Preparing Your Business for Global ECom

An Expert's View about Internet Sales and Mail Order in the United States

Last updated: 13 Jan 2011

A Guide for Online Retailers to Manage Operations, Inventory, and Payment Issues

Preparing Your Business for Global E-Commerce January 2011 Join the authors of this guide, industry experts, and Internet retailers in a global e-commerce webinar! See Table of Contents page for more information. A Guide for Online Retailers to Manage Operations, Inventory, and Payment Issues Preparing Your Business for Global E-Commerce A Guide for Online Retailers to Manage Operations, Inventory, and Payment Issues General Editor: Ken Walsh, Commercial Officer Additional Editing by Julie Klavens v Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Acknowledgements The U.S. Commercial Service thanks the following individuals for participating in the case studies contained in this document: Scott Cohn, Director of Merchandising and Sales?Bakers Direct, Bakers Shoes, bakersshoes.com Matt Cross, Co-owner, Red Rocket Hobbies, redrockethobbies.com Shirley Drake, Export Compliance Director, Bass Pro Inc., basspro.com Kathleen Reynolds, Credit Manager, Dultmeier Sales LLC, dultmeier.com The U.S. Commercial Service thanks the following individuals for providing assistance with content development: Greg Sack, President of Sales, Bongo International, 315 Seaview Ave., Bridgeport, CT 06607, (203) 683-4894, greg.sack@bongous.com, bongous.com Colleen Francis, Vice President of Business Development, GlobalShopex LLC, 9990 NW 14th Street, Suite 110, Miami, FL 33172, (786) 845-8828, colleen@globalshopex.com, globalshopex.com The U.S. Commercial Service particularly appreciates the eorts of those who made major contributions to this manual: Joel Reynoso, Director, U.S. Commercial Service Northern New Jersey Margaret Feinberg, Student, Washington University, St. Louis Allen L. Patch, CGBP, Director, U.S. Commercial Service Des Moines Carrie Brooks, Senior International Trade Specialist, U.S. Commercial Service Doug Barry, International Trade Specialist, U.S. Commercial Service About the U.S. Commercial Service The U.S. Commercial Service?the trade-promotion arm of the U.S. Department of Commerce?s International Trade Administration?helps U.S. companies succeed in markets around the world. Whether you want to make your first export sale or expand into additional international markets, we oer the trade counseling, market intelligence, business matchmaking, advocacy, and commercial diplomacy you need to connect with lucrative business opportunities. Located across the United States and in U.S. embassies and consulates in nearly 80 countries, our global network of trade professionals helps thousands of U.S. companies enter international markets in the most efficient, targeted way and export goods and services worth billions of dollars every year. Learn more at trade.gov/cs. vi vii Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Table of Contents Introduction ...........................................................1 Case Study: Red Rocket Hobbies .......................52 Chapter 1: Collecting Product Information ........3 Chapter 5: Shipping and Returns ......................55 Collecting Product Information: Introduction ..............4 Shipping Methods: Introduction ...................................... 56 HS Codes: Overview ...................................................................5 Setting Rates ............................................................................... 57 Harmonized Commodity Description and Choosing a Provider ................................................................ 58 Coding System (HS) and Schedule B Numbers ............6 Tracking ......................................................................................... 58 The Schedule B Book .................................................................7 Communicating With Buyers: Returns ........................... 59 Why You Need to Know Your Insurance ...................................................................................... 60 Product?s Schedule B and HS Codes ..................................7 Extra Fees ...................................................................................... 60 General Rules of Interpretation ............................................8 Terms and Conditions ............................................................ 61 How to Identify Your Product?s Schedule B Code ........9 Automated Export System (AES) ....................................... 62 Multiple Items Shipped as a Set ........................................ 10 Special Circumstances: Case Study: Bakers Shoes ...................................63 Textiles/Apparel Shipped as a Set .................................... 11 Tips for Your Business Strategy: HS Codes ................... 12 Chapter 6: Ready to Sell ......................................65 Final Thoughts ............................................................................ 66 Chapter 2: Country of Origin ..............................17 Country of Origin: Introduction ........................................ 18 Why Do You Need to Specify Country of Origin? ..... 19 Strategies for Determining Your Product?s Country of Origin ...................................... 20 Free-Trade Agreements ......................................................... 22 Country-of-Origin Documentation ................................. 23 Case Study: Bass Pro, Inc. ....................................24 Global E-Commerce Webinar Chapter 3: Export Controls .................................27 Export Controls: Introduction ............................................. 28 Tuesday, Feb. 1, 2011 Export Administration Regulations (EAR) 2PM Eastern/10AM Pacic and the Bureau of Industry and Security (BIS) ........... 29 International Traffic in Arms Regulations (ITAR) ........ 31 Hear the authors of this guide, industry Denied Persons or Entities ................................................... 32 experts, and Internet retailers discuss the essentials of preparing your Case Study: Dultmeier Sales LLC .......................33 business for global e-commerce. Chapter 4: Ordering and Payment .....................35 This is your chance to ask questions Ordering and Payment: Introduction ............................. 36 to industry experts who can guide Collecting Order Information ............................................. 37 you through the process of making Payment Options for Your International Customers ..38 your website truly global. The Culture of Online Fraud ................................................ 39 Cost: $40 Chargebacks ................................................................................ 40 Ways to Minimize the Risk of Fraud ................................. 41 Terms to Offer Customers ..................................................... 43 Register Now! Introduction to Tariffs and Taxes ....................................... 45 buyusa.gov/stlouis/ecommerce.html Managing Customer Expectations on Tariffs and Taxes .................................................................. 45 Delivery Methods: Advantages and Disadvantages ...46 How to Calculate Tariffs ......................................................... 47 Real Time Calculation for Clients ...................................... 48 Your Customs Broker ............................................................... 50 Technology Costs/Ongoing Review ................................ 50 Third Party Assistance ............................................................. 