Getting the Most Out of Foreign Trade Zones
When I first started working in logistics, I heard a horror story about what can go wrong when a single detail is missed in a given transaction.
A classic-car collector found his dream car in Europe after many years of searching and bought it for several million dollars. When shipping the car to the United States, it was not properly stored aboard the vessel, and when the car arrived in the U.S., it was completely rusted and destroyed because rain and seawater seeped into the container during the voyage.
While losing a multi-million-dollar car is bad enough, imagine realizing that, on top of everything else, you still had to pay import duties on the car.
If your organization imports inventory that exceeds its current purchase orders, or imports parts from around the world that are then assembled here in the United States, you may, like the man with the exotic car, be wasting money on customs duties.
Any business that imports products should investigate the benefits offered by taking advantage of Foreign Trade Zones (FTZs).
As Leigh Ryan, the World Trade Center Savannah Director of Trade Services and Foreign Trade Zone 104, explained: “In today’s uncertain trade and political climate, FTZs offer importers greater stability. The FTZ program expedites and encourages foreign commerce by lowering the costs of U.S.-based operations engaged in international trade, providing a secure, efficient, and profitable way to compete effectively in domestic and global markets.”
So How Do FTZs Work?
Subject to certain exceptions, foreign and domestic merchandise “may, without being subject to the customs laws of the United States,” be “brought into [an FTZ] and may be stored, sold . . . otherwise manipulated, or be manufactured… and be exported, destroyed, or sent into customs territory.” 19 U.S.C. § 81c(a). “Merchandise from foreign countries stored within an FTZ is not subject to United States customs duties so long as it remains in the FTZ.” U.S. v. 4,432 Mastercases of Cigarettes, More Or Less, 448 F.3d 1168, 1173 (9th Cir. 2006).
For businesses that stock large inventories of imported goods, this is a huge potential benefit: The rule allows a company to store inventory in a nearby FTZ until it is sold, and use the profits from those sales to offset import duties.
If your businesses imports products that are further assembled in the United States, there is an even more attractive benefit: “[t]he rate of duty and tax on the merchandise admitted to a zone may change as a result of operations conducted within the zone,” and the zone user “may normally elect to pay either the duty rate applicable on the foreign material placed in the zone or the duty rate applicable on the finished article transferred from the zone whichever is to his advantage.” United States Customs and Border Protection Agency, About Foreign-Trade Zones and Contact Info, cbp.gov.
Recently, a number of businesses have announced plans to reintroduce manufacturing in the United States. To the extent the end products being manufactured will require parts imported from other countries, manufacturing within an FTZ could allow the business to choose whether to pay import duties on the parts individually or on the final product.
An older case demonstrates how a business might use an FTZ to its advantage. Hawaiian Indep. Refinery v. U. S., 460 F. Supp. 1249 (Cust. Ct. 1978). The issue in the case was whether foreign crude oil brought into an FTZ was subject to customs duties when the oil was never exported, but instead used to keep a refinery within the FTZ operational. Id. at 1250.
U.S. Customs required the plaintiff to file “consumption entries” and pay corresponding duties for the oil used to run its refinery. The plaintiff protested, arguing that the oil was nondutiable “because it never entered customs territory.” Id. The court agreed with the plaintiff, and found that because the “merchandise never physically entered the customs territory of the United States, it, indeed, would follow that the merchandise is not subject to duty while remaining within the trade zone.” Id. at 1254.
While it is not a simple task to navigate the statutes and regulations that control FTZs, if you do not investigate whether using these zones can help your business, you may be leaving money on the table.