Retail Delivery Fees Are Not the Panacea for States’ Transport Budget Woes
Attracted by the proliferation of last-mile local delivery services such as Amazon Delivery, Uber Eats, and DoorDash, legislators in certain states have looked to retail delivery fees as a partial solution to their transportation budget woes. Pioneered by Colorado in 2022, Minnesota will implement one in July 2024, with Washington State considering a similar measure. Unfortunately, these fees are an inefficient and ineffective way to close budget gaps, and lawmakers should consider other, more sound, policy options.
Retail delivery fees are essentially a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
imposed by state or local governments on goods that are delivered by last-mile specialty delivery companies. Importantly, they are not typically levied against commercial carriers such as FedEx or UPS. Legislatures proposing them have argued that they are necessary to counteract the decline in gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline.
revenues, ostensibly due to the proliferation of electric cars and trucks. Retail delivery fees are specific charges, levied per delivery or per unit delivered by local delivery companies or persons. Colorado charges 28 cents per delivery, irrespective of the value or the number of items in the delivery, and Minnesota charges 50 cents. Importantly, both states have significant exemptions. Exemptions to the Minnesota Retail Delivery Fee include retailers with less than $1,000,000 of retail sales within the state, and transactions not subject to sales and use tax (except for clothing).
There is no denying that transportation funding gaps are a significant problem for most states. In fact, only three states have dedicated revenues sufficient for upgrades and additions to their transportation systems. Others have to divert funds from their general revenues to the transportation sector to make up the difference. For the states with a budget shortfall, a retail delivery fee may superficially appear to be a good option to bridge the gap. Unfortunately, this thinking is misguided for several reasons.
First, like all costs, some part of the retail delivery fees will be passed along to the customer, depending on the relative supply and demand elasticities for the service. This particular tax also significantly impacts the elderly, mobility-challenged individuals, and the less affluent. For example, approximately 14 percent of the customer base of food delivery services is over 60 years of age, and surveys have shown that 52 percent of the population making less than $10,000 use such services.
Second, local retailers would be at a price disadvantage to non-local competitors that do not use last-mile delivery services. While income-limited exemptions do allow for small mom-and-pop stores to not be harmed by these charges, larger local companies, especially sellers marginally above the limits, would be affected. As profits among delivery companies are already razor thin (or even cross-subsidized by other entities), it is reasonable to expect that delivery charges would increase by the amount of the tax. As this fee is inevitably passed on to the consumer, it is likely that demand for locally delivered items would decrease at the margins. This makes the playing field less even for retailers.
Third, delivery companies that use gasoline- or diesel-powered vehicles would be responsible for paying the retail delivery fee in addition to any applicable fuel excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.
. This, in effect, is double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income.
of the same use of the transportation infrastructure, preferencing those companies that opt to invest in electric vehicles.
Lastly, this will add to the compliance burden faced by taxpayers. In Colorado, the seller must clearly demarcate the retail delivery fee on the invoice, which may require modifications to an existing invoicing system. For its part, to administer the delivery fee, the state must create a separate account for every licensed retailer and monitor compliance.
Exemptions to the delivery fee aggravate these inefficiencies. For example, in Colorado, delivery fees typically do not apply to goods that are exempt from sales taxes. Nevertheless, taxpayers must indicate the deliveries of both taxed and untaxed goods on compliance and reporting forms. Large retailers may have the budget for such additional costs due to economies of scale, but smaller retailers would find the additional compliance and reporting obligations overly burdensome, which could impact investment and hiring decisions.
If these fees are not the solution, then how can states resolve their transportation budget woes? The obvious answer is an increase in gas taxes to match the spending goals of the transport departments and adjust for fuel efficiency. No one likes tax increases, but an increase would be preferable to and more efficient than a newly created retail delivery tax. To compensate for the proliferation of electric vehicles, states might consider replacing or supplementing their fuel taxes with a per-mile charge. That way, the payments made by drivers will be in direct proportion to their use of transport infrastructure, fulfilling the targeting principle of public policy. To keep the rates as low as possible, exemptions should be avoided. (In the interim, if a vehicle miles traveled tax is not viable, states could also impose higher registration fees on electric vehicles to ensure that these vehicles also pay for roads, at least in part.)
When contemplating these fees, lawmakers should consider the long-term effects on retailers and those who use their products. Retail delivery fees are inefficient and ineffective. Fortunately, there are other solutions that could help fix the problem without creating additional inefficiencies or distortions in the market.
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