Duty

One-Line Definition

Duty (also called customs duty or import duty) is a tax that a country's customs authority charges on goods when they cross its border — calculated on the value, weight, or quantity of the imported product, and paid before the shipment is released to the buyer.

If you sell cross-border, duty is not a footnote in your P&L. It sits directly inside your landed cost, and it quietly decides whether a $29.99 free-shipping offer makes money or loses it.

Real-Life Analogy

Think of duty like a cover charge at a club.

The club (the importing country) doesn't care who you are or how good your product is. If you want your goods to walk through the door, you pay at the entrance. The bouncer (customs) checks your ticket, and if you haven't paid, your goods sit in the hallway — sometimes for weeks — racking up storage fees.

And just like a cover charge, the price depends on the venue. A local bar might charge $5. An exclusive rooftop lounge might charge $50. Same customer, same intention, wildly different entry cost — because the venue sets the rules, not you.

That's exactly how duty works. The importing country sets the rate, and the seller or buyer absorbs it.

Core Formula

The most common duty calculation is ad valorem (percentage of value):

Duty = Customs Value × Duty Rate

Where Customs Value is usually the transaction value of the goods — but this is where sellers get tripped up. Most countries assess duty on CIF value, not FOB:

CIF Value = Product Cost + International Freight + Insurance
Duty = CIF Value × Duty Rate

Worked example (US → EU shipment):

Notice the freight and insurance got taxed too. That extra $1,350 in shipping and insurance added $162 to your duty bill — money most new sellers never budget for.

Some countries also apply specific duty (a flat amount per unit) or compound duty (ad valorem + specific combined). The US, for instance, still uses specific duties on some agricultural products, while the EU leans heavily on ad valorem.

Comparison with Related Terms

Sellers constantly mix these up. They are not the same thing, and confusing them wrecks margin forecasts.

Key distinction: Duty is a *border* tax on the goods themselves. VAT/GST is a *consumption* tax on the end buyer. De minimis is a *threshold*, not a tax.

Use Cases

1. Pricing a product for a new market

You sell a $45 leather wallet from China to Germany. HS code 4202.31 carries a ~9.7% duty rate into the EU, plus 19% German VAT. Your landed cost isn't $45 — it's closer to $58 before you've paid a cent for ads. If your competitor prices at $49 with "free shipping," they're either eating duty or mispricing.

2. Choosing a fulfillment model

DDP (Delivered Duty Paid) means you, the seller, cover duty upfront. DDU/DAP means the customer pays on delivery — and 20–30% of customers refuse packages when hit with an unexpected €25 customs bill. That refusal rate is a hidden cost most sellers underestimate.

3. Sourcing decisions

A 25% Section 301 tariff on Chinese-origin goods pushed countless US sellers to Vietnam, India, and Mexico in 2019–2023. On a $100,000 annual import, that's $25,000 in duty — enough to justify relocating an entire supply chain.

4. De minimis arbitrage

The US $800 de minimis threshold lets sellers ship small parcels duty-free. Temu and Shein built billion-dollar models on this. When the US moved to close the loophole for certain goods in 2024–2025, their unit economics shifted overnight.

5. Landed cost calculation

Before you launch any SKU, your landed cost formula should be:

Landed Cost = Product + Freight + Insurance + Duty + VAT + Last-Mile + Fees

Skip any line and your "40% margin" becomes 12% — or negative.

Misconceptions

❌ "Duty is the same as VAT."

No. Duty is a border tax on goods. VAT is a consumption tax on the sale. In the EU, you pay both — and VAT is often 2x the duty. On a €1,000 import into Germany at 5% duty and 19% VAT, duty is €50 and VAT is €199.50.

❌ "Duty is calculated on what I paid the factory."

Only if you're shipping FOB and the country assesses FOB. Most countries (EU, Canada, most of Asia) use CIF — meaning your freight and insurance get taxed too. That's a 10–15% higher duty base on typical air freight.

❌ "If I ship as a gift or sample, there's no duty."

Customs officers have seen every trick. Mislabeling commercial goods as "gift" or "sample" is fraud. Penalties range from seizure to fines to banned import privileges.

❌ "The buyer always pays duty."

Depends on Incoterms. Under DDP, the seller pays. Under DAP/DDU, the buyer pays on delivery. If you don't specify, your courier will default to one — and it may not be the one you want.

❌ "Duty rates are the same everywhere."

A single product can face 0% into Singapore, 5% into the US, 12% into Brazil, and 35% into India. Same SKU, same box, radically different economics.

❌ "De minimis means I never pay duty."

De minimis waives duty *below a threshold*. Cross it by $1 and the entire shipment — not just the excess — can become dutiable in some jurisdictions.

Related Terms

- Tariff — the government schedule listing duty rates by product code

- HS Code — the 6-to-10 digit classification that determines your duty rate

- Landed Cost — total cost of goods delivered to the buyer, including duty

- DDP / DAP / DDU — Incoterms defining who pays duty and when

- De Minimis — the value threshold below which duty is waived

- Customs Broker — the licensed agent who files your entry and pays duty on your behalf

- VAT / GST — consumption tax collected alongside duty at import

- CIF / FOB — the valuation basis customs uses to calculate duty

- Section 301 / Anti-Dumping Duty — additional punitive duties on specific origins or products

- IOSS / VAT One-Stop Shop — EU scheme simplifying VAT collection for cross-border sellers

Bottom line: Duty is the toll booth between your warehouse and your customer. Ignore it in your pricing model and it will find you — usually in the form of refused packages, angry reviews, and margins that evaporate on the last mile.