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NDA’s, agreements and having your own tooling in China

NDA’s, agreements and having your own tooling in China

NDA’s, agreements and having your own tooling in China

By Manuel Becvar
By Manuel Becvar

Table of Contents

Introduction

A lot of people are concerned when they produce their own design in China that the supplier will copy it and sell to other sellers.

First I would like to point out that in my nearly 12 years in China I have had almost only good experiences with suppliers even with my own designs and exclusivity agreements.
Today we are looking at your options and what it actually means to have NDA’s or Exclusivity Agreements in China and how likely it is to enforce it or hold up in a court.

Lets look at the terminology first and what they mean:

Disclaimer: Some of the products may contain an affiliate link and we may make a commission if you click on it at no additional costs to you.

NDA’s

Whats an NDA and when do you use it?

An NDA or Non-Disclosure Agreement is used when you have your own product design and want that developed by a factory in China. You basically agree with the factory that they are not allowed to disclose, share or produce your design (or even ideas) with any other customer or supplier. Neither local or overseas. In most cases if you have your own design a tooling is likely need to be made. The first step you take before you send any designs to a factory is to ask them to sign the NDA.

Tooling

To produce your design it is very likely that the factory needs to make a mould or tooling for you. With this tooling – parts of your product will be manufactured and eventually assembled into the final product.


(Categories like Textile or Food do not need tooling). Toolings are often included in the price quoted to you when you hand over your design. However you can also opt to pay for the tooling if you want to own the tooling as well.


Toolings can go anywhere from 1,000-30,000+USD depending on the size of the product. Yes, things can get pretty expensive.

Can I move my own tooling to a secure location?

Toolings are usually very large and heavy as they are made out of die-cast in most cases. Moving them requires quite some logistics.

So if you are unsure that your supplier is going to use them for other customers you should move them to a secure location (e.g. a rented warehouse). This can easily cost a few hundred US$.

And every time you would place an order this tooling needs to be moved to the factory and after production back to the warehouse. An expensive enterprise.

So having said all that if you feel you need to have your tooling secure somewhere else you should not work with this factory in the first place.

So whats the best way to go about having your own designs & tooling?

Two scenarios:

  1. You are just starting out and have no factory contacts whatsoever.

    My tip is to work with a sourcing agent  that can help you find reliable and trustworthy factories.

    Don’t go onto Alibaba and randomly look for factories that could make your product. You don’t know them, they don’t know you and are unlikely to help you anyway.

    Even if they tell you: “no problem, we can make it for you” they are likely to copy your product or sell the idea to other sellers the minute you place an order.

    Just the other day a reader of mine told me he found a trading company on Alibaba for his design and placed an order of 300 pieces.

    When he got contacted by the actual factory about labels and other things they needed from him he found out that the trading company placed a total of 500 pieces with that factory.

    They ordered an additional 200 pieces (without the knowledge of the client & even with the clients logo) for themselves probably to sell it on Aliexpress or even Amazon themselves.

  2.  You’ve been placing orders in China for a while.

    Work with the factory of your trust. Even if the product you are now looking to manufacture doesn’t fit into their assortment. Factories have a large network and contacts with other factories.

    Ask them to help you source a factory that can make your product whom they trust. I’d he happy to pay a few cents more for this type of help if it means I get connected to someone trustworthy.

    Ideally your existing factory can help you manufacture your new design.

Mutual Exclusivity Agreement

Let say you find a product on Alibaba or at the shows and you want to buy this product exclusively to sell on Amazon. Suppliers are likely not to give you a Exclusivity Agreement if you don’t purchase high quantities from them or if you haven’t had any previous business with them.

FBA sellers are in general very small customers for factories. The 1000 pieces (if even) you & I are going to want to place as a trial order cause more trouble to the factory than you could imagine. Setting up production and purchasing raw material for only a 1000 pieces is an expensive endeavour for factories.

