The Difference Between Duties, Taxes, and Tariffs—How They Factor Into Your International Shipping Strategy

What are Duties?  

Anytime you import a product into a country, you’ll incur duty fees. Known as customs duties, they are fixed by the government to determine how freely a product can be let into the country. For example, if the US has a lot of steel already being manufactured here, the government may put a 100% duty on steel being imported from other countries. It’s an attempt to stop other countries sending too much product that’s already made here.  

How do I know My Customs Duty Rate?   

Duties change but not very quickly, and they never go away. They are determined by international trade negotiations.  

Customs duties are calculated based on the import value of the product. The rate can vary from 0% to 30-40%. Duty rates are applied to certain categories of materials and products, and they largely depend on how much that country needs them. Most consumer goods (consumer electronics, apparel, etc.) duty fees are usually 5-7% of the import value, because these products may not have as big of an impact on the economy.  

Staying updated on the latest foreign relations will help sellers understand where their products may have fluctuating duty rates, or not. 

Impact of Duties on Consumers  

• Higher duties imposed on imported goods can help boost US manufacturing by encouraging companies to source from US companies. This can promote US jobs, resources and more.  
• Lower duties on imported goods often leads to consumers paying less for goods because they can source the lowest cost possible across global brands with no financial barriers. 

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What are Tariffs?  

Often confused with duties, tariffs are fees imposed by a government for certain products, or categories of products, at distinct times. Right now, for example, between US, Canada, and Mexico the current USMCA trade agreement states that there are no tariffs on products coming into the US from either Canada or Mexico. But with products coming from China there are tariffs, and the rate varies per product type.  

Just like duties, the percentage increase of a tariff is calculated from the import value of the product, and very often the fees are passed on to the end-customer. Tariffs can drastically change the prices of imported goods, thus affecting consumer habits.  

Tariffs can also change quickly. They are determined by the whim of the US government, based on how that government wants to impose restrictions from certain foreign countries.

Import Taxes, Explained 

Think of import taxes as a broad category of import fees, that include duties and tariffs, but also VAT/GST and sales tax.  

Import taxes are on a standard percentage, defined by the government, of additional cost added to any imported product coming into the country. Some examples are Value-Added Tax (VAT) or Goods and Services Tax (GST), or Canadian Provincial Sales Tax (PST).  

The Difference Between VAT and GST  

These taxes are very similar in terms of their implementation, but each is applied to different products based on the country importing into.  

For example, The UK has a VAT rate of 20% and Australia has a GST rate of 10%. All VAT/GST are a flat percentage rate applied to all products being imported.  

The US is one of the few countries that does not have VAT or GST which leads to a lot of US companies assuming that other countries are the same. This assumption can lead to costly implications. 

Explaining Sales Tax on Imports  

Some countries also include a sales tax, Canada for example has a Provincial Sales Tax (PST) that varies between the different Canadian states. There is also a harmonized state tax (HST) when importing to Canada. If you’re shipping into Canada, it’s best to understand the differences between PST, HST, and GST to make sure you’re not overpaying on customs fees. 

Who Pays Your Import Taxes? Understanding the Role of Importer of Record 

One aspect of importing goods that relates to taxes is the importer of record (IOR). This is the entity which holds responsibility for all customs documentation, product classifications, and payments of duties and taxes.  

The importer of record is required to have an established VAT number in order to function properly in this role. For most companies shipping internationally out of the US, the biggest market is Europe so you need to be properly set up for VAT. If you are going to be using a warehouse in Europe you need to designate an IOR and set up a VAT number.   

Sellers must clarify with customers upfront who is responsible for the VAT/GST—you can use the landed cost solution or let the customer pay these taxes. For example, if a customer in the UK assumes that the shipping includes the 20% VAT and you had not figured that into your final product cost, then you will all of a sudden have a 20% hit on your profit margins. 

How to Calculate Duties and Taxes for Customs Compliance 

One of the most important aspects of determining your import fees is correctly identifying your product’s 10-digit HTS code. HTS stands for Harmonized System. This is an internationally recognized standard of coding that classifies products and materials so that Customs Border Agency can document exactly what is passing into the country.  

HTS is a fixed code that is dependent on the characteristics of your product. Every type of product is classified with a specific HTS code. This step should not be missed, as customs compliance is a critical step to smooth international shipping. freight forwarder or customs broker will be able to find your HTS code and calculate your duty rates from there.

