Online sales tax would worsen cost of living crisis, warns IEA paper 

An online sales tax would help commercial landlords at the expense of consumers

• There is little evidence that online retail is systematically undertaxed, or that taxation played a significant part in the decline of traditional high street shops.


• An online sales tax would inevitably be passed onto consumers, as is the experience overseas and with the Digital Services Tax.


• Administering an OST could be complex and costly, eating into any revenue raised. For example, it would be hard to determine which transactions should be taxed, not least because many bricks and mortar businesses now have an online presence too.


• Applying an additional tax to new business models would send a terrible signal that innovations which benefit consumers are somehow to be feared, and penalised.


• Above all, there is no clear rationale for an OST. The government says the new tax would not be intended to discourage people from shopping online. If the only purpose is to raise more revenue in order to reduce business rates, this could be done in other, simpler ways.


• It would make more sense to focus efforts on repurposing high street buildings – and let the market decide how to make use of them.

A new briefing paper from the Institute of Economic Affairs argues that an online sales tax (OST), under consideration by the UK Treasury, would hurt consumers and raise little revenue.

The government estimates that the additional tax on transactions conducted over the internet could raise £1-2 billion annually to help pay for the reduction in business rates for physical retailers. However, business rates raise over £25 billion and are largely reflected in rent and paid by landlords. Therefore, the effect of using the additional revenues from an OST to reduce business rates would likely be a transfer of spending power from households to owners of commercial property.

As we have seen with Digital Services Tax, it is highly likely that additional costs levied on online retailers through an OST will be passed straight onto the consumer in the form of higher prices. This would increase the burden on households during a cost of living squeeze.

Supporters of the OST claim online retailers have an unfair advantage over traditional bricks and mortar shops and this new tax would ‘level the playing field’ between online and high street retailers. However, as author Julian Jessop points out, an OST would fail to reverse the decline of the High Street and would instead penalise firms which have innovated and gone online.

Further, any additional tax revenues could be offset – at least partially – by relatively high administrative costs and distortions. The consultation paper notes that a tax rate of 1% on online sales of goods from to consumers, or one alternative of a flat fee of £1 per order for deliveries, might raise around £1 billion. These are relatively small amounts of money in return for the hassle of introducing a brand new tax.

It would also be difficult to decide which transactions should be taxed, since traditional bricks and mortar shops are now providing online services. The OST could also effectively become a tariff on online retailers from abroad, particularly from the US, where many tech companies are based. This could damage the prospect of a future US-UK trade deal.

There is no good reason to think that the traditional model of high street retail is worth protecting. As with other sectors of the economy, consumers have benefited from technological changes which have reduced costs and increased consumer welfare. It would be far better to embrace change in the way we shop and focus efforts on making it easier to repurpose high street buildings – and create new economic opportunities.

Julian Jessop, Economics Fellow at the Institute of Economic Affairs, and author of ‘Why an online sales tax could be more trouble than it is worth’, said:

“There is no clear rationale for an online sales tax, which could just add to the burden on consumers at the worst possible time. The government says the new tax would not be intended to discourage people from shopping online. But if the only purpose is to raise more revenue in order to reduce business rates, this could be done in other, simpler ways.”

ENDS

Notes to editors

Contact: media@iea.org.uk, 07763 365520

IEA spokespeople are available for interview and further comment.

Why an online sales tax could be more trouble than it is worth is under embargo until 00.01 Thursday 30 June. An embargoed copy of the paper can be found here: https://iea.org.uk/wp-content/uploads/2022/06/Online-Sales-Tax.pdf

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expanding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.