Cross-Border Ecommerce: Tax, Duty, and Landed Cost

A customer in Germany buys a $50 product from your US-based store. Shipping costs $15, bringing the total to $65. The package arrives, and the delivery driver demands an additional $22 for customs duties and VAT. The customer is frustrated, leaves a one-star review, and files a chargeback. Technically, your store did nothing wrong, but the failure to communicate the full cost of cross-border shipping has resulted in a potential loss of a customer.

This scenario is all too common in the world of international ecommerce. Understanding and clearly communicating the landed cost—the total cost of getting a product from your warehouse to an international customer's hands—is crucial for customer satisfaction.

What Is Landed Cost?

Landed cost encompasses every expense associated with delivering a product from its origin to its final destination. It includes:

Product Cost: The price you charge for the item.

Shipping/Freight: The charges levied by carriers to transport the package.

Customs Duty: A tax based on the product type and origin country.

Import Tax (VAT/GST): A value-added tax charged by the destination country.

Brokerage Fees: Charges from customs brokers for clearing the package.

Insurance: Optional coverage for cargo.

Currency Conversion Fees: Costs associated with converting currencies.

Compliance Costs: Expenses for labeling, documentation, and certifications.

For a $50 product shipping to Germany, the real landed cost might break down as follows:

• Product Cost: $50.00
• International Shipping: $15.00
• Customs Duty (6.5%): $3.25
• German VAT (19%): $12.97
• Brokerage Fee: $5.00

This results in a total landed cost of $86.22, which is 72% more than the product price alone. If your customer is unaware of these additional charges at checkout, dissatisfaction is inevitable.

Customs Duties: How They Work

HS Codes

In international trade, every product is classified under a Harmonized System (HS) code, a 6-10 digit number that determines the applicable duty rate. The first six digits are universal, while the remaining digits are specific to each country. Correctly identifying the HS code is critical. A mistake can lead to overpayment or underpayment of duties, resulting in either unhappy customers or potential legal issues.

De Minimis Thresholds

Many countries set a de minimis threshold—a value below which no duty or tax is charged. This threshold is a key consideration for cross-border ecommerce.

• United States: $800 for both duty and tax
• Canada: CAD $20 (duty), CAD $40 (tax)
• EU Countries: EUR 150 (duty), no threshold for VAT since July 2021
• United Kingdom: GBP 135 (duty), VAT always applies
• Australia: AUD $1,000 (duty), GST always applies
• Japan: JPY 10,000 (~$67) for both duty and tax
• Mexico: $50 for both
• Brazil: $50 for duty, tax always applies

The elimination of the EU's VAT de minimis threshold in 2021 means every package shipped to the EU is subject to VAT, a significant change that surprised many small sellers.

How Duty Is Calculated

Duty is generally calculated on the declared customs value, which is typically the transaction value (the price paid for the goods, excluding shipping in most countries). For example, an $80 product shipped to the UK falls under the HS Code 4202.21 for leather goods, with a duty rate of 3%. The duty is calculated as follows:

• Duty = $80 x 3% = $2.40

Some countries calculate duty based on CIF value (Cost + Insurance + Freight), including shipping in the dutiable amount:

• CIF Value = $80 (product) + $18 (shipping) = $98
• Duty = $98 x 3% = $2.94

Import Taxes: VAT and GST

Countries outside the US often impose a value-added tax (VAT) or goods and services tax (GST) on imports, distinct from customs duty.

Major Market Tax Rates

• EU (Germany): VAT at 19% on product, shipping, and duty
• EU (France): VAT at 20% on product, shipping, and duty
• United Kingdom: VAT at 20% on product, shipping, and duty
• Canada: GST at 5% plus provincial variations on product and duty
• Australia: GST at 10% on product and shipping
• Japan: Consumption tax at 10% on CIF value and duty
• South Korea: VAT at 10% on CIF value and duty
• India: IGST at 12-28% on CIF value and duty
• Brazil: Complex tax structure with rates varying by state

VAT Calculation Example (UK)

Consider a product priced at $80 shipping to the UK:

• CIF Value: $80 (product) + $18 (shipping) = $98.00
• Duty (3%): $98 x 0.03 = $2.94
• VAT Base: $98 + $2.94 = $100.94
• VAT (20%): $100.94 x 0.20 = $20.19
• Total Duties + Taxes: $23.13

The customer ends up paying $121.13 in total, over 50% more than the product price.

DDP vs. DDU: Who Pays?

The choice between DDP (Delivered Duty Paid) and DDU (Delivered Duty Unpaid) is crucial in cross-border shipping.

DDU (Delivered Duty Unpaid)

With DDU, the customer pays duties and taxes upon delivery, with the carrier or postal service collecting payment before releasing the package.

