Understanding Landed Costs: Duties, Taxes, and Fees
As an ecommerce merchant, determining shipping costs is an essential and ever-present part of doing business. At first glance, it doesn’t seem like it would be a complicated calculation—just put some information into an online tax and shipping calculator, hit enter, and go about your day, right? Not quite, but it’s a start.
The duties, taxes, fees, rules, and regulations associated with international shipping can be time-consuming and confusing for even the most experienced merchants. Costs, calculations, and guidelines can vary between countries or provinces and change frequently. Attempting to manage that many moving pieces while also running your ecommerce business is a more significant undertaking than you may think.
If you’re doing business that includes cross-border shipping, developing a complete understanding of landed costs is crucial to accurately estimating delivery costs and optimizing profits.
The Difference Between Taxes, Duties, and, Fees
The cost of shipping is just one part of the equation, especially if you’re selling to a global market. Once your product crosses an international border, you’ll most likely need to add additional taxes, duties, and/or tariffs to your cost estimate, along with various other fees.
Some of these terms can seem interchangeable since duties and tariffs are both types of taxes, so let’s dive in to define the difference :
- Taxes: A tax is a source of government revenue placed on purchases and individuals to help fund government projects, programs, and public expenditures. Taxes are compulsory charges and a necessary part of doing business. Government fees placed on imported goods are referred to as sales tax, value-added tax (VAT), or goods and services tax (GST), depending on the country.
- Duties: Duties are indirect taxes that apply to financial transactions and goods. Duty fees may apply to goods manufactured locally (known as excise duties) or imported items (known as customs duties). They’re known as indirect taxes since they are imposed on the consumer; however, the seller pays the tax and usually passes on the cost in fees to the buyer.
- Tariffs: Tariffs are a direct tax that applies to certain imports or exports. Imported goods are classified under an HS code, which determines the tariff rates for various products. Tariffs are often leveraged to protect domestic manufacturers since they result in price increases, creating a loss of demand for imported products.
- Fees: There will also be fees associated with the shipping process. Fees can vary depending on the shipment details but may include brokerage, electronic filing, storage, formal clearance, and other miscellaneous costs.
How to Calculate Duties and Taxes
Miscalculating total landed costs is an easy mistake to make but can quickly become an expensive and time-consuming logistical nightmare. Duty and tax charges are based on the following factors:
- Value of goods: Customs uses the value of the goods listed on the commercial invoice to calculate duties and taxes. This value will include the cost of freight and insurance fees. There’s also a value ceiling for goods, referred to as de minimis, and goods that fall under that amount are not charged duty or tax and don’t have to follow the same procedures. De minimis varies by country, which can make doing your own calculations even more complicated.
- Description of goods: The commercial invoice lists the product’s use and the country it was manufactured in to ensure the shipment is correctly classified.
- HS Code: An HS code helps classify the product type, which determines any taxes, duties, or regulations that may apply. It’s important that the HS code and description of goods both match.
- International commercial terms: International commercial (INCO) terms are part of an agreement that defines who is responsible for various costs throughout the shipping process. These are listed on the commercial invoice.
How to Calculate Duty Fees
To accurately calculate duty tax, you would need to find the duty rate for the goods you are shipping to the country you’re shipping to. The percentage will vary depending on location and is fluid, based on the local country’s schedule. You would use your product’s HS code or description to search for the duty cost of the particular product.
FlavorCloud automates duty cost calculations so that you can ship your products with confidence and avoid the complexity and confusion involved with having to research the many different components involved for each and every shipment.
How to Calculate Taxes
Calculating import taxes requires knowing the destination country’s sales tax rate (VAT). Some countries may have several different VAT rates depending on the good or service.
Duties and taxes usually must be paid before customs will release your goods in the destination country. Using FlavorCloud ensures that your cost calculations include all of the correct taxes, duties, and fees so that they are paid in full and delivered without additional costs or interruptions.
The Importance of Landed Costs
Understanding all potential costs and fees allows you to set prices and determine processes that maximize the profitability of your business. The true cost of a product goes far beyond inventory and marketing, particularly when you’re a cross-border merchant. Landed costs include the cost of goods sold, insurance fees, freight fees, customs duties, domestic and import taxes, overhead costs, brokerage fees, and shipping fees.
Manually calculating landed costs and taking the time to research various countries to do so accurately is time-consuming, labor-intensive, and potentially risky. Automating these calculations can ultimately save your business time, money, and reputation.
How FlavorCloud Can Help
At FlavorCloud, we add confidence to every order (and save you from unnecessary research and math homework) by offering a guaranteed landed cost at checkout and Delivery Duty Paid (DDP) shipping where the consumer covers the accurate costs of duties, taxes, and fees at checkout.
Avoid costly surprises when it comes to paying duties and taxes on imported goods by knowing—and covering—your total landed costs upfront.
Learn more about FlavorCloud’s international shipping solution. We have the world’s largest cross-border carrier network offering the best shipping rates and routes. FlavorCloud makes cross-border ecommerce easy, affordable, and friction-free