This happens with cargo vans in the US, which are imported as passenger vans before being converted, to avoid a 25% tarrif on the import of cargo vans.

http://blog.caranddriver.com/feds-watching-fords-run-around-...

However I'd challenge that this is a market failure - this is an example of the failure of a rules-based approach to regulation.

In countries which take a principles-based approach to regulation then the substance of the transation is considered as well as the form.

So this kind of nit-picking to circumnavigate the rules wouldn't have been allowed.

What would you call it then? Market failures can also be created by ineffective regulation, as is the case in my example.

Considering the substance of the transaction isn't a viable strategy, it might be possible at larger scales as in your Ford example, but individuals can and will find clever ways around tariffs that are impossible for the authorities to keep up with.

As an example, I lived in a European country where import tolls on bicycles were much higher than the import fees on spare parts, so if the price of shipping was low enough you could simply ask the seller to send over a bike in multiple packages marked as spare parts to evade the import fees.

How are you going to detect cases like that with perfect accuracy? You'd need some massive tracking system to figure out who bought what, and even then it could be trivially evaded by me and a friend buying 1/2 of two bikes each as spare parts and combining them after they've been imported.

In Europe there are no import taxes between member states though. I live in Lithuania and it's quite common for people to drive to Poland for larger purchases (e.g. kitchen appliances) where they are a lot cheaper. If you buy as a business you pay 0% VAT in the country of origin.

That's why regulators need to be smarter.

Audio equipment is not taxed at 100%.

It doesn't need to be. Let's say it's taxed at 25%, then €10,000 of equipment costs €12,500 after the import fees, if I install that €10,000 of equipment in a shitty €1,000 car I've effectively got a €1,500 discount on the equipment and a free car to sell for scrap.

That's fraud, because that car would then be worth €11000 and should be taxed as such.

You think nobody tried to undervalue taxed imports yet? Probably a fraud as old as mercantilism.

No, it's not fraud. Yes the car is now worth €11000, but it's not taxed on its ticket price, it's taxed on what it is. It's a car, and a car includes seats, a car stereo (albeit now a very expensive one), an engine etc.

Nobody's trying to undervalue the car as costing €1,000 with a €10,000 stereo, that would be fraud.

The point is that by introducing differences in what sort of taxes you have to pay for certain products you trivially open yourself up to legal tax evasion in the form of simply bundling higher cost items as part of products in lower tax categories.

Perhaps a better example: Let's say you have a 200% tax on cylindrical metal tubes, but a 10% tax on bicycles. A lot of people would now legally import bicycle frames, cut them apart, and evade the import fees without the authorities being able to do anything about it. There's nothing illegal about buying a bicycle frame, and there's nothing illegal about cutting apart your bicycle and re-using it for parts.

Ah, I see where the confusion comes from. You mean when the audio equipment is taxed higher than the car.

I think OP did not mean "put 0 tax on cars" but rather remove the extra 100% tax on cars, so it's just taxed like any other product - i.e. just the same as tax on audio equipment. Then it would not matter.