Tuesday, June 25, 2024

The Tax Man Comes For Fast Fashion

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First, the tax authorities targeted soda, plastics, and hazardous chemicals with excise taxes. Now they’re coming for fast-fashion companies like Shein and Temu.

Imposing special taxes on mass-produced $16 party dresses? That seems like a lot of effort for some low-hanging fashion fruit.

But the fruit may not be as poor quality as it appears — not for lawmakers eyeing fast fashion as a billowing industry that they can tap for revenue; not for policymakers who see fast fashion as an environmental train wreck; and certainly not for customs officials annoyed that fast-fashion companies are allegedly skirting import tariffs thanks to the cheap value of their goods.

Fast fashion is a $100 billion industry, and as it grows, authorities are pointing out some red flags about its economic and sustainability practices. Increasingly, they are evaluating how taxation can be used to address or remedy some of their concerns.

The E-Commerce Problem: Tariffs

Fast-fashion companies like Shein have recently come under scrutiny in South Africa and the United States for allegedly bypassing customs duties because of the low cost of their shipments.

South Africa charges tariffs of 40% to 45% on clothing, but officials say the company is paying half of that rate — or even a quarter of it — by shipping its clothing in smaller packages, according to local reports.

In March South Africa’s Department of Trade, Industry and Competition announced that it opened an investigation into Shein’s practices. The department hasn’t released the details of that investigation, nor has it yet made any findings.

In June a U.S. House committee released a report accusing Shein and its competitor Temu of taking advantage of a de minimis tariff exemption. In the United States, importers are exempted from paying customs duties on packages valued under $800 under section 321 of the Tariff Act of 1930.

Millions of packages enter the country under this exemption — 685 million in 2022 alone, according to the report. About 30% of those packages came from Shein and Temu, as the two ship nearly 600,000 packages daily to the United States, House lawmakers found.

The problem, according to the report, is that most Shein and Temu packages are direct-to-consumer shipments, not bulk shipments. Because of this, they usually are worth less than $800 and can enter the country duty free.

Shein, on its end, surprisingly agrees that the de minimis exemption should be updated. Shortly after the House committee report, Shein sent a letter to the American Apparel & Footwear Association asking the group to lead the way on reform efforts. The company is largely concerned about supply chain management — specifically, the apparent lack of a universal supply chain management standard.

According to Shein, retailers are shipping products to the United States that do not follow responsible sourcing and manufacturing practices, and it believes that the de minimis exemption should incorporate some qualitative requirements.

The E-Commerce Problem: Environmental Impact

Just how worrisome are the environmental impacts of fast fashion? It used to be that retailers produced four fashion cycles per year. Now, fast-fashion companies produce 50 or more cycles per year. This amounts to 100 billion items of clothing produced annually.

To put it in context, this is almost double the annual amount before 2000, according to a report from the U.S. National Institute of Standards and Technology (NIST). Consumers aren’t holding on to these clothing pieces for long: the average consumer wears a piece of clothing about seven times before tossing it, the report said. On a larger scale, over 50 billion garments are discarded within a year of being made.

Resale programs offered by fast fashion retailers like Shein and Zara are laudable, but they’re not particularly effective at reducing carbon emissions, because demand for secondhand fast fashion is not high — at least, not high enough to reduce the rate at which retailers produce new clothing, according to research by resale solutions company Trove.

Most of this excess clothing is winding up in landfills. For example, in the United States, 85% of discarded clothes are sent to landfills or incinerated, the NIST report said.

Also, the emissions and water pollution effects are high: The fashion industry is reportedly responsible for 10% of global greenhouse gas emissions. The textile dyeing process accounts for 20% of water pollution, and the fabric industry is the second largest water polluter globally, behind agriculture, according to the World Health Organization.

Potential Tax Solutions

United Kingdom

In the United Kingdom, the Liberal Democrats want lawmakers to extend the country’s virgin plastics tax to textile products and implement several other tax policy measures, according to a policy motion issued by the party.

According to the Liberal Democrats, the environmental footprint that fast fashion leaves behind is too big to ignore. They’re worried about the fact that U.K. consumers purchase more new clothing per year than those in any other European country at 26.7 kilograms per capita, according to the motion.

They’re also concerned about fabric waste, which accounted for 800,000 tons of waste in the United Kingdom in 2016, and 700,000 tons in 2012. Globally, they’re concerned about greenhouse gas emissions and water pollution.

