Tea Act 1773

The Indemnity Act of 1767, which gave the East India Company a refund of the duty on tea that was re-exported to the colonies, expired in 1772. Parliament passed a new act in 1772 that reduced this refund, effectively leaving a 10% duty on tea imported into Britain. The act also restored the tea taxes within Britain that had been repealed in 1767, and left in place the three pence Townshend duty in the colonies. With this new tax burden driving up the price of British tea, sales plummeted. The company continued to import tea into Great Britain, however, amassing a huge surplus of product that no one would buy. For these and other reasons, by late 1772 the East India Company, one of Britain's most important commercial institutions, was in a serious financial crisis.

Eliminating some of the taxes was one obvious solution to the crisis. The East India Company initially sought to have the Townshend duty repealed, but the North ministry was unwilling because such an action might be interpreted as a retreat from Parliament's position that it had the right to tax the colonies. More importantly, the tax collected from the Townshend duty was used to pay the salaries of some colonial governors and judges. This was in fact the purpose of the Townshend tax: previously these officials had been paid by the colonial assemblies, but Parliament now paid their salaries to keep them dependent on the British government rather than allowing them to be accountable to the colonists.

Another possible solution for reducing the growing mound of tea in the East India Company warehouses was to sell it cheaply in Europe. This possibility was investigated, but it was determined that the tea would simply be smuggled back into Great Britain, where it would undersell the taxed product. The best market for the East India Company's surplus tea, so it seemed, was the American colonies, if a way could be found to make it cheaper than the smuggled Dutch tea.

The North ministry's solution was the Tea Act, which received the assent of King George on May 10, 1773. This act restored the East India Company's full refund on the duty for importing tea into Britain, and also permitted the company, for the first time, to export tea to the colonies on its own account. This would allow the company to reduce costs by eliminating the middlemen who bought the tea at wholesale auctions in London. Instead of selling to middlemen, the company now appointed colonial merchants to receive the tea on consignment; the consignees would in turn sell the tea for a commission. In July 1773, tea consignees were selected in New York, Philadelphia, Boston, and Charleston.

The Tea Act retained the three pence Townshend duty on tea imported to the colonies. Some members of Parliament wanted to eliminate this tax, arguing that there was no reason to provoke another colonial controversy. Former Chancellor of the Exchequer William Dowdeswell, for example, warned Lord North that the Americans would not accept the tea if the Townshend duty remained. But North did not want to give up the revenue from the Townshend tax, primarily because it was used to pay the salaries of colonial officials; maintaining the right of taxing the Americans was a secondary concern. According to historian Benjamin Labaree, "A stubborn Lord North had unwittingly hammered a nail in the coffin of the old British Empire."

Even with the Townshend duty in effect, the Tea Act would allow the East India Company to sell tea more cheaply than before, undercutting the prices offered by smugglers. In 1772, legally imported Bohea, the most common variety of tea, sold for about 3 shillings (3s) per pound. After the Tea Act, colonial consignees would be able to sell it for 2 shillings per pound (2s), just under the smugglers' price of 2 shillings and 1 penny (2s 1d). Realizing that the payment of the Townshend duty was politically sensitive, the company hoped to conceal the tax by making arrangements to have it paid either in London once the tea was landed in the colonies, or have the consignees quietly pay the duties after the tea was sold. This effort to hide the tax from the colonists was unsuccessful.

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