There are a number of duty savings strategies companies can use to conserve cash, lower customs duties and tariffs, and seek refunds. These strategies are always a high priority for businesses involved in international trade, but particularly so in the current environment. This is another in ST&R’s series of articles examining these strategies in more detail and covers the use of foreign-trade zones. Other articles address the first sale rule, transfer pricing, and Section 321 duty exemptions.
FTZs are designed to help businesses reduce production, transaction, and logistics-related costs by lowering effective duty rates, allowing special entry procedures, and encouraging production closer to market.
An FTZ is a defined physical area within the U.S. that, for customs entry purposes, is treated as being outside U.S. borders. In FTZs companies can use special customs procedures that allow domestic activity involving foreign items (assembling, exhibiting, cleaning, manipulating, manufacturing, mixing, processing, relabeling, repackaging, repairing, salvaging, sampling, storing, testing, displaying, and destroying) to take place prior to formal customs entry.
FTZs generally consist of two different types of sites: magnet sites, which are usually located at ports or industrial parks, provide leasable space to users in general warehouse-type buildings with access to various modes of transportation, and are open to multiple zone operators; and subzones and usage-driven sites, which are approved for a specific company or use (in as little as 30 days).
U.S. Customs and Border Protection handles the day-to-day monitoring of FTZ activity. A site that has been granted zone status may not be used for zone activity until it has been separately approved for FTZ activation by local CBP officials. Goods are admitted into a zone on CBP form 214 (import licenses or permits from other government agencies may still be required) and removed through CBP entry or transportation under bond procedures. Goods in an FTZ are under CBP control, and goods and zone records are subject to spot check and other verifications.
Goods imported into an FTZ and subject to allowable operations are not subject to duty if they (or the products they are used to make) are exported to other countries. If such goods are sold in the U.S. instead, duty payment on the imported components is deferred while they are in the zone, and once the goods enter the U.S. market users can normally choose the lower duty rate between the imported component and the finished product.
Goods may be transferred from one FTZ operation to another under customs bond (i.e., without duty payment), meaning a foreign-status component may be used in one FTZ operation to manufacture a product that is transferred to another, at which time that product could be used as an input to make a downstream product. That downstream product could then be shipped to the U.S. market, exported, or transferred under customs bond to a different FTZ operation. Unless the original foreign-status component is admitted in privileged foreign status, the applicable duty rate payable on the value of the component would be based on the classification of the goods ultimately shipped to the U.S. market.
Other FTZ benefits include access to streamlined customs procedures such as weekly entry (which can lower merchandise processing fees) or direct delivery, exemption of foreign goods and domestic goods held for export from state and local inventory taxes, no duty on foreign-status components that become scrap or waste, deferral or reduction of duties on foreign-status production equipment, and possible eligibility for other state and local benefits.
If FTZ activity results in a change in HTSUS classification at the six-digit level for the imported good or otherwise results in substantial transformation or a change in eligibility for entry, production authority from the FTZ Board is needed to conduct that activity under zone procedures (and generally takes 120 days to secure). Production can include traditional manufacturing activities as well as kitting or assembly operations.
There are some restrictions associated with FTZs. Goods that cannot lawfully be imported into the U.S. are prohibited from entering an FTZ. Placing goods subject to a quota into an FTZ cannot circumvent that quota, though such goods can be placed into a zone until the quota opens. Goods whose storage and handling is regulated by federal agencies (e.g., explosives) may be excluded, and products such as alcoholic beverages that are subject to an internal revenue tax may not be manufactured in a zone. Agencies that license importers or issue importation permits may block FTZ admissions that are not properly licensed or permitted.
The FTZ Board may exclude from a zone any goods judged detrimental to the public interest, health, or safety. It may also place restrictions on certain types of goods that would limit the zone status allowed, the kind of operation on the goods in a zone, the entry of the goods into U.S. commerce, or similar transactions or activities.
Is an FTZ Right for You?
FTZs aren’t feasible for every business model, and different types of FTZ arrangements may be suitable for different circumstances. ST&R’s experience and expertise allow it to review a company’s operations, determine the best FTZ-related options, and then guide the company through all the necessary steps. ST&R also keeps a close eye on developments that can affect zone operations.
For more information on how FTZs can benefit your business, please contact attorney Scott Taylor at (212) 549-0153 or via email.
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