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What small business sellers need to know about landed cost

Avalara

Selling internationally can offer a big opportunity for small businesses to expand their markets or find a niche that doesn’t exist domestically. With the help of technology, new international customers can be just a click away.

However, dealing with the logistics and the red tape involved in getting goods overseas can be intimidating to small businesses. International shipping and delivery, customs clearance and taxation add an additional level of complexity to the process of selling your products and getting them to your customer. But the rewards for your business can be great if you can conquer that complexity.

As a seller, part of successful international sales is overcoming any complexity on your end and making sure that buying from you is simple for your customers, no matter where they are located.

Your customers don’t need to know all the steps it takes to get your product to their doorstep. But they do need to know how much they have to pay for it to get there. The total cost it takes to get a product from you to your customer in another country is called the landed cost, and this includes the cost of goods, door-to-door shipping and insurance and all customs costs, taxes and fees.

Why the landed cost is important

Getting the landed cost right is crucial for making international selling a success. First of all, if you don’t have a full and accurate accounting of how much it costs you to get your products to your customer, you can’t correctly calculate your profit margins on international transactions. Failing to take certain costs into consideration or miscalculating them can result in transactions where your profit gets wiped out altogether.

And without correct landed costs, you may have a hard time attracting and keeping customers. If the entire cost of your product is not clear, they may not even get as far as checking out. Lack of clarity on the total cost of a sale is a key driver of online cart abandonment, Research from PayPal shows. For example, in Italy, 27% of shoppers have abandoned a shopping cart from an overseas seller because the amount of extra fees was not clear. In Canada, 42% have done so.

And if customers do buy a product that shows up with extra costs they weren’t expecting, your customer could refuse the shipment altogether, meaning that you lose a sale, most likely lose a customer for good, and pay both the initial and return shipping costs out of your own pocket.

For the best shopper experience, it’s key that customers understand the estimated total cost of their purchase as early as possible in the shopping process. This allows retailers to give customers upfront transparency and control the customer experience.

The customs process

In order to better understand how landed costs are calculated, it’s important to understand the journey a shipment takes when you send it to a customer abroad.

When you ship an item to a customer domestically, the process is familiar. Chances are you’ll be using a common carrier, such as the United States Postal Service, UPS or FedEx. You pay shipping based on the weight, size, destination and desired speed —and possibly insurance against anything happening to the shipment — and send it off with the carrier. The carrier delivers it to the customer, and that’s it.

In contrast, when you ship something out of the country, it won’t be allowed to officially enter the destination country until it clears customs, or in other words, the destination country determines that it can legally enter. This often means that items shipped from another country are held when they first enter the country until they are released for delivery.

At this point, customs officials determine whether the item can be legally admitted and how much, if any, customs duty needs to be paid. Depending on how the item is being shipped, the recipient, seller or a third party may be responsible for paying any duty, taxes or fees due.

Customs officials may also charge a processing fee. In some cases, private customs brokers may clear the item through customs on behalf of their clients (sellers, couriers or recipients, for example), who will be charged fees for that service.

What makes up the landed cost?

Many different expenses can go into total landed costs, but they commonly include shipping costs, duties, other taxes and customs costs. Getting landed costs right requires correctly calculating each of these elements and adding them up for a true total for each and every shipment.

It’s crucial to remember that one size does not fit all. Every single country is different, with its own unique codes, duty rates, taxes, forms and procedures. When you’re calculating landed costs, it’s key to research the specifics of your shipping destination.

Shipping costs

There are three main ways to ship items internationally: postal service, courier or freight.

  • If you use the U.S. Postal Service, the shipment will originate with USPS and then transfer to the national postal service of the destination country.
  • Courier or express services include door-to-door carriers such as UPS or FedEX.
  • Freight shipping means contracting directly with a shipping company to get your item transported by land, air or sea.

The carrier that provides your shipping can give you an estimate of the shipping costs to the destination country.

Duties

Customs duty is a type of tax, or tariff, imposed on goods when they are transported from one country to another. Duties make imported goods more expensive, discouraging imports and protecting each country’s domestic industry while also generating revenue for the government.

The duty rate is determined by the harmonized tariff code for each product. These 8-to-10+-digit codes are part of the Harmonized System, an internationally standardized system of names and numbers to classify traded products. While the first digits of tariff codes are the same for a product regardless of where you’re exporting it, the last characters vary by country. Each tariff code corresponds to its own customs duty rate, so it’s crucial to get the right code for your products in each country for correct duty calculation.

The customs duty rate is typically assessed as a percentage of the value of the product, or can sometimes be assessed based on other factors, such as weight, number of units, or other item-specific criteria.

Keep in mind that the duty rate can be assessed on the total value of the shipment, including shipping costs. Make sure you know what the policy is in the import country so that you come up with the correct amount.

Each country typically has a minimum value below which duties are not assessed, called the de minimis value. If your shipment’s value is below this threshold, customs duty may not apply. This threshold amount varies wildly. For example the de minimis in the United States was recently raised to $800 US (with certain exceptions), but in Canada, it is $20 CAD, one of the lowest in the world. Therefore, a retail shipment from France valued at $500 and shipped to an end customer in the US may not be subject to import duty/tax, while it would be in Canada.

Customs costs

Beyond duty taxes, you may be charged further customs fees. These may be processing fees charged by customs officials or fees for private customs broker services.

VAT and other taxes

On top of customs duty, foreign countries may also assess other value-added or sales taxes on international sales. One example is the value-added tax (VAT) that is often charged when a consumer buys a product in the European Union.

Common small business pitfalls

Selling internationally is complicated and small businesses starting out may not even know what they don’t know. Here are some common mistakes to avoid.

  • Do not assume that customs authorities don’t pay attention to small businesses. In recent years, the volume of small international e-commerce packages has risen and governments are taking note. And with new technologies and government modernization efforts, authorities are able to target and monitor enforcement activity, which may lead to an increase in small business import audits.
  • Misrepresenting the value or contents of your shipments — for example, misdeclaring a shipment as a “gift” or “sample” — in order to avoid duties and taxes is illegal. If you are caught, you can be slapped with fines and penalties, seizure of merchandise, or even revocation of import/export privileges.
  • Some types of items may not be legal to send to certain countries, or extra taxes and fees may make them cost-prohibitive. For example, shipping a car to Singapore can result in tens of thousands of dollars in duties, special fees and import tax — sometimes as much as or more than the car itself.
  • Keep in mind that duty and tax rates can and do change often. You need to keep updated on the correct rates to avoid possible serious miscalculations in landed cost.
  • Make sure you keep good records. International shipping can generate a lot of paperwork and it’s important for you to be able to find that information. Misplacing import and export paperwork can lead to significant delays in processing shipments, and in the event of a customs audit, having full supporting documentation will lead to an easier and less costly audit process.
  • Small businesses often choose to pass the burden of landed cost issues to transportation or fulfillment providers. However, if that provider gets duty rates wrong, for example, it’s still your or your customer’s responsibility and that’s who will be liable for the consequences of any mistakes.

Solution for small businesses

Many small businesses don’t have the expertise or resources to devote to making sure they are always updated on codes and rates, have taken all taxes into account and all the other research required to correctly calculate landing costs for each individual international sale.

Automation can help. Avalara’s LandedCost enables sellers of all sizes to determine the duties, taxes, cost of goods sold and shipping costs for all global commerce transactions in real time. LandedCost is constantly updated, so you can be confident that you are getting the right rates no matter where you are shipping. And it integrates seamlessly into your shopping cart software. Learn more.

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