The pandemic-fueled acceleration of e-commerce led to record growth in domestic e-commerce sales in 2020. However, as domestic sales have grown, so have the number of cross-border e-commerce sales. According to Worldpay, 55 percent of online shoppers worldwide have purchased from another country in the last 12 months.
The uptick in cross-border sales makes sense as consumers have had more time at home to browse for new retailers. Consumers have also been hit with shipping delays and out-of-stock notices as supply chains reckoned with increased demand and dwindling supply — pushing more to look at international suppliers and sellers.
As a result, we’re seeing two major trends in the world of cross-border e-commerce.
Businesses Are Revisiting Their Cross-Border Customer Experience
The COVID-19 pandemic dramatically increased online shopping worldwide as millions of consumers chose to shop from home because stores were closed or because they feared being in public spaces. The rise in e-commerce shopping has opened the door to new potential customers while increasing competition domestically at the same time.
Due to more customers shopping online and increased competition with domestic retailers, a significant opportunity has been created for online retailers to attract and retain international customers — but only if the experience is positive. As a result, companies are working to bolster the customer experience for international customers by addressing compliance requirements in advance and ensuring that buyers clearly understand all the associated cross-border costs.
Governments Are Changing Their Compliance Rules
Still, the work to improve the cross-border customer experience is being compounded by a second trend: rapidly evolving government regulation. As customs and tax authorities work to keep pace with the rapid acceleration of global e-commerce, they're changing rules and increasing enforcement of tariffs, customs duties, and taxes at a rate never seen before.
Every country has its own rules for how products are assigned customs duties and sales tax. While exporters have always had to deal with these complexities, many online retailers have had it relatively easy up to this point, as many countries allowed low-value parcels to cross borders without imposing duties or taxes. However, that’s all changing.
For example, the United Kingdom’s exit from the European Union, which took effect Jan. 1, 2021, adds new complexity for online retailers. Previously, the U.K. didn't require the collection of its value-added tax (VAT), which is similar to U.S. sales tax, for imported online purchases of under 135 pounds. With Brexit, the U.K. has eliminated that exemption and will require online retailers to collect and remit VAT on all orders shipped to the U.K. Online retailers selling to U.K. customers will be required to register and remit VAT collected on orders to the U.K. quarterly.
Another example of changing cross-border complexity is Mexico’s new Harmonized System (HS) codes. HS codes frequently have eight to 10 digits or more because governments add numbers to further define and distinguish products. The extra numbers vary by country depending on the attributes they want to track. For example, the U.S. typically uses 10 numbers (called Harmonized Tariff Schedule codes or HTS codes).
Mexico has used eight-digit HS codes since the Harmonized System was created in 1988. As of Dec. 28, 2020, Mexico’s HS codes must contain 10 digits. Mexico has also added new tariff codes for new products and eliminated codes for outdated (i.e., rarely traded) goods.
As cross-border transactions continue to grow, we can expect more countries to implement changes to their HS code nomenclature, duty and tax thresholds (de minimis), and duty and tax rates.
The pandemic-driven shift to e-commerce has granted retailers of all sizes a great opportunity to reach new customers internationally. As we move forward into 2021, we can expect that cross-border sales will continue to grow as more retailers find ways to serve an international audience and overcome the compliance challenges that lie ahead.
Despite the rapidly changing nature of cross-border compliance requirements, retailers can leverage technology to manage these complex rules in real time while integrating with other critical e-commerce systems, like payment and shipping. At the end of the day, retailers that want to capitalize on the opportunity to reach and delight international customers will need to harness technology to automate and integrate every aspect of the cross-border journey, from product browsing through to final delivery.
Craig Reed is senior vice president of global trade at Avalara, an automated tax compliance software provider.