Episode 49 is fourth and last in our series on eCommerce Sales Tax. In this show, we have Amy Morgan, Product Manager at Avalara, our sponsor for this informative series. She gives us some great insights into Landed Costs.
If you are an online business, small or large, buying or selling product across country borders, this show is for you. Whether you are aware of what Landed Costs are or not, you will want to make sure you are in compliance so any taxes you or your customers are responsible for, don’t come back and bite you later on.
In this show, we chatted about:
- What exactly is Landed Costs
- Things businesses need to consider when selling across country borders
- Why Landed Cost is such a big deal now even though it’s been around for sometime
- If shipping companies take care of you with Landed Costs
- How a seller can mitigate their risk and calculate cross-border custom duty and taxes
- Are you responsible for these costs once you have calculated them
- Amy’s craziest cross-border story.
The other shows in this series:
Thanks to Our Podcast Sponsor: Avalara
Bob Dunn: Hey everyone, welcome to our show. Bob Dunn here, also known as BobWP on the web. Today is the final show of our four-part eCommerce sales tax series, brought to you by our sponsor, Avalara.
In the previous three shows we’ve talked about sales tax essentials for online small businesses, charging sales tax on your services and diving deep into the VAT tax. Today we are talking about landed cost. If you are wondering what landed cost is, don’t worry, you will know by the end of this show. And if you are familiar with it, I’m sure you’re going to pick up some great added pointers today.
To help us understand landing cost, we welcome Amy Morgan, product manager at Avalara. Hi Amy, and welcome to the show.
Amy Morgan: Hey, Bob. Good to be here.
Meet Amy Morgan, Product Manager at Avalara Inc.
Bob Dunn: I know that people are anxious to learn about landed costs. In fact, people are anxious about learning about taxes all the time. I mean, they’re on the edge of their seat. But seriously, before we get into it, tell me a little bit about what you do at Avalara and how you ended up being there.
Amy Morgan: Yup sure. I am, like you said, I’m the product manager, I’m a product manager at Avalara. I’m responsible for our landed cost calculator and all of our cross-border tax calculator tools. What’s cool about my role here is that I come from a big retail background where I was responsible for managing cross-border shipments and international trade compliance for big companies, so the problems I get to solve at Avalara are problems I grappled with as an employee of big retailers in my past. I’m a licensed US customs broker. Customs duties and cross-border taxes are my life. I’m a self-proclaimed trade nerd, if you will. I actually genuinely love and am passionate about this space. That’s what I do at Avalara.
Bob Dunn: Very cool. So we’re talking to somebody well qualified here, for sure.
Amy Morgan: Thank you.
What is landed cost?
Bob Dunn: To start out, I know that some of my listeners might be still not real clear on it, or they may be saying, “What the heck is landed cost,” so in a nutshell, what is landed cost?
Amy Morgan: Of course. Landed cost is a common shipping term. It’s used to describe the total cost of getting a physical product, a physical shipment of products, from the seller’s facility in one country and landing it at the buyer’s door in another country, which is pretty simple. At a generic level, calculating a landed cost requires three pieces of information; the cost of the goods within that shipment, the total shipping including the insurance, and the customs duty and import tax involved. The cost of goods is really straightforward, and the shipping cost is straightforward. The tricky bit that people struggle with is determining the customs duty and the import tax that’s supposed to apply to that particular shipment.
Bob Dunn: It’s interesting because you basically covered two of the biggest pain points with a lot of eCommerce sites: shipping and taxes. A bit of both here.
Amy Morgan: Right, job security.
The number one cross-border selling mistake
Bob Dunn: What does a small business need to think about when they start selling across country borders?
Amy Morgan: Sure. Any company that makes a decision to sell or buy across country borders needs to be aware that there is a tax obligation at play. It often gets missed because people think, “Oh, I can ship anything anywhere now. The world is so small, and UPS, and DHL, and FedEx make it so easy to pop something into a box.” What people don’t think about is that there is a tax situation that occurs when something leaves one country and enters another country for commercial purposes.
In my experience, the number one cross-border selling mistake is not communicating the customs duty and the import tax, or the landed cost, to their customers prior to checkout. Many companies will spend all these investments and slick tools that make it really easy for their customers in other countries to shop on their site. There’s translation, there’s currency conversion tools, but they fail when it comes to calculating the cross-border tax. Calculating the cross-border tax, communicating it, is a critical step in the cross-border selling experience because it impacts the customer’s experience.
For example, when a seller decides to go global— and I say “go global” in air quotes because going global means buying or selling across country borders—when they make that decision to go global they’ll make a decision to partner up with a shipping company. They’ll partner with FedEx, or UPS, DHL, or even the Postal Service. When a customer makes a cross-border sale via their site, they’ll package up the goods, they’ll pop them in a box and off it goes. But when that box arrives in the destination country a whole bunch of things happen that will impact your customer’s experience.