Most raw material suppliers have MOQ’s of 5000 pieces (per raw material) and up. So getting the material for 1000 pieces can be quite expensive. While some factories may have stock left of material or might agree to purchase the larger quantity from the raw material supplier in order to produce your order it is unlikely to happen in reality. Having said that you could approach things a little different to get your exclusivity:

You could ask the supplier to sign exclusivity agreements for 6 months. Meaning you could agree on a quantity that you will place within those 6 months and if you don’t reach the quantity the contract will be voided.

Which will give you the time to figure out if the product is selling and the supplier on the other hand isn’t forced to sign a deal for a long time.

After this period of 6 months the contract/agreement can be reviewed and extended for a longer period. Even if the supplier does not agree to an extension you have at least a head start of 6 months on other sellers.

Validity of agreements & contracts:

In the FB groups I often see question like: “How are those agreements going to hold up and what are your chances of winning an NDA dispute in China if you find out your supplier has betrayed you?”
Well to be honest the chances are slim. Does it help to have an agreement in Chinese? No. Even if you hire an expensive lawyer in China and win the case by the time you resolve the issue your expenses will have ballooned into thousands of $. So unless you have a patent it isn’t even worth it pursuing a law suit.

You will also have difficulties finding out if your supplier actually used your tooling for another client. An un-trustworthy supplier will find many ways to wiggle himself out of the situation.
For example he could claim a disgruntled engineer of the company left the factory and took the designs to the next factory he started to work for. You won’t be able to proof him differently.

So whats the point of having an agreement at all and whats best approach?

To ask a supplier to sign an agreement or NDA shows that you mean serious business and they will take you and your project more seriously. If he doesn’t agree to it in the first place move on to the next supplier.

Work with a supplier whom you trust and have worked with for many months/years already. You will still need to have agreements in place with that supplier but the understanding is entirely different.
If you work with a supplier and you let him know he can grow his business with you over the years he will honour your agreement. The contract is more or less a formality.

Either place orders with a factory for ODM (products off the rack) in the beginning and eventually propose your ideas and designs after you worked with them for a while or hire a Sourcing Agent who can help you get you in touch with trustworthy factories.

For example in my case study I actually got exclusivity for my product (for an initial 1000 pieces order).

And the supplier honoured it. How do I know that? As you know my case study is public and people who join the course can see contacts of my supplier within the course.

After I launched my product and case study only a few days went by and my supplier contacted me to tell me that he had received quotation requests from 2 different US sellers already. Those 2 people wanted to copy my process (they even used my email templates and quotation forms that I offer in my course). The supplier refused to offer my product to those 2 guys. Thats not to say that they can’t go anywhere else but at least I know I have a reliable and trustworthy supplier.

So its all about finding the right supplier and develop a relationship with him. You will want to have agreements in place even after a long relationship but again, thats just really formality and if you found a trustworthy supplier they will honour agreements and in 95% of the cases help you if you have to claim money for example (defect or returned goods).

It also has to do with your professionalism and how you or your sourcing agent approaches the factory.
Imagine you are a factory based in China and someone with a Gmail address contacts you like this:

“Hi, we are looking to get products manufactured with you. Please see attached drawing and design. Please give us a price”.

The above is an actual email I received from a “potential” client in the US. I simply ignored it. But some suppliers will take this opportunity and steal your design or show it to their customers.
It’s entirely different if I would have received an email with an introduction, detailed business proposal and more background information from the buyer.

The point I want to get across to you today is not to worry too much about getting copied in China if you approach things professionally.

Getting copied will happen eventually because either:

  • Another factory copies/modifies the designs because they have seen it on Amazon.

  • Your competitor copies your product or modifies it.

  • Your approach was unprofessional.

Take the head-start that you have with your product and move on. Thats how this business is.

  • Let someone help you professionally with sourcing and negotiating deals in China –  or deal with factories that you trust and have business relationships with.

And remember the above goes only for your own designs. It is a different story if you are buying products off the rack maybe with small modifications from a supplier that you found on Alibaba for example. In these cases it doesn’t make much sense to have NDA’s or Exclusivity Agreements because it is not your design in the first place. It belongs to the supplier. However if you make significant modifications and are able to place larger orders it makes sense to have agreements.

