A Potential Game Changer for the Retail Industry
A Potential Game Changer for the Retail Industry
Insight

A Potential Game Changer for the Retail Industry

Leveling the Playing Field for E-Commerce Shipments from U.S. Foreign Trade Zones

With the recent spotlight on global trade tensions, U.S. importers are turning to mitigation strategies such as U.S. Foreign-Trade Zones to reduce costs, realize duty savings and overall supply chain efficiency.

The Foreign-Trade Zones (FTZ) program dates back to 1934 when it was established by the U.S. Department of Commerce as a government policy tool to foster economic development through the promotion of manufacturing activity, job creation, investment and exports. Although physically located within the United States, FTZs are considered to be outside of the U.S. customs territory for customs duty purposes, allowing merchandise to be imported into a FTZ on a duty-deferred basis. Although FTZ inventory may be warehoused or manufactured into another product, customs duties and fees are not payable until the inventory is physically withdrawn from the FTZ and enters U.S. commerce. There are many reasons why many U.S. importers operate or utilize FTZs today, including cash flow savings from deferring duties; reduced customs duties and fees; duty elimination on exported or destroyed FTZ merchandise and decreased Merchandise Processing Fees (MPF) and customs brokerage fees through the use of weekly entry provisions.

In recent years, the rise of e-commerce has transformed the way companies move and sell merchandise globally. Online shopping has become a prevalent source of spending as consumers are choosing to make purchases via the internet rather than shopping in stores. Thus in this new demand-driven environment, companies are looking for ways to deliver their merchandise to customers faster and more efficiently. Many companies who utilize a FTZ have changed supply chain operations from delivering bulk shipments to stores, to fulfilling smaller customer orders placed through an e-commerce platform quickly.

With this shift in consumer shopping trends, companies are increasingly benefitting from 19 U.S.C § 1321, also known as “Section 321” or the “de minimis” entry, a type of informal customs entry, which allows duty-free entry of products under a certain value threshold. Established by the Smoot-Hawley Tariff Act in 1930, the original $1 value threshold was increased to $5 in 1978, and then to $200 in 1993. Two decades later in 2015 under the Trade Enforcement and Trade Facilitation Act (TFTEA), the threshold was raised to $800, where it remains today. This changed was advocated for by express carriers and retailers to help reduce the burdensome administrative, cost and time requirements incurred with traditional formal entries, and was promoted as a way to grow e-commerce.

In adapting to the evolving marketplace, companies utilizing FTZs for warehousing have begun to not only withdraw bulk product to deliver to retail stores across the country, but are also now using FTZs to fulfill customer e-commerce orders. However despite the opportunity FTZ operators thought the increase to $800 would afford them, CBP’s interpretation of the law (as evidenced by ruling H282601 in September 2018), disallows products withdrawn from FTZs from being eligible for de minimis entry.

This prohibition not only gives offshore sellers a competitive disadvantage over U.S. companies, but places the U.S. FTZ program at an existential risk of becoming irrelevant in the future.

Some U.S. companies and trade associations have reportedly joined forces to explore updating the current legislation, with their objective of leveling the playing field between U.S. companies engaging in e-commerce and offshore sellers by allowing de minimis entry from FTZs. Draft legislation to address this challenge is reportedly being circulated to Members of Congress. Reportedly, FTZs would achieve a level playing field with this draft, with overseas warehouses that ship e-commerce products to U.S. customers no longer required to make the payment of customs duties to CBP when the value of each shipment is $800 or less per person, per day.

Whether your company operates a FTZ today, or is considering the implementation of a FTZ, there are certain steps that your company can take to explore whether, if enacted as reported, the potential legislation permitting de minimis entry on withdrawals from an FTZ of less than $800 per shipment, per day would provide a net benefit to your organization.  

To assess whether this opportunity would in fact be a game changer for your organization, take the following preparatory steps today!

  1. Analyze: Work with an advisor to analyze the impact on your supply chain and return on investment if you were able to take advantage of a Foreign Trade Zone and the Section 321 de minimis rule.
  2. Prepare: If the savings are favorable, consider conducting an “FTZ readiness assessment” to review operational and systems aspects of an FTZ implementation to set your company up for a successful implementation.
  3. Execute: Assemble your project team and start your FTZ implementation, as it can take 6 months from start to finish! Pay particular attention to the nuances in data requirements, systems configuration, and operations to meet the Section 321 requirements based on your company’s unique operational complexities.
  4. Collaborate: Stay in touch with the FTZ community to learn about timing and how to prepare for the potential changes.

To learn more on how KPMG is helping organizations improve their supply chains, visit Real Insights for Operations for our latest research, analysis, news and events to help operations executives innovate and drive business growth.  For more information about Foreign-Trade Zones or KPMG’s Trade & Customs practice, please visit:  https://tax.kpmg.us/services/trade-customs.html