Penny Lane: Many E-Commerce Pennies Add Up as Well
Yes, your Beanie Babies got more expensive! Step by step, we traded the convenience of home shopping for price increases. Remember the good ole’ times when your internet purchases weren't taxed? Those times made way for a system where you were charged taxes but only when the seller was in the same state or country. This was expanded to taxes always being applied as long as it was a company selling to you. This brings us to current day, when taxes are always applied on e-commerce sales, even if the seller is an individual.
Although tax authorities were a little late to the internet party, e-commerce taxes are now an integral part of your online purchases — and now it looks as though they’re here to stay. It was unavoidable: total tax revenues account for more than 50 percent of government income in almost every country (and more than 80 percent in half the countries according to Our World in Data). Missing out on tax revenue because of (initially) non-taxed e-commerce transactions was a party that simply couldn’t last. Astronomical volumes are in play — e-commerce sales will hit $4.2 trillion in 2021, and Q1 2021 U.S. e-commerce sales grew 39 percent year-over-year (for comparison, the total value of goods exported globally was $19 trillion in 2019, according to Statista) — and that attracts even more attention.
While it appeared the authorities initially sat on their hands, the prospect of losing out on billions of tax dollars (or Euros, Kroner, etc.) was happily reversed by some simple yet very impactful legislation. Therefore, brilliantly anticipating growing internet sales and related tax funds, over the last few years governments regulated internet sales and required that taxes were charged, specifically sales tax or the local equivalent thereof (sales tax is 0 percent in only a handful of states, but is up to almost 10 percent in others, and local equivalents like Value Added Taxes can be as high as 25 percent). And with large online retailers and platforms easily identified, enforcement is easier than ever. Auditors can go online, buy two carrots from the local grocery store, and immediately see if their checkout cart, besides the carrots, also includes taxes. If not, penalties and site shutdowns are just around the virtual corner.
With this change, authorities are not only no longer missing out on an ever-growing amount of taxes on internet sales, as it currently stands, they're also poised to collect more than ever — because one thing that was never previously taxed now also gets the internet tax treatment: consumer-to-consumer (C-to-C) sales. Your pickups from Craigslist are still cash and tax free (unless you fall for the obvious scam), but buying on eBay is now automatically subject to taxes, even if you buy from another individual. And with 724 million buyers on eBay and, for example, 41.1 percent of online retail in China being C-to-C, there's a little bonus there for the taxman. So, the regulations that primarily came into play "to protect local stores" against online mega stores are now casting as wide a net as possible to collect more taxes.
But wait, there's more: in addition to sales taxes, especially across borders, transactions can also be subject to additional taxes such as customs duties. This isn't a novelty, but with more controls in place to collect taxes on internet sales, automatically more shipments are monitored and the chances of getting lucky and slipping into the "no duties" channel are limited. Furthermore, internet sales tax doesn't seem to have a low value exemption. Typically, when the value of goods purchased are under a certain threshold, the customs duties and sales tax are waived. Not all countries went this route, however, and the countries that continue to apply thresholds require the vendor (i.e., the platform through which they sell) to apply the low value exemptions. This may not always happen, which results in yet a few more pennies being collected.
While the original Penny Lane retailers, other than perhaps the barber showing photographs, may now be out of business due to the crush of e-commerce, with the arrival of taxes on internet transactions, it’s governments this time that are enjoying their pennies-infused revenue.
Anne van de Heetkamp is vice president of product management GTI at Descartes, a global leader in uniting logistics-intensive businesses in commerce.