Tariff vs duty vs tax: What's the difference?

International trade is a huge opportunity for small and medium businesses.

But cross-border commerce comes with its unique complexities — tariffs, duties, and taxes. 

While these terms get thrown around a lot, their differences aren't always so clear.

And that lack of clarity can seriously impact your bottom line as an importer or exporter.

That's why we're breaking it down for you in this guide. Consider it your ultimate reference for understanding tariffs vs. duties vs. taxes.

We'll cover what they are, who pays them, how they get calculated — every little detail you need to navigate international trade like a pro.

And because we know cashflow is everything for growing businesses, we'll also explain how flexible financing solutions can help you manage these extra costs and keep operations running smoothly.

The basics: tariff, duty, and tax

Let's start with taxes. We're all familiar with these mandatory financial charges levied by governments on income, property, sales of goods and services, and more.

Income tax, sales tax, property tax — these are just a few examples of taxes that apply broadly, even outside of international trade.

Then, we have duties, which are a specific type of tax. A duty is a tax levied by a government strictly on imported goods from other countries.

It's collected at the border by customs authorities when those goods arrive.

Duties can be a fixed amount but are most commonly a percentage of the total value of the imported goods.

There are different types of duties, including:

• Ad valorem duties: Charged as a percentage of the goods' total value
• Specific duties: A fixed rate based on weight, quantity, or other criteria besides value
• Compound duties: A combination of ad valorem and specific rates
• Excise duties: Taxes applied to specific goods like alcohol, tobacco, and fuel (imported or domestic)

No matter the type, duties apply specifically to goods coming across the border from other countries.

They don't cover domestically produced items within a nation's borders.

Finally, there are tariffs — another form of tax, but distinct from duties.

A tariff is a tax imposed on imported or exported goods by a government rather than an internal tax on domestic products like an excise duty.

Some examples of tariffs are taxes on imported bananas, exported soybeans, and imported/exported cars and trucks between countries.

Major differences between tariff vs. duty vs. tax

Tariffs are taxes on imported or exported goods, duties are taxes only on imported goods, and taxes are broader mandatory charges on income, property, and transactions.

Now that we have a clearer picture, let's take a closer look at how these terms differ in more detail.

What is the difference between tariff vs. duty?

On the surface, tariffs and duties seem similar — they're both taxes related to imported goods that get paid at the border.

However, there are some critical distinctions:

Duties are fees collected by customs on all imported goods. They act as a basic barrier to entry and a way for governments to raise revenues.

Duty rates tend to be relatively static charges.

In contrast, tariffs are strategic taxes that governments actively use as policy tools to achieve economic and political objectives.

Tariff rates frequently fluctuate based on changing trade agendas, like:

• Protecting domestic industries from foreign competition
• Controlling import/export volumes
• Negotiating favorable terms with other nations

Unlike duties that only apply to imports, tariffs can also be levied on exported goods leaving a country. So duties are broader revenue generators, while tariffs are more targeted instruments.

What is the difference between taxes and duties?

Duties are a type of tax — but there's a catch. They are a specific kind of tax charged only on goods being imported from other countries, assessed and collected by customs authorities when those imported goods arrive at the border crossing.

It's also worth mentioning that duties do not apply to domestic purchases and economic activities within a country's borders. 

Taxes, on the other hand, are mandatory financial charges levied by governments on a wide range of entities, activities, income sources, property, and transactions occurring within their borders.

This includes individual income taxes, sales taxes, property taxes, business taxes, and more.

Another key difference is who pays them: taxes are paid by companies and individuals based on their domestic business operations, incomes, purchases, and assets, within a country's tax jurisdiction.

‍Import duties are paid only by importers bringing goods from other countries into a particular nation. 

That said, it's crucial to understand that businesses that are heavily reliant on imported materials might be more susceptible to cost increases due to duties.

For instance, a bakery that imports high-quality flour might see its profit margins shrink if the government imposes a duty on imported flour.

What is the difference between tariff and tax?

Like duties, tariffs are a type of tax, but they have a distinct purpose compared to general taxes.

To begin with, taxes apply broadly to a range of economic activities, income sources, purchases, property, and transactions within a country's borders.

However, tariffs are taxes specifically levied on imported goods from other countries or certain exported goods leaving a country.

While businesses and individuals must pay taxes, tariffs are only paid by importers bringing foreign goods into a country or exporters shipping certain products out. They do not apply to general domestic commerce and business activities.

That said, the biggest difference is the strategic policy objectives behind tariffs versus taxes.

General taxes exist primarily to raise revenues for funding public services, infrastructure, and government operations.

These rates are relatively stable. 

Governments actively use tariff rates as economic and political tools.

They can fluctuate frequently to achieve goals like safeguarding domestic industries, effectively managing import/export volumes, enforcing trade policies, or even gaining negotiating leverage with other nations.

How tariff vs. duty vs. tax affect your business financially

All these additional charges inevitably get passed on to businesses engaged in international trade one way or another.

Here's a quick overview of what you can expect:

Duties

As an importer, you are responsible for paying any duties owed to customs authorities when your goods arrive in the destination country.

They increase your cost of importing and are calculated based on the country of origin and the total value of the shipment.

For example, if you import $10,000 worth of clothing and the current duty rate is 15%, you'd owe $1,500 in duties to be paid when the shipment reaches customs.

There are different ways to calculate custom duties. Learn more about them in our blog: How to Calculate Customs Duty?

Tariffs

Like duties, tariffs are paid by the importer when bringing goods into a country. But they can also be paid by exporters when shipping out.

Tariff costs are calculated based on the good, origin, destination, trade policies, etc.

For example, if the US imposes a 25% tariff on imported steel from China, and you import $200,000 worth, you'd pay $50,000 to the government.

Taxes

Business and sales taxes are paid based on a company's operations within a country rather than at the border, like duties/tariffs. It's important to note that tax obligations can vary significantly based on local regulations.

Whether you're an importer or exporter, increased tariffs and duties translate directly to higher costs that can put serious strains on cashflow.

It can make your products more expensive and less competitive than domestic alternatives in foreign markets, potentially impacting your long-term pricing strategy.

That's where Stenn's flexible financing solutions, like revenue-based financing and invoice financing, come in.

We provide e-commerce businesses with upfront capital to confidently manage duties, tariffs, and other unexpected fees, keeping them competitive and operations running smoothly.

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Navigate the global marketplace with confidence (and Stenn by your side)

International trade holds immense potential for small and medium businesses, opening doors to new markets and exciting opportunities.

But navigating the complexities of import/export regulations, fluctuating costs, and unforeseen challenges can feel overwhelming.

We, at Stenn, understand the troubles SMBs face in the global marketplace, especially regarding overheads like tariffs and duties.

That's why we have ventured beyond traditional financing to offer you a suite of solutions tailored to support your cross-border and domestic trade endeavors.

With years of experience and billions in financing issued, Stenn gives you the funding flexibility to maintain your competitive edge. Leverage our financing services and expertise to remove barriers to growth. Focus on scaling your business, while we ensure you can cover international taxes, duties and tariffs with ease.

Take control of your cashflow today. Reach out to discuss your financing needs with a Stenn expert.

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