This blog provides an easy reference overview of five (5) proven and legitimate options for duty-saving opportunities.
We recommend U.S. importers, exporters, and manufacturers to consider these five (5) options as they apply to all products from virtually any country subjected to a tariff, including Section 201 tariffs for solar systems, Section 232 tariffs for aluminum and steel, and the infamous Section 301 Tariffs in place for Chinese originating goods and violations of trade agreements, as well as acts, policies or practices that are unjustifiable, unreasonable, or discriminatory and that burden or restrict U.S. commerce.
- Foreign Trade Zones (FTZ) or Bonded Warehouses
- Duty Drawback
- Tariff Engineering
- Country of origin changes
- First Sale
FOREIGN TRADE ZONES (FTZ)/ CUSTOMS BONDED WAREHOUSES:
Foreign Trade Zones (FTZ) are secured areas outside of US Customs and Border Protection’s (CBP) jurisdiction. Although located in the United States, FTZs function similarly to Free Trade Zones and are located in or around CBP ports of entry. As prescribed by the Foreign-Trade Zones Act of 1934 (19 U.S.C. 81a-81u), the FTZ Board vests the authority to establish these facilities and cooperates with CBP to set regulations.
These facilities bode are beneficial for both exporters and importers due to their allowance to move merchandise into zones of operations, such as storage, exhibition, assembly, manufacturing, and processing. Since FTZs are in the US, they are subjected to Federal Laws, State and or local laws, as well as the restrictions and requirements prescribed by the FTZ board.
What may be placed in zones?
Unless prohibited by law or other exceptions listed by CBP, all foreign or domestic merchandise, whether dutiable or not, can enter an FTZ. While prohibited merchandise is, in fact, prohibited by FTZs, due to the disconnect with CBP, merchandise subjected to a quota may be placed in an FTZ until the quota is opened up or is removed.
When using an FTZ, the typical CBP entry process, such as payment of duties, does not apply to the foreign merchandise until it leaves the FTZ, entering CBP territory for domestic consumption. While the FTZ is, in fact, inside the US, it is not under U.S. Custom and Border Protection’s jurisdiction
To enter an FTZ or to ESTABLISH YOUR OWN FACILITY AS AN FTZ, Contact DTL for aide and guidance to ensure a legal and desirable option.
How Can I avoid Section 301 Tariffs Using an FTZ?
According to CBP, per the Federal Register Notice published by the USTR, any product which is subject to the additional duty imposed by this determination, and that is admitted into a U.S. foreign trade zone on or after 12:01 am eastern daylight time on July 6, 2018, only may be admitted as ‘privileged foreign status’ as defined in 19 CFR 146.41. Such products will be subject upon entry for consumption to any ad valorem rates of duty or quantitative limitations related to the classification under the applicable HTSUS subheading.
CUSTOMS BONDED WAREHOUSES
Bonded warehouses function similarly to FTZs, in that they are subjected to different rules and regulations upon the entry of merchandise into the US. These facilities, which have been around for over 150 years and allow for goods subjected to duties to be “stored, manipulated, or manufactured without having to pay the given duties. Essentially the warehouses, which are secured and supervised by the US government, enable companies to avoid a duty until the items leave the warehouse for consumption.
Bonded Warehouses serve almost like a “pause button”. Importers may hold their goods in the warehouse until they want to distribute the goods to consumers. Until the moment the item(s) leave the facilities, they are exempt from duties. This allows for importers to transfer their goods from warehouse to warehouse and allows for items to be held, manufactured, and or manipulated prior to paying any obliged duty.
If you wish to explore more deeply the intricacies, similarities, and differences between Foreign Trade Zones and Bonded Warehouses, check out our previous blogs for the more valuable insight!
How Can I avoid 301 Tariffs Using a Bonded Warehouse?
According to CBP, an importer could store section 232 or 301 applicable merchandise in a bonded warehouse and then export it to another country without having to pay the tariffs on it. There is no special status for section 232 or 301 goods entered into a bonded warehouse and it serves as a great mechanism to mitigate the impact of Section 232 and 301 tariffs.