First, the value of the shipment will determine whether that shipment will be subject to any customs duty and tax. So right off, there’s a decision point that happens. If it does require customs duty or tax, the shipping company will then send the shipment paperwork off to their customs group. Most shipping companies have a special customs group that will handle facilitating these cross-border shipments. That group will complete what’s called an “Import Declaration” for that shipment. An Import Declaration is just, think of it like a tax return, because that’s exactly what it is. It’s a customs duty return, but it’s called a declaration.
They’ll complete that declaration for the shipment. Just like when you travel internationally, and the customs officers will ask if you have anything to declare, and you have to be honest, and you’re sweating bullets and stuff, this is essentially the same thing. It includes an assessment of the goods as they are described on the paperwork that accompanies that shipment; it’s like a bill of laden or a shipping manifest, or even just what’s on the label, whatever you print on the box.
The goods get assessed based on their description and then the customs group, that customs group that I mentioned earlier, will assess the amount of customs duty and VAT, or GST, or whatever local tax may apply to that shipment at that point. What happens next is that the shipping company will have to contact the end consumer to let them know that their shipment has arrived in country, and that they must pay the required customs duty and tax, and possibly an additional service fee before they’ll release the shipment for delivery. And often the end consumer will be frustrated at this point, because now they’re surprised. “What do you mean there’s an additional cost, a customs duty, a tax? When I went through checkout, I thought I was done. I paid what I paid for this shipment, and now you’re saying I have to pay more?” So often they are mad.
I talk to customers every day, retail customers who are struggling because they started selling to Canada from the United States, for instance, and customers are rejecting their shipments. Canadian customers will actually send shipments back and say, “You know what, I can’t pay this extra 50 Canadian dollars. That’s not what I signed up for.” They get frustrated. That’s why I think cross-border tax calculation before the point-of-sale is a critical piece to selling internationally.
Bob Dunn: Okay. Wow. We’re just on the second question. I’m already like, whoa.
Amy Morgan: I can go all day.
Why the buzz about landed cost right now?
Bob Dunn: Okay. I’m assuming landed cost isn’t something that just started three months ago or something, or even a year ago. It’s been around for a while. Is there a reason, or is it just now seem to be a more of a critical piece, or everybody’s like, “God, I got to pay attention to the landed cost,” versus in the past?
Amy Morgan: Right. God this is my favorite cocktail party conversation. I get really, really excited about it, but I’ll try to be concise for purposes of this podcast.
Access to global markets is easier now.
In my opinion, in my observation, there are two big reasons why landed cost is a hot topic or a trendy buzzword at the moment. The first is that, access to global markets has never been easier. eCommerce has simplified the international buy/sell process, making it easy with all the eCommerce platforms and marketplaces, OMNI channel fulfillment options, these sophisticated international payment and translation solutions. At least in my business it feels like there’s always a newer, faster, cooler, cheaper shipping method available so companies of any size can buy and sell globally. It’s seems really easy. So one, is access to global markets is super easy now.
Compliance with country tax regulations is more complicated.
Two, all of these eCommerce factors have resulted in the booming eCommerce shipment volumes which are influencing countries tax regulations, making cross-border activity more complicated from a compliance perspective. Especially with the, we’ll say, the very active political cycle we’re in right now all over the world, a lot of countries are starting to reassess their international trade position. They are asking themselves: should we make it easier for companies to ship their stuff inside our borders, or more difficult? Countries are changing the regulations by the day, so right now, it’s a funny time for going global. There’s a lot of that uncertainty going on.
Not only are these new regulations difficult for companies to navigate, if they’re even aware of them in the first place—“Is there a customs duty? I don’t know. What is the customs duty?”— it can be really difficult for them to navigate. But it’s also difficult for customs authorities to enforce those regulations. Therefore, authorities are modernizing, they’re adopting more sophisticated strategies to maximize and target their enforcement activity. The reason I mention that is because now small businesses may have never had to think about cross-border tax regulations before, and now in this new world order custom officials are to start looking. Just like the IRS or any other taxing authority, those customs officials are looking for any of their lost revenue opportunities. So small businesses need to be very concerned.
Bob Dunn: Yeah. That’s makes sense when you said, as far as everything’s global now and eCommerce is has made it that way. It brings in these people that don’t, or haven’t really have any experience with selling basically online at all. And now, “Oh cool. I can sell over here. I can sell across the pond. No problem.” A lot more people are going into it blind and they need to know about this.
