OP-ED: Why An Online Sales Tax Is Too Simplistic A Solution
First rumoured back in July of last year, it’s been in the news again that the Treasury are considering a new online sales tax. Details are scarce and the Treasury have not commented, other than to say it’s an option, under consideration. It’s been backed by familiar high street names including Tesco, Waterstones and Asda, and opposed by business groups including the British Retail Consortium, but what issues is the online sales tax supposed to solve?
Over recent years the retail landscape has changed drastically, with e-commerce increasing from around 11% of all sales in 2014, to nearly 20% of sales in 2019. Our relationship with physical retail has undeniably changed, with people taking advantage of the convenience of online shopping and seeing shops as experiences not just places to spend money.
Whilst the pandemic sped up adoption of online shopping, the underlying reasons for the transition have not changed. This has been resulting in closure of more and more shops, and a reduction in business rates receipts by government. Contrasted with the huge disparity in effective tax rates for e-commerce giants — 0.37% for Amazon vs 2.3% for traditional brick-and-mortar retailers — an online sales tax seems to be a quick and easy way to share the tax burden in a ‘fairer’ way, whilst stemming the closure of physical shops.
Such a simplistic tax, however, is unlikely to effect such an outcome. It ignores both underlying trends and other difficulties of operating physical retail. One of the big issues is business rates, a tax which the retail industry has long called for reformation. Though the trend has moved to people spending more online and less in stores, business rates for retail spaces remain stubbornly high, valued at around three times that of office space and five times that of warehousing for equivalent square footage. For huge online e-commerce only operations, savings in business rates can amount to millions of pounds, even when their other fixed costs are already lower.
The government can do little about consumer demand for more personal and social retail experiences. But a reform of business rates or reducing the burden on occupying businesses, could give a little cash boost to help shops adapt their cost model to this new reality.
It is clear that the intended taxpayers are the big e-commerce players, however, almost every major retailer has significant e-commerce operations, including those who have backed the tax like Tesco. In certain retail sectors, especially grocery, food and beverage, margins are already so low, that even a small 1 or 2% tax, could mean e-commerce operations are significantly less profitable, potentially leaving less choice for consumers. An online sales tax would also hit smaller e-commerce businesses harder, typically having higher costs, especially those in low margin sectors.
There are also questions on how a completely new tax would be implemented, whether it could be rolled up into the VAT system, making it effectively an increase or if an entirely new method of collection would be introduced. Implementing a new collection system would create additional administration costs for businesses to produce the required records. These additional costs of running an e-commerce business (on top of the tax itself) would add up, creating further barriers to starting a new business It would stifle entrepreneurialism in those with little funding.
In the end, it is likely that the customer will become the effective taxpayer, especially those of smaller businesses who are unable to absorb the cost, handing an advantage to bigger e-commerce businesses who can absorb or the cost or put pressure on suppliers to reduce prices. A simplistic approach to taxing online retailers creates very little of the desired outcome, and causes chaos for smaller businesses and start-ups that governments are usually so keen to support.
Selena is a consultant working with fashion brands, helping them to elevate their image, develop their sales and marketing and refine their direct-to-consumer strategies. She is passionate about sustainable business models and enjoys working with brands to realise their full commercial potential at all stages of growth. To get in touch with her, you can drop her a line at selena@moodconsultancy.co.uk or find her on Instagram @wu.selena