2 Tariff avoidance strategies you probably aren't considering

​During the last tariff riff in 2018, I had the pleasure of working with a value-add distributor managing through the process on a huge variety of categories. This company had the foresight to set up a FTZ, something I had never heard of before. It seems relevant to discuss this strategy today.

​In the intricate landscape of international trade, many companies remain unaware of strategic tools like the First Sale Rule and Foreign-Trade Zones (FTZs), which can significantly mitigate tariff impacts. A 2009 report by the U.S. International Trade Commission revealed that only about 2.4% of total U.S. imports utilized the First Sale Rule, with 8.5% of importing entities applying it. While more recent data is limited, these figures suggest that a substantial number of importers may not be leveraging available duty-saving mechanisms.

What Are They?

First Sale Rule: This strategy allows importers to base customs duties on the price paid at the initial sale (e.g., between the manufacturer and a middleman) rather than the final price paid upon entry into the U.S., potentially lowering duty liabilities. ​USITC

Foreign-Trade Zones (FTZs): FTZs are secure areas within the U.S. where imported goods can be stored, handled, or manufactured without immediate customs duties. Duties are applied only when goods enter U.S. commerce, allowing for deferral, reduction, or elimination of duties.

Who Can Use These?

First Sale Rule:

To leverage the First Sale Rule, importers must meet specific conditions:​

• Multi-Tiered Transactions: Involve at least two sales prior to importation—typically from the manufacturer to an intermediary, and then to the U.S. importer.​Sandler, Travis & Rosenberg, P.A.+2Cozen O’Connor+2USITC+2
• Arm's Length Transactions: Ensure that each sale is conducted independently, with pricing reflective of market value.​Cozen O’Connor
• Goods Destined for the U.S.: Demonstrate that the merchandise is explicitly intended for export to the United States.​
• Comprehensive Documentation: Maintain detailed records, including contracts, invoices, and proof of payment, to substantiate the transaction values.​Cozen O’Connor

Not all transactions qualify. For instance, direct sales from a manufacturer to a U.S. importer without an intermediary do not meet the multi-tiered requirement.​

Foreign-Trade Zones (FTZs):

Eligibility to operate within an FTZ involves:​

• Location Proximity: Sites must be within or adjacent to U.S. Customs and Border Protection (CBP) ports of entry, typically within 60 miles or a 90-minute drive.​Crowley
• Approved Activities: Permissible operations include assembly, manufacturing, storage, and processing. Retail activities are generally prohibited.​Crowley
• Regulatory Compliance: Adherence to federal, state, and local regulations is mandatory, and certain goods may require additional permits or licenses.​

Companies unable to meet these criteria or those dealing with prohibited merchandise may not qualify for FTZ benefits.​

Pros and Cons

First Sale Rule:

Pros:

• Duty Savings: Lower declared customs value can result in reduced duties.​USITC
• Competitive Pricing: Cost reductions can be passed to consumers, enhancing market competitiveness.​

Cons:

• Complex Documentation: Requires meticulous record-keeping and verification of transaction legitimacy.​
• Regulatory Scrutiny: Potential for increased audits to ensure compliance with CBP regulations.​

Foreign-Trade Zones:

Pros:

• Duty Deferral or Elimination: Duties are deferred until goods enter U.S. commerce; re-exported goods may be exempt.​
• Operational Flexibility: Enhanced inventory control and streamlined logistics.​

Cons:

• Initial Setup Costs: Establishing and activating an FTZ requires investment in time and resources.​
• Ongoing Compliance: Continuous adherence to complex regulations and reporting requirements is essential.​

So You Want to Investigate Implementing At Your Company?

Steps on the First Sale Rule:

1. Assess Supply Chain Structure:

Evaluate existing transactions to identify opportunities where the First Sale Rule may apply.

1. Engage Stakeholders:

Collaborate with suppliers and intermediaries to ensure they understand and support the documentation requirements.

1. Document Transactions:

Collect and maintain all relevant documents, including purchase orders, invoices, and proof of payment, to substantiate the first sale value.

1. Consult with Trade Experts:

Seek guidance from customs attorneys or consultants experienced in First Sale Rule applications to navigate complexities and ensure compliance.

1. Implement and Monitor:

Begin declaring the first sale value on customs entries and establish internal controls to monitor compliance and address any issues promptly.

Foreign-Trade Zones:

1. Determine Feasibility:

Conduct a cost-benefit analysis to assess potential savings versus the expenses associated with establishing and operating within an FTZ.

1. Identify Suitable Location:

Select a site that meets proximity requirements to CBP ports of entry and aligns with logistical needs.

1. Apply for FTZ Designation:

Submit an application to the Foreign-Trade Zones Board, detailing the intended activities and compliance measures.

1. Activate with CBP:

Upon approval, coordinate with local CBP officials to activate the zone, ensuring all security and inventory control requirements are met.

1. Establish Operational Procedures:

Develop and implement processes for inventory management, record-keeping, and reporting to maintain compliance with FTZ regulations.

By thoroughly understanding the eligibility criteria, weighing the pros and cons, and following a structured implementation process, businesses can effectively utilize the First Sale Rule and Foreign-Trade Zones to optimize their import operations and achieve significant cost savings.

Balancing Cost Savings and Pricing Strategies:

Even when companies successfully implement these cost-saving measures, the decision to pass on savings to customers requires careful consideration. Regardless of pricing strategy, these two cost-saving tools are available and may be worth further consideration for your company.