Amy Morgan: They’re blind, and what’s funny is that they don’t know they’re blind. These are smart entrepreneurial business people that just want to sell their stuff to the world. They’re blind, but they don’t realize it, because cross-border trade or international trade, nobody thinks about what it takes to ship something from one place to another. You pop it in a box and it gets to where it’s going. Nobody thinks about the bureaucracy, or the customs piece in between those two points. People don’t know that they don’t know. That’s our job to educate.
Bob Dunn: Yeah. Like you said, from the outside, they look at, it gets from here to there, how simple is that? That’s cool. But hey now there are some things they need to actually be educated about. That’s why it’s so cool we have you here today.
Amy Morgan: Another cool piece about that is that until now there weren’t companies that did this sort of work. I’ve been gainfully employed my entire career as a customs broker, because there weren’t technologies that automated the customs duty calculation. You always needed to hire an expert, because it’s compliance and it’s scary, and nobody wants to be on the hook for giving the wrong compliance advice. For the first time, companies like Avalara are taking a stand here and saying, “You know what, as much as this is an art, it’s also a science. This is a math problem. This is a tax calculation problem. We can solve this.” It’s a good time to be in the global business.
Doesn’t my shipping company handle all the duties and taxes?
Bob Dunn: Yeah. When you’re talking about people getting into this whole expanse, and we’re saying a lot of people aren’t aware of it, don’t the shipping companies do this sort of thing for their customers, or are we assuming they should know that, but really it’s a customer’s responsibility?
Amy Morgan: Yeah. I’m going to pick some of those things apart. I love this question as well, because when most companies start up their cross-border operation they rely on their transportation and their shipping partners to handle all things related to shipping. Because few realize all the steps involved, what happens between A and B once you pop something in that box, in their mind all that stuff in between, all that duty and tax stuff is just part of the shipping process, which is true to an extent.
It’s a natural assumption to think that your shipping company’s going to handle all of your cross-border duty and tax calculations, but what most sellers don’t realize is that their shipping partners don’t have an obligation to get that cross-border compliance stuff right. They’re not obligated to calculate the proper customs duty and tax. They use the documents. They use the information that’s been provided by the retailer on the paperwork. They do the best they can with the information they have, but these partners, as awesome as these companies are, they’re in the move-stuff-fast business. They’re not in the tax compliance business. If you read the fine print, they have a very limited liability and they typically aren’t responsible if they calculate the wrong tax amount.
It’s worth keeping in mind that the customs authorities, they’re modernizing, they’re using data and electronic methods to seek out their piece of the tax revenue pie, but if they do discover any compliance issues when they’re going to their enforcement activities such as inaccurate tariff codes … I can talk about those later … But if they discover inaccurate tariff codes, or customs duty was calculated wrong, or if a product was mis-declared or undervalued or whatever, it’s usually the end consumer, your end consumer, who will suffer the consequences. Not the shipping company and not you actually as the retailer right off the bat. They’re going to go after the end consumer, which your end consumer will come back to you and you may lose a customer if things go south.
Sellers should be concerned about what’s going on. They should be concerned when they pick their shipping company partners, that they’re still on the hook for the compliance details. Just creating that awareness. If I’ve done nothing else here today, creating the awareness around this one topic is really valuable.
Bob Dunn: It’s a lesson learned. Don’t assume anything. Don’t assume because this company handles this that they know everything in the world about how other pieces affect it. Perfect example; shipping taxes.
Amy Morgan: Right.
What can sellers do to mitigate their risk?
Bob Dunn: What can a seller do to mitigate their risk and calculate the cross-border customers’ duty and tax for their customers to make sure all this doesn’t go sideways?
Amy Morgan: Yeah. Yes, yes, yes. I’m been responsible for customs stuff at every company I’ve ever worked for. I’ve worked for big companies with deep pockets. You can hire teams of people like me to manage our—I used to call them “red carpet relationships”— with big shipping companies. If you work for a company like Amazon, or Microsoft, or Costco Wholesale, your shipping partners are your best friends. They love you. They’ll do whatever they need to do to keep you happy, give you dedicated teams of people, all these things. These companies can afford to stay on top of the regulatory changes, they have budget, they can buy software and tools. They can even use consultants and experts when necessary.
But those investments are unrealistic for the small or the mid-size seller. So automation and tools, like our landed cost calculator, are really the only way to go. For that reason, I suggest making the cross-border tax calculation organic to activities these sellers are already doing, rather than adding a new system and more overhead to their process. Using our landed cost calculator, since it’s my product and we’re here talking about Avalara, I’ll use my own product as the example. But it’s a good one because not only does it ensure that the correct math formula is being used to calculate the cross-border task, but we also make sure that the duty and tax rates are current, as countries can and have the privilege to change their tax rates at any time.