51 viii ix Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Introduction You?ve decided to start selling your products globally. Now you have an opportunity to market and sell them to the 95 percent of the world?s population that lives outside the United States. But new opportunities bring new responsibilities?in this case complying with regulations, collecting additional information about your product, and managing new risks. Don?t be discouraged. Thousands of small and medium-sized companies are thriving in the global marketplace. This manual explains the information you?ll need to complete international sales and how to integrate that information into your business operations from the very beginning of the sales-and-fulfillment process. This manual draws on the experiences of businesses that are now exporting throughout the world; we?ve included their stories as case studies to help you export successfully. Retailers that sell online or via other consumer-direct platforms, such as phone or mail, to international customers will find this manual helpful, as will retailers that plan to fulfill several international orders daily or weekly. We?ll explore the steps you?ll need to take to prepare your business for going global, both in terms of operations and sales fulfillment. Before beginning these tasks, however, your business should conduct the proper steps for developing a new market or territory, such as creating a market-development plan, allocating proper resources, and ensuring senior-management buy-in. The U.S. Commercial Service offers one-on- one business consulting to help walk you through the process of developing an export plan; visit buyusa.gov to find your local branch. Introduction 1 Chapter 1 Collecting Product Information Collecting Product Information: Introduction When exporting products, you almost always have to provide more information to government agencies and shipping companies than you would when selling domestically. This information is transmitted in certificates of origin, commercial invoices, packing slips, and special export-reporting systems. Later, we?ll discuss those documents and systems. In this section, we?ll take a look at the information you need to complete those documents, and suggest strategies for collecting and storing it. The first topic is product classification. The information is complex, but don?t be put off?it will help answer specific questions you may have as you classify your products, and classifying them will become much easier as you get the hang of it. For now, you need to understand only the basic concept behind product classification and review the strategies to help you classify your products. If you have specific questions later, you can always refer back to this manual. 4 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers HS Codes: Overview Every imported or exported item is assigned a classification code that corresponds to its product type. These numerical codes are used for statistic-gathering purposes by countries worldwide; they also determine which tariffs, if any, will be applied to the product. In addition, exporters are legally required, under the Foreign Trade Regulations, to include the correct classification code on export documentation. All import and export codes used by the United States are based on the Harmonized Commodity Description and Coding System (HS). Virtually all countries base their tariff schedules on this system, making it easier to conduct international trade. The HS assigns a specific six-digit code to classify all products or commodities. Countries that use the HS are allowed to create longer codes in addition to the first six digits so they can classify their products in more detail. For example, the United States uses 10-digit codes to classify products. The first six digits are the HS number. This HS number Duties, Taris, and Taxes will be the start of that product?s classification code regardless of The terms duty and tariff can which country is classifying it or how many digits that country be used interchangeably? adds when creating its own product-classification codes. both refer to taxes levied by governments on items imported into their countries. In this book, The last four digits are unique to the U.S. and more specifically we will simply use the word tariff wherever possible. classify the product. This entire 10-digit code is known as a Schedule B code. Schedule B codes are administered by the U.S. Countries, states, provinces, and other localities levy many Census Bureau, and are important to know when exporting. types of taxes, including sales Each country may append its own country-specific digit to the taxes, value added taxes, etc. These taxes usually apply to all end of the HS number. commercial transactions, not just imports. We?ll refer to these as ?taxes? throughout the book. Chapter 1: Collecting Product Information 5 Harmonized Commodity Description and Coding System (HS) and Schedule B Numbers Harmonized Commodity Description and Coding System (HS) codes are used to classify products for customs purposes. As noted above, every product is assigned a multidigit classication number, the rst six digits of which are uniform among countries that use the HS (most countries add a few more digits to classify the product with greater specificity, but the first six can?t be changed). To determine a tariff rate, the exporter needs to know the complete product classication code used by the importing country?that is, the HS code plus whatever country-specic digits are added. Those extra digits are not required on export documentation. The U.S. exporter can either write the six-digit HS code on the commercial invoice and allow the foreign customs broker to ll in the additional digits when the product arrives in the destination country, or study that country?s tariff schedule and classify the product with the country?s expanded number. (Calculating these tariffs is discussed in the ?Tariffs and Taxes? section of Chapter 4.) As mentioned above, the United States uses Schedule B numbers that are used to classify products for export and are based on the international HS system. The first six digits of a product?s HS number, Schedule B number, and country-of-import classification code will be identical; the remaining digits (usually three or four) will vary according to each country?s tariff schedule. To better understand these similarities and differences, let?s consider how the United States and Japan classify a given product, in this case a man?s overcoat, made of wool and with a fur-lined hood. In the U.S., the Schedule B number is 6201.11.0000; in Japan, where overcoats with fur are distinguished from those without, the number is 6201.11.100. Both numbers start with the same six ?harmonized? digits, but Japan adds only three, not the additional four seen in the Schedule B number. These differences in classication can make a big dierence: Overcoats with fur are taxed at 12.8 percent, whereas overcoats without are taxed at 9.1 percent. 6 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers The Schedule B Book All Schedule B codes are contained in the book The Schedule B: Statistical Classification of Domestic and Foreign Commodities Exported from the United States, which can be ordered from the Government Printing Office; call (202) 512-1800 (its stock number is 903-009-00000-4). The CD-ROM version can also be purchased from the Census Bureau; call (301) 457-1086. The book is also available on the Census Bureau website, www.census.gov/foreign-trade/schedules/b. The book contains several introductory sections followed by 98 chapters. Each chapter groups products logically based on materials or use; for example, Chapter 22 classifies ?Beverages, Spirits and Vinegar? and Chapter 69 classifies ?Ceramic Products.? Each chapter contains Chapter Notes and Statistical Notes?which must be read to ensure proper classification?followed by all the Schedule B codes for that particular category. Schedule B codes are composed of 10 digits. The first 2 digits indicate the ?chapter,? the first 4 digits taken together are the ?heading,? the first s digits are the ?subheading,? and the full 10 digits are the ?product code.? The Introduction section of the book provides an excellent overview