Companies importing products into the U.S. have faced an increased number of challenges over the last several years, from supply chain disruptions to higher tariffs and other trade barriers. This has led many companies to look for ways to source their products from other countries and minimize their tariff burden.
For example, let's say a company is importing a product from China. That product has a tariff classification that subjects it to a 5% import duty. The company later discovers that the product is on a China tariff list that subjects it to an additional 25% tariff. The cost of the product has now increased by 30%. Additionally, the product could be subject to import controls, such as forced labor protections, or other trade barriers.
Keep reading for options companies have to address these issues.
One of the first questions an importer should ask is whether its product is correctly classified for tariff purposes. When goods are imported into the U.S., they are subject to certain formalities involving U.S. Customs and Border Protection (CBP). In almost all cases, the goods are required to be "entered," that is, declared to the CBP. As part of the entry process, goods must be "classified" in the Harmonized Tariff Schedule of the United States (HTSUS) and their customs value determined.
Classification of a product takes into account a number of factors, including the product's description; ingredients or component parts and the percentages of each; principle use of the product; and its commercial, scientific, technical or common name or designation.
Classifying goods under the HTSUS is important for a number of reasons and because it determines whether the product is subject to an import duty (say 3-5%) or is duty free, and whether it is subject to higher tariffs (China tariffs, for example). Classification also determines whether the goods are subject to quotas, restraints, embargoes or other restrictions.
If the product is correctly classified, could a change in a product's composition or weight, for instance, subject it to a tariff classification with a lower duty? This is a form of duty mitigation known as tariff engineering.
Tariff engineering involves analyzing the steps and component parts used in a manufacturing process. This includes looking at whether parts can be purchased from more than one country; whether it is more cost-effective to import component parts from separate countries and manufacture domestically; or whether it possible to change the nature of the product through a manufacturing process.
One of the most often-cited examples is Converse sneakers. Converse designed their shoes to add a layer of felt to the soles. This allowed them to reclassify their product as a slipper and lower their duty rate from around 40% to 3%.
Proceed Cautiously When Re-Classifying a Product
While companies do not need permission from CBP to change classification of a product, they should be cautious. The importer of record is responsible for using "reasonable care" to properly classify merchandise and provide information necessary to enable the CBP to assess the correct duties. While a different classification could result in substantial duty savings, it could also lead to seizure and substantial penalties if an incorrect classification denies the U.S. duties it would be otherwise owed.
To assist in meeting the reasonable care requirement, importers may request binding administrative rulings from the CBP, or may use the services of an expert in customs law and procedures. Rulings are binding at all ports of entry unless later modified or revoked by CBP. A formal process is also available for challenging the classification of previously imported products.
Country of Origin
If the product has a high tariff or is difficult to import due to supply chain disruptions, can you source your product elsewhere and claim a different country of origin? Like a product's classification, its country of origin can affect the rate of duty. It can also affect the product's eligibility for special programs, admissibility, quota, procurement by government agencies, and marking requirements.
"Country of origin" is defined as the country of manufacture, production, or growth of any article of foreign origin entering the U.S. The country of origin is the country where the article last underwent a "substantial transformation." This occurs when an article emerges from a manufacturing process with a name, character, and use that differs from the original material subjected to the processing.
However, if the manufacturing or combining process is merely a minor one that leaves the identity of the article intact, a substantial transformation has not occurred. In order to determine whether a substantial transformation occurs when components of various origins are assembled into completed products, all factors such as the components and manufacturing processes are considered in determining whether a product with a new name, character and use has been produced.
Like classification rulings, an importer may submit a ruling request on a product's country of origin.
If a company cannot lower its tariff burden through a different classification or change in country of origin, it may want to consider utilizing Foreign Trade Zones or Custom Bonded Warehouses to defer the cost of duties.
Foreign Trade Zone
Foreign-Trade Zones (FTZ) are secured, designated sites in or near a U.S. Customs Port of Entry. FTZs are unique in that they are areas within the U.S. that the government considers to be outside of U.S. customs territory.
Because of this, merchandise of certain types can move through an FTZ without first having to travel through formal customs entry procedures, including import duties. Since customs duties are due only at the time of transfer from the FTZ for U.S. consumption, if merchandise never enters the U.S. commerce, then no duties are paid. In other words, payment of duties are due only upon entry into U.S. territory.
Foreign and domestic merchandise may be moved into zones for operations including storage, exhibition, assembly, manufacturing, and processing. However, any manufacturing or processing that results in a change of the tariff classification must be specifically approved by the FTZ Board.
A key benefit of the FTZ is that the zone user who plans to enter the merchandise for consumption into U.S. territory 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 lower.
Unlike FTZs, bonded warehouses are within U.S. customs territory. A customs bonded warehouse is a building or other secured area in which imported merchandise may be stored without payment of duty for up to 5 years from the date of importation. The duty is payable prior to release at the rate in effect at the time of withdrawal.
Services such as repackaging, sorting, or labeling may be performed but only under the supervision of the U.S. customs officials. Manipulation of merchandise is generally prohibited without advance permitting from the port director.
There are 11 different classes of bonded warehouses, designated according to ownership of the merchandise and operations to be performed. An applicant seeking to establish a bonded warehouse must make written application to the local CBP port director of the nearest port describing the premises, giving the location, and stating the class of warehouse to be established.
As companies continue to face hurdles in importing materials into the U.S., a review of all available options to reduce costs or work with potential supply chain issues can reap significant benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.