Our approach to calculating the landed cost naturally forces sellers to make important decisions about their cross-border activities that often go overlooked, and they may not even realize that they’re making those decisions. It’s just making this calculation organic to stuff that they’re already doing. Some of those decisions include deciding who is going to pay the duty and the tax when the shipment arrives at destination. Is it going to be the seller (because that is an option)? Will it be the consumer? That’s been sort of the status quo: just leave the tax stuff with the end consumer. So tools like ours can act as a compliance watchdog telling you exactly what information is needed and providing you with the answer well in advance of the point-of-sale.
Is the seller automatically on the hook for paying the taxes?
Bob Dunn: Great. You’re talking about a calculator and I’m thinking, okay, I’m Mr. Merchant or Ms. Merchant, and I’m going on there, I’m calculating it. I’ve calculated it. Now do I have to assume that I’m automatically on the hook for paying those taxes? Because I’ve calculated it, they’re in front of me, and it’s like,”Oh my God, what do I do now?”
Amy Morgan: Yeah. I get this question actually a lot. The short answer is no, not necessarily. It’s okay for a merchant to calculate an estimated landed cost but choose not to pay the customs duty and the tax that they calculated. The key is to do the calculation and let the customer know whether or not they’ll be responsible for paying these additional costs before delivery.
There’s really two options. The seller can say, “Yes, I’m going to estimate and calculate these costs. I’m going to collect it at the point-of-sale, just like I would in any other sales tax transaction, and then the seller will be responsible for declaring and filing those taxes in the destination country.” Or the seller can make the decision, “You know what, I want to calculate it because I want to do what’s right for my customer. I don’t want them to be surprised by extra fees or things when our products arrive, but I don’t want to be on the hook for paying it. I don’t want the risk, or I don’t have the resources to be able to pay it. So what I’m going to do instead is, I’m going to calculate it right up in the shopping cart, but I’m not going to collect it at the point-of-sale. I’m just going to make a little note. I’m going to say, “Hey, customer, I’m going to collect X amount from you here and now, but be aware you may have to pay 20 Euro when your products arrive at their destination so you know, don’t be surprised by that.”
I’ve got customers on both sides of that equation, both customers who want to sell cross-border and pay the taxes to make it really easy for their customers, and I’ve got customers on the other side who say, “I want to calculate it, Amy. Help me calculate it, but I don’t want to collect it.” It’s just a business choice. You can go either way.
Bob Dunn: That’s good. So now nobody will fear your calculator. That’s good.
Amy Morgan: I don’t want them to fear the calculator.
Bob Dunn: No.
Amy Morgan: Do not fear the calculator.
Bob Dunn: Nope, it’s there for your use, and then you decide what to do with it.
Amy Morgan: Right.
Amy shares a crazy cross-border horror story
Bob Dunn: Okay. One last question. I know there’s a lot more with landed cost and we could talk a long time. What’s some of the crazy cross-border horror stories? Everybody has horror stories. Do you have one or two that you might want to share with us where people will go, “Oh my God, did that really happen?”
Amy Morgan: Sure. Yes. I gave a webinar actually a few weeks ago where I told a few of these horror stories. The one that strikes me here now is not from within my Avalara life. I’m not going to name the situation. I have seen sellers intentionally mis-declare their shipments to their international customers calling them “gifts” or “samples” on the paperwork to try to avoid customs duty scrutiny, only to get those shipments flagged and examined by customs, and then their end customer has to deal with not only what was this mis-declared—this isn’t a gift, I can see the eBay invoice or the Etsy invoice right here— but not only was it a commercial shipment and not a gift but they still have to pay the duty and the tax. The customer experience suffers there as well.
I hear that a lot. Don’t do it. If any of your listeners are retailers and they’re thinking, “Oh, I want to sell from the US to Canada. I’m just going to call it all a gift.” Remember when I said earlier about the political environment we’re in? We’re seeing a pendulum shift away from security and towards enforcement to recover tax revenue opportunities. So with that in mind, customs officials have caught on to the whole gift and sample scheme and they’re starting to actually target shipment called “gifts” or “samples’ to validate that they are really gifts or samples. It’s a horror story, but it’s also a lesson learned for anyone who may be engaging in that practice, you may want to stop.
Bob Dunn: Yeah. I think we have a pretty clear understanding. I know that you’ve told me a lot more than Google did, when I Goggled “landed cost,” which is very good. I want to thank you. This has been a very special podcast because I actually have the opportunity to come and record this live. We are at the Avalara offices in Seattle, Washington. That’s in the US, for those of you across the pond. I don’t get to do this a lot, so it’s kind of nice to be able to actually sit in person and interview somebody. Again, you have cleared up landed cost and how it affects us as online sellers. I just want to thank you, Amy, for coming on today and sharing all of your wisdom.
Amy Morgan: Of course. Thank you for having me.
Bob Dunn: You’re very welcome.