Taxes, Tariffs, and Duties: Are They All the Same?



 Companies have to think about bottom-line finances regardless of the industries they are involved in. They must consider their own revenues and expenses alongside what customers ultimately pay for the goods or services they produce. That's why taxes, tariffs, and duties are so important to companies that do business across borders.


Vigilant Global Trade Services is an Ohio company that specializes in global trade management. They say that confusion over tariffs and duties is fairly common. Taxes are pretty straightforward, but tariffs and duties are not necessarily so. Nonetheless, companies engaged in cross-border business really need to know what they are all about.


Taxes: Direct to Consumer


Governments levy all sorts of taxes against individuals and businesses alike. But in terms of global trade, taxes are very specific. They are charges levied directly against consumers and payable at the time of purchase.


Your state might impose a sales tax on retail goods and services. Let's say the rate is 7%. A business owner knows that his customers will pay an additional $0.07 for every $1.00 of the retail price. This matters in highly competitive industries where mere pennies can make a difference.


Tariffs: Indirect to Consumers


Tariffs are fees assessed on sellers who export products to another country. However, the seller generally does not make the actual payment even though tariffs are collected at the point of entry. Rather, importers make the payment, then pass it along to wholesalers and distributors. They pass the cost on to retailers who ultimately pass it on to consumers.


The point of tariffs is to make imported goods more expensive. As the thinking goes, consumers will prefer domestic goods if imported alternatives are prohibitively expensive. You encourage them to buy domestic by making foreign goods pricier.


Duties: Indirect to Consumers


Duties are similar to tariffs in that they are taxes levied against imported goods based on a predetermined rate schedule. Duties also result in indirect taxation levied against consumers for the simple fact that they ultimately pay for them through retail purchases.


So what makes duties different? These can be levied against both domestic and foreign goods. By contrast, tariffs are only levied against imported products.


A duty levied on domestic products is known as an excise duty. One imposed on an imported product is known as a customs duty. In the case of the latter, duties are paid at the point of entry by the importer or another designated agent. Monies are collected by the importing country's customs authority.


The Purposes of All Three


Taxes differ from tariffs and duties in terms of purposes. The sole purpose for a tax is to raise government revenues. States impose sales taxes to help fund the general budgets. Some localities do the same thing. Washington applies taxes to a more limited number of goods and services with the same goal in mind.


Duties and tariffs are imposed for other reasons, despite the fact that they also raise revenue. Their purpose is primarily to influence trade balance. For example, former President Trump's well-publicized tariffs on Chinese goods were designed to increase demand for American products.


China retaliated with tariffs of its own, as did Canada when Trump renegotiated the North American Free Trade Act (NAFTA). Retaliatory tariffs were intended to do the same thing: make imported goods more costly than domestic, thereby encouraging consumers to purchase the latter.


Taxes, tariffs, and duties are not the same. They are similar in some ways but quite different in others. You should be familiar with all of this if you run a business with a cross-border reach.


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