The Tax Man Comes For Fast Fashion, Part 2

Of the many rivals that fast-fashion giants Shein and Temu are steadily compiling, Etsy is perhaps the most unlikely.

Etsy, which rose to fame for its marketplace of handmade and one-of-a-kind clothing, jewelry, and homeware designs, has been navigating a very discouraging past six months. In the height of the December 2023 holiday shopping rush, the online marketplace laid off 11 percent of its workforce, citing a challenging e-commerce environment. Its first quarter of 2024 was a bit lackluster — its gross merchandise sales dropped by nearly 4 percent, and the market didn’t respond kindly to the news. Etsy’s stock price fell 15 percent in early May after it released its first-quarter results.

Etsy doesn’t expect its second quarter to be much better.

Over the past few months, Etsy’s top officers have subtly, and not so subtly, blamed Shein and Temu for some of the company’s market woes. In a November 2023 earnings call, CEO Josh Silverman told analysts that there’s little doubt that Shein and Temu are significantly affecting the e-commerce market.

“You don’t get that big that fast without taking share from many people,” he said.

Companies also don’t get that big that fast without aggressive advertising blitzes, he said. Shein and Temu are “almost single-handedly” driving up advertising costs, particularly on Google and social media, according to Silverman.

For now, Etsy is just trying to ride out the storm and hope that consumers will eventually tire of mass-produced goods and return to Etsy for heirloom-style pieces.

“We are the opposite of Temu. If I had to think about what is the polar opposite of Etsy, I’d probably get pretty close to Temu,” Silverman said. “I think the more people experience super cheap and super disposable, the more they crave something different and something better, and that’s us.”

Etsy’s gripes with Shein and Temu magnify the wide-sweeping way in which fast-fashion companies have completely upended the e-commerce market. And around the world, fashion company executives are launching attacks at Shein and other fast-fashion brands for multiple reasons. As I discussed in a prior article, one of the largest concerns is that foreign fast-fashion companies are skirting customs duties by shipping their packages directly to consumers —instead of in bulk — which qualifies them for de minimis exemptions for low-value imports.

In South Africa, Fred Zietsman, the head of e-commerce giant Takealot, is upset. He’s concerned that foreign fast-fashion companies are bypassing import duties and taxes, and he’s reportedly talking to the government and nongovernmental organizations about regulations.

Theo Paphitis, the chair of U.K. stationery and office supplies company Ryman, is also concerned. He recently told the Times that the government needs to prevent fast-fashion companies from exploiting the country’s de minimis exemption for low-value imports.

“The companies benefiting from it are not British companies. The government is not plugging loopholes. It’s becoming absolutely clear that the emperor has no clothes on,” Paphitis said.

The head of U.K. fashion chain Next is also trying to get lawmakers’ attention. “I wouldn’t underestimate the difficulty and the administrative complexity of trying to tax lots of small deliveries. But I think it’s important that the Government look at it,” he recently told The Telegraph.

United States

In the United States, a group of lawmakers, manufacturers, labor unions, and other stakeholders are trying to tighten the country’s de minimis rules. In March, they launched the Coalition to Close the De Minimis Loophole amid a meteoric rise in low-value shipments. Importers are exempted from paying customs duties on packages valued under $800 under section 321 of the Tariff Act of 1930. In 2023 the United States received 1 billion de minimis packages, a 57 percent increase compared with 2020. U.S. Customs and Border Protection (CBP) estimates the country will receive a staggering 705 million packages by midway through this year, already more than the country received in total in 2020 or 2022, according to its statistics.

For decades, the de minimis exemption was hardly controversial. Until 1994, the de minimis threshold for low-value imports was $5, but Congress increased the threshold to $200 that year and then in 2016 to $800 per person, per day. There was a reason for the jump to $800 — Congress wanted to align the de minimis threshold with the duty-free exemption that applies to international travel. When U.S. residents travel abroad, they’re allowed to bring home up to $800 worth of goods duty free, Charles Benoit, trade counsel for the Coalition for a Prosperous America (CPA), told Tax Notes. However, the de minimis increase happened as international e-commerce really exploded. Shein, in 2016, was less than a decade old. Temu hadn’t even been created. Now that the landscape has changed, some lawmakers are questioning if it’s time to reduce the threshold or at least collect better data about the shipments that are entering the country.

In June 2023 a bipartisan group of lawmakers introduced a bill that would prevent goods from China and 17 other countries that are nonmarket economies or are on the U.S. trade representative’s “priority watch list” from using the de minimis exemption. The measure, the Import Security and Fairness Act, would also require U.S. CBP to collect specific data about each shipment, including its individual U.S. transaction value.