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How to properly place an order with factories in China

How to properly place an order with factories in China

How to properly place an order with factories in China​

By Manuel Becvar
By Manuel Becvar

Table of Contents

Introduction

So while I am waiting for my newest item to be in stock I thought I’d lay out a very important part of the order process to a Chinese factory to you. (I you haven’t followed my case study check out my last webinar here).

So why is it so important to lay out terms and sign contracts with your supplier? Quite simple actually. You want to have safety nets and agreements in place if something goes wrong.
And trust me there can always be something that can go wrong. It could be a failed inspection, it could be that the item produced is severly damaged during transport, it could be that the material used is completely different from what you wanted and so much more.

You might ask yourself for what kind of order value should I have agreements in place? Because maybe you only have an order value of 1000US$, do I still need all this?
Yes! At least you should have agreements in place that bind the supplier to pay for a re-inspection. However to be honest not many suppliers sign agreements or terms if your order is very small.
But you should at least give it a try.

Just recently I heard from a student of mine that the inspection was fail and 25% of the products had faults, were damaged or not properly manufactured.


In this case the supplier wanted to ship out what was OK and wanted to re-work the other 25% later and ship it later. He even didn’t agree on paying for a re-inspection but simply said “ don’t worry, it will be ok”.
Well I wouldn’t worry if the original 100% would have been a pass results but how does he even have the nerve to tell me not to worry and blindly trust him when 25% of the order is screwed up? Not only did the customer have to pay for re-inspection (the supplier wouldn’t budge) but he had higher shipping costs because he now had 2 shipments!

Disclaimer: Some of the products may contain an affiliate link and we may make a commission if you click on it at no additional costs to you.

Agreements

You need to have agreements in pace that state clearly how each situation is to be resolved – to your benefit.

Sometimes it might be a minor issue such as that he forgot to put the labels on the carton. In that case it doesn’t make sense to send an entire re-inspection but you could rather have him issue you an LG (Letter of guarantee) stating that all items have been re-worked and if you find that what was promised was not kept he has to pay for any costs. E.g. he promises that he will label all cartons and then send it out and once you got the order you find out he hasn’t done it. You could charge him the label costs (as agreed on the LG).

So how do you make sure that your supplier follows each of the steps you want him to do? You clearly state things in your order email and in your purchase contracts and agreements.
Due to popular demand and because I was asked for it many times here is an example-email of how I place an order to the supplier (bear in mind to fill in the details of your own product here):

Supplier email template for order

Hi xxxx,

As discussed I would like to place a trial order of xxxx pieces of product X to you.
If my calculations are correct I will re-order 2,000 pieces every 2-3 months.

Details as discussed and herewith laid down:

– Product requirement for particular item (FDA approved)
– accessory for this particular item (FDA approved)
– 1 accessory (in acrylic)
– Material; Stainless Steel and Copper
– extra screw on the handle in copper plating as discussed (little detail that you agreed on could be here)
– Color box packaging. To be provided by me in a short time. (You dont need to have the packaging design ready when placing the order. If you have a white box then there is no need anyway)
– Insert card to be provided by me in a short time.

Price: In order to support this first order and in view of all future potential business that we discussed please confirm price of xxx as agreed on during our last phone call. Again please confirm and I will make payment right away. (It is difficult for the supplier to say no here. You are ready to place the order and he smells the money )

Sample costs: Please deduct the sample cost of Sample Invoice No.12345 of 150$. This was agreed on when I sent you the sample order on xxx.2016.

Please send PI based on above details with your bank acccount details so that I can make 30% T/T deposit to you.

1) I am also looking at an exclusivity deal. Since this model is more or less OEM in nature (modification and custom packaging). I would like you to sign the attached Exclusivity Agreement.
It means that anyone wanting the exact same specifications and is selling on Amazon United States is not allowed to buy from you.
You can still sell this model to other Amazon countries and customers but not with the same specifications like mine. (custom made file that he has to sign)

2) Please sign attached Purchase Order (a custom made file with all details again in a Word document.)

