10 import tax and duty mistakes you can't afford to make

Avalara Whitepapers

Shipping internationally can expand your business's reach and reputation — and provide a big boost to your bottom line. But venturing into the international shipping space can create massive headaches when it comes to tariff and duty rates. Every country has its own laws and rates, and businesses from different sectors face different compliance challenges when shipping overseas.

In this whitepaper, consider the most common pitfalls experienced by companies shipping internationally. While many of these mistakes are most commonly made by businesses that have only recently begun to expand their shipping policies, even longtime multinational businesses can make costly tariff and duty mistakes. Specifically, we'll look at specifc examples of exporting to China, Singapore, and Canada.

Check out this top 10 list of potential problems to make sure you’re not putting your business at risk of significant fines and penalties.

Every new country your customers order from creates new tariff, import tax, and duty obligations, with different rates, rules, and forms. Customs procedures change at each international border and compliance, even in neighboring nations, can look drastically different.

Take flip-flop sandals, for instance. If a flip-flop-style sandal is made of rubber, duty rates of 9 percent in the United States and, if we're exporting to Candada, a duty rate of 16 percent in Canada applies. But if you’re selling leather flip-flops, both countries change their rate — in Canada, it goes up to 18 percent, but in the U.S., the product is now duty free.

Faced with the difficulties of assigning tariff codes to products and calculating duty rates, many companies decide to punt the issue to transportation and fulfillment providers. Some providers of these services may imply that they can classify your products and calculate duty rates, but here’s the secret they’re not telling you: They have no obligation to get it right — if you fall out of compliance, you could be the one liable, not the shipping company that mis-classified the shipment or estimated an incorrect rate. If your providers make a mistake, prepare yourself — the monetary burden could fall on your shoulders.

It can be a lot of work to get accurate duty rates and customs charges for your entire product catalog. Often, once these rates have been calculated for a new country, complacency sets in — the rate sticks in your shopping cart system for years, with no updates in sight.

Of course, there’s a problem here: Rates and taxable products change all the time. A sustained drop in oil prices and changes in currency valuation have caused many world governments to search for new sources of tax revenue, and imports are being scrutinized more carefully than ever. A rate that was valid last year may no longer be current, and refused shipments (due to unexpectedly high import taxes) are the likely result of relying on old rates.

It’s not supposed to happen, but a lot of businesses have done it: deliberately undervalue shipments of goods, or misdeclare one type of item as another in order to avoid paying a higher duty rate. Some companies, for instance, always fill out a low estimated value regardless of the actual product value in a shipment in order to sneak in under duty-free or low-value customs policies.

Governments have noticed this tactic, and are cracking down more than ever. Customs authorities have developed profiling tactics that help them target shipments for detailed examination and evaluation. Customs processing delays, as well as major fines and penalties, can be expected if your company routinely engages in these practices.

Forms, forms, and more forms: International shipping can generate a lot of paperwork. It’s important not only to keep everything, but also to ensure that each form is properly filed and stored. Misplacing import and export paperwork, or being unable to easily search for documentation when it’s requested, can lead to significant delays in processing shipments.

In the event of a customs audit, having full supporting documentation for your international transactions will lead to an easier and less costly audit process. Ensure that all documentation is stored with later access in mind and consider digital scanning to make cross-referencing easier.

It can’t always be helped: Changes happen when you’re shipping internationally. Rerouted or revised shipments and last-minute changes sometimes lead to quick, back-of-the-envelope calculations that can turn costly if estimates are incorrect. Almost always, it’s the shipper that ends up eating the cost.

When a change is made to an international order, even if deadlines are tight, don’t count on a quick guess based on other transactions or your recollection of the law. Without due diligence, you risk embarrassing customer experience mishaps and rejected shipments.

In many countries, specific products are flagged as regulated and subject to additional import duties and charges. These costs are not always trivial; for instance, when shipping a car to Singapore, duties, special fees, and import tax can cost tens of thousands of dollars — sometimes as much as or more than the car itself.

Regulated products vary from country to country, and aren’t always obvious. Sometimes, products can be regulated to protect domestic trade, which is why wood bedroom furniture imported to the U.S. from China is subject to a duty rate of over 92 percent, but similar furniture from other countries is considered duty free. In other situations, products may be illegal to import: Singapore has banned chewing gum inside its borders and Nigeria bans almost all imports as a matter of trade protectionism.

One of the trickiest and most time-consuming aspects of calculating accurate customs duty and import tax is making sure every product in your catalog is correctly assigned a tariff code for each country you ship to. While the first digits of tariff codes are “harmonized” internationally — that is to say, the same first digits apply to a product regardless of where you’re exporting it — the last digits vary by country.

Making incorrect determinations about tariff codes (or trying to use one country’s tariff codes when shipping a product to a different country) can lead to customs delays, unanticipated extra costs, and returned shipments. Each new product should be evaluated individually to ensure that the correct code determination is made.

Automating this process with a solution like Avalara Managed Tariff Code Classification can give you confidence in the country-specific tariff codes required for your international shipments.

Some companies calculate international customs duties on their shipments, then fail to consider VAT, GST, or other local taxes that can significantly impact the total cost. It's important to remember that total landed cost is a combination of several factors, and that duty rates will only take you part of the way to a comprehensive landed cost calculation.

When you calculate total landed cost, make sure you’re taking every factor into account: the value of the order, door-to-door shipping costs, shipping insurance costs, customs duty, and any import taxes. This way, you’ll have a comprehensive picture of your costs and avoid any expensive surprises upon delivery.

One of the easiest mistakes to fall prey to is trying to get customs duty and import tax right without any outside expert assistance. Sometimes, the cost of professional tariff code classification and tax determination can be excessive, especially if you’re paying the pros by the hour.

Fortunately, there are low-cost, reliable alternatives. For example, Avalara offers a highly efficient and affordable Cross-Border solution for classifying your products and calculating customs duty and import taxes anywhere you sell.

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