Easier Cross-Border Commerce Creates Tax Challenges

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Gail Cole
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Customs and tax authorities are modernizing in response to an increase in global ecommerce trade. Likewise, many accounting firms have an increasing number of clients that are selling across borders.

What does this increase in trade mean for your accounting business?

If you drink coffee, eat chocolate, wear shoes, or use a smartphone, you’ve probably been on the receiving end of a cross-border sale. Moving goods around the globe is a complicated business, but most of us don’t usually think about all that has to go right for us to be able to lace up a new pair of Converse.

We don’t dwell on where the shoes were made or how they’re transported to our door unless they don’t arrive when we expect them to. And we certainly don’t worry about customs duty or import tax. And neither do your clients.

As consumers, we have that luxury. For cross-border sellers, customs duty and import tax are essential considerations. Anyone who ships goods across international borders must sooner or later deal with customs duty and import tax because global sales involve more than just the cost of goods.

Global sales entail figuring out shipping and insurance costs; assigning the correct tariff code (every product has one) for each product and each country of import; determining the value of the shipment for customs duty (often this includes shipping and insurance costs); knowing the de minimis threshold (the minimum declared value a shipment must have for it be subject to customs duty) of ship-to countries; and attributing the proper rate of import tax for each exported item in each import country.

It’s a monumental task. But the sooner global sellers come to terms with all that is involved in the landed cost — the total cost to ship goods internationally from door to door — the better. Getting it right is critical to the long-term success of global ecommerce.

As an advisor, you’ve likely come across small to mid-size businesses who ignore compliance implications of their global sales activities. The internet has made the world so small that sellers may not realize they’re engaging in global trade when they have a customer in another country. Or they may not realize their business can benefit from getting in front of international taxes, and suffer from ignoring them. According to PayPal’s Cross-Border Merchant Research 2016, more than half of all cross-border sellers do not include taxes at checkout, and even more have no intention of ever doing so.

For your clients, that strategy can only last so long. Although global sellers are not usually liable for the duty and import tax on their exports (liability rests with the importer, or customer), some choose to collect it at checkout as a courtesy to their international customers.

The double-edged sword of cross-border ecommerce

Internet connectivity enables a one-person, in-home business based in a basement in Bismarck, North Dakota, to market and sell to consumers in Calcutta and Caracas almost as easily as to those in nearby New Salem. Greater connectivity afforded by ecommerce and more sophisticated international payment and translation solutions have created a surge of international sales activity, particularly among small to mid-size businesses.

This has not gone unnoticed by customs officials and tax authorities. To the contrary, it’s caught their attention and sparked an increase in regulations, tariffs, and border checks. Ever eager for more tax revenue, countries are realizing that opportunity is flowing across their borders, one package at a time. It may take more work to capture duty and import tax revenue from numerous smaller sellers than it does from one Amazon or Alibaba, but the potential payout is worth it.

The spike in global sales has therefore created somewhat of a vicious cycle: Easier international trade is causing a surge in cross-border sales, which is heightening global trade regulations, which are complicating import and export tax compliance and international trade for all sellers. In other words, easier ecommerce is a double-edged sword.

The original article appeared on Avalara.com

 

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