3) Please sign attached Purchase Order contract (a custom made document he needs to sign in Word file)

4) Please advise shipment date. Again, please check if you can ship out before xxxx.2015. I could send you the giftbox and all other order details within Monday next week so you would still have 30 days for production.

5) PLEASE ADD “FRAGILE-HANDLE WITH CARE” STICKERS TO ALL EXPORT CARTONS (my product had glas in it so I wanted this warning on the shipping/export carton)

6) Please advise inspection date (when 70% is finished). Inspection to be conducted trough: Asiainspection (I will pay for the inspection). If there is a fail inspection you have to re-work the goods and pay for re-inspection (this is also mentioned in the Purchase Order contract)

Please provide address, contact details and telephone number and contact person in both English and Chinese for the Inspection company.
I will also need these details so that I can give you the shipment labels from Amazon Seller Central with the actual factory who delivers.

7) Shipment to be conducted trough:
Please contact my freight forwarder to arrange pick up of both AIR and SEA shipment
John Doe
Made up name logistics (SHENZHEN)
TEL:+86-12345678
Fax:+86-12345678
E-MAIL: john doe@madeupnamelogistics.com

8) 100% shipment by AIR to following address. Please add the address in the commercial invoice and packing list.
FBA: Mandarin-Gear Limited
Amazon.com.dedc LLC
560 Merrimac Ave
Middletown, DE 19709
United States

The following is for the documents:

Importer of Record:
Mandarin-Gear Ltd.
xxxxx adress, Hong Kong
Tel: +852 12345678
mail: xxx
EIN: 123455678

Ultimate Consignee:
FBA: Mandarin-Gear Limited
Amazon.com
4255 Anson Blvd
Whitestown, IN 46075
United States

Notify Party for customs:
Mandarin-Gear Ltd.
xxxxx adress, Hong Kong
Tel: +852 12345678
mail: xxx
EIN: 123455678

9) Labels for for export carton as attached.

10) Please send full certificate of FDA and Borosilicate glass for this item.

11) Please find attached logo to be printed by Silk-Screen on the item. Logo to be put at the bottom of the product.

12) If there is a polybag included it needs to have the attached suffocation warning printed on the polybag.

13) Products need to be packed very very well especially around the glass as you know the glass can easily break.

If you have any questions please do not hesitate to contact me.

I am looking forward to building a long term business-relationship!
All the best,
Manuel

So you see there is quite a few things you have to consider when placing an order. Usually I sit 2-3 hours when writing the order email and terms up to each supplier. Since I want to take my time and think of everything that I want the supplier to do. Make sure you attach all files and documents you want him to sign.

Since I am a supplier and manufacturer myself I am sometimes surprised at how I receive orders from customers. Sometimes I get an email just stating the order quantity, delivery place and not much else. If anything goes wrong I could blame the buyer “well you haven’t specified anything” and there is nothing he can do.


Obviously I am not that kind of supplier but many Chinese suppliers work that way… You as the customer have the right to demand certain terms and if the supplier doesn’t agree to them well then you should move on.

I hope the above gives you a bit of an idea on what you can and should do when placing an order.

If you like this post please share on social media
All the best and happy sourcing,
Manuel

Ps.: Feel free to check out my ImportDojo Masterclass where I teach in very detail on how to import from China and sell on Amazon as well as your own eCommerce store:

IMPORTDOJO MASTERCLASS

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Subscribe to our newsletter!

Sign up for ImporDojo and get our free eBook “The Import Bible” – the complete starter guide to importing from China. As well as updates on blog posts and news around the eCommerce world. We’ll never spam and you can unsubscribe any time – its FREE to subscribe! 

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Best Packaging Practice – How to create a great private label packaging!

Best Packaging Practice – How to create a great private label packaging!

Best Packaging Practice – How to create a great private label packaging!

By Manuel Becvar
By Manuel Becvar

Table of Contents

Introduction

I recently asked in ImportDojo’s Facebook group what topics you would like me to cover on my next blog post and I listened.

So here goes, below is an overview on how you can improve your packaging and beat the competition.

