Note: Updated on Feb. 22 to incorporate comments from the Retail Council of Canada.
Few business expenses annoy Sudbury, Ont.-based eBay store owner Christine Deslauriers more than the import fees she’s forced to pay on the items her customers return.
Like many ecommerce retailers, Deslauriers’ figure skating, gymnastics, dance, and sports swimwear shop Boutique Step Up has cultivated a client base around the world.
“I think of us as a micro-multinational,” she says.
Unlike many of her competitors, however, when the swimsuits, dance shoes, or skating dresses that the company ships out don’t quite fit customers correctly, they’re frequently shipped back on Deslauriers’ dime. That’s because under Canada’s current de minimis threshold, which the Retail Council of Canada (RCC) argues prevents American retailers from gaining an unfair advantage over Canadian merchants, anything Canadians order from outside the country that costs more than $20 is subject to tariffs.
For example, a Canadian customer ordering a pair of $414.99 figure skates from Boutique Step Up would be charged around $20 in shipping fees and nothing more, while a customer ordering a similar product for less from outside Canada – $249.99 USD ($328.56 Canadian) skates from one of Boutique Step Up’s American rivals, say – would be charged enough import fees to render the savings useless, protecting Deslauriers’ Canadian customer base in theory.
In practice, she says, the de minimis threshold has been nothing but a headache: Though returns aren’t supposed to be taxed, customers will often forget to mark their items as returns, and even if they do certain shipping companies will charge HST anyway, leaving Boutique Step Up paying for its own merchandise so it can be altered and sent back.
“Sometimes I find that even if you do all your homework – bring something under a master agreement so that it doesn’t have any duty or taxes – a mistake can happen and then whoops, you wind up with a $500 bill because the company didn’t test its shipping correctly,” Deslauriers says. “It’s very difficult for a small business to swallow something like that.”
Raising the de minimis threshold would allow companies like hers to more easily compete on the world stage – which already exerts a downward trend on prices anyway, she says.
An outdated system
Delauriers isn’t alone. According to eBay Canada managing director Andrea Stairs, 99.8 per cent of the company’s top Canadian merchants – retailers who sell more than $10,000 per year on eBay – export more than half of their merchandise outside of Canada.
“That is the new face of retail,” she says. “And they’re experiencing the kinds of frictions that you and I would experience if we were sending goods to our aunt in Palm Beach.”
Nor does Boutique Step Up lack company in its returns-related headaches, Stairs says.
“Returns are really table stakes at this point for ecommerce globally,” she says. “And when returns coming back from U.S. and international buyers are re-assessed for duties and taxes, the small or medium-sized business has a choice: Either they can allocate precious administrative resources to reclaiming those amounts, or they can just eat those amounts… which means their cost of doing business is higher than their competition in key markets.”
Recently eBay has taken a lead role in petitioning the Canadian government to raise the de minimis threshold, a step in line with its long history of advocating for issues that affect small and medium business across the globe, Stairs says – including the U.S., where the company supported an ultimately successful campaign to raise the American de minimis threshold from $200 to $800 USD.
“We’re encouraging the government to take a look at what is a 30-year-old measure at this point,” she says. “The Canadian de minimis threshold was set in the early 1980s, and is now far out of step with its equivalent in peer countries.”
For example, she says, Australia’s de minimis threshold is currently $1,000 AUS; the E.U.’s duty threshold is 150 Euros (approximately $200 CAD); and Mexico’s threshold for postal shipments is $300 CAD.
Maintaining a $20 de minimis, Stairs says, negatively impacts Canadian small businesses, especially businesses geared towards international markets such as those trading on eBay; Canadian consumers, who are at a disadvantage should they try shopping on the international online marketplace; and the government, which currently earns less from the rules than it spends to enforce them.
How Canada’s de minimis hurts small businesses…
eBay’s leading opponent in its fight to raise the de minimis threshold is the RCC, an industry organization representing more than 45,000 stores which argues that changing the threshold would give American retailers an unfair tax advantage over Canadian merchants.
“de minimis at anything like the $200 -level would lead to massive increases in cross-border orders, with the obvious negative consequences for retailers in Canada and their employees,” the organization writes on its website. “Even a seemingly small increase could have a major impact, especially because, as the threshold level rises, U.S. online merchants could start to offer free shipping to Canada as many of them do for their customers in the United States.”
According to the RCC, not only would raising the threshold threaten jobs in an industry that employs more than 2 million Canadians, but the tax and duty losses at both the federal and provincial level would be substantial.
