Taxing The Fast-Fashionistas

Tax Notes contributing editor Nana Ama Sarfo discusses how lawmakers across the globe are looking to taxes to address problems with fast fashion.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: Taxes never go out of style.

The holiday season approaches and with it comes the mad rush to find deals on gifts for friends and loved ones. At the same time, there’ll be holiday parties and other year-end events that will send shoppers to find outfits that will let them look good without breaking the bank. Enter fast fashion.

Today we’re taking a look at the tax implications of fast fashion and why policymakers are starting to take notice of the industry.

Here to talk more about this is Tax Notes contributing editor Nana Ama Sarfo. Ama, welcome back to the podcast.

Nana Ama Sarfo: Thank you, Dave. It’s really good to be back. This is definitely something fun to talk about, at least leading up to the Black Friday retail frenzy and the holiday season like you’d mentioned.

David D. Stewart: Yeah, excellent. Now, why don’t we start off with a sort of basic definition of, what are we talking about when we talk about fast fashion?

Nana Ama Sarfo: Fast fashion is a multibillion dollar industry that basically enables millennials and Gen Z to buy a completely new wardrobe every season, throw it out after a few wears, and then start all over again the next season.

It’s kind of democratized the idea of luxury because, as soon as a high fashion house releases a collection, there’s a fast fashion brand sewing knockoffs as soon as the models walk off the runway. It allows people to participate in luxury trends for cheap. Although in those cases, no one is really fooled because the knockoffs generally aren’t too great.

But if you want a more academic answer, fast fashion is a segment of the retail industry that mass produces huge volumes of clothing at a really rapid speed and then sells them very cheaply. It runs the gamut from ultralow priced retailers like Shein and Fashion Nova and Temu, to ones that are a bit higher priced to Zara and H&M.

They are everywhere, both online and in brick-and-mortar form, and they’re making a killing. They have an iron grip on the fashion industry. Some of the world’s top fashion retailers are fast-fashion companies like the H&M group or Inditex, which is the parent company of Zara. Right now it’s estimated that the global fast-fashion industry is worth something like $100 billion. Many people are shopping there, and it’s been the case for years.

David D. Stewart: What sort of concerns does this new world of fast fashion and the fast turnover of wardrobes, what sort of concerns do they raise?

Nana Ama Sarfo: Well, there are many concerns. Just at a high level, there are concerns about the environmental impact of these companies’ manufacturing practices. There are concerns about the sheer volume of clothing that’s being produced and also the life cycle of these products.

Those life cycle concerns are specifically about what’s happening to unsold inventory or clothing that consumers are purchasing and then later throwing away. Then there are also concerns about, let’s call it tariff avoidance.

David D. Stewart: OK, well, let’s get into that. What sort of tariff avoidance are we seeing?

Nana Ama Sarfo: As far as tariffs are concerned, you would think that customs officials would be really happy about the high volume of shipments that are entering their countries from fast-fashion companies. But the reality is that some of them believe that these companies aren’t paying the proper amount of tariffs that they should when you look at the overall volume of goods that they’re sending.

That’s because some of these vendors are shipping their packages directly to the consumer. They’re not doing it in bulk amounts to then be broken down and distributed once the bulk shipment reaches the target country. Since they’re selling really low-cost items, that impacts the tariff amounts that can be collected.

In South Africa, the Department of Trade, Industry and Competition announced in March that it was investigating Shein, and this was reported by The Wall Street Journal. Now, I don’t believe we have details of that investigation or findings yet, but the background is that South African officials reportedly say that the company is paying half or even a quarter of the proper tariff rate by shipping its clothing in smaller packages.

Then there’s also some scrutiny in the United States. In June a U.S. House committee released a report accusing Shein and Temu of taking advantage of a tariff exemption. In the U.S., importers are exempted from paying customs duties on packages that are valued under $800. Hundreds of millions of packages enter the country under this exemption.

The House committee said that about 30 percent of those packages come from Shein and Temu, and they also said that the packages are being sent as direct to consumer shipments and not bulk shipments. Because of this, they’re usually worth far less than $800, and they can enter the country duty free. That’s the tariff issue.

Then there are also environmental concerns. On the environmental side, it used to be that retailers produced four fashion cycles per year, and it’s been reported that fast-fashion companies are now producing 50 or more cycles per year. That’s boiling down to about 100 billion clothing items that are being produced annually.

But consumers don’t keep fast-fashion pieces forever. Either the clothing breaks down, or they think they can throw it away because it’s so cheap. The average consumer wears a piece of fast-fashion clothing about seven times before tossing it.

On a larger scale, it’s estimated that about 50 billion garments are discarded within a year of being made, and they have to wind up somewhere. In the U.S. particularly, it’s been reported that 85 percent of discarded clothes are sent to landfills or incinerated. Then also looking at this from a production lens, the emissions and water pollution effects are high.