of the book?s structure and should be read in its entirety. Why You Need to Know Your Product?s Schedule B and HS Codes Exporters need to know their product?s Schedule B and HS codes so they can: ? Determine applicable import tariff rates and determine whether a product qualifies for a preferential, or lower, tariff under a free-trade agreement; ? Complete the many required shipping documents, including commercial invoices, certificates of origin, and other documents; and ? Comply with U.S. law, where applicable. Chapter 1: Collecting Product Information 7 General Rules of Interpretation Now that you know what HS and Schedule B codes are, we?ll discuss them in more detail. Sometimes determining a Schedule B code is easy; other times, classifying a product requires a very detailed look at the rules that govern the Schedule B classification system. The introduction to the book containing all Schedule B numbers lists these rules, as well as general guidelines for finding Schedule B codes. The steps for determining your product?s code follow the principles detailed in the General Rules of Interpretation (GRI), which are found in the Introduction to the Schedule B book. Before attempting to classify your products, you should read the entire Introduction to the Schedule B book; it describes how the GRI is used in conjunction with Chapter Notes to determine the correct code, plus it defines key terms. For more specific instructions, review the video resources noted in this chapter. 8 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers How to Identify Your Product?s Schedule B Code You need to determine the Schedule B code for each item you plan to export. Modifying your inventory system?adding a field for each product?s Schedule B code? will simplify your export process because you?ll have ready access to the relevant Schedule B codes when completing requisite export documentation (we discuss this in subsequent chapters). The Census Bureau offers a free, and widely used, online Schedule B search tool (www.census.gov/foreign-trade/schedules/b) that can help you classify your products. The Schedule B search tool is the most commonly used method for classifying products. Simply follow the easy on-screen instructions to find the appropriate code for your product. To learn more about the Schedule B search engine, visit the Census Bureau's Frequently Asked Questions Web page (www.census.gov/foreign-trade/faq). If you still can?t find the Schedule B code you need, consult a commodity specialist at the U.S. Census Bureau Foreign Trade Division: Key Resources: Product Classication ? For durable goods (metals, machinery, computers, The government offers some electronics, and other miscellaneous goods), excellent webinars and videos to call (301) 763-3259; guide you through the process of classifying exports according to the HS and Schedule B ? For nondurable goods (food, animal, wood, paper, mineral, systems. For videos about Schedule B classification, visit chemical, and textile goods), call (301) 763-3484. the Census Bureau?s Export Training Videos page (www.census.gov/foreign-trade/ Your local Export Assistance Center or the Trade Information aes/exporttraining/videos). Center can help you identify the appropriate HS and Schedule B codes; call them at 800-USA-TRADE. If your product is difficult to classify, the Customs Rulings Online Search System (CROSS) database can help you find its Schedule B code. CROSS contains official, legally binding rulings from other exporters? and importers? requests for Schedule B codes. Use this database to see whether other exporters or importers requested a ruling on the same or a similar product and, if so, what that ruling was. The CROSS database is found at rulings.customs.gov. Chapter 1: Collecting Product Information 9 Multiple Items Shipped as a Set The third General Rule of Interpretation addresses composite goods, mixtures, and items that are sold in a set. Let?s consider the example of an unassembled bicycle sold in a box containing the bicycle frame, handlebars, pedals, and seat. On official documentation, this product would be classified as a bicycle (because the item is sold as one unit), not as several different components. However, some sets are harder to classify. The GRI has established a three-step process for determining the Schedule B code in such situations; the introduction to the official Schedule B publication contains the relevant passage: 3(a) The heading that provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to parts only of the materials or substances contained in mixed or composite goods or to parts only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods. 3(b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component that gives them their essential character, insofar as this criterion is applicable. 3(c) When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading that occurs last in numerical order among those that equally merit consideration. Source: Introduction, Schedule B: Statistical Classification of Domestic and Foreign Commodities Exported from the United States 10 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Special Circumstances: Textiles/Apparel Shipped as a Set The rules that govern Schedule B codes for textiles and apparel sets are unique. Let?s say that Company X sells a set consisting of a hat, a top, and a pair of pants. According to the GRI passage excerpted above, a set should be classified under one Schedule B code. However, textiles are treated differently, as seen in Chapter 50, Note 14: Unless the context otherwise requires, textile garments of different headings are to be classified in their own headings even if put up in sets for retail sale. For the purposes of this note, the expression "textile garments" means garments of heading 6101 to 6114 and headings 6201 to 6211. (Note: These heading numbers include most articles of clothing.) Therefore, if the top and the pants are primarily composed of textiles with different headings (i.e., the first four digits of the Schedule B number), then each item in the set must be listed separately under its own product classification. In our example above, export documentation must list the top, pants, and hat under separate product codes. Many countries and regions, including Canada and the EU, apply these atypical rules to textiles. Chapter 1: Collecting Product Information 11 Tips for Your Business Strategy: HS Codes Determining the HS and Schedule B codes for your products can be complicated, depending on how many you have and how diverse your product line is. The strategies below can help you simplify the product-classification process. Personnel Classifying products becomes easier with experience. It requires specialized knowledge, so you should choose a few capable employees who will undergo training and then be responsible for assigning HS and Schedule B numbers to your product line. Training several product-classification ?experts? is a good idea? that way, you?ll be covered in the event of one expert?s prolonged absence or departure. When deciding which employees are good candidates for that training, consider these factors: 1. Likelihood of long-term employment; 2. Knowledge of product components and materials/ingredients; and 3. Access to inventory-management software. 