Taxing times for global sales

As global sales are becoming complex, the logistics associated with e-commerce are proving to be a stumbling block for companies.

As global sales are becoming complex, the logistics associated with e-commerce are proving to be a stumbling block for companies.

International traders have always had to overcome a complex array of tariffs and local tax laws. But with the advent of e-commerce, having this information at your fingertips is critical to successful business, as Hazel Ward finds out

Calculating the total end-to-end cost of a transaction - the total landed cost - is a critical function for anyone involved in global buying or selling. Speed is essential when quoting a final price to a potential buyer to avoid losing a sale. But calculating the final cost, which covers international taxes and tariffs, has been lengthy and complex (see panel, below).

Research published last September by US investment consultant Bear Stearns found that 85% of online traders were unable to handle international orders because of the difficulty of getting a total landed cost estimate in real-time. The report said the logistics market would increase from $42bn (£28bn) last year to $274bn in 2004, with expenditures from outsourcing the logistics functions of e-commerce rising from $11bn in 2000 to $100bn by 2004.

The use of Web-based technology track local regulations can enable a company to take into account the visible and hidden costs associated with international buying and selling, such as duties and taxes, insurance and shipping.

Anthony Awaida, chief executive of Xporta, a California-based software company that provides immediate information on costs, tariffs and delivery charges at the point-of-sale, said the expansion of international trade over the Internet meant that companies could no longer afford to keep local inventory.

"With 40% of orders over a B2B Web site being from abroad, the cost at origin and at destination can be very different and working it out can be complex," Awaida said.

Calculating the landed cost of importing or exporting has always been the responsibility of export-import managers who are experts on these issues. Now sales or procurement staff need this information.

"These people don't have that expertise, so they pick up the phone and liaise with the export-import manager, which takes a lot of phone and fax contact," Awaida said.

The import-export manager usually has to calculate the international taxes and tariffs and allocate a Harmonised Tariff Schedule (HTS) number, an international code to classify products for duty purposes.

The allocation of an HTS code is a legal requirement and is a highly complex, and crucial, part of the process.

The range of tariffs is staggering. Within the European Union alone, there are more than 90 tariffs and even within a single country, there can be different regional taxes. In some cases, there are import taxes on PC equipment over a certain weight or chip speed.

According to Tim Minahan, director of supply chain management research at US analyst Aberdeen Group, many companies have not been successful at working out all the elements involved, with even the largest organisations falling foul of international regulations for cross-border shipments.

Since 1995, over 200 high-tech companies have violated US regulations and incurred a civil or criminal penalty, with names like Silicon Graphics, IBM, Dell and Boeing incurring penalties for non-compliance.

"Most violations have been administrative. It's not wilful negligence, it's just that the information is not widely available and the export-import laws are so complex. They can't proactively track whether they have the right licence, if they have paid enough tax or if they are shipping to a prohibited area," Minahan said.

Non-compliance with international trade regulations is a serious issue. Penalties range from a hefty fine, which can be up to five times the value of the goods exported, a revocation of export privileges or even a prison sentence.

Having accurate information in real-time is also a matter of customer service.

"Because most organisations don't have up-to-the-minute landed cost information, they update data monthly or quarterly - it's not accurate and this can hit customer satisfaction and cost.

"It's almost better not to ship to certain areas because it's so expensive. If you don't know the information at point-of-sale, you cannot quote the buyer the total landed cost and later discover it was two or three times as much. Then you either charge that back or swallow the charges yourself, cancelling out any profit and even causing negative debit," added Minahan.

Knowing landed cost at point-of-sale was becoming important for companies wanting to support cross-border e-commerce.

"It's extremely important to have real-time estimates, because without the total landed cost, it could be costly mistake. Having that information in real-time is going to be imperative for global ventures," Minahan said.

For vLinx, a Canadian B2B exchange for consumer products, investing in software to automate trade and tariff rates for international imports and exports was an effective way of gaining competitive advantage and rationalising operations.

Formed two years ago, vLinx offers Asian-produced goods to wholesalers and retailers in Asia and the North American continent.

"Importing and exporting goods is a quagmire of complexity and fraught with uncertainty," said Kombiz Eghdami, chief executive and chairman of vLinx.

Variation in tariffs could alter the final price by 40% of stock value.

"Finding all the duty, tax data and HTS codes was a practical part of logistics, but it was taking up too many resources," said Eghdami.

After considering trade facilitation products, vLinx invested in Xporta's Global Tradeware software.

Previously, vLinx had 17 people working in-house to determine the HTS number and calculating landed costs.

vLinx chose Xporta as it felt it could integrate quickly with existing systems and because of the integrity of Xporta's database for HTS product codes.

The software was delivered via vLinx's customer relationship management system and took three weeks to integrate with vLinx's databases. Data is uploaded to the Xporta program, analysed, then the results are fed back into the application. By typing in a simplified product definition, the Catalog Harmoniser software automatically assigns it an HTS code, an important sourcing and decision-support tool to the company.

"Before, everything was in-house and inefficient, but now the configuration of all complex information is immediate. It has taken the burden off us," said Eghdami.

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Trade tariffs for importing a laptop

  France Brazil
Product $1,500 $1,500
Duties $0 $900
Taxes $322 $880
Shipping $95 $90
Total $1,917 $3,370

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