I am based in the U.K. Some of the challenges that affect my ecommerce business at first appear different from U.S. businesses. But, in fact, many of these challenges apply equally, on both sides of the Atlantic.
My current gripe is the unfairness of taxes. To be clear, I am not complaining about having to pay taxes — although it would be nice to not pay them. My complaint is that there is not a level playing field. Small-to-medium businesses like mine are being squeezed out by competitors that do not play by the same rules and pay much less tax. These competitors come from all directions.
At the bottom of the market are the bedroom sellers. These are retailers that started out selling as a hobby, perhaps just selling their old collections and unused possessions. They move on to buying inventory (or use drop shipping) and expand.
These sellers have low-to-nonexistent overhead. They probably have not told their insurance company that they are running a business from home — thus their stock is not insured. They have not told their local council — so they are not paying business rates. They do not declare their income — so do not pay income tax.
Many of these sellers also seem to be unable to calculate margins fully and often sell at less than cost, as they have apparently forgotten the post or packaging or commission that they have to pay.
These sellers undercut the market and drive prices down so we cannot compete. For every one that goes out of business, there seems to be two or more to replace it.
Large companies seem to think that paying tax is not for them. They have offices worldwide and somehow manage their accounts so that they make losses in countries like the U.K. and the U.S. and their profits somehow, apparently, come from tax havens.
So the percentage of their turnover that they pay in taxes is much less than a smaller company. This, combined with their volume-buying power, enables them to reduce prices, leaving smaller companies exposed.
Amazon is encouraging a worldwide market. Amazon encourages sellers on Amazon.co.uk to sell on Amazon.com. Likewise U.S. sellers on Amazon.com are being encouraged to sell on Amazon.co.uk. This leads to unfair competition.
U.K. merchants can sell in the U.S. without charging sales tax. Thus, we have roughly an extra 10 percent margin to play with. This is not fair on the U.S. sellers.
In return, U.S. sellers can sell in the U.K. without charging our sales tax — called VAT, value added tax — which is 20 percent. Thus, U.S. sellers get the extra, unfair margin. What makes matters worse is that the U.K. customers may be charged that 20 percent by U.K. customs when the parcels are imported. This is a random action.
Either way, we cannot compete on price when non-U.K. competitors can avoid the 20 percent tax.
Whilst the bedroom sellers may be illegal, there is a much larger threat. This is mainly Chinese competitors that hold stock in local U.K. warehouses and sell as “foreign companies” and thus do not charge the 20 percent VAT.
These companies will have imported the goods by the container, declaring a very low value and paying the 20 percent tax on that low value. Then, the companies sell the goods at a much higher retail price without charging the VAT. This is illegal. But governments move so slowly that it may be years before they notice and act on this.
There is, moreover, a variation on this scheme. Large Chinese companies sometimes import and warehouse their stock into the E.U. They enlist Chinese students studying in the U.K. to set up individual accounts on Ebay and Amazon, so they look to be small sellers. The students get a small income, and the large company avoids paying tax.
Customers benefit because the products are locally sourced and do not take weeks to arrive from China. And the customers don’t have to pay VAT. The disadvantage is likely poor refunds and returns, and no warranty — things that most shoppers do not at first notice.
What to do
For one thing, smaller ecommerce businesses need to promote what we are best at: specialized knowledge, good customer service, prompt delivery, and a proper warranty. We need to assure our shoppers that we offer trouble-free purchasing. This will not stop the consumer who just shops by price. But it will catch some who are more savvy and aware of the seller.
The tax situation is less clear. It would be fairer if all retailers, regardless of nationality, charged the same sales tax to a customer. The problem is how to calculate it and how to pay it to the correct authority.
It would be much easier if Amazon and Ebay collected the sales tax and distributed it properly. They are large companies with extensive administrative departments. Any proposal for small foreign companies to collect the sales tax and distribute it to multinational authorities will add such a layer of complexity that many will have to stop selling abroad.
It would be especially difficult for those of us selling into the U.S. There are thousands of different tax rates depending on the state, county, and city. As for selling into the U.K., there is just one rate, 20 percent, but even that is not so simple. Unfortunately, I cannot see any legislation coming soon to fix this, and even when it does come, it will likely not be simple to implement.
In short, the Internet is making the world a smaller place. It is increasingly common to buy everyday items from overseas. Legislation has not caught up with this. Every small-to-midsize retailer should lobby his representatives to sort this out. Otherwise, we could end up with mainly large corporations — not smaller businesses.