Border agency drops rule for iPod tax exemption

A rule that would have made it difficult for importers to avoid paying a tariff on iPods has been quietly dropped by the Canada Border Services Agency.

The agency issued a notice on Friday before the long weekend saying it was offering "clarification" on the record-keeping requirements relating to electronic goods imported duty-free under a special exemption, known as tariff classification 9948.00.00, that dates back to 1987.

The exemption requires importers to provide end-use certificates from consumers on how the goods will be used and imposes conditions that make it hard to see how devices such as iPods and other MP3 players would even qualify.

Now, under the CBSA's proposed changes, consumers will not have to certify the actual use of the goods purchased from a retailer as the current rules require.

The CBSA said in the notice that it will allow the importer of the goods to attest to the intended use of the goods rather than requiring an end use-certificate to be signed by the user of the goods. But importers are still required to inform CBSA if they become aware of the products being used for a purpose that would disqualify them from being duty-free.

Tariffs on iPods and other MP3 music devices became a controversial and confusing subject in the wake of the most recent federal budget in March. The budget eliminated preferential tariff rates for 72 countries starting in 2015, including countries where music devices are manufactured such as China.

An assistant professor at the Richard Ivey School of Business, Mike Moffatt, published articles saying the measure would essentially amount to an "iPod tax." Finance Minister Jim Flaherty's office responded that wasn't true and that music devices can be imported duty-free under the special 9948.00.00 category.

But to be eligible for that exemption, goods are supposed to enhance the function of a computer and remain physically connected to it, along with other requirements. Retailers are required to collect certificates from consumers with their name, address, occupation and an indication of how the product will be used. Those forms then have to be passed on to the importer who must have the records available if the CBSA wants them.

If a consumer used the music device in a manner not covered by the tariff exemption during the first four years of ownership, the importer is responsible for correcting the paperwork and possibly being on the hook for duties and taxes. 

Moffatt said there is no practical way for importers to verify how a retailer's customers are using the product and they would therefore be ineligible to claim the tariff exemption.

More clarity still sought

In an interview Tuesday, Moffatt said the CBSA has clearly backed down. "I think the CBSA is admitting that the whole end use certificate program didn't make any sense in this context," he said.

Moffatt said the other requirements are still ambiguous, however, and that the CBSA could do more to clarify what products are covered by the exemption and which ones are not. Technically an iPod would still have to enhance the use of a computer and be connected to it to qualify for the exemption.

"Those rules haven't changed," he noted.

Moffatt said importers will still be taking a risk in claiming the exemption because it's not clear how strictly the CBSA will enforce the remaining conditions.

The CBSA and importers are already embroiled in a legal battle worth $16 million. The government says the money is owed from 2011 due to a reassessment of customs duties and end use certificates are a primary point of conflict in the case. Moffatt said that CBSA has just weakened its own case by the move announced Friday and he suspects it won't actually make it to court.

The iPod tariff issue is a highly political one because of a long-standing battle between the Conservatives and the opposition parties. In advance of the 2011 election, the Conservatives had a communications campaign saying the NDP and Liberals supported an "iPod tax" in the form of a levy on blank media. They repeatedly attacked the opposition parties, and when the tariff issue arose out of this spring's budget the NDP pounced on it and said it is in fact the government that is imposing an iPod tax.

The NDP's consumer affairs critic Glenn Thibeault said Tuesday he's pleased the CBSA dropped the certificate requirement.

"This is a positive step, but you need to think things through before you make unilateral changes without consulting," he said.

He agreed with Moffatt that there is still a lot that needs to be clarified by the CBSA. "What business needs is certainty, not uncertainty. They need well-defined rules to do business efficiently."

The CBSA said other regulations may need to be changed as a result of dropping the end use certificate requirement but didn't specify what else might be affected.

The association representing Canadian importers and exporters — I.E. Canada — offered a mixed reaction on the decision.

"This is a step in the right direction, and I.E.Canada is pleased to see CBSA responding to the concerns of industry," said director of communications Andrea MacDonald, but she said there are "still a number of outstanding questions surrounding the issue."