What it means
Governments charge import duty for two reasons: to raise revenue and to make foreign goods less cheap relative to domestic ones. The words duty and tariff are used almost interchangeably in business, although tariff more often refers to the published schedule of rates and duty to the amount actually charged.
Three things determine the bill. The commodity code assigned to the product, the customs value of the shipment, and the country of origin, since trade agreements can reduce or remove duty for goods made in particular places.
Most duty is ad valorem, meaning a percentage of value, but some products are charged a specific duty per unit of weight, volume or quantity. Alcohol and tobacco are common examples, where the charge is per litre or per thousand units rather than a percentage.
Duty is normally not recoverable, which is the difference that surprises people who are used to reclaiming sales tax. Value added tax or its equivalent at the border can usually be reclaimed by a registered business, but import duty is a genuine cost that must be built into pricing.
The nuance is that duty is often more manageable than it looks. Getting the commodity code right, holding valid origin documents, using bonded warehouses to defer payment and claiming relief on goods that are re-exported can all legitimately reduce what a business pays.
In practice
Real-world examples
Example 1
A bicycle retailer discovers its frames have been declared under the wrong commodity code for two years, at 6% instead of 4%. It files a voluntary disclosure and reclaims the overpayment rather than waiting for an audit.
Example 2
A cosmetics brand sources the same product from two factories in different countries. One qualifies for zero duty under a trade agreement, so the slightly higher factory price still produces a lower landed cost.
Example 3
A machinery distributor imports parts, assembles them and re-exports 60% of finished units. It uses a customs warehousing arrangement so duty is paid only on the units that are actually sold domestically.
Think of it
Import duty is like a toll booth operator charging a fee for bringing foreign goods across the national border, similar to paying a highway tax for using a specific road.
Formula
Calculation
Import duty = Customs value x Duty rate
A furniture importer brings in a container with a customs value of $180,000, calculated on a cost, insurance and freight basis. The commodity code for the goods carries a duty rate of 4.5%.
Import duty is $180,000 x 0.045 = $8,100.
Border sales tax is then charged on the duty-inclusive value, not the invoice value. The taxable base is $180,000 + $8,100 = $188,100, and at a rate of 10% the border tax is $188,100 x 0.10 = $18,810.
The total the importer must pay to clear the goods is $8,100 + $18,810 = $26,910. Because the $18,810 of sales tax is reclaimable for a registered business but the $8,100 of duty is not, only the duty enters the cost of goods, adding $8,100 / $180,000 = 4.5% to the landed cost of the shipment.Case study
Seen in the real world
This is an illustrative and fictional example. Ledbury Outdoor imported technical jackets and had been paying 12% duty on every shipment since it started trading, treating the rate as a fixed fact of life. Annual imports had grown to a customs value of $2,400,000, so duty was costing $288,000 a year.
A customs review found two things. Part of the range, the unlined shells, belonged under a different commodity code carrying 8%, and a second supplier's goods qualified for preferential treatment under a trade agreement provided Ledbury obtained origin declarations it had never asked for.
Reclassifying the shells cut duty on $900,000 of value from 12% to 8%, saving $36,000 a year, and the origin paperwork removed duty entirely on a further $500,000 of value, saving $60,000. The illustrative point is that duty is administered on the information the importer supplies, so accurate classification and paperwork are worth real money.
Watch out
Common mistakes
- Assuming import duty can be reclaimed like sales tax, when in almost all cases duty is a permanent cost that belongs in the product margin.
- Accepting a commodity code from a supplier or freight agent without review, since the legal responsibility for correct classification sits with the importer.
- Quoting customer prices from the supplier invoice alone and discovering the duty only after the goods arrive and the price list is printed.
Questions
People also ask
What is the customs value based on?
Usually the price paid for the goods plus freight and insurance to the border, though the exact basis depends on the country's rules and the agreed trade terms.
Why do two identical products attract different duty?
Because origin matters as much as the product itself, and goods made in a country with a trade agreement may enter at a reduced or zero rate.
Is duty charged before or after border sales tax?
Duty is calculated first, and the sales tax is then charged on the value including the duty, so the two are not simply added to the invoice price separately.