Tax Systems Built for Linear Economies Threaten Progress of Global Circular Fashion

If the resale boom shows what consumers want, tax codes signal what the system still rewards. The value-added tax is from a bygone era—it was never devised with reuse in mind. Built for a linear economy of extraction, production and disposal, VAT assumes a product is sold once, not multiple times across its life. That intrinsic flaw has today become the bane for secondhand markets.

Campaigners describe it as “double taxation.” A jacket, for instance, is taxed at full value when sold new. When resold, VAT is charged again on the resale price, inflating costs for buyers and shrinking margins for sellers. So, the tax system nudges consumers back towards new, cheap imports, which often avoid similar fiscal hurdles. The paradox is stark: the government taxes a product more heavily for being used longer, even as it publicly champions climate targets. And, this is happening across geographies and political dispensations.

Some governments have recognised the contradiction, but solutions are outright messy. The UK, for instance, allows resale under a “margin scheme,” which applies VAT only to the difference between purchase and resale price. A business that buys a jacket for £1,500 and resells it for £2,000 pays VAT on the £500 margin, not the full £2,000. Ireland runs a similar approach. The principle is sound, prima facie, at least: avoid taxing value that has already been taxed once. But this comes with heavy record-keeping obligations, making them difficult for small sellers and charities to use effectively.

Online marketplaces, now central to the business of seconds, have to deal with their own compliance headaches. In both the EU and UK, platforms have been reclassified as “deemed suppliers,” meaning they are directly responsible for collecting VAT on transactions that pass through them. The intent was to prevent leakage in a fast-growing digital market. But that hasn’t happened.

Instead, in practice it forces platforms to assign VAT liabilities in real time, based on information provided by thousands of sellers. This shift increases administrative costs, and risks squeezing out small-scale resellers and charities who rely on these platforms to reach buyers. Some observers also warn that excessive compliance burdens could push smaller players into informal, untaxed channels, undermining both fairness and revenue collection.

Across the Atlantic, the same critique is gaining traction. A coalition of US platforms and advocacy groups has launched a petition to scrap resale taxes altogether, arguing that they unfairly penalise consumers and businesses who keep clothes in circulation. They content this is as a structural barrier to sustainability: taxation designed for a throwaway economy applied to practices that extend product life.

For Swedish businesses, the frustration is writ large. Many STICA members have been experimenting with rental, resale and repair services, but profitability is still not working out. VAT adds to costs that already include sorting, logistics and administration. In their view, fiscal reform could be the lever that finally allows circular business models to compete with traditional ones.

Unless governments re-engineer tax systems that reward consumption and disposal, the economics of secondhand clothing will remain tilted against sustainability. The question now is whether policymakers are ready to treat circularity not just as rhetoric but as a fiscal priority.

The secondhand boom is often held up as conclusive proof that consumers are ready for circular fashion, and Sweden’s secondhand fashion sector remains one of Europe’s fastest growing. What is less visible is that circular sales often generate higher logistics costs per item—from sorting to distribution—compared with mass-produced fast fashion. Yet, for all the optimism, the sector remains brittle. Profitability is slim, business models are untested at scale, and taxes continue to tip the balance in favour of new production. They are skating on thin ice.

Inside the STICA initiative, which has 54 companies among its signatories, circularity is essential to meeting climate goals. An earlier survey (mentioned in the 2024 Progress Report) found that 72% of the initiative’s members view circular business models as central to their transition plans, and 65% have already launched initiatives such as rentals, repairs or resale. But the revenue outlook remains bleak: almost half have not calculated the potential income from circular models by 2030, and among those who have, most expect just 1–5% of revenue to come from them.

The environmental stakes are clear. The fashion industry contributes an estimated 2–4% of global greenhouse gas emissions. The bulk of that footprint lies in the production of new garments—energy-intensive, water-heavy, and chemically intensive processes. Extending the lifespan of clothing through reuse, repair and rental is one of the most effective ways to cut emissions. Studies show that when secondhand purchases replace new consumption, the reductions in climate and resource impact are significant.

