Your Complete Guide to Understanding How Duties and Taxes Work
Customs duty, duty rates, import taxes, value-added tax ... you see these words all the time, but what do they mean? It can be easy to get confused. After all, duties and taxes are part of all international shipments, and all countries have them. In this article, we're answering all your questions.
That's why we've created this guide to understanding how taxes, duties, and tariffs work. Keep reading to learn the answers to all these questions and more! OptimalShip helps customers navigate this whole process every day.
What are Taxes?
Taxes are a form of government revenue. This revenue stream is sourced from just about every purchase you make. Clothing or home décor are just two of many examples of consumer tax. Taxes are non-negotiable. For international shipments to other countries, taxes come in the form of duties and tariffs. Duties are an indirect tax, while tariffs are a direct tax.
Why Pay Taxes?
For international shipments, you will need to pay any levied duties or tariffs, which will be invoiced separately from your freight cost. The taxes you'll pay accomplish several purposes:
- Taxes protect domestic producers from international competitors.
- Taxes control how some goods come in and out of the country.
- Taxes raise money, which helps each state and the nation. All countries, not just the United States, benefit from the taxes that are levied.
What are Duties?
There's more than one kind of duty. There are import duties and export duties. Import duties are for merchandise imported from another country, while export duties are for goods shipped sent to another country. We'll focus on the customs duty that applies to an international shipment for this article.
Why Pay A Customs Duty?
The government instituted the duty tax for the sake of local industries. The fees collected from the duty tax make international manufacturing rates more affordable. It could get too expensive to manufacture things internationally without the duty tax. What's manufactured internationally must be shipped to the United States. The tax collected also provides an extra layer of protection for jobs. Not only that, but it also increases the country's overall revenue.
The exact duty rate or duty percentage varies. It's based on your goods' commodity, value, weight, dimensions, and country of origin. Each country has its own custom duty rates. For example, shoes may have a duty rate of 5% in the United States but 7% in Norway. Each country's governmental agency that oversees trade determines how much you will pay.
What are Tariffs?
Tariffs are direct taxes on goods that are imported from another country. They are specific to the class of imports or exports. Tariff fees are based on the Harmonized Tariff System Codes (HTS). The harmonized tariff schedule determines rates, which are primarily for imports.
How to Handle Duties and Tariffs
Not every international shipment requires duties and tariffs. Your package might not hit the tax threshold, or maybe the commodity you are shipping is tariff-free due to a trade agreement between countries. But it's helpful to know the steps involved. At some point, you're likely to hit the tax threshold.
Find Out Your Tax Threshold
Find out what the tax threshold is for your destination country. Your shipment could be duty-free in the destination country.
Hire a Customs Broker If You Need One
Decide whether to hire a customs broker. Does the whole process stress you out? There's nothing wrong with paying someone else to do it! Most B2B businesses use a customs broker. Contact OptimalShip for help. If you need any help along the way, we'll be here. We handle duties and taxes every single day. And we'll be happy to do it for you. A benefit of shipping internationally through OptimalShip is the DHL Service we offer. DHL will act as your customs broker and clear your shipment for you in most cases!
Who is Responsible for Paying Duties and Taxes?
Most carriers give you three options on who can be the responsible payor. The sender, where the duty/tax is billed back to their carrier account. The receiver, where the payment of duty/tax is required before the shipment is released for delivery. Third-party, where the duty/tax is billed to a third party carrier account. It is up to whoever creates the shipping documents to assign the duty/tax payer.
Keep Your Customers Informed
Tell your customers about paying for duties and taxes. Not mentioning taxes could result in canceled orders and upset customers. Trust us! A well-informed customer will save you time. It would help if you mentioned duties and taxes for international shipments in the following places:
- Your shipping policy page
- Product page
- Order confirmation email
Include A Customs Invoice
Don't forget to include your commercial or pro-forma invoice with your shipment. A commercial invoice is packed with many non-document international shipments. It lists what is in your package. A pro-forma invoice is an invoice that's sent in advance. It gives you an idea of how much something will cost. If you need to make a down payment or deposit on goods, you'll often receive a pro-forma invoice. It's essential to make sure you have the right kind of invoice. Don't hesitate to contact us if you need help. At the border, customs officials will need the customs invoice. Be honest on the invoice. These officials can check your website if they think you're cutting corners.
At international borders, customs officers will look at your package. The customs officials will determine whether your package meets the de minimis value.Your customer will need to pay the applicable duties before receiving their goods.
Have questions? Need help? OptimalShip is here to help you. We work with businesses just like yours. We help ensure your compliance with any duty you might need to pay to send or receive your package.
When you call OptimalShip, you speak to a live agent right away. There are no long waiting periods, there's no annoying hold music that you can't mute, and there are no automated messages. We believe in providing exceptional customer service. That means helping you quickly so that you can be on your way. Call us to get started.
We've included FAQs and a Terms section to help you more fully understand how everything works. Remember to contact us if you need any help or have any questions!
What are import duties? How do import duties affect me?
You'll need to pay import duties on some international shipments. Import duties are direct taxes placed on items shipped into the United States. The package will be held at customs until the import duty is paid. Once you pay the import duties, the package will be released.
Is an import tax separate from other shipping costs?
Yes, an import tax is separate from other shipping costs. You'll also need to pay shipping and handling fees and state sales tax (if applicable). Additional charges may also apply. Duties and taxes will also always be billed separate from your freight charges.
