Customs Compliance: A Comprehensive Guide for Ecommerce Success

What is Customs Compliance?  

Customs compliance means strict adherence to all laws, regulations, and requirements set forth by customs authorities when importing or exporting goods.

Moving goods across international borders is complex because of nuances that need to be met properly to import and export shipments. US Customs and Border Protection (CBP) check that all imports are properly documented, processed, and paid for according to current trade agreements.

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1. Classification of Products  

One of the most important aspects of importing or exporting shipments is verifying exactly what is being shipped across the border. Any goods or materials need to be properly documented (known as customs declaration) as there are many items that have taxes or tariffs associated when moved into another country.

To properly assess what is being imported or exported there are a few important codes of classification. They are outlined below; correct classification is necessary to ensure shipments are correctly labeled so they can be assigned appropriate duties and taxes.

Harmonized System (HS) Code 

A standardized numerical method of classifying traded products, used by customs authorities worldwide to determine tariffs, duties, and regulatory requirements.

HS stands for Harmonized System, which is an internationally recognized standard administered by The World Customs Organization (WCO). HS codes are comprised of six digits. Each unique code identifies a specific commodity or raw product. All imports and exports are identified by their HS code at customs to be cleared to move in or out of the country. Be sure to keep updated on any changes made to HS codes.

Incoterms (International Commercial Terms)  

Incoterms is an abbreviation of the phrase International Commercial Terms. These are standardized terms used in international trade contracts to define the responsibilities of buyers and sellers regarding transportation, insurance, and risk during the delivery of goods.

Incoterms is trademarked by the International Chamber of Commerce. These terms are used to communicate to customs agents the transaction between the party exporting goods and the party importing them. Incoterms define who is responsible for the various costs, tasks, and processes associated with the import and export, such as transportation, taxes and payments, and all responsibilities for the export or import to happen.

Here is a list of Incoterms and their meanings:

• EXW – Ex-Works
• FAS – Free Alongside Ship
• FCA – Free Carrier
• FOB – Free On Board
• CFR – Cost and Freight
• CIF – Cost, Insurance and Freight
• CPT – Carriage Paid To
• CIP – Carriage and Insurance Paid To
• DPU – Delivered At Place Unloaded
• DAP – Delivered At Place
• DDP – Delivered Duty Paid

Learn more about the difference between DDU and DDP.

Export Control Classification Number (ECCN)  

A classification code used by the U.S. Department of Commerce to identify items for export control purposes. It helps determine whether an export license is required for certain products.

ECCN is an alphanumeric code, based on the nature of the item, its technical specifications, and its intended use.

2. Import Fees (Taxes, Duties, Tariffs)  

International trade agreements determine the taxes, duties and tariffs incurred when products are shipped cross-border. This is a complex and ever-changing aspect of the customs clearance process that requires expertise.

Simply stated, import duties are taxes imposed by government agencies on goods imported into a country. The specific rate (of the tax or duties) varies depending on the type of goods and their country of origin; they are often based on current trade regulations. It’s so important that shippers work with reliable customs brokerage experts to ensure they meet specific customs laws where they ship, and settle the appropriate tax filings to meet all compliance requirements.

Value Added Tax (VAT) 

All countries impose a consumption tax added to the price of goods and services when being imported called a value-added tax or VAT. It applies to most goods and services traded internationally.

VAT is applied at each stage of the supply chain where value is added. It’s essentially the difference between the sale price and the cost of materials used to produce a product or service.

How is VAT Calculated?  

1. Identify the taxable amount: To calculate VAT, you start with the sale price of the product or service.
2. Determine the VAT rate: The rate of VAT can vary depending on the country and the type of goods or services. Different countries have different rates, and some items might be exempt from VAT.
3. Calculate the VAT: Multiply the taxable amount by the VAT rate. For example, if the sale price is $100 and the VAT rate is 20%, the VAT amount would be $100 * 0.20 = $20.
4. Total price: Add the VAT amount to the original sale price to get the total price the consumer pays. In the above example, the total price would be $100 (original price) + $20 (VAT) = $120.
5. Reporting and remitting: Businesses collect VAT on behalf of the government and are responsible for reporting and remitting it to the tax authorities. They can often deduct the VAT they’ve paid on business expenses (input VAT) from the VAT they’ve collected (output VAT), paying only the difference to the government.

GST, HST, and PST (Canadian Sales Tax)  

There are other import taxes that act like VAT but aren’t interchangeable, these include GST, PST and HST. The latter two are Canadian taxes only.

Is GST Different Than VAT? 

GST is a goods and services tax applied at customs in certain countries. It is a fee added to goods, products, or services as a sales tax at the point of sale. It is calculated as a percentage of the sale cost of the goods or services. This type of tax generates income for the government.

GST and VAT get used interchangeably when they often shouldn’t. They often have a different rate of taxation, VAT being typically higher than GST. Whereas the rate of VAT in the UK is 20%, the rate of GST in Australia 10%. Canada’s GST is currently 5% which is one of the lowest in the world.

Some goods that are exempt from VAT may not be exempt from GST. It’s important to look up the materials that you may be taxed on in each country, because they will differ.

PST and HST 

Both PST and HST are Canadian taxes only. For many US brands importing into Canada, these are important to know and differentiate. They can change according to where you import into Canada and can add to your overall cost of importing products.

• PST is the Canadian Provincial Sales Tax. It is applied by some Canadian provinces but not all. The PST rate differs depending on which Province your products are sold in. It is handled through the individual revenue agencies of each province in Canada that collects PST separately.
• HST stands for Harmonized Sales Tax and is administered and enforced by the CRA (Canada Revenue Agency).  HST is calculated as a combination of GST and PST.

