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Border tax rort: Could you be caught by a Customs crackdown?

Gerard Emery with legitimately imported photographic gear. Photo/Tony Nyberg/Listener

New Zealand retailers hit by a GST rort that has been going on for at least two years hope officials, Trade Me, ministers and even customers will help stop the perpetrators, although a Customs sting has failed to deter them.

Gerard Emery has loved photography almost as long as he can remember. He got his first camera when he was 10 – a Baby Brownie he used to take photos of the wild beaches and rolling farms around his family’s land at Pakiri beach. He worked as a freelance news photographer when he left school, had a studio, then managed a professional photo lab. He now runs a wholesale camera-importing business and is chairman of the Photographic Imaging Association.

Two years ago, Emery joined a group of self-appointed crusaders building up evidence against online sellers supplying expensive products to New Zealand buyers without goods and services tax (GST) being paid. And trying, unsuccessfully so far, to get them shut down.

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In the old days we called it smuggling: pirates rowing little boats into obscure coves under the cover of darkness to avoid customs duties or import restrictions, dragging sacks of contraband up cliff paths. These days, most of us associate smuggling with endangered animals, illicit drugs and weapons.

But what Emery is worried about is the more traditional type: importers avoiding paying GST at the border, thereby gaining a 15% advantage over local retailers who do have to pay it.

No one needs a boat (or an eye patch) to dodge GST in 2019. Modern-day smugglers use the postal system. And, increasingly, Emery says, they use web addresses ending in .co.nz to give themselves credibility with New Zealand buyers. Or, they list their products on Kiwi-grown marketplace Trade Me.

It’s not just cameras. Smartphones, jewellery, sports goods, fashion items – even vehicles – are coming into the country and the importers are paying no GST, or not enough, Emery says.

A camera body bought from UDS Mart on Trade Me. Photo/Getty Images

How to avoid GST

An overseas company, often Hong Kong-based, lists a product for sale on Trade Me or its own website. Let’s say it’s a camera and the price is $3500. The customer pays the overseas company. So far, so legit.

The price should include GST, which is collected by New Zealand Customs Service, and paid to the government. On a $3500 camera, GST at 15% would be $525.

But imagine if instead of the Hong Kong supplier telling Customs the package contains a $3500 camera, it writes on the import documentation that it’s a $315 camera lens?

This is where it gets cunning. The cut-off point for paying GST on imported goods is $400, so if the overseas company pretends the $3500 camera is a $315 lens, GST is avoided. That’s a saving of $525 in tax, which Emery says the online seller can then pass on to its customers as a discount.

The customer is unlikely to take much notice of the Customs paperwork or see any discrepancy. Even if they do, they probably don’t care whether it’s legal or not – they got a great deal on a new camera.

If a Customs official opens the package and realises that the so-called $315 lens is actually a $3500 camera, the customer could end up paying the GST and a penalty, or lose the item.

The confirmation email with a total paid price of $3907.95. Image/Supplied

But there are millions of parcels coming into the country. Customs does spot-checking, but in most cases it doesn’t have the resources to open packages. Finding the smuggled goods is like finding a needle in a haystack.

So, a couple of years ago, Emery and other photographic-industry players decided to do their own investigations.

“We noticed the gap was moving further and further apart between the prices overseas sellers were offering on Trade Me and elsewhere and what local retailers were charging,” says Emery. “Very often the price difference ended up being close to 15% – the value of the GST.”

They concentrated on a handful of companies, including Hong Kong-based UDS Mart, which supplies cameras, photographic equipment and phones to New Zealand buyers.

At any one time, UDS Mart might have more than 1000 camera-related listings on Trade Me, from $7500 downwards, plus about 200 smartphones for sale.

Emery and others started buying cameras and equipment, then checking whether the prices they were paying on Trade Me matched the Customs invoices that arrived with the package.

They claim that in every case, the camera or lens was worth more than $400, sometimes significantly more, but the Customs declaration listed a different item, always worth less than $400.

