You’ve been to Europe as a tourist. You walk for endless thirsty hours. You would sell your mother for a bench to nap on. You get home after dark and you pee for the first time of the day. And you have what seems like a hundred tiny paper receipts in your pocket. Have a look. They all have something called ‘VAT’ on them. VAT stands for ‘Value-Added Tax’. Twenty percent! Holy smokes–what a racket.
When you first manufacture goods in the EU, you’re going to see that number again, but this time it’s going to get your attention. 20% would kill your profit margin. The good news is that you don’t have to pay it. That’s what I discovered by making 2000 paper punch-out models in Sofia, Bulgaria.
No VAT on Goods for Sale in US
The reason you don’t have to pay VAT: VAT is a consumption tax meant to be collected from the final consumer of goods in EU. In order to get passed through to the consumer, VAT is imposed on all sales in a supply chain involving the production and the distribution of goods, and the provision of services for consumption within the territory of the EU. If your goods are for consumption outside of EU, then you don’t have to pay VAT (and neither do your suppliers).
Manufacturers and suppliers inside the EU who have exported before know about this, but some may not. It’s a good idea to work with a manufacturer who has done this before, because they will know the process and documents which need to be collected in order to not pay the 20% VAT.
What Do I Have to Pay?
What you do have to pay boils down to three things:
- import tariffs: typically zero
- customs handling fees
- sales tax on US sales
For import tariffs, there’s more good news. (That is, it’s good news if you want to manufacture abroad and import into the US.) Historically, tariffs on goods imported into the US are almost non-existent. Yes, this is what that s.o.b. Trump has been railing about since 2010. In terms of protecting national industries, he has a point. Everybody else has higher import tariffs than the US, it seems.
So you’re going to need to look at the current Harmonized Tariff Schedule and see what you’ll pay for the product you import. Guess what the import tariff is for paper toys. Zero!
Also, you’ll need to arrange with your supplier / manufacturer to ship goods directly with a licensed shipper in EU to the US. That way, they can limit their liability for goods that ‘leak’ into the EU without VAT payment.
The easiest way to deal with VAT is to be pro-active. Don’t pay it and hope to recover it later. There are three reasons you don’t want to pay VAT:
- it may take a lot of time before you get repaid
- the paperwork required after the fact is a lot more work to deal with
- if you don’t do all the paperwork in time, you’ll have to forfeit what you paid anyhow
Customs handling fees are what you pay (typically through your shipper) to handle the paperwork on the receiving end. The customs agent takes care of inspections at the port of entry, and they carry insurance against a variety of shipping problems or customs clearance problems that can happen. I wouldn’t attempt to accept a delivery in the US from Bulgaria without a customs agent. Your shipper can estimate those fees for you. I found that there are two components to the fees the customs agent charges:
- Fixed fee: this covers their costs of doing the paperwork and showing up
- Variable fee: this covers the work of handling large quantities of goods, managing inspections, opening and closing crates, etc
For my small business, the fixed fee was the most significant thing, and the few hundred dollars my first shipment cost me made me consider that I would rather aggregate multiple small shipments into a single shipment wherever possible. The variable fees are quite manageable by comparison.
If you’ve ever sold anything in the US, you know that collecting sales tax is a pain in the butt that has been taken care of for you by services like Amazon fulfillment. I won’t say more about that here.
Short Answer: basically, when you manufacture goods in the EU for sale in the US, you can send those goods to the US without paying the Value-Added Tax (VAT).