12 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Working With Your Suppliers If you need to classify a large number of products, asking your suppliers to provide HS and/or Schedule B numbers could save you time. If you resell products that you purchased wholesale, your suppliers may have already classified them, especially if those suppliers have exported or imported them in the past. If you?re reselling products imported from an international supplier, then the shipping documentation probably lists the HS number and may contain the full Schedule B number. Keep in mind that modifying the product may change its classification. Always remember, though, that you, the exporter, are responsible for correct reporting to the U.S. government, regardless of any classification that your supplier may suggest. This is an important consideration in determining if you should simply accept your supplier?s suggested Schedule B numbers. Some additional suggestions for using your supplier?s codes are: ? Use them as a guide for directing you to the approximate location of the code in the Schedule B book and use your own analysis to determine which code you will use; or ? Conduct your own product classification and use the supplier?s codes as a ?double- check? of your work. Chapter 1: Collecting Product Information 13 Top Sellers If your company has thousands of items in its inventory, you may not need to classify all of them, especially if you?re just beginning the classification process. Remember, you only need to assign a Schedule B code to items that will actually be exported. If you plan to sell only some, rather than all, of your items to international clients, or if you think there is no market outside of the United States for particular products, then classify only the ones you plan to export. Make sure you develop some system to prohibit items that are not classified with a Schedule B number from being shipped internationally. You also might want to stipulate that some products can?t be shipped outside the country because of export controls. For more information, see ?Export Controls? (Chapter 3). Instead, classify your top-selling products first. Use these criteria to decide which to start with: ? Products with a history of international sales, if any; ? Top selling products overall; ? Products you have determined to be the top prospects for international sales; and ? Items in sales materials (e.g., catalogues, your website, etc.) that can be accessed by international customers. 14 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Grouping An additional, time-saving strategy that can be used to classify a large number of products is grouping them by product type. As noted earlier, the Schedule B book is divided into chapters with like products found in the same chapter. For example, Chapter 65 addresses headgear. Grouping all your hats, helmets, and headbands together and classifying them simultaneously according to the information in Chapter 65 would be much easier than constantly jumping from product to product in your portfolio. By focusing on one chapter at a time you will also become much more familiar with the classification codes in the chapter so you can quickly identify the correct code for your products. New Products Classifying new products just after they?ve been entered in your inventory system should be part of your business process. Train the individuals who enter new products into inventory to look for Schedule B numbers on the documents mentioned above (e.g., commercial invoices, certificates of origin, etc.). Be sure to emphasize that if the employees can?t determine a product?s Schedule B number, they should consult the staff expert(s)?classification is a complex process, and untrained employees who make classification errors can cause problems down the line. Worldwide Sales Permission If you sell products that you didn?t manufacture, be sure that your distribution agreements allow you to resell the products internationally. Some manufacturers don?t want their products sold internationally, because they are concerned about issues like liability and warranty coverage. If any of the items you offer can?t be sold internationally, there?s no reason to spend time classifying them. Chapter 1: Collecting Product Information 15 Chapter 2 Country of Origin Country of Origin: Introduction As noted in the previous chapter, HS codes are one criterion used to determine the tariff on goods entering a country; country of origin is another. A certificate of origin is an official statement that indicates in which country the product was produced. Country-of-origin determinations are governed by many rules; in certain circumstances, discerning a product?s origin is difficult. For example, if you import raw plastic pellets but then process them to manufacture a telephone handset in a U.S. facility, is the handset considered to be of U.S. origin? Or, if you import telephone- handset parts but then assemble and paint the finished product in the United States, what is that product?s country of origin? The answer is: It depends. We?ll discuss why we need to determine country of origin and then discuss strategies for how to do it. 18 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Why Do You Need to Specify Country of Origin? Trade agreements between countries are formed in order to lower tariffs on items produced in those countries. For example, country A and country B sign a trade agreement that lowers the tariffs on goods produced in those countries to zero percent. Manufacturers now need to certify that their products originated in country A or B in order to get the lower rate. If a product originated in country C, was shipped to country B, and re-shipped to country A, it would not be eligible for the lower tariff because the lower rate only applied to items originating in country A or B. The United States, Canada, and Mexico are members of the North American Free Trade Agreement (NAFTA), which offers preferential (i.e., lower) tariffs for items produced in those three countries. Canada, for example, wants to ensure that items coming from the United States were actually produced there and not simply shipped there from a non-NAFTA country to be forwarded to Canada. That?s why Canada demands that certificate of origin for all imports, or a specific NAFTA Certificate of Origin for items produced in those three countries. Every country participates in multiple trade agreements, so each must determine a product?s country of origin in order to apply the appropriate tariff rate. In addition, many countries restrict or have quotas on imports from certain regions, so certificates of origin are also used to ensure compliance with these regulations. Chapter 2: Country of Origin 19 Strategies for Determining Your Product?s Country of Origin Wholesale Products If you?re a retailer, not a manufacturer, then determining a product?s country of origin should be fairly simple: Ask the manufacturer to provide that information. The manufacturer will know the source(s) of the product?s raw materials and will have the most accurate information for determining the country of origin; sometimes, the manufacturer is the only one who can determine its country of origin. Obtaining country of origin information can be easy as long as you require the manufacturer to provide this information on every order you make with them. If the inventory you purchase is imported and shipped directly to you, the country-of-origin information should be noted on the import documentation. In such cases, you can simply enter that information in your inventory-management system. If you use multiple suppliers from different countries?for example, if you?ve been using a supplier from Mexico and then decide to buy from one in Japan?you need to separate your inventory by country of origin, keep all necessary documentation, and make sure that your inventory-management system accurately reflects the country of origin for every item. 20 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Manufactured Products Determining the country of origin of the products you manufacture requires you to identify, assign a value to, and determine the country of origin of every component of your product. You then calculate the value of the foreign parts used in your product as a percentage of the total costs of all components. The resulting percentage can be used to determine from which country your product originates. An alternative method is to indicate the country in which the components underwent the substantial transformation that