Know before you sell: Avalara’s quick guide to starting exports
If your business hasn’t yet started exporting, you’re not alone. Less than 1 percent of America’s 30 million businesses ship outside the United States — a lower proportion than in any other nation in the developed world. For the business owner who wants to get ahead of the competition, that can be great news: few, if any, of your domestic competitors may be selling abroad.
Staying compliant with international laws can be daunting. In this guide, we’ll demystify the basics of export processes, making it easier to understand your options as a B2B or B2C exporter.
Shipping abroad: Incoterms explained
Globalization creates a need for standardization. Established for the first time in 1936 and updated most recently in 2010, Incoterms create several types of standard legal agreements between importer and exporter. Before the development of Incoterms, trade required making new agreements with each new customer in each country sold to. Today, businesses can choose from seven different Incoterms for their shipments abroad (and businesses using water transport for their goods can select from these or any of four additional Incoterms).
Different Incoterms place differing levels of responsibility on the buyer and seller in an international transaction. DDP, or Delivery Duty Paid, is the Incoterm that requires the seller to take the most responsibility. Under the terms of this agreement, the seller is responsible for the delivery of the shipment as well as all associated customs duties and import fees.
At the other end of the spectrum, placing the most responsibility on the buyer, is EXW, or Ex Works. Under the terms of an Ex Works agreement, the buyer is responsible for arranging all delivery and carriage, as well as paying all associated fees and duties.
Starting B2B exports
In the export world, B2B companies have some advantages. That’s because most businesses that import goods have already imported from other companies before, and can do some of the legwork for you.
Typically, when a business is just getting started selling goods B2B overseas, the Incoterms agreed upon should be those that transfer ownership of the goods in question prior to importation. Both EXW and DAP (Delivery At Place) can ensure that customs clearance, as well as all associated duties and taxes, are the responsibility of the buyer. When you choose these Incoterms, your business will not have any liabilities at the time of import.
While this takes the pressure off new exporters, having the buyer pay all associated costs can sometimes backfire. If the landed cost — that is to say, the total cost with all taxes and duties paid — turns out to be significantly higher than the buyer had anticipated at the time of purchase, the importer may pay, but could be wary about purchasing from the same company in the future.
One way to avoid this issue is calculating the total landed cost at the time of sale, as a courtesy to the customer. When a customer is aware of the total cost that will need to be paid, they can make informed decisions and will be less likely to have a negative experience.
Starting B2C exports
Exporting B2B can be a simple matter of choosing the right Incoterms and letting the buyer pay the costs. B2C transactions are significantly more complicated, because most individual consumers don’t know much about the import process and may not want to take on unknown levels of liability.
Under Incoterms that specify the buyer as the importer of record, the shipping carrier or freight forwarder will act as customs broker, charging the buyer for all associated fees and tariffs, as well as an additional fee for their brokerage services. Depending on the costs of importation and the fees charged by the carrier, this can significantly add to the total landed cost of goods.
Buyers are often caught unaware of these charges, and can experience “sticker shock” when they see how much they are expected to pay to accept a shipment with significant import duties and tariffs. The result is often a rejected shipment and a costly lesson learned by buyer and seller alike.
To avoid this negative experience, many B2C exporters choose to act as the importer of record in international transactions. This, however, puts the obligation for paying local taxes, including VAT (value added tax), GST (goods and services tax), and import duties on the seller. The seller calculates these costs and adds them to the customer’s invoice prior to purchase. However, if landed cost turns out to be more than expected, the profit margin on the shipment could shrink or disappear.
Automating landed cost calculation
Whether a business takes on responsibility for customs duties and import fees or asks the buyer to take responsibility for these costs, it’s important to be able to calculate the total landed cost of a shipment. Provided as a courtesy, it can help the customer determine how much they will be responsible for at the time of customs clearance. If a seller is responsible for paying associated costs, accurate landed cost calculation ensures that a buyer can be charged upfront and that the seller won’t be liable for unexpected additional fees.
Calculating landed cost is a complicated topic, and can take a long time to understand even for people well-versed in trade. Fortunately, technology means that businesses no longer need to spend time poring over international regulations and foreign tax rates. Automated, cloud-based landed cost calculation from Avalara LandedCost ensures that no matter how complex the tax picture, you’ll always get a clear view.
LandedCost can be used to calculate total shipping costs whether your customer or your business will be responsible for paying these costs in the end. Using always up-to-date automation in the cloud means that you’ll never have to fear the unexpected when it comes to customs clearance.
To learn more about calculating landed cost automatically in the cloud, visit the Avalara Item Classification product today.
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