'iPod tax' debate gets complicated, highlights confusion

A war of words over whether the 2013 federal budget will trigger a new tariff on MP3 players such as iPods is shining the spotlight on how the Canada Border Services Agency applies a special exemption.

Finance Department, border agency disagree over how MP3 player exemption applies

The 2013 federal budget seems to have triggered a new tariff on MP3 players such as iPods - or has it? (Paul Sakuma/Associated Press)

A war of words over whether a measure in the 2013 federal budget will trigger a new tariff on MP3 players such as iPods is shining the spotlight on the Canada Border Services Agency's current interpretation of a special tariff exemption.

On Thursday, the NDP pounced on a newspaper account written by a business professor who suggested the Harper government may have accidentally triggered what could be seen as an "iPod tax" because the devices are made in China. 

The budget announced that goods from China and dozens of other countries will lose their current tariff exemptions on Jan. 1, 2015, and a new five per cent hike in the cost of the devices appeared set to take effect as a result.

Noting the Conservatives' strong communications campaign against a different kind of "iPod tax" in the run-up to the 2011 election, the opposition pounced on the idea of a new "iPod tax" with the pending tariff hike and said the Tories were being hypocritical.

Finance Minister Jim Flaherty's office fired back that "music devices like iPods" would not be subject to a tariff increase because of a particular special exemption dating back to 1987 for devices that are plugged into a computer.

"There is no iPod tax," a department spokesperson said.

However, the Canada Border Services Agency's interpretation of that tariff item, 9948.00.00, requires importers to obtain the consumer's name, address and occupation and register it on a certificate attesting to the fact that the device will be attached to a computer and used continuously in that manner for four years.

In fact, the point of an MP3 player is to be able to detach the device from a computer and use it to play digital music files anywhere.

In a statement released late Friday, the CBSA said importers of MP3 players would "continue to be eligible to apply for tariff relief" under the exemption.

"Customs duty will be relieved on those imported goods that meet the requirements of tariff item 9948.00.00," the statement said.

Border agency tightening tariffs

Meanwhile, the federal government is tightening up tariffs on imported products such as televisions and iPods that receive the special exemption.

Importers owe about $16 million from 2011 alone due to a reassessment of customs duties, according to a memo from the Canadian Border Services Agency, released under the Access to Information Act and obtained by The Canadian Press.

The memo from March 2012 — which includes a handwritten notation to keep "the minister" informed — says the crackdown "will likely result in a significant amount of customs duty being reassessed, and will not be well-received by the importing community."

The memo says importers who use the computer exemption must get certificates from the end users — consumers, in most cases — that certify the product will be used with a computer.

No certificate, no exemption, the agency says, while acknowledging the "vast majority" of end users are consumers and no such certificates are available.

"As the vast majority of 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," says the document.

And the exemption has been interpreted to apply only to devices in "continuous use" with computers, which means iPods and other MP3 players are unlikely to qualify.

While Flaherty's office pointed to the computer exemption this week to say tariffs on iPods are not increasing, the agency told at least one importer in writing as recently as Dec. 7, 2012 that the "iPod Touch 8GB" is subject to end-user verification in order to get the tariff exemption, according to correspondence obtained by The Canadian Press.

Certificates 'must be obtained'

"Certificates or records of actual use must be obtained and readily available for inspection by an officer," the letter states in bold print.

The March 2012 CBSA memo, meanwhile, said the agency was planning to extend the verification demands to other items "such as CDs, DVDs and computer speakers."

None of this was publicized at the time, but the memo said "the program is currently working with the Communications Directorate to prepare reactive media lines."

Canada's complex tariff regulations have become a political football since the Harper government announced in last month's budget that it is reducing tariffs on a few popular items, while quietly raising tariffs on thousands of other consumer products.

Mike Moffatt, assistant professor at the Richard Ivey School of Business and the economist whose account set off the debate, wrote a new blogpost Friday afternoon explaining how he determined a tariff would apply to iPods.

Moffatt spoke with Finance officials who assured him the 1987 exemption applies, "but [I] am uncertain how the CBSA came to this decision in light of the precedent set by [another case]," he wrote on the Globe and Mail's website.

"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."

Moffatt told the Canadian Press that the issue highlights a separate problem.

"The larger thing that is coming out of all this is that the rules are so vague and so open to interpretation that you could probably ask 10 different people at the CBSA and I suspect you're going to get 10 different answers," he said.

with files from The Canadian Press