turned them into the finished product. The specific calculations and methods used and the way these results are applied vary. Because of this complexity, developing a system for calculating the country of origin of your products is beyond the scope of this book. You must study training materials that specifically address product-origin certification in order to develop a process for calculating the content of your products and to ensure that you?re applying the results correctly. An excellent place to start is the Department of Commerce export website, export.gov. Use the search function on that page and enter ?certificate of origin.? Several links, including one for the NAFTA Certificate of Origin, will be especially helpful. Many government and private organizations provide training on product-origin calculations. Find your local U.S. Export Assistance Center at buyusa.gov and ask for assistance in identifying local training opportunities, or type "certificate of origin training" into an Internet search engine. Chapter 2: Country of Origin 21 Free-Trade Agreements The United States has negotiated several free-trade agreements under which partner countries give preferential tariff rates to items that originate here; those rates can be as low as zero. A list of U.S. free-trade agreements is found on the website of the U.S. Trade Representative (ustr.gov). The North American Free Trade Agreement (NAFTA) was created to facilitate tariff-free trade among Canada, Mexico, and the United States; as a result, the United States trades more with these partners than with any others. Under NAFTA, unique origin- determination rules apply; you can find them on export.gov. The site also explains how to comply with the rules of origin (found in Section 401 of the agreement), and how to complete a NAFTA Certificate of Origin. 22 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Country-of-Origin Documentation Commercial Invoice The country of origin is listed on two documents used during shipping: the commercial invoice and the certificate of origin. Every shipment must include a commercial invoice that lists the country of origin for each product it contains; the information on that invoice will be used to determine the tariff rates for exports. You can view samples of commercial invoices on export.gov, in the ?International Logistics? section. Certicate of Origin A certificate of origin is an official document, signed by the exporter, certifying the country of origin for each product contained in the shipment. With lower-value shipments (e.g., those under $1,000) customs officials will accept the country-of-origin information on the commercial invoice. Shippers may want to include a certificate of origin with larger-value shipments to ensure that nothing is held up in customs because of insufficient documentation. You can find sample certificates of origin, including the NAFTA Certificate of Origin, on export.gov, in the ?International Logistics? section. Occasionally, a country?s customs authority requests that the certificate of origin be certified by the exporter?s chamber of commerce. If this happens, contact your local chamber for details on obtaining certification. For more information about this process, contact your local U.S. Export Assistance Center (buyusa.gov). NAFTA Certicate of Origin NAFTA requires a specific certificate of origin; you should familiarize yourself with it because you?re likely to send goods to either Mexico or Canada. You can find details on how and when to use this document on export.gov. Sometimes a certificate of origin isn?t required, as Shirley Drake of Bass Pro noted (?Case Study,? Chapter 2). If the goods are valued at $1,000 or less, the exporter may simply add an explanatory statement to the commercial invoice. You can find information about such statements on export.gov. Chapter 2: Country of Origin 23 Case Study Bass Pro, Inc. Six years ago, Bass Pro, Inc. hired Shirley Drake The company ensures that its products comply to develop and direct its export-compliance with export regulations by stipulating that program. The company?one of America?s an item cannot be exported until it has been premier outdoor retailers, with retail stores assigned a Schedule B code, an approved ECCN, across America and Canada and an online and a corresponding country of origin, and that store at basspro.com?wanted to ensure that an export-compliance associate has approved international sales from its website were fully this information. compliant with U.S. export regulations. If any of that information is missing, the order generates an error code and the products Business Challenge are ineligible for export until the requisite Bass Pro needed to ensure that its operations information has been entered or corrected. Also, were as streamlined and efficient as possible. Bass Pro?s export-system software compares each The company has over 90,000 SKUs and fills 800 product's ECCN to the destination?s country code to 1,200 international orders per week, so the to determine whether the articles can be shipped export-compliance process needed to be as to the destination country without an export automated as possible. license. (ECCN and export licenses are discussed in Chapter 3). Approach ?The first thing we did was develop an internal If all the information is present and correct, IT program capable of storing the regulatory then the company?s automated export system information about our products,? Drake explained. approves the articles for inclusion in an export The company modified its New Item Set-Up Form, order. Approved orders then appear on an adding fields for Export Control Classification Order Edit screen. At this time a member of the Numbers (ECCNs), HS numbers, country of export-compliance team manually reviews the origin, and NAFTA eligibility, so it could collect order to make sure that no errors were keyed the required export information directly from into the system and that no items are destined its suppliers. (ECCNs are special numbers used for countries where export is prohibited by the for export licensing purposes which will be United States. discussed in Chapter 3.) ?We now require each of Once the international order has been approved our suppliers to provide harmonized codes and on the Order Edit screen, the items are processed country-of-origin information when we order,? for shipping. Drake said. ?Some suppliers are very sophisticated and we accept what they provide us, but with less experienced vendors, we review the information they supply to ensure it?s accurate. In global commerce, you have to know how sophisticated your suppliers are.? 24 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Bass Pro has also developed a system to annually Bass Pro does outsource some of its export- renew the country of origin for all products compliance tasks. All international shipments eligible for export. This allows them to take are processed in real time through a third-party advantage of preferential tariff rates stipulated online vendor in order to verify that the buyer in trade agreements like the North American is not on any U.S. government lists of parties to Free Trade Agreement (NAFTA). This annual whom sales are prohibited. renewal process requires Bass Pro to send a Insights communication to suppliers to certify the country of or When asked what advice she?d give to exporters igin of all products they supply. An employee looking to sell products globally, Drake said they then enters into the inventory management should ?get the full support of top management system the origin country and the expiration date of this cer because selling internationally involves extra tification (certifications are usually valid costs, and to be successful you need to spend for 12 months). some money on legal assistance, software Bass Pro uses this information to state the changes, training, etc.? appropriate country of origin on the