But reality is very different from rhetoric—the economics more often than not work against circularity. Repair services are labour-intensive and therefore expensive relative to the price of cheap fast fashion, which benefits from automation, offshore production and economies of scale. Resale platforms must handle sorting, verification and logistics costs that far exceed those of high-volume new production. For many consumers, the economics tilt further when tax is layered on top of already expensive repairs. Critics believe this distorts price signals: mending or reusing is made to feel like a premium choice, while cheap imports remain artificially competitive.

There are, meanwhile, discernible signs of adaptation. Several European governments are testing repair incentives. France, for example, pairs VAT cuts with a repair bonus funded through producer fees, while Sweden uses a reduced rate on minor services. Advocates argue these fiscal nudges, when scaled, could shift consumer expectations across the single market.

For now, however, Sweden’s resale sector illustrates the limits of momentum without policy change. Consumer demand is rising, companies are testing out new models, and the climate case is immediate. Yet, the rules of the market continue to reward what is cheapest to produce, not what is most sustainable to extend. Without reform, unsold or undervalued clothing is more likely to be exported in bulk to developing countries, where it often ends up as waste (OAI.docx). Circular fashion risks staying on the margins rather than becoming the norm.

There are lessons for everyone, certainly Europe, in the context of the STICA call. Sweden is not alone in grappling with the contradiction between circular-economy ambitions and fiscal structures built for linear consumption. Across Europe, governments have begun experimenting with targeted tax reforms, offering a glimpse of how policy can either slow or accelerate the shift to reuse.

France has gone furthest, even as we speak. In 2023, it introduced a “repair bonus,” giving consumers immediate discounts on mending clothes, shoes and other goods. Patching a pair of jeans can earn €7 off the bill, while repairing shoes qualifies for €8. The bonus is funded not by taxpayers but through contributions from textile and footwear producers under an extended producer responsibility (EPR) scheme. Also, France reduced VAT on clothing and footwear repairs from the standard 20% to 5.5%. Together, these measures show how fiscal incentives and producer responsibility can reinforce each other, making repairs more affordable and circularity more visible to consumers.

Sweden itself already applies a reduced VAT rate of 12% on minor repair services such as clothing alterations, shoe mending and bicycle maintenance. But campaigners argue that extending relief to resale is the missing piece. If consumers see a tangible difference at the till, they say, secondhand purchases could become a default choice rather than a niche alternative.

The UK has taken a more cautious route, holding consultations on VAT relief for donated goods sold by charities. The Treasury framed the move as a way to encourage donations and reuse, but the measure stops short of a systemic rethink. Analysts acknowledge margin schemes ease the burden of double taxation, but in the same breath warn that varying rules and record-keeping demands undermine their accessibility. For small operators, the complexity often cancels out the intended relief. Similar debates extend beyond Europe: in Bangladesh, policymakers have considered VAT waivers on recycled clothing, recognising the importance of fiscal levers for strengthening the country’s emerging circular textile sector.

Beyond national initiatives, the European Union is building a broader regulatory framework to support circular textiles. The Ecodesign for Sustainable Products Regulation (ESPR) will set durability and repairability standards across the bloc, while a digital product passport (DPP) will require brands to disclose the environmental impact of garments from production to end-of-life. New EPR rules will make producers financially responsible for their products after use, creating funding streams that can support fiscal incentives such as repair bonuses (EU Waste Framework Directive). Some analysts argue governments could go further by recycling VAT revenues into dedicated repair hubs or textile-sorting infrastructure, making fiscal reform part of a broader investment in circular systems.

What Sweden now proposes could push that agenda further. An across-the-board cut in VAT on secondhand sales would be a direct fiscal lever in Europe’s circularity toolkit. Supporters say it would not only level the playing field for resale businesses but also send a strong policy signal across the single market. If Sweden succeeds, it could pressure other EU countries to harmonise VAT rules, turning what is now a patchwork of pilots into a more coherent European approach.

The lesson is clear: fiscal design matters. Tax codes can quietly entrench the economics of fast fashion, or they can make it cheaper, easier and more normal to keep clothes in use. For a sector under pressure to shrink its climate footprint, the difference between those two futures may come down to whether governments are willing to put tax reform at the heart of circular policy.