Before you read on, I previously posted on packagings in general and you may want to read this post too here: https://importdojo.com/private-labels-packaging-differences/

But today I want to look into six different topics when it comes to packaging:

1) Why is a good packaging necessary
2) What differences are there in materials and what is the ideal material?
3) Simple things that greatly improve your packaging
4) Why is it so difficult to get a manufacturer print low quantites of packagings?
5) Great packaging examples (low and high cost)
6) Conclusion and where should I start?

 So let’s dive right in: 

Disclaimer: Some of the products may contain an affiliate link and we may make a commission if you click on it at no additional costs to you.

1) Why is a good packaging necessary?

  • A great packaging adds value to the product. Think of Apple’s packaging. Have you ever bought a product from Apple and holding the packaging in hand thinking: “that’s a nice packaging, it adds value to the product and is therefore one of the reasons I bought this product”?When I bought my first iPhone I actually kept the packaging until today (that was 2012). I even still keep the packaging of my Macbook Air because if I ever want to sell it the packaging adds value and I can get a higher price.

  • There is a saying in German (my native language) in the retail industry. “Eine gute Verpackung ist die halbe Miete” which litearlly means, “a good packaging is half the rent” or if you have a good packaging its “half the battle”.

    No matter if you are selling online or physically at a store the packaging is the first thing your customers sees when he is exposed to your product.

    It certainly applies more to retail than when selling online because the potential customer can see the packaging. The first thing a potential customers sees online are the pictures in your listing but a good packaging still applies, I ll get to that in a little bit.

  • Protection. You will want your product to be packed well. Your product goes trough six different logistics cycles before it reaches the customer:

  1. Packed in mass-production

  2. Picked up by the logistics company sent by Air or Sea

  3. Received in the US and unloaded from the ship or plane

  4. Transported to Amazon

  5. Ordered by customer, picked and packed by Amazon

  6. picked up carrier (UPS etc.) and delivered to you

Imagine this being your shipment: https://www.youtube.com/watch?v=qJdZgQwRMBk
Now don’t worry, that usually never happens, I guess he had a bad day 🙂

However there’s a lot of people and hands handling your product and you’ll certainly want your box to arrive in perfect condition when the customer receives it.

How often have you read on Amazon reviews “product received damaged”. Thats one bad review you can avoid.

2) What differences are there in materials and what is the ideal material?

It is quite simple actually, I give my suppliers usually the requirement to pack products directly in a b-flute (e-flute is acceptable for light and simple products) and the gift boxes must be packed in a minimum c-flute cardboard.
A double wall (C&B flute) would be preferred but c-flute is accepted.

Here are the standard cardboards available:

A) Coroplast
B) Chip Board
C) e-Flute
D) b-Flute
E) c-Flute (standard)
F) Double Wall (c&b Flute)
G) Triple Wall

Rating:

Cardboard boxes (Corrugated Fiberboard) are rated by an industry standard known as the ECT (Edge Crush Test).
This indicates the pounds per square inch the board standing on edge can withstand.
A standard moving box (c-flute) has a rating of 32 pounds per square inch before crushing, therefore would have a 32 ECT rating.

Ratings You Can Choose Or Indicate To Your Supplier: 

  • No Test – really light

  • 26 ECT – light

  • 32 ECT – standard

  • 44 ECT – Strong

  • Double Wall

  • Triple Wall

Still not sure what you should use and what applies to the weight of your cartons? See below illustration referencing the carton strength to the total weight of each carton:

3) Simple things that improve your packaging

  • UV coating. I use UV coating for most of my packagings. It gives the logo or text you want UV-coated a nice 3D effect and feels great when having it in hand

3) Simple things that improve your packaging

  • UV coating. I use UV coating for most of my packagings. It gives the logo or text you want UV-coated a nice 3D effect and feels great when having it in hand

  • Fun facts. I add “Nutrition facts” onto my packaging even they aren’t of any food nature. I sure add all technical description in there but I will also add a few “fun facts” making my product “hip”.

  • Don’t over-confuse with a lot of text and keep things simple. Rather use pictograms as per below examples. Instead of boring wording I use pictograms that describe functions of the product.