requisite e Also, every company should train a compliance xport documentation. A physical Certificate of Or associate, who will attend training on Export igin is not included in shipments, but only when the customer asks for the cer Administration Regulations and other export tificate, or if controls. It?s essential to stay within the law. And, the item gets held up in customs. if your company sells products or technology ?For shipments to NAFTA countries, low-value that fall under International Traffic in Arms shipments (shipments valued at $1,000 or less) Regulations (ITAR), as Bass Pro does, your don?t require a certificate of origin in order to compliance associate(s) must receive receive preferential tariff treatment. When Bass ITAR training. Pro exports certain items?its computer system tracks which SKUs are eligible for preferential Bass Pro and the U.S. Commercial Service treatment under NAFTA?a statement is added to Shirley Drake and Bass Pro have worked with the bottom of the commercial invoice noting that the U.S. Commercial Service on many exporting NAFTA treatment applies. Usually the statement is issues. Their relationship and the hard work of the accepted in lieu of the certificate,? Drake said. entire team at Bass Pro have allowed them to take advantage of international sales opportunities. Details on NAFTA Certificates of Origin and circumstances in which a commercial invoice The U.S. Commercial Service, recognizing Bass will suffice are discussed in Chapter 2 (?Country Pro?s global efforts, presented the company with of Origin?). the ?Export Achievement Certificate for Recent Accomplishments in the Global Marketplace.? Case Study 25 Chapter 3 Export Controls Export Controls: Introduction To protect national security, foreign policy, and economic interests, the United States has established regulations that prohibit or limit certain exports. Known as export controls, these regulations also limit transactions with certain individuals, organizations, or countries. Because there are compelling reasons to prohibit certain transactions, the punishments and penalties for noncompliance are severe. This section provides an overview of some export controls; specialized training in each is highly recommended. 28 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Export Administration Regulations (EAR) and the Bureau of Industry and Security (BIS) Overview Items with both commercial and military or nuclear proliferation applications are known as ?dual-use products,? and they?re licensed by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce (www.bis.doc.gov). The regulations governing these types of products are found in the Export Administration Regulations (EAR), also found on the BIS website. Relatively few items require a dual-use export license, but such licenses are required in certain situations involving national security, foreign policy, short supply, nuclear nonproliferation, missile technology, chemical and biological weapons, regional stability, crime control, or concerns about terrorism. An item's technical characteristics, its destination, its end-use and end-user, and other activities of the end-user determine whether a license is required. Before shipping your product, make sure you understand both the concept of dual use and basic export-control regulations. Training To learn about the EAR, visit the BIS website, which has videos that explain how to classify your products with an Export Control Classification Number (ECCN). ECCNs are the codes used to classify the products detailed in the EAR. This classification concept is similar to HS and schedule B numbers, but the system used is very different. It?s a good idea to make one of your employees the staff EAR expert, responsible for understanding the EAR and developing a comprehensive export-control policy for your company. In addition to studying the BIS videos, the staff expert should attend specific EAR and export-control seminars. Visit the BIS website or ask your local U.S. Commercial Service office or World Trade Center for information about where to find training. Chapter 3: Export Controls 29 Strategy Every dual-use item needs a specific ECCN; the BIS website can help you determine the ECCN for your dual-use products. Approach ECCNs as you do HS numbers (Chapter 1): When adding a product to your inventory or reviewing your current product line, ask your suppliers whether they can provide the necessary ECCNs; create a field in your inventory-management system for ECCNs; and add a related field that lists the countries to which export of that product is prohibited by the EAR. If you are obtaining ECCN numbers from your suppliers, work closely with them to understand how they arrived at this ECCN determination. Make sure you are comfortable with their explanation and always double check with your internal expert as you are ultimately held responsible for violations of the EAR, not your supplier. Create as many internal controls as possible to make sure that you don?t inadvertently violate the EAR. Since the ECCN and any license numbers you receive will need to appear on export documentation, this information should be easily accessible in your inventory-management system. As noted above, all dual-use items require a specific ECCN. Items that are not specified in the EAR under a specific ECCN are classified as "EAR99." Details on EAR99 can be found in the "ECCN Questions and Answers" section of the BIS website. It?s a good idea to establish a companywide rule that underlines how crucial ECCNs and HS numbers are: If the inventory- management system doesn?t list an ECCN or HS number for a product, then that item is ineligible for international shipping. If possible, adapt your inventory-management software so it flags problematic orders. You need to be especially careful with items that require ECCNs?you don?t want to inadvertently violate export-restriction regulations. 30 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers International Trac in Arms Regulations (ITAR) The International Traffic in Arms Regulations (ITAR) control the sale of items used for military purposes. If you produce or sell these products, you need to learn about the ITAR. Details can be found on the U.S. Department of State website (pmddtc.state.gov). Start by finding out whether your products for export (hardware, technical data, and/ or defense services) are on the U.S. Munitions List (USML), found in Part 121 of the ITAR. If they are, then explore the ITAR website for complete information on the ITAR, or call your local U.S. Export Assistance Center (you can find contact information on buyusa.gov. Exporting items on the USML without proper licensing has very serious legal consequences. If you don?t know whether your products are regulated by the ITAR, consult your local U.S. Export Assistance Center. Chapter 3: Export Controls 31 Denied Persons or Entities Both the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury and the Bureau of Industry and Security administer and enforce economic and trade sanctions against certain foreign countries, regimes, companies, and individuals, based on U.S. foreign-policy and national-security goals. Virtually every commercial transaction with any target of OFAC or BIS sanctions is prohibited, no matter what the product; a few exceptions are made in specific circumstances, but those don?t apply to the vast majority of transactions. Because every product is subject to these regulations, every exporter must be aware of the individual, organizations, and countries on these lists. On the BIS home page (www.bis.doc.gov) you?ll find a link for ?Lists to Check.? Check these before completing any international order. Always remember that you?re responsible for ensuring that your company complies with these regulations. If you prefer, you can hire a third-party company to conduct these checks for you in real time, via data transfers with your network. To find such companies, search the Internet for ?export- compliance companies.? 