Armed with this evidence, Emery went to Trade Me and Customs. The government agency then designed its own sting.

Over two months in 2018, Customs’ investigators took information given to them by Emery and his fellow sleuths and targeted 250 parcels tagged as containing camera-related equipment from countries and suppliers where GST fraud was a possibility. They compared the contents with the revenue declaration.

In 170 of the 250 parcels – almost 70% of the total – the goods were undervalued, says Richard Bargh, who heads the revenue and assurance section of Customs.

The invoice attached to the subsequent parcel with a unit value of just $243. Image/Supplied

Bargh says it has run other operations in the past, not involving camera equipment, when it has been given specific information about potential wrongdoing. “This was the fourth time in five years where we’ve looked at parcels, and each time we have found a similar level of non-compliance.”

From the 170 packages in the 2018 camera sting, Customs identified almost $20,000 of unpaid revenue – or about $100 per parcel, Bargh says.

Emery reckons it’s just the tip of the iceberg. “We estimate UDS Mart is selling between $100,000 and $150,000 worth of camera gear a month using Trade Me,” he says. That represents hundreds of thousands of dollars of GST. And that’s just one overseas seller of camera equipment.

UDS Mart didn’t respond to repeated requests for answers to our questions, but the terms and conditions on its website are non-committal: “To simplify the process of buying internationally, Udsmart.co.nz choose to handle the process of custom clearance for customers. By purchasing products through Udsmart.co.nz, the Buyer authorises the Company to make arrangements for clearance of customs on your behalf for the products in your order … As a result, prices shown on this website are the final total you have to pay to have the order delivered to your door, without any hidden charges and customs delay.”

But does it actually guarantee to pay New Zealand GST? Not exactly. Under “Shipping and delivery”, the website says only that “Udsmart is not responsible for country tax and/or any duty charge that may incur [sic] out of New Zealand. Restrictions, duties, taxes, and any other fees collected by the country of destination other than New Zealand shall be the responsibility of the customer.”

Meanwhile, it’s not clear who is behind UDS Mart. The company has an Auckland address, but packages always show the sender as being in Hong Kong. New Zealand Companies Office records don’t show a business called UDS Mart in this country. A telephone number listed along with the company’s domain name details is not in service.

The UDS Mart store on Trade Me. Image/Supplied

Keeping it honest and legal?

With the evidence Emery had provided to Trade Me, and with Customs on the trail of the Hong Kong suppliers, local camera retailers were optimistic. Emery and his colleagues assumed Trade Me would suspend companies it believed were suspicious, or at least make sure they were paying the right amount of tax.

Trade Me did neither. The company’s head of B2C marketplace, Rick Davies, told the Listener it had received a number of complaints about UDS Mart and had asked the company to make “minor tweaks” to its listing.

Davies wouldn’t go into detail, although the main change appears to be UDS Mart removing the words “Import tax and duty inclusive” from its listings.

Emery argues this isn’t enough. He says UDS Mart and others are breaking the law by not paying tax and that Trade Me terms and conditions state that sellers must “keep it honest and legal” and that “advertised prices must include GST and you [ie, sellers] are responsible for your taxes”.

It makes Emery furious: “We have the evidence and we have given it to Trade Me, but it hasn’t done anything. It is the biggest website in the country and it gives trades a level of credibility.”

Davies doesn’t agree. “Trade Me can’t be judge, jury and executioner” about whether a company is fulfilling its tax obligations, he says.

But what about the evidence from the camera retailers? “UDS Mart told us it had difficulties with its logistics processes. We are satisfied with its response,” says Davies. “Our concern is with the integrity of our marketplace and in this case the seller is fulfilling all their obligations for operating in the marketplace.” He says Trade Me would work with Customs but hasn’t been asked to.

Meanwhile, Emery argues the avoidance of GST is having a significant effect on local retailers, which are already struggling to compete with parallel importers.