If you import products into the US only to export them to another country, you may be entitled to compensation for the duties paid upon importation to the US. Duty Drawback provides for the refund of up to 99% for certain duties, internal revenue taxes, and fees collected by CBP upon importation. The drawback may be granted only after the subjected item(s) have been either exported or destroyed (under CBP supervision). In order to receive a Duty Drawback, a Customs broker must file a submission to CBP on behalf of your company. While potentially beneficial, it is important to recognize that the duty drawback process is detailed and may span the course of months before any monetary compensation is retrieved. Some of the required information includes proof of the export or destruction, as well as proof that duty was originally paid. According to CBP, a bill of sale or airway bill is valid proof of export and a CBP Officer must witness the destruction of the goods. Without proof of export or the destruction, the claim is not substantiated.
Duty Drawback is available for Section 301 duties, but not for Section 232 duties; it is unclear that the president had the authority to eliminate drawback for Section 232 duties under his import authority.
Essentially, tariff engineering is a method of altering the HTS classification of an intended imported good to benefit from a lower duty rate. Since CBP can only levy tariffs on the condition of goods as imported, tariff engineering gives importers the opportunity to redefine their imported products and pay lower duties. An importer cannot simply re-classify the exact same good under a different HTS (this would be evasion), rather the imported product must actually embody the qualities of another HTS, which happens to be duty-free.
In order to properly re-classify the imported good, importers should review the HTS chapter of the good and determine whether there is a more appropriate classification that has a lower duty (or even duty-free). Additionally, slight deviations in packaging or how the product is purchased may change the classification of the product. For instance, product components may be imported separately and assembled in the United States; these components would be individually classified under HTSs that may have fallen into an entirely different tariff provision that has a lower duty (or even duty-free).
For the purposes of mitigating Section 232 and 301 tariffs, ensure your new classification is currently excluded from the China Tariff Lists and not subject to an additional 25 percent tariff.
While Tariff engineering exists in a legal gray-zone, Courts have frequently upheld the legality of the process since the 1880s. However, companies attempting to alter their products’ classification have run into problems.
The most notable recent dispute appeared in Ford Motor Company v. United States (2018). The case regarded Ford’s classification of imported vans. While Ford and the courts preceding rulings favor the legality of the company’s decision to modify the interior of the vehicle enough to earn the classification of a passenger van (subjected to a 2.5% ad valorem), and effectively avoiding the tariffs subjected to cargo-vans (subjected to a 25% ad valorem), the court ruled otherwise. This case, as well as other similarly controversial ones, highlight the need for a cautious, concerted effort to both modify the imported good, while fully adhering to US law. DTL has successfully assisted multiple clients in their tariff-engineering efforts, resulting in a legal avoidance of potentially crippling duties.
COUNTRY OF ORIGIN CHANGE
An additional option is to consider relocating operations or your sourcing country, i.e., the product’s country of origin. If a given country has exceptionally higher duties for imports than a comparable third country, move your supply chain to the duty-free nation. While potentially costly to initially relocate, changing the country of origin will allow you to import the exact same item(s) without paying the additional duties. If considering this option, one must be cognizant of the list of nations that have a free-trade agreement with the United States. Even though another nation may not be subjected to substantial duties, shifting your supply chain to a nation that has a formal, free and fair-trade agreement with the US ensures accountability and reliability.
First Sale is a system that decreases the dutiable value of imported goods by authorizing importers to use the price paid in the first sale. It allows an earlier sale to be used in declaring customs value as long as that sale can be documented as a sale for exportation to the United States and the importer meets all other Customs requirements.
Consequently, that equivalent value is assigned according to the transaction between the manufacturer and the middleman not between the middleman and the new buyer. The First Sale benefit is available to all importers that meet the above criteria. We are currently seeing importers subject to China tariffs avail themselves to this duty savings opportunity. Importers subject to high duty rates or high middleman markup and have a cooperative relationship with the middleman would greatly benefit from the First Sale valuation option.
More information on First Sale read our blog on “USING A MIDDLEMAN? LEARN HOW TO LOWER YOUR CUSTOMS VALUE USING FIRST SALE!“
Importers, exporters, and manufacturers should consider this five duty-saving (5) options when negotiating trade deals to mitigate the impact of tariffs, including Section 201, Section 232, and Section 301 tariffs. To assess your specific business and product to determine your duty-saving opportunity, contact our international trade law attorneys at firstname.lastname@example.org or 305-456-3830.