32 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Case Study Dultmeier Sales LLC Dultmeier Sales, a manufacturer and wholesale Dultmeier doesn?t charge different prices for stocking distributor with two stocking locations, different international markets, but it does charge has been in business since 1934. The company a handling fee on international orders to recoup generates significant sales through its website the cost of document preparation. (dultmeier.com) and its credit manager, Kathleen Reynolds Insights, is responsible for handling all aspects of in Reynolds offered some insights based on ternational sales, from setting up new experience: Be attuned to issues that could arise accounts to reviewing shipping documentation. when exporting textiles, which have highly "We?ve been selling online for about eight years; we ha specific HS code and time-consuming country ve more than 50,000 SKUS, and we export ever of origin rules, and always scrutinize terrorist ything that we sell domestically, except for watch lists to make sure that you are not selling items with HAZMAT restrictions,? said Reynolds. to a denied person or entity. She encourages any Approach company that wants to expand its international All international orders go through her; she e-commerce sales to budget time and money for reviews each individually, ensures that the export-requirements training, to develop a good order has been paid for, and then forwards it relationship with its local U.S. Commercial Service to shipping. ?You learn about a lot of exporting office, and to encourage its shipping company to issues through experience, like ensuring that help with documentation (or find one that will). you use only heat-treated or chemically treated pallets, and labeling every box, even if boxes are consolidated on a pallet, because sometimes pallets break apart in the shipping container.? Dultmeier relies on its suppliers to provide much of the information needed for export documentation. However, many suppliers are unaware of HS numbers or NAFTA Certificates of Origin. ?You have to use your leverage as a buyer and insist that they get trained on Schedule B, HS, and origin criteria in order to sell to you,? Reynolds said. To further minimize documentation problems, Dultmeier has two employees who maintain international data in its inventory-management system. Case Study 33 Chapter 4 Ordering and Payment Ordering and Payment: Introduction You?ve worked hard to build a marketable product, make your brand recognizable, launch a great website, and create compelling product pages that attract international customers. It?s just as important to devise a sound plan that maximizes payment options for your international buyers while minimizing the risk of online fraud. Also, you want to ensure that you are collecting the appropriate information from your international customers and communicating all the responsibilities that buyers and sellers have in any online transactions. 36 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Collecting Order Information When you?re ready to sell internationally, make sure that essential customer information doesn?t fall through the cracks. Use these tips to create clear, customer- friendly payment pages: ? Label your fields as clearly as possible and provide alternatives to help customers who don?t speak English (or for whom it?s not the primary language). For example, ?First? could be displayed as ?First Name/Given Name? and ?Last? as ?Last/Family Name/Surname?; ? Add a third or even fourth line to the address field to accommodate longer international addresses; ? Add a field for ?Country?; ? Insert a ?Country Code? field above or to the left of the ?Telephone Number? field; ? Ask for ?State/Territory/Province? rather than just ?State?; and ? Request ?ZIP/Postal Code? rather than just ?ZIP Code.? Also, if your system uses the ?ZIP Code? entry to automatically fill in the ?City? and ?State? fields, you might want to offer separate fields for ?ZIP Code? and ?Postal Code??many other countries use five-digit postal codes, and a postal code keyed into the ?ZIP Code? field could gum up the customer?s address. Chapter 4: Ordering and Payment 37 Payment Options for Your International Customers Now that you have the customer?s order details and delivery information, it is time to collect payment. U.S. firms that sell online have most likely accepted payment on credit cards that have been issued by banks in other countries. American Express, Visa, MasterCard, and Discover are the most frequently used payment systems worldwide, both in real and virtual stores. Keep in mind, though, that in some countries other payment methods are just as popular, if not more so. In many European countries, for example, people buying online pay by wire transfer or with country-specific cards, such as Carte Bleue in France. If you have determined that there is a large market for your products in a particular country, you may want to research some of these alternative payment methods to determine if accepting these other payment methods would increase sales Another payment option is PayPal, a third-party service that processes payments from customers? credit cards and bank accounts and forwards you the money in a manner you select. PayPal has become increasingly popular among U.S. firms selling online to foreign buyers. Sellers like it because they don?t assume the risk of collecting the buyer?s payment information and because PayPal, which collects from the buyer?s bank account or credit card, essentially guarantees payment to the seller. PayPal is most popular in North America and Latin America and is gaining popularity worldwide. It doesn?t operate in all countries, but you can find comparable services to fill in the gaps. Before you enter into an agreement with any of these payment options, find out how each company resolves payment disputes and take that into account when making your decision. In certain instances, a credit card holder can dispute a charge weeks or even months after the seller has received payment. 38 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers You?ll also want to consider the costs associated with every payment option. Each has a unique cost structure that will be listed in written agreements. If you are already selling online, discuss with your current bank and payment processor the fees associated with international payments. There are many companies that specialize in processing payments from international customers. To learn more about these companies, type ?international online payment? into an Internet search engine. The Culture of Online Fraud Accepting online payment, even with established credit cards, exposes the seller to some risk. According to Cybersource?s 2010 11th Annual Online Fraud Report (cybersource.com), U.S. merchants continue to reject three times as many international orders (7.7 percent) as domestic orders (2.4 percent). Merchants reject orders they have reason to believe may be fraudulent. But there is some good news: The same survey notes that actual international e-commerce fraud rates for U.S. merchants fell from a 2008 average of 4.0 percent of total online orders to 2.0 percent in 2009. The drop can be attributed in part to firms that use various methods to safeguard against unauthorized use of credit cards. Although the trends in online fraud are encouraging, U.S. firms need to continue to be vigilant. This is true especially in countries that used to be considered ?safe? for e-commerce retailers. The U.S. Commercial Service has a long history of reports from U.S. exporters about online fraud coming from China and Nigeria, but now fraudulent activity is occurring in places where it was once rare; the U.S. Commercial Service is now receiving complaints about fraudulent activity in Singapore and the Scandinavian countries, among other previously low-risk countries. Chapter 4: Ordering and Payment 39 Chargebacks The possibility of incurring chargebacks, the process where the card holder?s issuing bank requests a reversal of charges on behalf of the card holder, is one of the more frustrating aspects of accepting payment online. Weeks, and sometimes months, after having received payment and delivered goods, a U.S. exporter might hear from a credit-card holder or a credit-card firm that wants him to reverse a charge for various reasons, including fraudulent use of the card. According to Cybersource?s 2010 11th Annual Online Fraud Report, chargebacks account for nearly 50 percent of fraud claims (the other half were claims made by the card holder to the issuing bank, which then issued their own credit on the account). Because of the dollar volume involved in fraud, credit-card firms are playing a more active role in the mediation process on chargebacks. The Cybersource report noted that merchants win about 42 percent of the chargebacks they dispute with credit-card companies. 