In addition to basic transaction requirements, customs duty calculations also involve currency codes, tariff codes, duty rate types, de minimis thresholds, and international trade agreements.
If your ecommerce integration uses the Avalara REST API to calculate customs duties and import taxes, see How to calculate customs duties in REST.
Customs duty elements
Countries use unique harmonized system (HS) tariff codes to calculate tariff rates for most internationally traded products. AvaTax uses the tariff code and destination country to determine the most accurate tariff rate for that product. Transaction line items must have a fully qualified HS code for the destination country.
In the case of multiple product variants, parent products are classified with a tariff code and any child SKUs inherit that classification.
Duty rate types
Most duties are calculated as a percentage of a product's value, but some duties are based on the weight or amount of the product being shipped. At the line level, AvaTax considers the total amount of calculated tax, the duty rate of the product for the destination country, the duty rate type, and the unit of basis (such as Per Currency Units).
Translated from Latin as "according to value," the duty rate is calculated as a percentage of the product's value.
- Example: An ad valorem duty rate of 5% applied to a $10,000 product is a duty amount of $500.
Per unit or volumetric
The duty rate is calculated as a flat charge per unit of measure, such as the weight or quantity of the product.
- Example: A per unit duty rate of 5¢ per kilogram applied to 1500 kgs of a product is a duty amount of $75.
- Per unit or volumetric calculations require additional product attributes and parameters
De minimis threshold
A country's de minimis threshold determines when customs duties, value-added taxes (VAT), or goods and services taxes (GST) apply to an international shipment. Duties or import taxes aren't applied to a line item amount if it's below the destination country's de minimis threshold. AvaTax uses the currency code and trade agreements of the destination country to calculate the amount and check it against that country's threshold.
AvaTax converts the value of a shipment to the destination country's currency before measuring that value against the country's de minimis threshold. AvaTax checks key transaction values in order to make an accurate conversion, including currency code, Ship From address, Ship To address, and the Cost, Insurance and Freight (CIF) or Free on Board (FOB) status of the shipment according to the trade agreements that are present in the destination country.
For example, when shipping a €750 EUR product to the US, AvaTax converts EUR to USD based on the currency code and address information included with the transaction. AvaTax then compares the converted value of the shipment ($840 USD) to the destination country's de minimis threshold ($800 USD) before applying a duty rate.
Importer of record
The importer of record setting identifies who collects customs duties and import taxes for a transaction. This setting controls whether or not customs duties are calculated in AvaTax. The Importer of Record should be Yes if the buyer is the importer of record in your shipping agreement but you still want to collect duties and taxes in transactions, such as when using a Delivered Duty Paid shipping service.
When determining the importer of record, AvaTax can prioritize your country-specific settings or the importer of record data from your incoming transaction. Change the priority in Settings > Advanced Account Settings.
Customs unions and free trade areas
A customs union is an agreement between multiple countries to streamline trade between its members by charging the same import duties or none at all. Likewise, free trade areas such as Hong Kong or Singapore (also known as free ports) don't subject goods to customs duties. Union and free trade relationships are typically supported in AvaTax tax calculations.
Countries may agree to a favorable duty rate (or not duties at all) for certain products. A recent example of a preferential treaty supported by AvaTax is the USMCA trade agreement involving Mexico, Canada, and the United States.
To calculate preferential duty rates, your transaction data must include trade agreement parameters. When the parameters are present, AvaTax applies the appropriate preferential duty rate instead of the Most Favored Nation (MFN) rate.
Document details include transaction information such as the document or invoice code, invoice type, date, and ship to and from addresses.
- Ship From and Ship To addresses
Duties are calculated for countries you've added to Settings > Where You Collect.
- Importer of Record
This determines who pays the customs duty and tax. If you're calculating customs duties and import taxes on behalf of your buyer, such as when using a Delivered Duty Paid shipping service, this value should be Yes.
The type of currency used in the transaction. Normally this is the ISO 4217 currency code. AvaTax converts this based on the Ship From and To addresses.
AvaTax uses this to look up the correct duty rate for this tariff code in the destination country. These codes may be provided in the Avalara Item Classification service.
Line items include product or service information such as the tax rate, basis of currency, total sale amount, plus any discounts, overrides, or exemptions.
- Item code
An Avalara code that's mapped to an item to calculate tax.
- Tariff code
AvaTax looks up the correct duty rate for the fully qualified HS code in the destination country. These codes are mapped to the item code under Settings > What You Sell.
The number of items included. Used in certain cases to calculate sales-tax caps and thresholds.
Most duties are calculated as a percentage of a product's value, but some duties are based on the weight or amount of the product being shipped.
Viewing a customs duty calculation in AvaTax
You have a $10,000 shipment. The destination country is the United Kingdom. You're collecting customs duties and import taxes because your company is the importer of record.
The tariff code assignment for this item is found under Settings > What You Sell.
- The associated item code is ST01
- ST01 is assigned to a unique tariff code of 6404199000
At calculation, AvaTax uses the currency code and destination country to apply tariff and customs duty rates:
- The amount of this sale exceeds the United Kingdom de minimis threshold (135 GBP)
- The basis is Per Currency Unit because this is an ad valorem duty calculation