How do customs authorities determine whether my commercial invoice is accurate?
Customs authorities are highly trained. They look at the total cost of your shipment and the value of your goods. If the price and value seem off, they'll look further into your business. You could be fined if you're dishonest.
How is the duty rate determined?
The United States Customs and Border Protection determines what duties must be paid. The value, weight, dimensions, and destination are all factors.
Can I get a reduced rate for my custom duty?
No, you can't get a reduced rate for your custom duty. The United States Customs and Border Protection determines this. You'll owe what they say you owe. If only coupons existed!
Is there an official website where I can find the HS Code?
Yes, there is!
Is there a custom duty to ship to the U.S. Virgin Islands? What about other costs?
Yes, a six percent customs duty applies to imports and exports for the USVI. However, exemptions to this taxation apply to tourist items. The total cost will depend on how many tourist items are included in the shipment.
Do I need to pay a customs duty for a shipment within the country?
No, a customs duty only applies to imports and exports. Both revolve around international trade.
Do I need to pay customs duty on a freight shipment?
Is your shipment international? Yes, the type of transportation doesn't matter. If you meet the tax threshold, you must pay the customs duty.
Can I purchase an exemption to paying a customs duty?
No, there is no way to purchase an exemption from customs duties.
Can I avoid charging taxes to make my business more competitive?
We can't control what you do, but we strongly advise against it. Avoiding charging taxes for shipments is tax evasion. That could land you in serious trouble with the government.
What you can do is pay the taxes yourself. If you prepay the taxes, the goods will automatically be released to your customers. You'll lose money this way, though.
Are gifts subject to customs duty?
Yes, customs authorities don't determine customs duty based on whether it's a gift. It's about the value of certain goods. It's also about where the goods originated from and where they're going. Again, you can pay the customs duty yourself if you want your recipient to receive their package for free.
Are there duties and taxes on the same goods?
It depends on what you're shipping and your shipment's destination. Relationships between countries often affect customs duty and tariff rates.
For example, do you have an abundance of goods here in the United States? The government wants to encourage you to get your goods here instead of buying them from foreign competition. It helps the U.S. economy. So, they'll impose a customs duty and a tariff. You want to pay less, so buying domestically is the obvious choice.
International Shipping Terms You Need To Know
Are you shipping internationally for the first time? The vocabulary and terminology can easily overwhelm. That's why, in this section, we're going over all the standard terms you should know.
OptimalShip is here to help you! They'll make your shipment process easier. In the following section, we'll walk through the customs duty process.
Import Duty: When other countries send goods to the U.S., import duties must be paid to receive the item. That tax imposed exists, in part, to encourage consumers to buy locally because it's cheaper.
Commercial Invoice: This invoice is included with some non-document international shipments. It tells everyone involved what items are in the package. It's helpful because it allows you to keep track of what you're shipping. Customers can use an invoice to ensure that they've received all their goods. Couriers and customs brokers use commercial invoices to track what's going in and out of the country.
Pro-forma Invoice: A pro-forma invoice is an invoice that's sent in advance. Say you need to order parts for your business, and a down payment is required. The supplier could send you a pro-forma invoice requesting advance payment. Pro-forma invoices are preliminary. The amount owed is subject to change. But pro-forma invoices are still helpful for the estimate that they give you.
Carnet: A carnet is a type of export document. It's used primarily for trade fairs or exhibitions. A carnet is only suitable for where it's being used. You'd need another type of document for other kinds of shipments.
Value Added Tax: The VAT Tax is the tax that's added to the subtotal of your customer's order.
Goods & Services Tax: This flat-rate percentage is charged to everyone. Unlike a VAT Tax, this is refunded to everyone but the customer.
Tax threshold: The tax threshold varies by state and by country. The tax threshold determines where tax rates begin. It's the minimum amount you will owe. You won't owe anything if your shipment is below the beginning tax rate.
De minimis value: The de minimis value is the rate at which the tax threshold begins.
Customs Broker: A highly-trained individual who knows everything about duties and taxes. You can hire one to handle everything for you. You can contact OptimalShip if you want to hire a customs broker.
Duty Levied: A duty placed on certain items. The levy is placed on an item, not on a person.
Duty-Free Treatment: Duty-free treatment means that your goods aren't subject to taxes. Some imported goods are duty-free. This is usually because your package doesn't meet the de minimis value.
HS Code: The HS Code is the 10-digit code assigned to your goods. It determines the worth of your goods.
Additional costs or other fees: Any additional costs other than your subtotal, duties, or tariffs. These fees vary by country. Each country's government determines costs and regulations.
Restricted goods: These are goods that require extra care to ship. Some countries prohibited some items but restricted them to certain limits in others. Special regulations must be followed to ship anything that is classified as a "restricted commodity," "hazardous material," or "dangerous good.". Restricted goods include:
- Alcoholic beverages
- Dry ice
Some types of batteries
Incoterms: Incoterms is an abbreviation for "international commercial terms." Incoterms are the rules that govern everyone involved: both the buyer and the seller. Incoterms are responsibilities that each person must meet. Incoterms are recognized internationally for every sale or purchase. There are different incoterms for different kinds of foreign shipments.
Have questions about how incoterms work and which one you should use? Contact OptimalShip today. We'll help you sort it out.