Managing customs duties: customs duties--like excise taxes and value-added taxes--are an indirect tax, buried within the cost of goods sold, and for companies that deal in hard goods, they should be considered as costs by financial executives when planning overall financial, tax and compliance strategies.

• Author: Neville, Mark K., Jr.
• Position: STRATEGY

Now that the on again/off again issue of whether the United States should adopt a value added tax (VAT) is back on the national agenda, many financial executives have become newly aware of indirect taxes--those levied not on the taxpayer directly but rather on a product or service external to the taxpayer.

Yet, in focusing on the VAT debate, financial executives may be overlooking the federal indirect tax regime that we already have.

While the U.S. may or may not introduce a VAT, it already has federal indirect taxes in the form of excise taxes on a few discrete products and customs duties.

Financial executives whose companies deal in goods need to become more aware of customs duties. Whether the company imports or sources the product from companies that do import, the costs of the duties will be passed along. If the company exports, customs duties will be assessed on the customer in the foreign market--often a foreign affiliate--in accordance with the same principles discussed here.

Duties are an Indirect Tax

While financial executives are rightly sensitive to the impact of federal and state income taxes, that focus has been at the expense of planning strategies for customs duties that can take a major bite out of a company's financial statement above the line income.

Indeed, many companies have little or no clue about the impact of customs duties, as those costs are buried within cost of goods sold or are a sub-account within their transportation or logistics spend.

Even companies sporting a world-class supply chain model built around a just-in-time or vendor-managed inventory scheme, with reduced cycle times, have built-in assumptions as to customs clearance costs. As a result, many financial executives for whom customs duties have been an "out of sight, out of Customs duties--like excise taxes and value-added taxes--are an indirect tax, buried within the cost of goods sold, and for companies that deal in hard goods, they should be considered as costs by financial executives when planning overall financial, tax and compliance strategies mind" experience can only hazard a rough guess at their annual customs duty bill. For others, customs duties are regarded as a fixed and immutable cost, with the only issue being how much can be shifted to the customer versus being absorbed. The reality is quite different.

Customs duties are an indirect tax and, as is the case with many taxes, tax planning strategies will lower the tax bill. Duties and taxes on exports are prohibited by the U.S. Constitution, but we have had customs duties on imported products since the founding of the Republic (the very first substantive law passed by Congress was the Hamilton Tariff Act of 1789).

Until the income tax was inaugurated in 1913, it was customs duties that furnished the major source of revenues for the federal government.

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