CCIA Says Tariffs Needed to Stop DSTs; AAFA, FDRA, NRF, RILA Say They Won't Work

Trade groups whose members would have to pay foreign digital services taxes and trade groups whose members would have to pay if tariffs are hiked up to 25% on products from the countries imposing DSTs agree that DSTs are wrong and that the government should use all its persuasive power to convince countries like India, the United Kingdom and Spain not to impose these taxes. But the internet trade groups split on whether tariffs are the right tool to convince countries to roll back or never pass DSTs, and retailers and apparel and footwear companies say the tariffs will hurt American businesses and consumers more than the targeted exporters.

The Computer & Communications Industry Association gave the most direct support of levying tariffs on DST countries. In testimony at a virtual Office of the U.S. Trade Representative hearing May 3, CCIA Policy Counsel Rachael Stelly said that in addition to working for a global international taxes solution at the Organization for Economic Cooperation and Development, USTR should impose tariffs “to deter countries and send a strong message to other countries. As noted in its original written comments in this investigation, CCIA takes seriously the impact that tariffs can have. Tariffs should only be used in limited circumstances, in a targeted manner, and where there is a clear strategy in place designed to change the behavior of a trading partner. USTR’s proposed action appears to meet this standard.”

Jordan Haas, director of trade policy at the Internet Association, said IA has no position on the proposed retaliatory tariffs, but he said he hopes duties will never be levied because he hopes countries will roll back DST laws before any additional escalation occurs.

But he said he is concerned, because more countries are thinking of passing DSTs, including Brazil, Vietnam, Belgium, Pakistan, Nigeria, the Philippines and Canada.

He said he's concerned the OECD will reach a solution but the countries with DSTs will not roll them back.

The App Association opposes tariffs, because it's concerned that targeted countries could retaliate, and its small company members would be hurt.

USTR Assistant General Counsel Patrick Childress asked Gary Sprague, an attorney from Palo Alto, California, representing the Silicon Valley Tax Directors Group, whether he thought tariff actions would dissuade other countries from adopting DSTs. Sprague said his group hasn't taken a view on tariffs, but encouraged a “whole of government approach,” including OECD negotiations from Treasury, diplomatic conversations and trade negotiations.

Sprague did give officials ammunition for larger tariff actions, as he said the information from his member companies -- which doesn't include Amazon, as it is not a Silicon Valley giant -- is that USTR estimates are too low for the cost of paying the taxes, by 120% to 200%. The figure that USTR produced for the cost of India's DST, in particular, he said, was too low.

And those numbers don't even count the administrative version. He gave an example of how a DST would require a company to track all views of advertisements, not just those who click on the advertisements, and track how many of those views were in the country levying the tax versus the rest of the world, and then preserve that data so it could be audited. Sprague said the engineering costs to track the billions and billions of data points would be significant.

Representatives from the Retail Industry Leaders Association, the American Apparel and Footwear Association, the Footwear Distributors and Retailers of America and National Retail Federation all spoke against the tariffs.

Beth Hughes, vice president for trade and customs policy at AAFA, said many of its companies moved manufacturing out of China to India and Turkey. India is the fifth largest supplier of accessories, and Turkey apparel exports to the U.S. have doubled over the last 10 years. Turkey has also taken market share in carpets from China, the NRF's Jon Gold said.

Gold also said that higher tariffs on European luxury goods would lead to more counterfeiting. Written testimony from NRF said, “The products on the proposed lists -- perfumes, handbags, apparel, footwear and accessories -- are already the most counterfeited, primarily coming from China.”

Hughes testified that hiking tariffs on accessories or apparel by 25% would “punish the U.S. companies who have made much needed progress in this area to find supply chain partners.”

Agricultural Department Senior Policy Advisor Andrew Stephens asked Hughes where her member companies would turn if the tariffs are increased. “We’re running out of places quite frankly,” she said, after the tariffs on China and the threat of tariffs on Vietnam.

She also gave one anecdote to show USTR how much these tariffs could cost. She said one company imports sandals from Italy or Spain, with a 12.5% to 37.5% tariff. If there's a Section 301 tariff of 25%, that importer would pay $1.35 million in just those new tariffs on 150,000 pairs of sandals.

Blake Harden, vice president for RILA, said businesses and customers paying $85 billion in Section 301 tariffs has “failed to stop China’s unfair trading practices.”

“From USTR’s proposed product lists, our members import goods such as cosmetics, perfumes, and shampoos from the United Kingdom; carpets, bed linens, curtains, tiles, kitchen fixtures and bathroom ceramics from Turkey; glassware, footwear, and seafood from Spain; and jewelry, seafood, basmati rice, and furniture from India. We fail to see how the imposition of an additional import tax on these products -- which will be paid by Americans -- will convince our trading partners to withdraw or reform their digital services taxes,” she said. If the USTR does decide to impose tariffs, she asked for at least 30 days' notice, so goods on the water won't face the additional taxes.

FDRA CEO Matt Priest testified that even the threat of tariffs on Italian shoes has led to layoffs, so one of the officials asked him how he can argue that the tariffs won't convince Italy to drop its DST. Priest acknowledged that demand from U.S. customers could decline with the higher prices, and that could harm Italian or Spanish exporters of shoes. But would those shoe exporters be able to convince the government to reverse course? “That's a political question, right? That's a question I can't answer,” he said. But he tipped his hat to the historical reason that shoes face high tariffs in service of his argument that the government can't be confident a punishing tariff would get a result. “We’re actually the poster children of how duties don’t do what they’re supposed to do … protecting domestic production,” he said.