What Is Import Duty Tax, Who Pays It, & How Is It Calculated?

As an e-commerce seller, international expansion can be very fruitful, but it doesn’t come without its challenges. There are lots of complex rules, regulations and fees involved in the importing process. If you’re new to importing and exporting, the amount of terms you need to learn can feel overwhelming.

If you’re intimidated by import duty tax, you’re not alone. Fortunately, a third party like Zee can facilitate the smooth transfer of goods across foreign borders.

In this guide, we’ll break down everything you need to know about import duty tax. You’ll learn what it is, who pays it, which goods it applies to, how it’s calculated and ways to manage your payments. As a result, you can feel more confident that you’re paying all the relevant fees at customs.

What Are Import Duties And Taxes?

Import duty, also known as customs duty, is the tax placed on goods (as well as services and capital) attempting to enter a foreign country. This is overseen by the destination country’s customs authorities. 

It’s at customs that duty is actually collected, accompanying an often exhaustive inspection process to ensure VAT Compliance, authenticity, and fair market provenance of the goods seeking to clear the border. In order to make entry, your importer will also have to verify these criteria with the appropriate (and valid) documentation.

What is the Purpose of Import Duty?

The purpose of duties levied on imported goods is fourfold:

• To generate value on behalf of the local government (and dually, the importing country itself) through international trade,

• To maintain a home-field advantage for comparable, competing goods manufactured in the importing nation,

• To regulate goods that may have an adverse impact on public health or interest (for example, cigarettes),

• And, in some cases, to penalize a foreign country of origin (COO) by imposing high duties on the products they import.

Who Is Responsible for Paying Import Duties?

The importer is responsible for paying import duty on goods entering a country. As an e-commerce seller, it’s advisable to hire an Importer of Record (IOR), because they can take care of any import duties charged by the destination country.

Traditionally, there are three parties who may be responsible for paying income duties:

• The owner of the product,
• The person or entity who purchased the product,
• Or the customs broker who mediates the product’s entry through customs and border protection.

Because import duties incurred will ultimately be reflected in the product’s market price point, it’s essential to make good on (and not overpay) import duties on your goods. This will ensure that customers don’t take their business to a more affordable place. This is where hiring an Importer of Record comes in handy, because they have the knowledge and expertise to manage the process for you.

How Are Import Duties and Taxes Calculated?

In the US, customs duty rate is calculated as a percentage based on the total purchased value of the items. This can range from 0 to 37.5%. E-commerce sellers do not pay duty and tax if the purchase price is below the $800 de minimis threshold.

However, every nation has its own method of calculating import duty tax imposed on foreign goods, but their formulas for determining it are universally dense and complex. Before paying VAT on imports, a thorough assessment will be taken to determine the given value of an item. Assessing a given product’s value means taking a magnifying glass to the myriad resources, manufacturing practices, and workers it took to mint any given piece of merchandise.

For instance, if you’re in the business of producing milk frothers, trade specialists may examine the raw materials used to sculpt the product. They will determine how the motors were made to give the frother its spin and pinpoint where the frother itself was assembled, becoming more than the sum of its parts.

Duties vs Tariffs: What’s The Difference?

More often than not, the terms “duty” and “tariff” are used interchangeably. This is because they ultimately have the same effect on both producers and consumers of products: driving up the cost of goods and the overhead costs of commercial enterprise.

The main difference between duties and tariffs is that the former has an immediate impact on how much a consumer pays for a given product. Conversely, the latter only bears on the producer or owner of international imports. This means that the customer that has to pay import duties, while the seller must build the tax they pay at customs into their ultimate price point.

Duties and tariffs can also be distinguished by the distinct motivations behind each:

Duties are regarded as an indirect tax. While an importer is responsible for covering import duties, they ultimately land on the consumer. Theoretically, this makes domestically-produced goods more attractive by keeping their prices lower than international competitors’.

