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Virtual Intermediaries II - Canadian Solutions (Drop Shipments) Compared with US, Japanese & EU Approaches

37 Pages Posted: 22 Dec 2009  

Richard Thompson Ainsworth

NYU - Graduate Tax Program; Boston University - School of Law

Date Written: December 18, 2009


Virtual travel agents are opportunistic internet-based travel agents. They are intermediary businesses that create mutually beneficial three-party transactions that secure accommodations for a traveler that: (a) meet the basic needs of the traveler (at a discount), (b) fills vacant room for accommodation retailers with guests that pay below market, but above standard costs, and (c) profit from the extra cash, the margin in the transaction.

The virtual intermediary’s eye is always on the discount and the cash flow. One of the things that catches their attention are the accommodation taxes which they collect from the traveler in advance and remit to the accommodation retailer when they are invoiced for the room. Needless to say, there are incentives to minimize consumption taxes on the part of the intermediary just as there are counter-incentives on the part of revenue authorities to prevent revenue losses. Unclear statutes exacerbate these problems.

Canada is unique among the system considered, and their experience with intermediaries is very informative. It is the only system considered here where there are consumption taxes on accommodations at three levels of government (federal, provincial and local). A considerable amount of Canadian thought has gone into how to harmonize these taxes, how to deal with compliance and enforcement issues, as well as what to do about the very difficult problem of the non-resident, non-registered intermediary engaged in reselling accommodations at a discount.

Only Canada analyses this problem triangularly. The model adopted federally in the GST/HST and in the Province of Quebec is a drop shipment model. The Canadian approach is similar to the way California handles drop shipments.

The paper concludes by applying Canadian and European insights to this problem, and suggests statutory approaches to this issue in the US and Japan.

Keywords: GST/HST, Québec Sales Tax, Virtual intermediary, VAT, Sales tax, Tax avoidance, Consumption tax, Travel agent, Internet

JEL Classification: H2, H26, H29, K34, O33

Suggested Citation

Ainsworth, Richard Thompson, Virtual Intermediaries II - Canadian Solutions (Drop Shipments) Compared with US, Japanese & EU Approaches (December 18, 2009). Boston Univ. School of Law Working Paper No. 09-52. Available at SSRN: or

Richard Thompson Ainsworth (Contact Author)

NYU - Graduate Tax Program ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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