Landed Duty Paid, or LDP, is the final price that a retailer or brand pays for goods, particularly apparel, that are being imported cross-border. The price includes delivery, shipping, insurance, duty, and customs clearance.
Duty paid is known well in advance, so a wholesale owner has a good idea of what to pay when the goods arrive at port. However, there are elements of the total pricing that are estimated. It’s common in the wholesale industry for a wholesaler to make a sale before receiving the product. If that’s the case, an estimated LDP has to be calculated to establish a sale price that will be profitable.
Product content and type make up the Harmonizing Tariff Schedule, or HTS, code. Apparel material is a good example to look at when seeing how HTS works.
Take polyester, for instance. Polyester has a higher duty rate than cotton. This means that a 2-piece set of apparel with a top that is cotton and bottom that is polyester will need values associated with each piece so that a duty rate can be calculated. Often, a price is negotiated with the factory for the set as a unit. Smart wholesalers will determine the values of each piece themselves rather than rely on their customs brokers to do so.
HTS is subject to change by trading partners and negotiations. This schedule is the replacement for the former Tariff Schedules of the United States. It’s comprised of a specific, hierarchical structure that describes goods in trade for quota, duty, and statistical reasons.
This structure is based on the Harmonized Commodity Description and Coding System. There are unique 8-digit rate lines for the U.S. and non-legal statistical reporting categories that are 10 digits long. Goods classification is done in compliance with the General and Additional U.S. Rules of Interpretation. While this sounds complicated, there is an online tool made available by the United States International Trade Commission that makes finding current HTS rates easy.
Many manufacturers will quote Freight on Board (FOB) pricing. High-volume retailers often prefer FOB purchases. Wholesales often prefer FOB sales even though the margins are usually tighter because FOB sales eliminate warehousing and other uncertainties around cost. Nonetheless, most wholesalers still do most of their business by selling landed goods. The challenge, in this case, is making sure that the duty rates that are actually paid are the same as what is estimated.
When figuring estimated LDP as close to the actual cost as possible, certain systems must be in place to make sure the customs broker is using the same duty rates on each item or component in the declarations as the wholesale owner is using to calculate their estimated cost. If the right systems aren’t in place, a wholesale owner that has pre-sold products could inadvertently price the products too low.
Why Figuring Landed Duty Paid is Important
There are some elements of pricing that aren’t known until later in the production process. These elements include freight, insurance, and customs clearance. Initially, these must be estimated. After the entire sales process is complete, a wholesale owner needs to actualize the cost so they can determine the gross margin actually made on the product, to learn from any mistaken assumptions, and to make sure future estimates are more accurate.
The goal is to establish more accurate landed duty paid estimates, to set up better systems and processes, and to verify the actual costs after the fact, so that the pricing wholesalers place on their products are profitable. With the right automated system and tools, more accurate estimates can be made, human error in calculations reduced, and inconsistencies with customs brokers eliminated.
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