The World Health Organization has estimated that the fashion industry is responsible for about 10 percent of global greenhouse gas emissions and that the textile dying process accounts for 20 percent of water pollution. The fabric industry reportedly is the second largest polluter of water globally behind agriculture, which is staggering.

David D. Stewart: Yeah, I mean, that’s a lot of impact from one industry. How would taxes be used to deal with this issue?

Nana Ama Sarfo: That’s a really good question. There have been discussions in a few different countries, and the main ideas are garment levies or offering favorable VAT rates to clothing resale and repair providers.

About four years ago in the United Kingdom, a House of Commons committee issued a report asking the government to implement a few tax measures. At the time, the U.K. was considering a plastics tax, which it now has.

The committee at that time said that the proposed tax should apply to clothing items with less than 50 percent recycled PET [polyethylene terephthalate]. The committee also said that the U.K. should reduce VAT on clothing repair services, which is something that Sweden currently does. They also requested that the government impose a clothing levy. The government declined to do any of that, but some lawmakers have recently revisited those ideas. The Liberal Democrat party released a policy motion in September, and they asked for the same sorts of measures.

Now for them, as far as a levy is concerned, they would want to see a one pence per garment levy on new garments that are produced for sale in the U.K. market. They would like to see those proceeds earmarked for improving and developing clothing recycling facilities and clothing collection.

Then in Australia, right now there’s a voluntary garment levy that companies can agree to pay. It was created by the Australian Fashion Council. It’s a 4 cent per item levy on domestically manufactured clothing and also imported clothing.

That being said, there are news reports that clothing manufacturers have been reluctant to sign on to this voluntary levy. The country’s environmental minister reportedly is not happy about this. The Australian Broadcasting Corporation reported that she had told clothing manufacturers that they have one year to sign on to this voluntary levy before the Australian government decides to impose its own regulations.

I mean, we’re talking a pretty significant amount of money here. This 4 cent per item levy could raise an estimated AUD 36 million per year.

Then in the European Union, the European Commission has an EU strategy for sustainable and circular textiles. There, it’s encouraging EU member states to devise their own tax measures to promote clothing reuse and repair. But the initiative is new, and it remains to be seen how individual countries will respond to that call.

Then also along similar lines, Sweden had thought about introducing a chemical excise tax on clothing and footwear a few years ago. Fast fashion wasn’t specifically mentioned within that proposal, but it’s certainly something that would’ve touched that industry.

Then lastly, we have Brazil, which also has voiced concerns about e-commerce companies paying the proper amount of import taxes on their shipments.

In Brazil, low-value international e-commerce shipments are exempt from a federal import tax, and Brazil is concerned, similarly to officials in South Africa and the U.S., that these e-commerce companies are shipping their goods in a way that allows them to avail themselves of this exemption.

Brazil is saying that it’s thinking about resolving this via a digital tax, which is a really interesting name, because that’s not normally what comes to mind when we think about digital taxes.

David D. Stewart: Now, you mentioned earlier that there were concerns in the U.S. about this industry. Do any of these solutions seem like something that could be adopted here, or is there some other measure that could be adopted?

Nana Ama Sarfo: I definitely think that it’s fair to revisit the tariff exemption. I do think that’s a task that could attract bipartisan support, predominantly because many of the top fast-fashion companies are not American, so there wouldn’t be a concern that this could negatively impact American industry.

Beyond that, I think that clothing levies could be more successful at the state and local level rather than the federal level. At the local level, we’ve seen that with the example of excise taxes on soda. In New York City, there’s a 5 cent fee on paper bags.

But even in those cases, I think that the success of a local levy might hinge on whether there are local waste problems that have come to the attention of the public and lawmakers. Sales taxes are the domain of states and localities, and I think that clothing levies could fall into the same category.

David D. Stewart: Now, do you expect there to be a push toward tax solutions to the questions of fast fashion, or is that not necessarily the best way to handle it?

Nana Ama Sarfo: I think that a tax solution is very possible, especially as governments draw closer to their Paris Agreement commitments and they’re looking for ways to fund them or adhere to them.

As for the question on whether or not taxes are the best way to handle some of the issues that we discussed, I think the word “best” is doing heavy lifting here because it’s a very high threshold to meet. I probably wouldn’t say “best” because clothing levies of a few cents per item aren’t going to deter buyers from getting already cheap clothing.

But I do think that they could offer a good way to start mitigating some of the concerns that we discussed previously. For example, revenue from clothing levies could be used to fill environmental trust funds or to fund clothing recycling programs and things of that nature.

David D. Stewart: Well, Ama, this has been fascinating and thank you so much for being here to talk about it.

Nana Ama Sarfo: Absolutely. It’s always a pleasure, Dave. Thank you for having me.