In the case of one package, which arrived here in late May, the price difference between the UDS Mart lens on Trade Me and that of a local retailer would have been just $29 with GST on top, Emery says.

Given the potential added complication and risk for customers buying from overseas suppliers, if the equipment is faulty or breaks later, “why would a customer buy something offshore to save $29?” he says.

Rick Davies, head of Trade Me’s B2C marketplace. Photo/Mark Coote/Supplied

More confiscations

Meanwhile, if Trade Me couldn’t or wouldn’t blacklist the overseas suppliers, Emery and his colleagues hoped Customs’ intervention would continue.

Customs has the power to seize goods “where the goods are described incorrectly or valued incorrectly”, Customs Minister Kris Faafoi told one camera retailer. “Customs can also fine importers if they are at fault.”

Trouble is, that rarely happens. Bargh has worked for Customs for 14 years, the past two in the revenue and assurance role. He heads a team of 70 people whose job is to audit the more than $14 billion worth of revenue coming from importers, exporters and excise manufacturers.

Over the past few years, the number of parcels arriving in New Zealand has ballooned as more and more people buy goods online. Last year, more than 27 million posted parcels went through Customs. That’s 74,000 a day, or more than 6000 an hour during the revenue section’s 12-hour working day.

Bargh says his team has grown as volume has increased, but the idea of Customs opening every package is crazy. “It is ridiculously time-consuming and costly to open a parcel, check the contents, contact the importer and hold the parcel. It’s totally inefficient.

“It might take a week or two and you’d have legitimate importers and customers complaining about not getting their stuff.”

Customs’ spot checks suggest 90% of parcels arriving via the mail system are fine, Bargh says. Though, of course, that means 2.7 million aren’t.

Emery says he’d like to see more confiscations. It’s tough luck if buyers are put out by delays with delivery and having to pay GST on a product they thought was tax-inclusive, he says.

“Maybe next time they’ll buy it from somewhere else … We are just asking for the market to be fair.”

Richard Bargh. Photo/Supplied

To catch a crook

Bargh says a much better way to catch GST fraudsters is to use data analytics – as Customs does with other investigations. This involves increased use of behind-the-scenes digital detective work, algorithms and profiling.

The trouble is that catching undervalued cameras isn’t a high priority for a service that’s also got to look out for weapons, objectionable material, drugs and endangered species. Still, it’s better than a slap in the face with a wet fish.

“Customs got $58 million in last year’s Budget over four years to bring in more people to build inspections, intelligence and border analytics,” Bargh says. “That’s largely for prohibited items, but it will have a spill-over effect.”

Another solution is to improve the visibility of parcels being sent around the world by mail, he says. At present, courier companies such as DHL or FedEx have more stringent requirements in terms of screening packages than postal systems. That’s changing, but slowly.

Following the terror attacks on September 11, 2001, the US Congress introduced legislation forcing airlines to provide customs authorities with “a comprehensive electronic manifest” of all goods arriving in the country “either upon departure from a foreign airport, or four hours before arrival in the US”.

But, strangely, postal services were exempt. It’s taken almost 20 years for mail companies to be forced to account for what is in their packages, but new international regulations, which come into effect in 2021, should change that, Emery says.

And it could be earlier in some places, including this country. “New Zealand Post thinks it will be earlier here and in Australia and maybe China and other places. We are reasonably confident we will have a system in place in the next financial year,” Emery says.

Kris Faafoi. Photo/Supplied

Whack a mole

The final weapon in the Government’s arsenal in the fight against GST fraud at the border is the so-called “Amazon tax”, originally due to come into force on October 1 this year, but likely to be delayed until at least December.

Under the revised GST regulations, overseas suppliers such as UDS Mart, and the online platforms they operate on, will have to collect and return all New Zealand GST on goods valued at $1000 or less. Customs will continue to collect GST on goods over $1000. This should catch any overseas company selling through Trade Me or other marketplaces such as Amazon or eBay, Inland Revenue says.

