What’s the Difference Between Import Duties and Taxes?
Understand the financial obligations of importing. This overview clarifies the separate government levies and the factors that influence your total landed cost.
When goods are brought into a country, governments impose charges on the imported items. These charges, broadly categorized as duties and taxes, are levied by customs authorities and are a significant financial consideration for any business involved in importing. These government-mandated fees serve multiple purposes, from protecting domestic industries to generating revenue. While often discussed together, duties and taxes are distinct charges calculated differently, and understanding them is necessary to ensure goods are released from customs without delay.
Key Components of Import Duties
Import duties are determined by the Harmonized System, referred to as HS or HTS codes in the United States. This standardized numerical method classifies traded products, allowing customs authorities to apply the correct duty rate. The code consists of up to ten digits; the first six are uniform globally, while subsequent digits are assigned by individual countries for more detailed classification. Correctly classifying a product with its HTS code links the item to a duty percentage in the national tariff schedule.
The country of origin, where the goods were manufactured or produced, is another determinant in the duty calculation. This information is important because trade agreements can significantly reduce or eliminate duties on certain products. For example, goods from countries with which the U.S. has a free trade agreement may have a lower duty rate.
The de minimis value is a valuation ceiling for goods, below which they can enter a country without duties and taxes being levied. In the United States, this threshold is $800. Items valued at or below this threshold can pass through customs without incurring duty charges. However, this exemption is not universal, as shipments from certain countries may be subject to duties regardless of their value.
Other Import Fees and Taxes Explained
Separate from customs duties, other fees and taxes can be applied to imported goods. While the United States does not have a national Value-Added Tax (VAT), imports may be subject to other charges like the Merchandise Processing Fee (MPF) and the Harbor Maintenance Fee (HMF) for ocean shipments. These fees cover costs for processing imports and maintaining port infrastructure. Federal excise taxes may also apply to specific commodities, such as alcohol and tobacco.
Calculating Your Total Import Costs
To budget for an import, you must first determine the customs value of the goods. The United States uses the Free on Board (FOB) valuation method, which is based on the price of the goods at the foreign port of export and excludes international shipping and insurance costs.
The duty payable is calculated by multiplying the customs value by the duty rate applicable to the product’s HTS code. For example, if a shipment has a customs value of $10,000 and a duty rate of 4.5%, the duty payable would be $450.
Other fees like the Merchandise Processing Fee (MPF) are also calculated based on the declared value of the goods and have minimum and maximum charge amounts. The total landed cost is the sum of the customs value, the duty, and any other applicable fees.
The Customs Clearance and Payment Process
The customs clearance process involves submitting required documentation to the customs authority to have goods legally enter the country. For most commercial shipments, this is managed by a licensed customs broker or freight forwarder who acts as an agent for the importer. These professionals ensure the customs declaration is filed correctly.
Payment of the assessed duties and taxes is required for the release of the goods, and the importer of record is responsible for this payment. The customs broker may pay the charges on the importer’s behalf and then invoice them for the total amount plus a service fee. Importers can also set up their own accounts for direct payment to the customs authority.
After the customs authority confirms that all duties and taxes have been paid and regulatory requirements are met, it will authorize the release of the shipment. The goods can then be moved from the port or bonded warehouse. This final step completes the import journey, transitioning the goods from being under customs control to being freely available to the importer.