The Digital Economy and Taxation – 1. Internet Shopping and Local Taxation

Much is being written about “digital taxation” at present, but the analysis is conflating three separate issues, digital services, beps and the impact of internet shopping on bricks and mortar retailing. They are separate issues needing different solutions.

The principals of the taxation of digital services go back to the late 90s and the Ottawa Taxation Framework. Although related digital services and internet shopping pose different issues, the impact of online shopping on retailers has led to calls for online retailers and platforms to be taxed more with a focus on corporation tax. I will deal with this in a later blog, but first the real challenge is the impact of online shopping on tangible retailers and what policy makers want to do about this. This challenge is one of a number where changes in business and policy will need new responses on what and how we tax in a digital, low carbon world.

In deciding on the appropriate tax policy, one needs to consider whether “supporting” tangible retailers is a valid policy. But in tandem the consequences on tax income through the business rates needs to be considered and its impact on local authority services if the policy leads to tangible retailers closing. To put this in some context, business rates raised £22.9bn in 2014-2015, 3-4% of total taxation so an important part of the tax take, what are the consequences of this being eroded?

Amazon (which is now the 5th biggest retailer in the UK – ahead of John Lewis and only surpassed by 4 supermarket chains) paid £0.000000063bn in business rates. Marks & Spencer pays 3 times as much business rates as Amazon – it’s a smaller retailer than Amazon in the UK. So, it’s easy to see why high street retailers are complaining.

This issue is most acute in the UK where online retailing is most established in Europe, but this doesn’t mean this won’t be a problem for other countries over time. Addressing the erosion of local business taxation by internet shopping is a major issue to address in both tax policy and funding local services.

How could policy makers respond to this?  Introducing a specific tax on internet shopping (in addition to vat) might be an appropriate response if this tax was payable to the local authority to compensate for lost business tax revenue. Customers would have to identify their local authority (but this would not be difficult for larger online platforms) and the platforms would have to guarantee the payment of the tax and return their calculation to each local authority. There would have to be a de minimis level which might be linked to the VAT registration level.

This raises the question as to how to deal with a hybrid sale. An online order to a retailer which is collected from a branch of that retailer? The policy issue here is what are we trying to achieve? Keeping retailing and local taxation on the high street? Perhaps online sales for retailers with a physical presence could be exempt or subject to a lower rate? This seems to me to be too complex and a simple tax on online sales is preferable.

Online retail sales in the UK in 2015 were £553bn and have increased since, so each 1% internet sales tax would probably raise £2-3bn (assuming that exempting smaller businesses removes 50% of sales) which could replace the erosion of income from closed retail businesses in local authority tax bases.

Its worth looking at what online shopping is doing to your local shopping area. The King’s Road in Chelsea has fewer retail shops and more services (less subject to online competition) so there are over 50 bars, cafes and restaurants – most replacing shops. High street retailers can’t hold the level of inventory which online retailers can, so they lose sales unless what the shopper wants is a personal service. While business models do change, we do need to think about the consequences. To quote Joni Mitchell “You don’t know what you’ve got til it’s gone”.

Disclosure – I do a lot of internet shopping!

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