What small business owners need to know about landed cost

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.

When you ship an item to a customer domestically, the process is familiar. You’ll likely be using a common carrier, such as the United States Postal Service, UPS or FedEx. The shipping costs you pay are 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.

When you ship goods out of the country, however, they won’t be allowed to officially enter the destination country until they clear customs, in other words, the destination country decides that it can legally enter. This often means that items shipped from another country are held in customs when they first enter the country waiting to be released for delivery.

While your goods are being held in customs, officials determine whether the goods 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.

A processing fee may also be levied by the customs officials. 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 additional fees for that service.

Many different expenses can go into total landed costs, but they commonly include shipping costs, duties, import 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 country is different, with its own unique tariff codes, duty rates, import taxes, forms, and procedures. When you’re calculating landed costs, it’s important to research the specifics of your shipping destination. Consider the following list which outlines the four components of landed cost.

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

• If you use the U.S. Postal Service (USPS), the shipment will originate with USPS, 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.

Customs duty is a type of tax, or tariff, imposed on goods when they’re 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 System code (also known as an HS code, or tariff code) for each product. These 8–12-digit codes are part of the Harmonized System, an internationally standardized system of names and numbers to classify physical goods. While the first six 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. Automated solutions like Avalara Managed Tariff Code Classification can help you efficiently and confidently assign country-specific tariff codes to your products.

The customs duty rate is typically assessed as a percentage of the value of the product, but 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 you determine 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 is $800 US (with certain exceptions), but in Canada, it’s $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 U.S. may not be subject to customs duty, but would be if the end customer was in Canada.

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

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

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

• Don’t assume customs authorities only pay attention to big box retailers. In recent years, the volume of smaller, international ecommerce packages has risen and governments are taking note. With new technologies and government modernization efforts, authorities are able to target and monitor enforcement activity, which may lead to an increase in import audits for businesses of all sizes.
• 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’re 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 stay up to date 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.
• Businesses often choose to pass the burden of customs duty and import tax issues to transportation or fulfillment providers. However, if that provider gets the rates wrong, it’s still your or your customer’s responsibility and that’s who’ll be liable for the consequences of any mistakes.

Many businesses don’t have the expertise or resources necessary for researching correct tariff codes and duty rates for each individual international sale. But automation can help. Avalara’s Cross-Border solution enables businesses to offload the manual and error-prone tasks required for selling and shipping products internationally. Avalara Managed Tariff Code Classification helps sellers maintain compliance more efficiently by mapping HS codes to products for multiple countries.

Armed with country-specific tariff codes, the AvaTax Cross-Border tax engine calculates the customs duty and import taxes for any country you ship to in real time. The software integrates seamlessly into your shopping cart software and is constantly updated, so you can be confident you’re getting the right rates no matter where you’re selling.

Get the information you need to stay compliant — from Managed Tariff Code Classification to duties calculation — and reduce your risk of penalties, fees, and unhappy customers.  Download our free ebook: Selling Cross-Border For Dummies.

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