The bill’s sponsors, House Ways and Means Committee member Earl Blumenauer, D-Ore., and Rep. Neal P. Dunn, R-Fla., and Senate Finance Committee member Sherrod Brown, D-Ohio, and Sen. Marco Rubio, R-Fla., are largely worried about competition. In a release, Blumenauer’s office said the legislation was “responding to the explosion in imported e-commerce packages.”

But the legislative conversation has really picked up steam in recent weeks because there have been several bills introduced since March, some of them bipartisan.

A sprawling trade and investment bill introduced in March, the Americas Trade and Investment Act, would prevent China and Russia from using the de minimis exemption. Some lawmakers think the United States could raise $15 billion annually if it does. The bipartisan measure, introduced by Reps. Maria Elvira Salazar, R-Fla., and Adriano Espaillat, D-N.Y., and Senate Finance Committee members Bill Cassidy, R-La., and Michael F. Bennet, D-Colo., would not only block the two countries, but also change how the de minimis exemption works. Instead of maintaining the $800 exemption, the United States would reciprocally match the threshold from the shipment’s country of origin.

Because many countries have a lower de minimis amount than the United States, reciprocity should, in theory, make it easier for the government to raise some revenue. However, the National Foreign Trade Council and several other business associations have warned that the transaction costs of collecting revenue on low-value shipments could cost more than the actual revenue collected and significant government resources would be required to implement these changes.

The United States has one of the highest de minimis thresholds. By comparison, Canada’s exemption is C $150 ($111); the European Union’s is €150 ($162); and the United Kingdom’s is £135 ($168). China’s threshold is often quoted as CNY 50 ($6.50), but it’s actually much higher for e-commerce, pointed out John Pickel, senior director of international supply chain policy at the National Foreign Trade Council. The rate is CNY 5000, or about $700, according to data maintained by the Global Express Association.

Another bill introduced in April by Sens. Tammy Baldwin, D-Wis., and Mike Braun, R-Ind., would require federal agencies to track whether de minimis imports are illicit or made with forced labor. Offending importers would face fines under the measure, titled the Ensure Accountability in De Minimis Act of 2024.

Baldwin isn’t interested in reducing the $800 de minimis amount across the board. But she, too, is interested in matching the threshold to that of America’s trading partners on a country-by-country basis. She is also interested in barring Chinese and Russian shipments from the de minimis exemption. She wants to use the resulting proceeds to reshore industry from China. In June 2023 Baldwin and Cassidy introduced these plans in the De Minimis Reciprocity Act of 2023, but the bill has languished in committee.

Pickel is concerned that the reciprocity provisions would be next to impossible to administer and cede a portion of U.S. sovereignty to other countries.

“It’s saying basically, you Country X, if you want to set your de minimis level at $1, that’s where we are going to set ours, and that will have to be re-calculated on a rolling basis for accurate implementation,” he said. “But Congress has said time after time, that there’s value to the U.S. economy having quick access, without added transaction costs, to low value commodities.”

“When considering how other countries implement de minimis, there are different categories, agreements make goods subject to different thresholds, so there’s a lot of concern about how that would work,” he said.

Another bill introduced in April, the End China’s De Minimis Abuse Act, would prevent firms from applying the de minimis exemption to any goods subject to section 301 trade enforcement tariffs. Rep. Gregory F. Murphy, R-N.C., had his eyes on China when he introduced it; that provision alone would block more than half of Chinese de minimis imports from receiving the exemption.

It’s clear from the pending bills that some lawmakers believe there is an information gap about de minimis shipments, but Pickel, who spent more than a decade at U.S. CBP working on trade matters, said that’s a misconception. U.S. CBP does collect data on all de minimis packages, including information about the shipper, recipient, value, country of origin, and a detailed product description. Even more information is collected on about 80 percent of de minimis shipments that participate in CBP’s Entry Type 86 Test and 321 Data Pilot, he said. In the case of entry type 86, additional data, including the package’s harmonized tariff schedule classification, are collected on the vast majority of de minimis shipments, he said.

“The key to improving enforcement is ensuring that CBP can objectively validate data in all environments to increase confidence that the agency is making assessments based on correct information regardless of the value of a shipment or how it arrived at a U.S. port,” Pickel said.

However, entry type 86 collects the package’s fair retail value in the country of shipment, and some lawmakers want the U.S. value instead. Benoit is concerned that type 86 data, which is reported by the foreign vendor, is subject to manipulation, but U.S. CBP recently clarified that vendors that engage in misconduct are subject to penalties, sanctions, and liquidated damages. But what is the value of de minimis imports entering the country, and how much revenue might the United States be losing because of tariff avoidance? According to official U.S. CBP data, about $29 billion worth of de minimis imports entered the country in 2018, and nearly $40 billion in 2021. The Coalition for a Prosperous America (CPA) thinks that’s an underestimate. It has calculated that de minimis imports from China alone were valued at nearly $188 billion in 2022.

