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You can't offer "contact-free" if you don't ship DDP

Perhaps nothing reveals how interconnected the world has become better than the new coronavirus (COVID-19). It spread from Wuhan, China, to 185 countries in a matter of months, leaving stay-at-home orders and shuttered businesses in its path. To survive in these uncertain times, businesses are focusing on online sales and relying on shipping companies more than ever.

Of course, shipping has always been an essential component of cross-border sales: There’s no buy online pick up in store (BOPIS) option when the seller’s in another country. However, social distancing rules put in place to help slow the spread of COVID-19 can have a real impact on some shipping options — notably, the Incoterms, DAP (Delivered at Place) or DDU (Delivery Duty Unpaid).

DAP (Delivered at Place)

DAP is most often used when there’s no need to clear customs: shipping from California to New York, say, or from one EU member state to another. Yet it can also be employed for cross-border sales.

With DAP, the seller:

  • Arranges transportation
  • Pays transportation costs
  • Handles the export process (if a cross-border sale)

And, the buyer:

  • Handles the import process (if a cross-border sale)
  • Pays customs duties and other import taxes and fees (e.g., clearance fees, GST, sales tax, or VAT)
  • Unloads the shipment at the destination

Shipping DAP is less risky for sellers because the buyer is liable for customs duties, import taxes, and other fees that may crop up at the last minute (e.g., storage costs if a shipment is delayed). Unfortunately, it can be a hassle for buyers.

In some cases, officials will hold shipments at customs until the buyer shows up to pay the duty, taxes and fees. In other cases, the shipment will be released to the transportation company, which must then collect customs duty, taxes, and fees from the buyer at the point of delivery. Carriers sometimes allow buyers to pay and sign necessary forms online, but sometimes the recipient must be present to sign and accept the delivery. That’s challenging during a pandemic.

Basically, the shipper won’t drop a package on the doorstep unless all associated costs have been paid. If online payment isn’t allowed, and a recipient isn’t present at the time of delivery (or can’t or won’t sign documents or pay the amount due), the delivery won’t be made. Instead, the shipper will leave a collection invitation, and the buyer will have to go to the carrier (e.g., FedEx, UPS, USPS) to pay the taxes and fees and collect the package.

Under the best of circumstances, shipping DAP reminds customers of the expense of the purchase. Who wants to travel to the post office, stand in line, sign papers, or pay taxes and fees to get something they ordered days, weeks, or even months ago? It’s irritating — and unless a customer expressly asks for a DAP shipment, it usually comes as a surprise.

The biggest risk of DAP for sellers has always been rejected shipments. That risk may be even higher today because of COVID-19 (unless the shipment is toilet paper or face masks).

DDP (Delivered Duty Paid)

When shipping DDP, the seller is liable for all fees and risks associated with transporting goods to the destination.

With DDP, the seller:

  • Arranges transportation
  • Pays transportation costs
  • Handles customs clearance (export and import)
  • Pays export taxes (if any), customs duty, and import taxes
  • Pays other costs, including but not limited to:
    • Damage fees
    • Shipping insurance (optional)
    • Storage fees (in the event the shipment is held up at customs or elsewhere)

And, the buyer:

  • Receives the shipment at the destination

Because liability rests on the seller, this is the ideal scenario for customers — especially during the current health crisis, when stay-at-home orders are de rigueur. Buyers place an order and pay applicable shipping and duties up front. The seller or shipping agent has the goods cleared at customs, and the package is delivered to the customer’s doorstep.

For buyers, it’s easy peasy.

Incoterms risks vs. rewards

No matter which option is used, it’s best for the buyer and seller to agree on all terms before finalizing the sale.

Shipping DAP (DDU) can lead to unhappy customers or the loss of a sale. Unless customers are aware of the terms up front and agree to pay the costs of importing their shipment upon arrival — even if it means a trip to a customs house or post office — they could be so put off by the experience that they simply refuse the shipment. In this case, the seller will bear the cost of reclaiming their goods.

Even if unhappy customers do go through with the purchase, after they finally get what they needed, they may clear the seller’s website from their browsing history and never return.

Yet there are risks associated with DDP as well, especially for sellers.

Shipping DDP can be costly if handled incorrectly: Customers may abandon their shopping carts or cancel their order if the customs duty, import taxes, and fees are more than they want to pay. Sellers can underestimate final cost and undercharge customers. If absorbing taxes and fees, the seller may end up a paying a tax (e.g., VAT) for which the buyer can then claim a refund.

There can also be unexpected costs when shipping goods long distances and across international borders: Weather can delay shipments; strikes can close ports; customs officials can hold shipments they suspect of being inaccurately classified and charge a holding fee. Risks are elevated during a pandemic due to reduced workforces and added safety measures at border crossings.

Sellers can also insist on obtaining the customer’s signature, even when shipping DDP. This is most common with high-value goods, and it’s a hassle.

It’s hard to plan for every possible scenario, as the current health crisis reveals, but for cross-border sales, DDP is generally preferred to DAP. It’s certainly the better option when stay-at-home orders are in place.

Automating calculation of customs duties and import taxes reduces risk for sellers. It applies rates and rules based on the latest global trade regulations at the point of sale, eliminating guesswork and improving accuracy. And during a global health crisis like COVID-19, Avalara's cross-border solution can help any business calculate customs duties and import taxes without leaving the office.

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