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

Megan MacKeownJuly 17, 2023

Reading Time: 4 Min.

As an ecommerce seller, international expansion can be 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 TecEx 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 ecommerce 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, the 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%, depending on the HS Code, COO, and, in some cases, the weight or volume.

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 duties and taxes 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?

In short, there is no difference. When it comes to international trade and importing, the terms “duty” and “tariff” are used interchangeably by both the World Trade Organisation (WTO) and the International Trade Administration (ITA). There are a lot of misconceptions when it comes to the distinctions between these two terms and many emphasise that understanding these differentiating factors is crucial to international shipping.

In fact, it’s not important to understand the difference because there isn’t a difference. More important is understanding how duties (or tariffs) are calculated and applied to your shipments. 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 undergoes customs clearance, the import fee it incurs accords with this predetermined percentage, dictated by the particular product(s) category it falls within.

HTS codes are specific—up to 10 digits long—reflecting the nuanced process of dictating a product’s tariff rate. 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.

The Bottom Line

In practice, duties are determined by a distinct but equally complex series of methods employed by trade experts. In the world of international trade, sellers needn’t (and shouldn’t) burden themselves with understanding the nuances of duties and their calculations.

For sellers, the main takeaway is much easier to conceptualize: duties 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 eCommerce Sellers

Import duties 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 eCommerce Seller

Every country has a vested interest in guarding its own economy against international competitors, and import duties are theoretically one of the easiest ways for a country to protect its own interests.

However, with the expansion of ecommerce, 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:

Handle the entire customs clearance process once a shipment arrives at 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,
Arrange payment for all duties and taxes on behalf of the seller,
Resolve stuck or delayed shipments tied up in a country’s customs process,
Take on the risk associated with the import at the time of clearance and for up to 7 years after,
And facilitate the smooth movement of international freight.

Expand Internationally With TecEx

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.

TecEx 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 TecEx 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:

eCommerce Frequently Asked Questions, US Customs and Border Protection

Determining Duty Rates, US Customs and Border Protection