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US import duties & taxes – How much and when do I have to pay for import tax?

by Manuel Becvar 

So you are wondering how much tax and import rates you have to pay on your product? You keep hearing that anything below “2500$” doesn’t get taxed? Lets look at import duty rates & taxes for the US in detail.

 

What we are talking about today is the:

1) Informal Entry

An informal entry is the entry of goods valued under 2500US$ and does not need to be cleared by a customs bond as it is designated for mostly personal importations. The amount used to be 1000$ before 2013 but the threshold has been increased to 2500$ since then.

2) Formal Entry

A formal entry is the entry of goods valued over 2500US$ and needs to be cleared by a customs bond. This type of entry is used for commercial importations only (e.g. re-selling goods on Amazon).

3) Lowering product costs to avoid taxation & rates

I’ll explain each entry in a little while. The word in the community is that anything below 2500$ doesn’t get taxed and no rates apply. Wrong.

First of all any amount is technically taxable if the product is intended to be re-sold but the US customs and border protection calls the entry with a value under 2500$ an informal entry. An informal entry are “goods for personal consumption or enjoyment”.

Now in most cases customs turns a blind eye and won’t tax or slap rates on your products imported under 2500$. That is if the actual declared product value makes sense. What does that mean? Lets look at two example:

1) Informal Entry

My actual product costs 4$ and I order 500 pieces. The total order is therefore valued at 2000US$. This is called an informal entry.

Now I technically have to pay taxes and duties because I am importing as an individiual or entity with the intent to re-sell these goods.

But customs doesn’t know that and since there is a threshold of 2500$ anyway they often don’t impose any tax or duties.

But that doesn’t mean that you aren’t liable to pay them. Because if you import 500 pieces of a private labeled product it is very likely that customs knows that you have the intention of re-selling the goods.

However, as I mentioned US customs turn a blind eye in many cases and release your goods without having to pay any taxes and duties (just don’t count on it and calculate duties and taxes anyway when calculating your profit margin)

This happens especially if you use couriers like DHL, UPS etc. because they have a special clearance lane and customs often “wave these goods trough”.

Also (see my last post on this here under point 2): http://importdojo.com/how-to-import-to-the-us-for-international-sellers-ship-to-amazon-directly/

If you were to ship by a freight forwarder (Sea or regular Air freight), the forwarder has to file for a Informal Entry and you will likely be taxed according the customs tariff number.

2) Formal Entry

My actual product costs 6US$ per piece to manufacture and I order 500 pieces

I declare 3000US$ Total Order value on my Invoice which means I (my forwarder/carrier) have to file for a formal entry. I get taxed at the import rates and duties as filed under the official US Harmonized Tariff Schedule” https://hts.usitc.gov/

It’s not easy to navigate around that site and often you need to look for a long time to find the correct tariff number. If you aren’t sure you can also go to: www.dutycalculator.com and look for your tariff number there.

However there are only 3 free “look-ups” and then you’ll have to pay.

Let’s say for example my product is the famous “Garlic Press”. I do the research and find out that the garlic press has a import rate of 3%. Therefore the taxable amount and import rate is 90$ (3% of 3000$).

There will be merchandising processing fees that are usually a couple of dollar. In total I won’t be paying more than roughly 100-120$ for import rates and duties.

I am happy to pay that amount and import my product in a fair and square manner.

3) Lowering the product value on the Invoice:

Now a lot of sellers/buyers manipulate their product price on the invoice to avoid any taxation because they have heard of the “2500$ rule” but they aren’t aware of the actual regulation (informal/formal).

They do that because they have heard from other people in Facebook groups that they do that as well. Or their supplier told them that they will lower the invoice to help them save costs…. Please don’t!

Say for example they manipulate that 6$ product to a price of 4$ instead to stay below the 2500$ threshold. In most cases customs will not check and therefore you can import your products “if you’re lucky” at a zero percent tax rate which is an informal entry.

While I don’t encourage you to do so this procedure is very common and customs is aware of it. I guess the US supports their economy and has better things to worry about.

However If you greatly underprice your item you can get in trouble. Say for example that the supplier puts 1$ (or even less) on the Invoice to make the total amount out to 500$ (for 500 garlic presses).

How will you explain that your 500 pieces of private label garlic presses are for personal consumption? How will you explain that a product that sells for 15-20$ is being imported by you for 1$ a piece? You can’t and you will likely be taxed the full amount as well as a fine for deceiving customs.

Those fines can be in the excess of thousands of US$, depending on the product and the circumstances of the case.

Also bear in mind that the assesment of the total product value is the option and at the opinion of the customs officer on duty.

They aren’t stupid and if a product obviously has a higher value than you have declared they will definitely slap you with the full import rate and/or a possible fine.

In order to avoid any mix up with the correct customs tariff number I recommend you to tell your supplier to mention the correct number. If you aren’t sure which one is the correct number look on https://hts.usitc.gov/ or www.dutycalculator.com

If you still can’t find it then you can also call the phone number on the customs tariff website and they will give you this information for free.

So I’d recommend you to declare the real value and if you really must to save a few $… lower the price to a reasonable price. (E.g. 5.5$ instead of 6$).

I personally declare the real value because it’s simply not worth to falsify a customs invoice to save 90$ of taxes (in above example).

Important: Samples are a different scenario. You actually should declare your samples at a low or NO VALUE at all because they are simply for your evalutation and order decision. You will most likely also not re-sell that sample.

Therefore you can declare samples at a nominal value (1$) and mention on the sample Invoice: “Samples Of No Commercial Value”. Your supplier can put this on the sample invoice for you. See an example below:

How do I declare informal or formal and how do I properly file this with customs?

You don’t have to worry, your logistics company will declare that for you. This could be a freight forwarder or a courier like DHL.

In any event, the forwarder/courier knows the amount of total product value and will know how to declare for you.

1) Informal Entry

https://help.cbp.gov/app/answers/detail/a_id/215/~/filing-an-informal-entry-(for-goods-valued-at-less-than-$2500)

2) Formal Entry

https://help.cbp.gov/app/answers/detail/a_id/214/related/1/session/L2F2LzEvdGltZS8xNDUyMzk4NDUxL3NpZC9zTU50bzhHbQ%3D%3D

3) Merchandising Processing Fee

https://help.cbp.gov/app/answers/detail/a_id/334/related/1/session/L2F2LzEvdGltZS8xNDUyMzk4NDUxL3NpZC9zTU50bzhHbQ%3D%3D

IMPORTANT: There are exceptions to the 2500$ rule! One exception to the “valued under $2,500 rule” includes textiles. For this type of trade-sensitive merchandise, a lower value of $250 applies. A variation, or subcategory, of informal entry is known as “Section 321” which allows the duty-free entry of merchandise valued at $200 or less – as long as it is imported by one person on one day.

I hope this helps and shines some light onto the subject.

All the best and happy sourcing,

Manuel  


Manuel Becvar is the founder of "Mandarin-Gear Ltd Hong Kong" a sourcing company based in Hong Kong. Previous to founding his own company Manuel had been working with large retailers as a buyer in Hong Kong for over 10 years. Apart from Mandarin-Gear, Manuel runs a blog: www.importdojo.com that focuses on helping buyers to import from China; especially for Amazon FBA buyers. He has also written 4 best sellers books about importing from China that are available on Amazon as well as in his online course on www.importdojo.com.

 

Learn how to source from China suppliers at the Smart China Sourcing Summit. Learn more here: www.globalsources.com/summit

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