4) Why is it so difficult to get a manufacturer print low quantities of packagings?

Printing a packaging (color box) requires to create a so called printing film for the printing factory. Do not be confused, your supplier outsources this job to a separate printing factory.
I have yet to come across a supplier who also prints his packaging. That means that your supplier has no control over the minimum amount of pieces needed to be printed. This amount is determined from the printing factory.

Some printing factories offer from 500-800 pieces while some printing factories require at least a 1000 pieces per item/color. It is often useless to argue with your supplier to find another printing factory because they have running contracts with those printing factories that guarantee them consistent quality and low prices. So he won’t jeopardise his relationship because I the new buyer need 300 pieces of a color box.

However there are some printing factories who specialise in helping small time buyers to print lower quantities. Costs will be higher though. Have a look at my other post where I explain costs in detail:
https://importdojo.com/private-labels-packaging-differences/

5) Great packaging examples:

I recently travelled to Vietnam. Vietnam is known for its food and vietnamese coffee. I am avid coffee lover and I definitely wanted to bring back a coffee from Vietnam. So I went to a couple of stores and looked for coffee. I got myself a pack of Kopi Luwak coffee. If you don’t know Kopi Luwak check out Wikipedia https://en.wikipedia.org/wiki/Kopi_Luwak its quite special 🙂 

But thats not the point of the story, while browsing for coffee one product and packaging really caught my eyes. It’s a tea packed in bamboo packaging. Vietnam is also known for its bamboo products. While I don’t really drink tea I bought the product even I didn’t really need it. Why? Because the packaging sold me the tea. Have a look at the packaging picture:

I really like the use of Bamboo here, not your every day packaging. This option is certainly more expensive but it sold me!

Simple packagings that are great and cheap. When you have a product that doesn’t need a fancy packaging because it is an every day use item you can save a lot of money and still have a decent packaging.

This is also extremely helpful if your suppliers gives you a high order quantity for packagings.  I recently ordered a product from Amazon (as the Merchant) and when I received the packaging I was quite surprised at the simplicity but effectiveness of the packaging. No fancy packaging needed because it was just an iPhone charging cable.

This packaging is a simple but padded envelope and great for cables, rubber, plastic items and things that won’t easily break.

There is a campaign running right now from Lays Thailand (potato chips). The campaign says, post a picture of yourself on Instagram, tag the company and the product and maybe win xxxxx$. Not only do they have a great packaging but the customers are doing all their marketing for them. Have a look so you’ll see what I mean.

That Lays marketing campaign is brilliant. Engage with your customers on your packaging. Add a insert card or a link to your website and create a challenge, maybe even similar to above and you’ll get “free” exposure to your product and brand.

Try to think outside the box and think of little things that can improve your packaging but have a big marketing effect.

If you are looking for more ideas, simply Google “Great packaging ideas” and browse trough the various search results. Find something you like? Speak to your supplier and see if he is willing to help on your packaging idea.

6) Conclusion and where do I start?

So where do you start? I would say that your packaging should :

A: reflect the product inside
B: something that the product is affiliated with – a brand or a quality seal

Examples:

Reflecting the product inside:
1) Cigars are often packed in wooden boxes because they resemble a humidor.
2) Great example of Nike’s Air products. The product is actually packed in a bag of Air.

Something that the product is affiliated with or a quality/brand seal:


B: Swiss products usually have the white cross in the red circle (the country’s flag) on products because the Swiss are proud of their country and quality of their products. I have often seen cosmetics in department stores that have the Swiss flag on them with some wording like “Swiss formula” or “Swiss made”. It creates trust in the potential customer because people know or think that Swiss products must be good. Check out below examples:

Ok, lets wrap it up. I am not saying that you should apply all these things on your very first packaging. Because a few of the above examples can become quite costly, especially if you have low quantities.
Try to start with a simple white box, put your logo & labels/barcodes on it and when you are ready to place larger orders improve your packaging by applying some of the techniques and suggestions above.

Now you may ask yourself why is it important to have a nice packaging for an online or fulfilment business? After all the customers doesn’t see the packaging when ordering online?