The motion has 13 points, and tax accounts for three of them:

  • Introducing a 1-pence-per-garment levy on new garments produced for sale in the U.K. market. Those proceeds would be earmarked for improving and developing local clothing recycling facilities and clothing collection.
  • Offering favorable VAT rates to resale shops and online platforms, rental services, tailoring and repair services, and clothing repair providers to encourage clothing reuse and repurposing.
  • Extending the U.K. virgin plastics tax to textile products containing less than 50% recycled polyethylene terephthalate (PET).

The U.K. plastic packaging tax went live in April 2022 and applies to products with less than 30% recycled plastic by weight. Those items are subject to a £210.82-per-ton tax on packaging.

Those recommendations are similar to ones found in a 2019 House of Commons committee report — “Fixing Fashion: Clothing Consumption and Sustainability” — which called for a few tax measures to address the environmental impacts of fast fashion.

“We recommend that the Government reforms taxation to reward fashion companies that design products with lower environmental impacts and penalize those that do not,” the report said.

The committee asked the government to do three main things: extend the plastics tax (which was a proposal at the time) to items with less than 50% recycled PET; reduce VAT on clothing repair services, like Sweden does; and impose a clothing levy.

“The Chancellor should use the tax system to shift the balance of incentives in favor of reuse, repair and recycling to support responsible companies,” the report said.

According to the committee, a 1-pence levy on clothing sold in the United Kingdom could raise around £35 million annually. The government could use the proceeds to create clothing collection points and invest in sorting and recycling, they said.

Meanwhile, the Royal Society of Arts says it doesn’t want the United Kingdom to remove all new plastic from clothing, but wants the government to mindfully remove cheap, harmful synthetics from the market. In an April 2021 briefing, it, too, called for a virgin plastic tax on clothing, among other measures.

Australia

Australia’s fashion industry is facing an ultimatum: Agree to pay a voluntary garment levy or be subject to government regulation.

In June the Australian Fashion Council — the country’s largest fashion industry group — launched the garment levy initiative in an effort to fund clothing recycling projects and curb landfill waste. Participating companies agree to pay a 4-cent-per-item levy on both domestically manufactured and imported clothing.

That levy could raise AUD 36 million per year. However, clothing manufacturers have been reluctant to sign on, according to the Australian Financial Review. The scheme launched with zero formal commitments — not even from a group of six foundational members.

That upset Australian Environment Minister Tanya Plibersek, who told clothing manufacturers that they have a year to sign on before the government decides to impose its own regulations, according to the Australian Broadcasting Corporation.

Plibersek is playing tough because the levy could help significantly reduce landfill waste. It is estimated that about 60% of old clothing could be recycled rather than deposited in landfills by 2027, according to the Australian Fashion Council.

European Union

The European Commission is encouraging EU member states to devise tax measures promoting clothing reuse and repair. Although the commission is working through an EU Strategy for Sustainable and Circular Textiles, it is leaving the fiscal elements to the discretion of member states. But the initiative is new, and it remains to be seen how individual countries will respond.

A Different Way in Brazil

In April Brazil’s finance minister announced that the country would impose a digital tax on shipments sent to the country by large e-commerce companies.

Finance Minister Fernando Haddad made clear that companies — not customers — would bear the costs of the tax.

“Consumers will be exempt from any tax collection when they make the purchase; companies will collect it without passing on any additional cost,” Haddad said, according to Reuters.

The notion of a digital tax here is interesting. Haddad said Brazil is following the example of developed countries by imposing a digital tax. He didn’t specify what kinds of digital taxes inspired his administration, but the tax Haddad announced is different than the digital services taxes on turnover that have proliferated around the world.

Here, it seems that the government may be using the phrase “digital tax” as a blanket term — one that is ambiguous enough that it can be expanded to other tax measures affecting other digital companies.

Originally, the government contemplated imposing a different kind of tax measure on e-commerce providers. Right now, international e-commerce shipments worth under $50 are exempt from a 60% federal tax on imports. It’s an exemption that applies to person-to-person orders, not business-to-consumer orders.

However, the government wants to completely scrap the exemption because it says foreign e-commerce companies are wrongly labeling their orders as person-to-person to avoid paying the tax — a complaint similar to the ones levied by South African and U.S. authorities.

Conclusion

The idea of taxing fast-fashion companies is clearly new, but it is gaining traction in several different forms. Will consumers tolerate or push back against these measures? And will clothing levies truly offset the environmental impacts scaring policymakers? It remains to be seen.

However, fast fashion is now such an entrenched part of the global economy that the tax issue certainly will be an area to watch in the coming years — particularly as governments continue to wrangle with environmental policy issues.

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