Pros: Lower upfront costs for the seller, simpler checkout process.

Cons: Customers face unexpected charges, leading to higher refusal rates and chargebacks.

DDP (Delivered Duty Paid)

In a DDP model, the seller pays duties and taxes upfront, offering the customer a single price at checkout that includes everything.

Pros: Eliminates surprise charges, improves customer experience, reduces refusal rates.

Cons: More complex to manage, seller absorbs duty/tax costs (or builds them into the price), potential cash flow impact.

Comparing DDU and DDP

• Cart Abandonment Rate (International): 55-70% for DDU vs. 30-40% for DDP
• Package Refusal Rate: 8-15% for DDU vs. <1% for DDP
• Customer Complaints About Shipping: High for DDU vs. Low for DDP
• Return/Chargeback Rate: 3-5x higher for DDU
• Operational Complexity: Lower for DDU
• Repeat Purchase Rate (International): Lower for DDU vs. 40% higher for DDP

Data shows that DDP significantly enhances customer experience. While it may require more effort, DDU often results in disgruntled customers when they face unexpected charges.

Setting Up DDP Shipping

Step 1: Calculate Duties and Taxes at Checkout

To offer DDP, integrate a landed cost calculator into your checkout process. Consider these options:

• Zonos: An API solution with per-transaction pricing, integrates with Shopify and WooCommerce.
• Avalara: A subscription-based API compatible with major platforms.
• Duty Calculator: Offers per-query pricing for custom integrations.
• Global-e: A full solution with revenue sharing, ideal for enterprise-level businesses.
• Passport Shipping: Combines API and carrier services with per-shipment pricing, integrates with Shopify.

Step 2: Choose Your Duty Payment Method

• Carrier DDP Service: FedEx/UPS/DHL collect and remit duties on your behalf, suitable for medium to high volume.
• Self-Remit via Broker: Pay a customs broker who remits duties, best for high volume or specific markets.
• Platform DDP: Shipping platform handles duty pre-payment, good for low to medium volume.

Step 3: Display Total Cost at Checkout

Ensure transparency by displaying total costs:

• Subtotal: $80.00
• International Shipping: $18.00
• Import Duties & Taxes (Estimated): $23.13
• Order Total: $121.13
• Note: No additional charges on delivery

That last line assures customers of no unexpected fees, reducing hesitation.

Country-Specific Gotchas

EU: IOSS (Import One-Stop Shop)

Since July 2021, the EU mandates VAT collection at checkout for packages under EUR 150. The IOSS system allows sellers to register once and remit VAT across all EU countries.

• Without IOSS: Customer pays VAT on delivery, potential handling fee, customs delays.
• With IOSS: VAT collected at checkout, no handling fee, faster clearance, transparent pricing.

Canada: CBSA CARM

Canada's CBSA Assessment and Revenue Management (CARM) system requires regular shippers to Canada to obtain a business number. Consider registering for the Non-Resident Importer (NRI) program for smoother operations.

Brazil: The Tax Stack

Brazil's complex import tax system includes multiple overlapping taxes that can push the total tax burden to 60-100% of the product value:

• Import Duty: 20-35% on CIF value
• IPI (Industrial Products Tax): 0-30% on CIF + duty
• PIS/COFINS: 9.65% on CIF value
• ICMS (State Tax): 17-25% on total value

A $50 product can easily cost a customer over $100. Many sellers avoid Brazil until demand justifies the complexity.

Australia: GST on Low-Value Imports

Australia requires foreign sellers with AUD $75,000+ in annual sales to register and collect GST (10%) on all orders. If you reach this threshold, registration with the Australian Tax Office is mandatory.

Practical Tips for Cross-Border Success

Start With 3-5 Countries: Don't overwhelm yourself by shipping everywhere at once. Focus on top markets by demand and expand gradually.

Use HS Code Lookup Tools: Avoid guessing. Use the US International Trade Commission's free HS code search tool to prevent delays and customer frustration.

Build Duties Into Product Pricing for DDP: Instead of a separate duty line, increase the product price for international customers to cover estimated duties, simplifying the checkout experience.

Offer DDP and DDU as Options: Let customers choose. Present "Standard (duties paid at delivery): $18" vs. "All-inclusive (no surprise charges): $41." Most will opt for the all-inclusive option.

Track Duty Refunds for Returns: If an international customer returns a product, you may be eligible for duty refunds. This process, known as duty drawback, recovers money many sellers overlook.

Watch Currency Fluctuations: Exchange rate swings can affect margins if you quote prices in local currency. Update international pricing monthly or use dynamic pricing.

Cross-border ecommerce is expanding at a rapid pace. Businesses that master landed cost and transparent pricing will thrive. Those that surprise customers with unexpected charges risk losing them to competitors who provide clarity and predictability.