Well for all of the above reasons and your customer will greatly appreciate to get the product in a well packaged box plus it will increase the chance of getting a great review. You may also want to think ling term that your brand eventually becomes recognised and you want to deal with retailers or supermarkets to have your products also offline!

I hope this gives you an overview and I look forward to your comments. Please like and share if you found the post helpful 🙂
All the best and happy sourcing,
Manuel

https://importdojo.com/importdojo-masterclass/

Final Thoughts

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Read More »

Subscribe to our newsletter!

Sign up for ImporDojo and get our free eBook “The Import Bible” – the complete starter guide to importing from China. As well as updates on blog posts and news around the eCommerce world. We’ll never spam and you can unsubscribe any time – its FREE to subscribe! 

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US Import Duties & Taxes – How much and when do I have to pay for import tax?

US Import Duties & Taxes – How much and when do I have to pay for import tax?

US Import Duties & Taxes – How much and when do I have to pay for import tax?

By Manuel Becvar
By Manuel Becvar

Table of Contents

Introduction

So you are wondering how much tax and import rates you have to pay on your product?

It may seem complicated but it’s actually not. Once you know your customs tariff number (official database here: https://hts.usitc.gov/) you can calculate it yourself. So before importing a product to the US you may want to find your customs tariff number first. Admittedly it’s not easy to navigate on the official site but once you got the hang of it you’ll be fine. 

You also need to consider if you are importing as an informal or formal entry. 

You may also keep hearing that anything below “2500$” doesn’t get taxed? Lets look at import duty rates & taxes for the US in detail.

What we are talking about today is the:

 

Disclaimer: Some of the products may contain an affiliate link and we may make a commission if you click on it at no additional costs to you.

1) Informal Entry

An informal entry is the entry of goods valued under 2500US$ and does not need to be cleared by a customs bond as it is designated for mostly personal importations. The amount used to be 1000$ before 2013 but the threshold has been increased to 2500$ since then.

2) Formal Entry

A formal entry is the entry of goods valued over 2500US$ and needs to be cleared by a customs bond. This type of entry is used for commercial importations only (e.g. re-selling goods on Amazon).

3) Lowering product costs on invoices to avoid taxation & rates

This tactic is used to avoid taxation which I certainly cannot recommend since you are basically committing a felony.

4) Important exceptions on Textiles

There are exceptions on textiles which I’ll discuss below. 

I’ll explain each entry in a little while. The word in the community is that anything below 2500$ doesn’t get taxed and no rates apply. Wrong.

First of all any amount is technically taxable if the product is intended to be re-sold but the US customs and border protection calls the entry with a value under 2500$ an informal entry. An informal entry are “goods for personal consumption or enjoyment”.

Now in most cases customs turns a blind eye and won’t tax or slap rates on your products imported under 2500$. That is if the actual declared product value makes sense. What does that mean? Lets look at two example:

1) Informal Entry

My actual product costs 4$ and I order 500 pieces. The total order is therefore valued at 2000US$. This is called an informal entry.

Now I technically have to pay taxes and duties because I am importing as an individiual or entity with the intent to re-sell these goods.

But customs doesn’t know that and since there is a threshold of 2500$ anyway they often don’t impose any tax or duties.

But that doesn’t mean that you aren’t liable to pay them. Because if you import 500 pieces of a private labeled product it is very likely that customs knows that you have the intention of re-selling the goods.

However, as I mentioned US customs turn a blind eye in many cases and release your goods without having to pay any taxes and duties (just don’t count on it and calculate duties and taxes anyway when calculating your profit margin)

This happens especially if you use couriers like DHL, UPS etc. because they have a special clearance lane and customs often “wave these goods trough”.

Also (see my last post on this here under point 2): https://importdojo.com/how-to-import-to-the-us-for-international-sellers-ship-to-amazon-directly/

If you were to ship by a freight forwarder (Sea or regular Air freight), the forwarder has to file for a Informal Entry and you will likely be taxed according the customs tariff number.

