Online sales taxes have been a controversial topic for some time. The basic argument – in summary – is that online retailers have an advantage over brick-and-mortar retailers who have to pay business rates/property taxes to operate on high street or high street or in the local mall.
There is also huge controversy over (largely) US giants, such as Amazon, using perfectly legal mechanisms to pay less tax in some geographic jurisdictions than in others. This has led to saber-rattling from many quarters, notably in Europe where France has tried – and failed – to get European Union states to sign a digital services tax. That after collapsing and burning, several countries are moving forward, in theory, with their own national taxes.
For example, the UK, for its part, has been very keen on imposing a tax on online sales to somehow help offline retailers to be more competitive. This is the same Brexit Britain that wants (needs) a trade deal with the United States. Trump almost got into a trade war with France over the same idea. The Biden administration is no friendlier when it comes to this topic.
Today, new research from the UK’s Institute for Economic Affairs (IEA) think tank warned that introducing a tax on online sales would be problematic for both retailers and consumers already under pressure of the global cost of living crisis. He warns that – obviously – retailers would pass the costs of such new taxation on to their customers. It would also be, continues the Institute, an “operational nightmare”.
Problems
UK finance ministers have suggested a tax on online sales would generate up to £2billion in revenue, money that would apparently be used to cut costs for brick-and-mortar retailers and help level the playing field. game. But, says the Institute, there is no evidence to suggest that would be the case. He argues:
First, there is little hard evidence that online retail is systematically undertaxed or that it has played a significant role in the decline of traditional high street stores. When digital companies pay less tax, it’s usually for good economic reasons or as a result of tax breaks that governments themselves have promoted.
Second, it is wrong to assume that the economic burden of taxes is borne by the companies that pay them. In this case, the extra tax on online sales would inevitably be passed on to real people, including consumers, driving up the cost of living even further.
The real winners here may well turn out to be landlords raising rents.
Meanwhile, administering such a tax on online sales could be a nightmare as it would be difficult to determine which transactions should be taxed, especially since many brick-and-mortar businesses now also have an online presence. The Institute’s study warns:
The Treasury’s own consultation paper identified a long list of potential issues, including: i. how to define an online sale, and whether this should extend to “distance” sales made by telephone or mail; ii. whether there should be exemptions, for example for “click-and-collect” sales or for particularly sensitive goods, such as foodstuffs (professional prices do not depend on the type of goods sold); iii. how to deal with digital products, such as e-books or newspapers, that compete with purchases of print publications sold by physical stores; iv. whether the tax should cover only goods, or also services (bearing in mind that many transactions involve elements of both); v. how to deal with sales that cross international borders »
In other words, any theoretical benefit in terms of revenue generation for the government could most likely be wiped out by the associated administration costs. All told, it might just be too much trouble and more of a gesture than a practical benefit, in the words of the study, “a clumsy solution to a problem that either doesn’t exist, or at best is misdiagnosed.” “.
The Institute concludes:
Above all, there is no clear justification for an online sales tax. The [UK] The government says it is not intended to discourage people from buying online. But if the sole purpose is to generate more revenue in order to reduce business rates, it could be done in other simpler ways.
It’s not just a problem in the UK, he adds:
The share of internet sales in total retail sales has soared during the pandemic, but the latest figure (27% in April) is only a few percentage points above the upward trend in long term (ONS, 2022). This trend is global and not driven by the UK tax system. An online sales tax is unlikely to change that. Indeed, the UK government does not expect a corporate action to raise a large sum of money anyway. Part of the reason is that it’s not intended to actively discourage people from buying online, so it would be set at a low rate.
In other words, it won’t bring in enough money to pay for the hassle involved.
There is also a broader argument about free market economics to be made here around taxing new business models that disrupt the status quo:
For example, does anyone remember Blockbuster? In the early 2000s, Blockbuster was a household name on the high street, renting videos and DVDs from over 800 stores across the UK. Ten years later, the company was itself “bankrupt”, rendered obsolete by online streaming.
The government at the time might have tried to prevent that. It could have imposed an additional tax on the downloading of entertainment via the Internet. This could have reduced the professional rates charged to video rental stores. The government could even have paid for customers to get discounted rentals on certain days.
But few people would have thought that these forms of intervention made sense. Blockbuster has fallen victim to technological advancement and changing consumer preferences. Few people were sorry to see him go. The free market quickly found other uses for the properties it occupied – and other opportunities for the people it employed.
None of this negates the fact that there is clearly a problem now in terms of retail taxation that needs to be addressed:
The corporate rates themselves are also a mess and a fundamentally bad tax, in part because of their rigidity and problems in the assessment process. But if the sole purpose of a corporate action is to generate more revenue to fund a reduction in corporate rates, it could be done in many other, probably better, ways. Options here include increasing the VAT or extending its scope, introducing some form of land value tax or increasing corporation tax. However, it would of course be better not to go down this road at all.
my catch
What we have now is a mess – and one that is dividing the retail industry. United Kingdom. Tesco, Sainsbury’s, Co-op, Morrisons and Kingfisher came out in favor of an online tax, while John Lewis, Asos and Marks & Spencer (M&S) did not.
The words of Steve Rowe, until recently CEO of M&S, resonate here:
It is wrong to pit bricks and mortar against each other online. Our future demands a mix of digital services and physical retail so customers can shop how they want and when they want. When we do this, stores can be a real source of competitive advantage, delivering a modern, inspiring and convenient shopping experience.
In other words:
The simple fact is you can’t tax people in stores. You have to invest and adapt.
It is reality. But that doesn’t make for opportunistic headlines from politicians looking to look tough.