“RCC does not understand why the Government would ever want to confer a tax and duty advantage on a U.S. warehouse seller, who employs few if any people in Canada, at the cost of a Canadian employer who creates jobs and economic activity here, whether in bricks-and-mortar stores or online,” the organization writes. “The consequences for investment and employment could be catastrophic and given that retail employs one-in-eight Canadians, the Canadian economy overall would suffer.”
While the RCC did not respond to ITBusiness.ca’s initial request for comment, its public affairs vice-president Karl Littler later pointed out that internationally trends are moving towards reducing de minimis thresholds, rather than raising them. Australia, for example, plans to lower its threshold from $1000 AUS to $0 AUS on July 1, 2017, while the E.U. is considering a zero-Euro de minimis as well.
On Dec. 1, Littler noted, the European Commission proposed removing the current tax exemption for small-consignment imports from outside the E.U.
Even the U.S., he said, 39 states have implemented what are are colloquially known as “Amazon taxes,” in which interstate sales are subject to the same state taxes that would be collected by local merchants.
Stairs says the reality is more complicated than the RCC makes it look, with domestic and multinational companies on both sides of the argument.
“Our Canadian sellers are not big, international brands – they’re domestic small businesses who employ people in their local communities,” she says. “The problems they face on a daily basis and those boil down to shipping and border issues, including de minimis. So this is very much a community-led initiative that we’ve picked up.”
Moreover, she says, according to Statistics Canada ecommerce sales represent only two per cent of Canada’s total retail industry, which remains dominated by bricks and mortar.
These sellers don’t trade internationally the same way their larger multi-national counterparts do, Stairs says: Rather than pre-clearing their goods, they frequently send them across the border one or two items at a time, with Canada’s border protection laws leaving smaller ecommerce retailers unable to compete with U.S. sellers’ access to low-value international supply chains.
“A competitive U.S. dollar is able to bring in $800 worth of imports into the U.S. without paying duties and taxes, whereas a Canadian seller will have to start paying duty at $20, which leaving aside shipping costs, immediately puts Canadian sellers at a cost disadvantage relative to their U.S. competition,” she says.
But it isn’t just small businesses that are impacted by the current de minimis threshold, Stairs says – it leaves consumers at a disadvantage as well.
“Canadian consumers are very much disadvantaged in their ability to actively participate in international ecommerce compared to their peers in countries like the U.K., the U.S., or Australia,” she says. “It limits choice for Canadian consumers, and is especially impactful for Canadian consumers who are underserved by traditional retail – Canadians who live in rural communities in the north, for example, for whom ecommerce is not just a nice-to-have but core to how they get their daily necessities.”
While Stairs acknowledges that Canadians might prefer to buy domestically in theory, the fact is that certain items are not available, or at the price they’re looking for, leaving many of them to rely on international ecommerce to fill the gaps.
The current system also unfairly penalizes Canadians who live further from the border, she notes, as Canadians who live further south are able to bring in up to $800 in goods without paying duties or taxes.
“We know that Canadians prefer to buy domestically, whether it’s online or offline, and look to foreign ecommerce to fill the gaps,” she says. “The reality is that many Canadians are already doing what they can to circumvent the rules… I’m in California right now and have a bunch of shirts that my husband ordered for my son, and I will cross the border with them, and I will declare them, and it will be entirely legal, because they will be within the $800 threshold that I’m allowed.”
…And the government (really!)
When ITBusiness.ca asked the Department of Finance whether the federal Liberals would consider lowering the de minimis threshold, representative Valérie Forgues responded with the following:
“Canada is a trading nation, and the government believes in keeping goods moving. While we’re broadly supportive of streamlining custom processing and importation requirements, when it comes to waiving duties and taxes, the impact that would have on Canadians and on Canadian businesses needs to be carefully considered, not to mention economic and administrative considerations for both the federal and provincial governments.”
Though Stairs says she isn’t surprised the federal government would hold its cards close to its chest, she says she’s fond of pointing officials to a report issued last year by the C.D. Howe Institute concluding that by refusing to raise the current de minimis threshold to at least $80, the government collects an additional $39 million in revenue at a cost of $166 million.
“At low values the cost associated with collecting duties and taxes far outweighs the duties and taxes themselves,” Stairs says.
Nor is eBay asking for a massive increase in the de minimis, she says. An increase at a commercially reasonable level, where the cost to collect is at least equal to the revenues generated – somewhere in the $80 to $100 range – is a good first step.
In fact, a recent Nanos poll sponsored by the Canadian American Business Council discovered that 76 per cent of Canadians supported raising the de minimis threshold to $200.
“We just want to make sure that Canadian buyers and sellers are not being penalized for happening to be in Canada versus the U.S. or Australia or the U.K.,” Stairs says.