40 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Ways to Minimize the Risk of Fraud U.S. exporters can reduce their exposure to credit-card fraud in a number of ways but must keep in mind that each method has limitations. Use Common Sense: If something seems wrong?for example, if a buyer?s billing and shipping addresses don?t match (especially if the addresses are in different countries)? then scrutinize the order and don?t process it until you?re sure that the credit card being used is legitimate. Address-Verification System (AVS): Ask your bank how you can ensure that a buyer?s credit card is valid. An AVS?a system used to verify the identity of the person claiming to own the credit card that is available through your credit card processing company? can determine whether the address on a buyer?s credit-card account matches the address the buyer typed into your online order form. An AVS can check information for cardholders in Canada and the U.K., but not elsewhere. Card Verification Number (CVN): At the time of purchase, many sellers require the customer to enter not only the credit-card number but also a three- or four-digit security code (usually found on the back of the card). In theory, that number is available only to the cardholder, so requiring it helps reduce the incidence of fraud. However, as more sellers require buyers to provide CVNs, it?s likely that savvy crooks will find ways to capture them, thus reducing the CVN?s effectiveness as a fraud- prevention tool. IP Geolocation: This service that is available from various companies enables a seller to identify a prospective buyer?s geographic location (country, region, ZIP/postal code) based on the IP address of the computer being used. If the country or region of the buyer?s credit-card address doesn?t match that of the IP address, the seller can flag the order and then investigate or reject it. This method is increasing in popularity, particularly among larger exporters. For a list of companies providing this service, type in ?IP Geolocation? into your Internet browser. Chapter 4: Ordering and Payment 41 Background Checks: U.S. exporters?especially those involved in business-to-business (B2B) sales to a foreign agent or distributor that total thousands, possibly millions, of dollars?should conduct background checks on prospective buyers, even if that means taking the payment process offline or placing it on hold. Background checks may include purchasing a credit report on the prospective buyer, calling up references, or other practices. Conducting online due diligence in certain countries can be difficult; information about the company might be published in a language you can?t translate, or the practice of reviewing buyers and sellers online might not have caught on. Several firms can provide financial information about foreign companies, and the U.S. Commercial Service?s International Company Profile can also be of use (export.gov/salesandmarketing). Background checks can be costly and time-consuming, so they should only be used for higher value orders. Country Exclusions: If your company is small and if you?re just testing the export waters, you might not want to ship to countries where the risk of fraud is high. Just be sure that your site lists those countries; that way, prospective customers won?t waste time building an order that can?t be filled. Additional Resources: The best resources you have to combat fraud are your bank and the credit card companies themselves. These groups spend millions of dollars to combat credit card fraud and share that information with you in an effort to reduce fraud. You can also visit USA.gov and type in "Internet Fraud" in the search box. This gives you information on how to combat fraud and how to report fraud to the proper legal authorities. 42 Preparing Your Business for Global E-Commerce: A Guide for Online Retailers Terms to Oer Customers Incoterms When the goods you export arrive at their destination, the importing country requires that all applicable tariffs (import taxes levied by the destination country) and local taxes, including Value Added Taxes (VAT), be paid; many companies make the buyer pay the tariffs and taxes. Buyers typically want to know the final price, with shipping and taxes included (known as the ?landed cost?), before they agree to buy, but you might not be able to provide it?tariffs and taxes vary widely throughout the world, so determining those rates before you ship can be difficult. Be clear about your policy on tariffs?specifically, who pays and when payment will be due. Shippers worldwide use standard trade definitions called Incoterms, which spell out who?s responsible for shipping, insurance, and tariffs on an item; they?re commonly used in international contracts and are protected by International Chamber of Commerce copyright. Familiarize yourself with Incoterms so you can choose the ones that enable you to provide excellent customer service and clearly define who is responsible for what charges. Look for the list of Incoterms on export.gov, in the ?International Logistics? section. Also, experts at your local U.S. Export Assistance Center (contact information buyusa.gov) can help you decipher them. The most common Incoterms are EXW (Ex Works); FOB (Free On Board); CIF (Cost, Insurance and Freight); CPT (Carriage Paid To); DDU (Delivered Duty Unpaid); and DDP (Delivery Duty Paid). Most business-to-business e-commerce agreements will use EXW, CPT, or CIF; most business-to-consumer transactions will use CPT or CIF and, sometimes, DDP. With the exception of DDP, the Incoterms mentioned above require the buyer to pay all tariffs and taxes upon arrival. To make sense of all these terms, you should take the time to understand the use of Incoterms. Look for the list of Incoterms on export.gov, in the ?International Logistics? section, and view the easy-to-read Incoterms chart at iccwbo.org/incoterms/wallchart/wallchart.pdf. For sample language you can use on your website, check out the ?Standard Terms for Shipping? section below. And, keep in mind that some (maybe even most) customers are unfamiliar with Incoterms, so whenever you use one, be sure to spell out, in plain language, what it means. Chapter 4: Ordering and Payment 43 International Order Preparation Fees Selling internationally is labor-intensive; shipping preparations take longer, plus
Posted: 13 January 2011, last updated 13 January 2011

See more from Internet Sales and Mail Order in the United States

Expert Views    
US Hispanic Market Website Translation & eCommerce   By Globalization Partners International
Preparing Your Business for Global ECom   By U.S. Commercial Service
What is a Non-Resident Importer or NRI (Canada)   By Pacific Customs Brokers Ltd.
Licensing - a good International strategy?   By Atlantric
Hot Tips    
What is a Non-Resident Importer or NRI (Canada)   By Pacific Customs Brokers Ltd.