Companies are strongly encouraged to not deliberately undervalue products, or mis-declare one type of item as another in order to avoid paying a higher duty rate. If you mis-identify or mis-declare your goods, there is a very high chance that customs will find this out sooner or later and you will be subject to very heavy penalties and fines. 

As an example, if you sell a leather handbag and declare it as that, it will be assigned a specific HTS code. But if your handbag is actually 60% leather and 40% cotton, you need to ensure that your HTS code is correct given all facets of your product. This is where an expert will be the best help to figure it out.  

Certificate of Origin Can Change Your Duty Rates 

Imported products must be declared as originating in a particular country. A certificate of origin is an important declaration for customs, and in some cases the country named can change what a seller pays in customs duties.  

For example, a product might be manufactured 40% in China, and 60% manufactured and assembled in Vietnam. If the seller declares a certificate or origin that it’s made in Vietnam from Chinese components, they won’t have to pay the (current) tariffs on goods made in China.  

Depending on the trade climate and how distributed your manufacturing network is, a certificate of origin that declares your products from a certain country, will change your overall duty rates. You may end up paying higher or lower duties than if you declared a different certificate of origin.  

Factoring Import Costs into Your Shipping Strategy—Understanding Incoterms  

When shipping internationally there are many fees associated, to better understand what you’ll be paying it’s important to calculate the total landed cost. This is calculated by including all factors of importing—taxes, tariffs, but also shipping costs, cargo insurance costs, and any other fees that may come along. With an accurate total landed cost, there are no surprise fees, and you can better assess if your will absorb all import fees or have your customer pay them. 

What are Incoterms? 

When goods are manufactured overseas and sold to your ecommerce business, there are international shipping rules that help define the relationship between the buyer and the seller (in this case your company and the manufacturer). These are called Incoterms.  

Incoterms are a widely used set of 11 distinct, internationally recognized rules that define the responsibilities of both the seller and buyer of imported products. They specify who is responsible for the shipment, insurance, documentation, customs clearance, and other logistics. Sellers must factor these costs into their shipping.  

For example, under the Incoterm Ex Works (EXW), when you buy the product from the manufacturer at the dock (ready to take it back to the US for distribution and fulfillment) you are responsible for paying the freight, the cargo insurance, and the clearing customs in the US.  

Passing Taxes to Customers or Not—DDP vs. DDU  

When shipping internationally ecommerce brands need to decide who will pay the imort taxes and duties. The brand can pay and fold the cost into their overall product price, or they can pass the costs to the consumer.   

This consideration is deciding between the Incoterms Delivery Duty Paid (DDP) and Delivery Duty Unpaid (DDU).  

• DDP – Having all duties, taxes, and tariffs paid upfront means the manufacturer can just send the product to a warehouse in the US, and it’s understood that the manufacturer will take care of everything (shipping, cargo, customs, etc). The drawback to DDP (Delivery Duty Paid) is that the manufacturer will likely take a premium because they are taking care of these logistics and fees for you.  

• DDU – If you wish to have the end-customer pay for import duties and taxes, choose DDU. When this happens, the customer will get a note from the post office saying that they have to come to the post office to pay the taxes and duties and then get the product released. Be sure you communicate this clearly to customers, so they aren’t surprised.  

All of your Incoterms will inform the customs clearance and who manages the duties. It’s important to work with a reputable freight forwarder to help define the right Incoterms based on your specific products, the countries you are working with, and the current trade climate.  

How to Find International Shipping Experts to Help

There are two distinct components of shipping, domestic and international. For domestic shipping, it’s best to work with a reputable 3PL who can calculate the best carrier service for your products getting from the port to the warehouse, to your end-customer.  

International shipping is more complex and requires more nuanced expertise. It includes air freight, cargo insurance, and all the duties and taxes. For these, working with a trusted freight forwarder to calculate and optimize them will be the best method to ensure all international fees are folded into your shipping strategy.   

You can work with an import freight forwarder who will help with services: customs brokerage and freight forwarding. They will help you determine the best freight option (air or ocean) and then also manage all of the customs clearance work.  

Any certified customs broker will be licensed by the government so their services will be standardized. But when you are looking for freight services and optimizing those based on your company and product, it might make sense to talk with a few providers

Freight has more nuance and variation, and companies who outsource those for sellers are largely private companies whose services and fees will vary. If you work with a 3PL, they should have good recommendations on international partners who are trusted and have a good reputation.  

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