However, Emery worries that rogue traders that are writing fake customs declarations now will continue to get around the law. “The new laws are going to make it easier for these suppliers, because, in effect, it means the threshold has grown to $1000.”

It’s the responsibility of a seller to register and collect GST once they sell over $60,000 of products a year. But these kinds of overseas sellers will just shift to selling on their own websites, Emery says. And since they tend to use different names for each product – “one day the camera is shipped by Macs Ltd, the next day it’s Bob’s Ltd” – they will be able to get around the $60,000 threshold.

“I have a list of another half a dozen .co.nz websites we suspect are doing the same thing,” says another Photographic Imaging Association member, who didn’t want to be named. “But because for the moment no one is doing anything about it, we aren’t going to gather any evidence yet.”

Still, the industry has contacted Faafoi, the Commerce Commission, Retail New Zealand, Trade Me and Customs. It has also made submissions to the first independent review by New Zealand’s Domain Name Commission. The review is looking at whether the commission should have more powers to act “to mitigate or minimise” harm from the use of .nz domain names. This includes powers to turn off, suspend or lock a .nz website. Submissions for the domain name review closed on June 6.

Emery believes the photography industry’s concerns have started to get some traction. He says pursuing the tax-evading suppliers via several routes – Customs, Trade Me, the Commerce Commission and the Domain Name Commission – gives the industry the best chance of success.

“I’m working on the theory of ‘whack a mole’. If these companies get investigated and shut down, after two or three times they will realise it’s too hard to operate in New Zealand and they will target somewhere else.

“I’m still passionate about the photography industry. It’s heartbreaking to see wholesalers and retailers closing up because it’s no longer a level playing field.”

Illustration/Getty Images

Clicks and brickbats

The differences between parallel importers and authorised dealers are starkly demonstrated, thanks to the anonymity of social media.

When Gerard Emery, chairman of the Photographic Imaging Association, removed himself from a social-media thread in March, it wasn’t because he was worried Facebook was stealing his data. He was shocked when a post he wrote on the New Zealand DSLR Photography Group closed page, about underpayment of GST and parallel importing, saw him vilified as Trump-esque, amoral and greedy. 

This particular thread starts with Emery, a photographic equipment wholesaler, urging members of the group to support the local industry.

“Why is this group so strong on wanting to parallel import?” Emery asks. “Firstly, you are undermining the country by fraudulently bypassing GST. Secondly, you don’t care or support the New Zealand photo industry at all.”

Of course, Emery is wrong when he implies that all parallel importers are dodging GST. Normally, the tax is collected by New Zealand retailers, and sent straight to the Government, which spends it on things such as schools, hospitals and mental health. Parallel importing is legal and has been since 1988. In fact, the Government likes it – it believes the practice creates healthy competition, and that’s good for consumers.

The only difference between parallel and straight importing is that with the former, the seller isn’t an authorised dealer of that brand – a non-Apple registered retailer selling iPhones, for example.

As you’d expect, official dealers and retailers aren’t big fans of parallel imports; they fought hard in the 1990s against them.

But the reaction when Emery wades back into the debate two decades later shows just how heated it can still be.

In the thread, you see pro-parallel importers arguing that official New Zealand sellers add a “ridiculous mark-up” on to prices, putting products out of reach of cash-strapped punters.

The anti-parallel-importer brigade, including Emery, argue they are supporting the industry, sponsoring competitions and workshops, helping local associations and providing jobs.

The debate on the DSLR Photography forum gets heated within hours.

“This self-righteous rant is like telling people to support their local video store instead of streaming,” says one poster. “You can’t tell people they have to pay your higher prices just because you believe you are morally superior.”

Another: “So, basically, you’re saying we should support your family instead of our own? Yeah, nah.”

Then Emery’s Facebook feed gets vitriolic: “You’re complaining people don’t support our local shops … Screw you, asshole.” That’s when Emery pulled his post.

This article was first published in the June 22, 2019 issue of the New Zealand Listener.