to foreign buyers, an online sales tax might generate meaningful additional revenues.

But Trinidad is not a major online seller. Purchases of foreign goods are subject to import duties, leaving citizens bearing the burden of double taxation with no net inflow to the government’s foreign currency reserves. There are only a few domestic retailers such as trinitrolley.com, shopcourts.com and sportsandgames.com.

If government prints $100 and uses $50 on international goods, there are $50 dollars left in the domestic economy, all else equal. Taking an additional $5 dollars as an online sales tax only decreases aggregate consumer demand, lowering that segment of GDP—a lose-lose situation.

It is no wonder online retailers are finding ways around this cumbersome, backward-looking legislation. Practically speaking, economic growth arises from increased consumer spending which is directly tied to increased disposable income. This tax ultimately diminishes that.

This tax will be harmful to the national economy. Major developed economies choose not to institute online sales taxes, opting instead to increase spending and the effortless free flow of online commerce. The legislation would discourage foreign companies from offering Trinidad and Tobago retail customers their product offerings, or limiting those offerings.

Currently, U.S. law imposes no sales tax on foreign entities that remain without a physical presence in its borders. Companies are only required to comply with sales tax laws in states where they have a physical presence. Amazon.com, one of the world’s premier online retailers, collects sales tax in the 23 U.S. states where it has a physical presence, i.e., warehouses. 

The Trinidad sales tax plan flies in the face of economic theory, good sense, and usual practice. It will only harm consumers and commerce, and ultimately Trinidad and Tobago.

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