Why An Online Sales Tax Could Be More Trouble Than It Is Worth

6th July 2022

The UK Treasury has been consulting on the concept of an ‘online sales tax', or OST, which could raise £1-2 billion annually to help pay for a reduction in business rates for physical retailers. This is a bad idea, for many reasons.

First, there is little hard evidence that online retail is systematically undertaxed, or that this has played a significant part in the decline of traditional High Street shops. Where digital businesses do pay less tax, it is 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 additional tax on online sales would inevitably be passed on to real people, including to consumers, adding even more to the cost of living.

At the same time, any associated reduction in business rates might simply benefit landlords, in the form of higher rents. The net effect would therefore be to transfer spending power from households to owners of commercial property.

Third, an online sales tax could be a nightmare to administer. 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.

Any additional tax revenues could therefore be offset, at least partially, by relatively high administrative costs and distortions. And if the new tax disproportionately affects tech companies based in the US, it could also be challenged as a de facto international tariff.

Indeed, the experience of the Digital Services Tax provides more evidence that an online sales tax could be more trouble than it is worth. Like the DST, an OST would be a clumsy solution to a problem that does not exist, or, at best, is wrongly diagnosed.

Above all, there is no clear rationale for an online sales tax. The government says it is not 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.

It would of course be preferable not to go down this route at all. It makes far more sense to focus efforts on making it easier to repurpose high street buildings - and let the market decide what use to make of them.

In the meantime, 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.

Note
The report by Julian Jessop is published by the Institute for Economic Affairs.
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