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Addressing Potential Tax Impacts of FTZ Actions is Focus of New Guidance

Tuesday, November 29, 2016
Sandler, Travis & Rosenberg Trade Report

The Foreign-Trade Zones Board has posted to its website the following guidance on addressing the potential tax impacts of designating FTZ sites.

In certain states there are taxes for which collections can be affected through FTZ Board actions to designate FTZ sites. When proposed FTZ designation of a particular parcel of land could result in a reduction in revenue collected locally for such a tax, the FTZ Board requires the applicant to address the potential impact by (1) explaining the specific local tax(es) for which collections would be affected, (2) including a letter from the FTZ grantee containing a certified list of all affected parties, and (3) including copies of correspondence from all affected parties indicating concurrence or non-objection to the proposed FTZ designation.

No concurrence or non-objection needed. The guidance states that no concurrence or non-objection is needed in those circumstances in which tax revenues will not be reduced as a result of FTZ designation.

For example, there may exist a state constitutional provision or other state/local legal provision that provides an exemption from ad valorem inventory taxes within a state in circumstances unrelated to the FTZ program (e.g., a “freeport” exemption for goods shipped into the state and then back out within a certain period of time). To the extent that all goods that would be stored in a proposed FTZ site would be already exempt from such taxes, the guidance states, FTZ designation and the subsequent use of FTZ procedures at the site would have no impact on such taxes payable on the goods and there would therefore be no affected parties whose concurrence or non-objection would be needed for the application requesting FTZ designation.

The application would, however, need to explain fully the exemption or provision under which all goods to be stored at the proposed FTZ site would be already exempt. In addition, the FTZ user would need to include in its agreement with the grantee a provision that constitutes a binding commitment to limit its FTZ use to storage of exempt goods. The grantee would also need to confirm in its application to the FTZ Board that it would take any necessary steps to ensure that use of the proposed FTZ site would be limited to storage of exempt goods.

The guidance also states that no concurrence or non-objection is needed if the FTZ user will not claim the FTZ-related tax reduction or will make other payments to the potentially affected party(ies) to offset fully any such reduction. In those circumstances the grantee would need to (1) include in its agreement with the FTZ user a provision that constitutes a binding commitment by the user not to claim the FTZ-related tax reduction or to make fully offsetting payments, (2) explain this contractual commitment fully in its application to the FTZ Board, and (3) confirm in its application that it would take any necessary steps to enforce that commitment.

Timing and content of concurrence or non-objection. The guidance states that when correspondence indicating concurrence or non-objection is required, an affected party may issue it with respect to a specific parcel(s) of land at any point, including prior to the identification of any specific company(s) that might seek to use FTZ procedures at that location. That correspondence can then be used for an application to the FTZ Board if and when the need actually arises for FTZ designation at that location.

In addition, an affected party may express its concurrence or non-objection to FTZ designation for a specific parcel(s) of land within its jurisdiction, a larger subset of its jurisdiction, or the entirety of its jurisdiction. Such documentation can then be used at any point when the need for FTZ designation might arise at the affected location(s).

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