Cross-border shopping has always been a popular activity for Canadians living near the U.S. border. Lower prices, better selection, lower sales tax rates and a strong Canadian dollar drew over 1.9 million Canadians over the border to shop in June. June was also when Canadian Customs raised the tax and duty exemption levels for Canadians bringing goods back from U.S. stores, and that has resulted in a spike of shopping trips. Canadians can now bring back $200 of tax-free goods for trips of 24-48 hours, and $800 for trips over 48 hours.

Who Else Is Affected?
Not everyone is happy about the new trend. Recently, American shoppers at a Bellingham, Wash. Costco created a Facebook page to lobby for American-only shopping hours. They were concerned about Canadians inundating the store and being rude. The Facebook page was deluged with supportive comments, but the Bellingham Chamber of Commerce quickly released a statement reiterating their support for Canadian shoppers. While some American consumers may not be fans of cross-border shopping, border town stores certainly are.

Many grocery stores that line the border are dependent on Canadian business. Grocery staples, such as milk and chicken, are far cheaper in the United States than in Canada, due to subsidies. Currently, in many parts of the U.S., a gallon of milk runs around US$2.50, whereas in Canada, it can go for roughly C$5.00. Gas is also cheaper. U.S. gas can be more than US$2 per gallon less than at Canadian stations.

Long-Term Consequences
The benefit of cross-border shopping to U.S. retailers comes at the expense of Canadian stores. BMO Capital Markets recently released a report suggesting that Canadian purchases over the border represent up to 8% to 10% of all goods that can be moved across the border. This creates a potential $20 billion drain on the Canadian economy. Canadian retail organizations, such as the Retail Council of Canada, are calling for federal studies into wholesale pricing and tariffs that affect Canadian goods, in order to make them more competitive with their American counterparts. Canadian retailers fear that the strong Canadian dollar, coupled with upcoming cuts to Canadian Border Services Agency staff, will result in Canadian shoppers taking more trips under 24 hours and taking their chances about not getting caught coming back over the limit.

Cross-border shopping not only benefits American border city retailers, but it also gives a huge boost to state tax coffers. New York and Washington, the destination of most shoppers, does not offer a tax rebate for Canadian shoppers, although sales taxes are substantially lower in these states than the combination of federal and provincial taxes north of the border, making purchases an even better deal. Erie County in New York - which includes Buffalo - reported a 4.5% increase in sales tax revenues in 2011 over the prior year, in part due to an increase in Canadian shoppers. This sales tax bounty means less tax revenue for Canadian government treasuries. To the extent that the lost revenue must be made up by increased sales tax or income tax rates, all Canadians can be hurt in the wallet by cross-border shopping.

The Bottom Line
Everyone loves a deal and, as long as there are pricing and tax differentials on the other side of the border, shoppers will flock there to save money. This transfer of retail activity can benefit border towns immensely, allowing them the funds to increase services and the standard of living for its residents. On the flip side, the sales and tax drain on the northern side of the border can hurt Canadian businesses and the wallets of all Canadian residents.

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