Non-Tariff Barriers (NTBs)  

Non-Tariff Barriers (NTBs) refer to various restrictions, regulations, and obstacles imposed by governments or other entities on the importation or exportation of goods and services, which go beyond simple tariffs or customs duties. Unlike tariffs, which are taxes levied on imported goods, NTBs are non-tax measures that can impede global trade. NTBs encompass a wide range of policies, standards, and procedures that affect trade flows and can have significant economic implications.

One category of NTBs includes quantitative restrictions, such as import quotas and export restrictions, which limit the quantity of goods that can be imported or exported. These restrictions artificially control the supply of goods in a market, affecting prices and trade volumes.

Technical barriers to trade (TBT) are another significant subset of NTBs, encompassing regulations related to product standards, testing, certification, and labeling. These regulations often serve legitimate purposes, such as protecting consumer health and safety or preserving the environment.

Sanitary and phytosanitary measures (SPS) represent another form of NTB, focusing on regulations related to food safety, animal health, and plant health. These measures aim to protect human, animal, and plant life from various risks associated with imported products.

Tariffs and Trade Compliance

More than other import fees, tariff classification varies depending on the current trade relationships. Tariffs are calculated by a combination of product classification, country of origin, and the country where the goods are being shipped.

Every country has a specific trade agreement with other countries.

For example, tension between two countries may mean higher overall tariffs on products coming from that specific country. Or the opposite can happen; good relations between countries could result in a Free Trade Agreement (FTA), where there are reduced or eliminated barriers to trade.

Another way a country determines a tariff is on specific products or goods that they want to prioritize production of within their country. For example, if olive oil is easily manufactured in Italy, they may want to impose a higher tariff on olive oil coming from other countries. This incentivizes Italian citizens to buy olive oil made in Italy versus products imported from other places.

All tariffs are based on two main factors:

1. The type of goods being imported, as classified by the correct HS Code.
2. The international trade agreements between the country of origin and the country of import. If you are unsure of the country of origin based on your supply chain, use the WTO rules of origin to determine.

To calculate the tariffs you’ll incur when shipping abroad, the first step is to accurately classify your products. HS codes help CBA (Customs and Border Patrol Agency) properly identify the customs process needed, tax and tariff rates, and any special shipping or handling that may be necessary.

Once you know the HS Code for your products, you can look up the corresponding tariff (duty) rate.  Here are two resources to help with this second step.

• Tariffs overview and resources – https://www.trade.gov/import-tariffs-fees-overview-and-resources

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3. International Shipping Documents  

Any issues with your shipping documentation can result in fines, returned goods, or delayed processing, which naturally will lead to unhappy customers and other negative downstream effects. Non-compliance will result in more frequent customs audits, fees, and delayed products at the border.

To streamline your customs clearance and meet all compliance requirements here are a few of the most important international shipping documents and how to ensure they are correct for swift cross-border shipping.

A List of Important Customs Documents

Commercial Invoice. The most often used and important document is a Commercial Invoice (CI). It serves as a formal request for payment and provides important information about the goods being shipped from the exporter to the importer.

Certificate of Origin. A document certifying the country where the goods originated. It may be required by customs authorities to determine eligibility for preferential tariffs under trade agreements.

Bill of Lading (BOL). Bill of Lading is a legal document issued by the carrier or their agent that serves as a receipt of goods and evidence of the contract of carriage. It includes information about the shipper, consignee, the goods being transported, and the terms of shipment.

Packing List. This document may sound generic, but it’s a very specific list that provides details of the contents of each package or container being shipped. It includes information such as the number of packages, weight, dimensions, and a description of the goods.

Import/Export Licenses. Depending on the nature of the goods being shipped and the countries involved, specific import or export licenses may be required.

Customs Declaration/Form. Customs Declaration/FormA Customs Declarations document provides information about the shipment to customs authorities, including details about the goods, their value, and the parties involved.

4. Customs Valuation  

Customs valuation is the process of determining the value of imported goods for customs purposes. It affects the calculation of duties and taxes payable on the goods.

Ecommerce brands can ensure they’ve streamlined customs clearance through efficient customs valuation practices, here’s how

1. Accurate Declaration. It’s essential that your customs documentation are correct. The declared value includes the product price, any applicable discounts or rebates, and additional charges such as shipping and insurance. This is not to be confused with total landed cost, which is part of your business strategy, not customs clearance.
2. Automate When Possible. Utilizing electronic data interchange (EDI) systems can leverage automation to submit customs documentation and reduce processing times. EDI allows for the electronic transfer of information between businesses and customs authorities, minimizing paperwork and manual errors.
3. Implementing Consistent Pricing. Avoid discrepancies, compliance issues, and internal audits by maintaining detailed record-keeping of product costs, invoices, and transaction documents to support the declared value of goods.
4. Building Positive Relationships. If you are always in compliance, provide proactive communication, and address issues quickly, customs authorities may be more apt to expedite the clearance of your goods. Some businesses may be granted status of Authorized Economic Operator (AEO), which is for successfully demonstrating compliance with customs regulations and security standards.

Bottom Line

When looking for help with international shipping readiness and customs management, ecommerce businesses should always seek expert help from reliable partners.

A customs broker, for example can help you facilitate the clearance of goods through customs on behalf of your brand. They can assist with documentation, tariff calculation, and regulations compliance. You’ll be glad to have a smooth, streamlined experience.

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