To arrive at the $188 billion figure, CPA analyzed company reports from 10 retailers, including Shein, Amazon, and Walmart; U.S. retail sales data from the U.S. Department of Commerce; and U.S. CBP reports on de minimis shipments. CPA charges that the imports it calculated weren’t included in the U.S. Census Bureau’s import statistics — which draw from CBP data — because CBP had based its data on shipments with electronically submitted value declarations.

The U.S. Chamber of Commerce disputes CPA’s findings, saying that earning statements are not correlated with import data. But the fact that the debate even exists underscores why lawmakers need more data about the de minimis landscape.

Meanwhile, experts affiliated with the Federal Reserve Bank of New York have estimated that the government lost $10 billion in tariff avoidance in 2020 because of import underreporting. Fully eliminating the de minimis exception may not be the best solution, because consumers and businesses would find themselves paying merchandise processing fees and broker payments on top of tariffs. That could cost U.S. consumers and businesses $47 billion annually, according to Christine McDaniel, a senior research fellow at George Mason University’s Mercatus Center.

Pickel is doubtful that reversing the 2016 de minimis increase would affect shipment volume or compliance rates. “CBP has said that the average de minimis shipment into the United States is about $55. So even returning to the $200 threshold would not have an impact on the vast majority of de minimis shipments,” Pickel said. Benoit, however, thinks Congress shouldn’t stray too far from the threshold’s original structure.

“We should go back to 1993; if you adjust $5 for inflation, that’s $9, and I think that would be fine. I don’t think we need to go to zero,” Benoit said. “The key is that de minimis should not be an avenue of commerce. It’s to ensure the government is not wasting its time.” Benoit also suggested that the government apply existing informal entry rules to low-value shipments instead of the de minimis regime. An informal entry is a personal shipment valued under $2,500, and it is subject to a roughly $10 merchandise processing fee, along with other user fees.

Polluter Pays in the EU

EU lawmakers are planning to make clothing, footwear, and textile producers pay for the costs of recycling their products. Some 78 percent of post-consumer textiles are thrown away in the EU, creating an escalating waste problem according to the European Commission. Right now, lawmakers are toying with a fee to cover the costs; the European Commission has suggested it’ll cost 12 cents per item. The concept isn’t new — it’s called Extended Producer Responsibility (EPR) — and EPR laws squarely hold producers responsible for managing the end and waste stages of their products’ life cycle.

The fee is being discussed within larger negotiations to revise the bloc’s environmental waste and recycling law, called the Waste Framework Directive. The main question is how strict will the EU’s EPR fees and rules be? The European Commission and European Parliament have different views.

The European Commission originally envisioned that the fee would apply to textile, footwear, and textile-related products. It would exclude micro-enterprises, self-employed tailors, and resale companies. And the commission wanted to give member states a long runway to enact these fees; they would have 30 months to do so from January 1, 2025.

Members of the EP, on the other hand, think member states need only 18 months to start assessing fees. MEPs are also pushing for the fees to apply to carpets, mattresses, and other non-household products that contain textiles. That means the measure would apply to clothing, bedding, mattresses, carpets, and products that contain (real or faux) leather, rubber, or plastic. The EP adopted these changes in March in one of its last official votes before the bloc holds parliamentary elections in June. The new Parliament will continue the negotiations. Lawmakers, however, don’t have a lot of time to hash out the details; the EPR rules are scheduled to start on January 1, 2025.

Some environmental groups think European lawmakers can do even more.

Last October, the European Environmental Bureau and 10 other environmental groups voiced concern that the rules won’t be enough to reduce pollution or force textile producers to make more eco-friendly designs. Rather, producers might see it as a mere cost of doing business.

To avoid this, the EPR fees should be based on volume rather than weight, they said. A weight-based fee is too easy to game; a clothing manufacturer could decide to replace a heavier fabric, like cotton, with a lighter and less biodegradable one, like polyester.

France

Lastly, there’s France. In March France’s National Assembly unanimously approved a bill that would slap fast-fashion producers with a graduated set of fines, starting at €5 per product in 2025 and reaching €10 per product in 2030. The proceeds would be used to finance clothing collection and recycling. The measure would also block fast-fashion retailers from advertising within the country. It’s the first legislation of its kind, and some analysts are questioning whether France’s bold move could start a trend. The French Senate must vote on the measure, so it’s far from finalized. But the idea has opened up conversations in other countries, like Ireland, where a member of Parliament recently asked the public whether the country should follow France’s example and introduce a fast-fashion levy.