2) Formal Entry

My actual product costs 6US$ per piece to manufacture and I order 500 pieces.

I declare 3000US$ Total Order value on my Invoice which means I (my forwarder/carrier) have to file for a formal entry. I get taxed at the import rates and duties as filed under the official US Harmonized Tariff Schedule” https://hts.usitc.gov/

Let’s say for example my product is the famous “Garlic Press”. I do the research and find out that the garlic press has a import rate of 3%. Therefore the taxable amount and import rate is 90$ (3% of 3000$).

There will be merchandising processing fees that are usually a couple of dollar. In total I won’t be paying more than roughly 100-120$ for import rates and duties.

I am happy to pay that amount and import my product in a fair and square manner.

DIY U.S. Customs Clearance

3) Lowering the product value on the Invoice:

Now a lot of sellers/buyers manipulate their product price on the invoice to avoid any taxation because they have heard of the “2500$ rule” but they aren’t aware of the actual regulation (informal/formal).

They do that because they have heard from other people in Facebook groups that they do that as well. Or their supplier told them that they will lower the invoice to help them save costs…. Please don’t!

Say for example they manipulate that 6$ product to a price of 4$ instead to stay below the 2500$ threshold. In most cases customs will not check and therefore you can import your products “if you’re lucky” at a zero percent tax rate which is an informal entry.

While I don’t encourage you to do so this procedure is very common and customs is aware of it. I guess the US supports their economy and has better things to worry about.

However If you greatly underprice your item you can get in trouble. Say for example that the supplier puts 1$ (or even less) on the Invoice to make the total amount out to 500$ (for 500 garlic presses).

How will you explain that your 500 pieces of private label garlic presses are for personal consumption? How will you explain that a product that sells for 15-20$ is being imported by you for 1$ a piece? You can’t and you will likely be taxed the full amount as well as a fine for deceiving customs.

Those fines can be in the excess of thousands of US$, depending on the product and the circumstances of the case.

Also bear in mind that the assessment of the total product value is the option and at the opinion of the customs officer on duty.

They aren’t stupid and if a product obviously has a higher value than you have declared they will definitely slap you with the full import rate and/or a possible fine.

In order to avoid any mix up with the correct customs tariff number I recommend you to tell your supplier to mention the correct number. If you aren’t sure which one is the correct number look on https://hts.usitc.gov/ or https://www.rakutensl.com/services/ecommerce-freight-service

If you still can’t find it then you can also call the phone number on the customs tariff website and they will give you this information for free.

So I’d recommend you to declare the real value and if you really must to save a few $… lower the price to a reasonable price. (E.g. 5.5$ instead of 6$).

I personally declare the real value because it’s simply not worth to falsify a customs invoice to save 90$ of taxes (in above example).

Important: Samples are a different scenario

You actually should declare your samples at a low or NO VALUE at all because they are simply for your evaluation and order decision. You will most likely also not re-sell that sample.

Therefore you can declare samples at a nominal value (1$) and mention on the sample Invoice: “Samples Of No Commercial Value”. Your supplier can put this on the sample invoice for you. See an example below:

How do I declare informal or formal and how do I properly file this with customs?

You don’t have to worry, your logistics company will declare that for your. This could be a freight forwarder or a courier like DHL.

In any event, the forwarder/courier knows the amount of total product value and will know how to declare for you. More information and forms here: 

1) Informal Entry

https://bit.ly/2H6UF8C

2) Formal Entry

https://bit.ly/2FK8Zlq

3) Merchandising Processing Fee

https://bit.ly/2U2kEQE

DIY U.S. Customs Clearance

4) Important exceptions on Textiles

IMPORTANT: There are exceptions to the 2500$ rule! 

One exception to the “valued under $2,500 rule” includes textiles. For this type of trade-sensitive merchandise, a lower value of $250 applies. A variation, or subcategory, of informal entry is known as “Section 321” which allows the duty-free entry of merchandise valued at $200 or less – as long as it is imported by one person on one day. 

I hope this helps and shines some light onto the subject 🙂

All the best and happy sourcing,

Manuel 

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