Tariffs are considered a direct tax. Depending on the politics of foreign relations, they may also be intended to protect the domestic economy (or sanction a foreign one) by making it more costly for foreign sellers to import their goods to the local marketplace.

The tariff fees placed on imports and exports are determined by a percentage. This is a non-flexible, preordained percentage codified in the World Customs Organization’s (WCO) official Harmonized Tariff System Codes (HTS). 

In most cases, every product shipped across national borders must carry an HTS code appropriate to the country it’s destined for. When a shipment reaches customs clearance, the import fee it incurs accords with this predetermined percentage, dictated by the particular product(s) it contains.

HTS codes are specific—up to 10 digits long—reflecting the nuanced process of dictating a product’s value. If you were importing peanuts, the exact kind of peanut, the origin of the peanut, whether or not the peanut was shelled, and whether or not it was seasoned with salt are all factors that will determine the code assigned to the imported good. This code will ultimately impact the tariff your product will incur to clear customs.

Duties vs Tariffs: The Bottom Line

In practice, duties and tariffs are determined by a distinct but equally complex series of methods employed by trade experts, even as the terms themselves seem fairly interchangeable. In the world of international trade, sellers needn’t (and shouldn’t) burden themselves with knowing the precise differences between tariffs and duties.

For sellers, the main takeaway is much easier to conceptualize: both duties and tariffs affect how much you’ll be charged when importing a product overseas and, ultimately, feed into your ROI—whether or not you optimize your profits.

How Import Duty Affects E-Commerce Sellers

Import duties and tariffs are just one barrier constituting the larger complex known as customs compliance. 

Any business is legally obliged to accurately declare their commercial products and meet the customs requirements stipulated by the destination country’s authorities.

A failure to accurately classify and meet import duties, and meet customs requirements more generally, can result in:

• Stuck shipments,
• Overpaying on transport costs, taxes, and duties,
• Underpaying on imported goods, resulting in exhaustive (and time-intensive) inspections,
• And, upon violation, fines or even legal trouble for the seller.

How To Manage Import Duties As An E-Commerce Seller

It’s a tale as old as time: every country has a vested interest in guarding its own economy against international competitors, and import duties and tariffs are theoretically one of the easiest ways for a country to protect its own interests. 

However, with the expansion of e-commerce, international trade regulation has become even more complicated and slippery. The morass of regulations can be enormously restrictive to small and medium-sized businesses burdened with the labor, time, and cost-intensive task of staying up to date with current trade and taxation policies in every country they do business in.

This is one reason why it is in the vast majority of businesses’ best interest to work with an IOR (Importer Of Record) to manage the shipment and Customs Compliance of their products. In the face of international trade regulations’ density, complexity, and caprices, IORs have the ability to:

• Serve as the legal guardian of the sellers’ merchandise as it makes its way to its destination country,

• Draw on their knowledge base and experience to know what products will incur which duties in each country they petition entry for,

• Manage all duties, taxes, and tariffs on behalf of the seller,

• Resolve stuck or delayed shipments tied up in a country’s customs process,

• And facilitate the smooth movement of international freight at the lowest rates.

Expand Internationally With Zee

The major takeaway from getting acquainted with Import Duties is this: it takes expert-level knowledge of the fluxes and flows of international trade to enter foreign markets without a hitch.

It’s a tall order for businesses to supply this know-how independently—but fortunately, there are partners who can help you sail through customs and border protection, assume responsibility, and cover import duty taxes to streamline your products’ entry to foreign markets, whether that be in the United States, Europe, Australia, and so on.

Zee is your one-stop-shop shipping partner equipped to serve as your business’ Importer Of Record. Rather than attempting the Herculean feat of managing shipping protocol and transport costs solo, look to Zee to cut through the red tape so that you can focus on what you do best: selling.

Learn more about our Importer of Record (IOR) services today. 

Sources: 

E-Commerce Frequently Asked Questions, US Customs and Border Protection

Determining Duty Rates, US Customs and Border Protection

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