Advantages of The Foreign Trade Zone

I received an invitation through the Long Island Importers and Exporters Association to take a tour of Long Island’s Foreign Trade Zone (FTZ), known as the “Town of Islip/Foreign Trade Zone 52.”

Created in 1934, the FTZ program was established to stimulate domestic economic growth and development through the promotion of American competitiveness by encouraging companies to maintain and expand their operations in the United States.

The FTZ program encourages U.S.-based operations by removing certain disincentives associated with domestic manufacturing.

What is an FTZ?

FTZs are secure areas under U.S. Customs and Border Protection supervision that are generally considered outside CBP territory upon activation. Located in or near US Customs ports of entry, they are the United States’ version of what are known internationally as free-trade zones.

Under zone procedures, the usual formal US Customs entry procedures and payments of duties are not required on the foreign merchandise unless and until it “enters” the territory of the U.S. for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product (in the event the original goods have now been assembled into a completed different product).

The duty on a product manufactured abroad and imported into the U.S. is assessed on the finished product rather than on its individual parts, materials, or components. The U.S. based manufacturer finds itself at a disadvantage compared with its foreign competitor when it must pay a higher rate on parts, materials, or components imported for use in a manufacturing process.

The FTZ program seeks to correct this imbalance by treating products made in the zone, for the purpose of tariff assessment, as if it were manufactured abroad. At the same time, the United States benefits because the zone manufacturer uses U.S. labor, services, and inputs.

Another benefit is that domestic goods moved into an FTZ for export may be considered exported upon admission to the zone for purposes of excise tax rebates and drawback. Goods may also be exported from the zone free of duty and excise tax after being reworked or merely being warehoused there temporarily.

US Customs is responsible for the transfer of merchandise into and out of the FTZ and for matters involving the collection of revenue. The local US Customs Port Director, in whose port a zone is located, is charged with the oversight of zone activity and enforcement as the local representative of the Foreign-Trade Zones Board. The Port Director controls the admission of merchandise into the zone, the handling and disposition of merchandise in the zone, and the removal of merchandise from the zone.
For more information, you can click here and/or contact these offices below directly:

U.S. Department of Commerce
Foreign-Trade Zones Board
1401 Constitution Avenue, NW, Room 2111
Washington, D.C. 20230
Main Phone: (202) 482-2862
(Foreign-Trade Zones Board )

CBP Regulations, 19 CFR Part 146, govern the transfer of merchandise to and from foreign-trade zones. For answers to specific questions contact the Port Director of the CBP port where the zone is located or CBP headquarters at:

U.S. Customs and Border Protection
Office of Field Operations
Cargo and Conveyance Security
1300 Pennsylvania Avenue, NW, Room 5.2C
Washington, D.C. 20229

Questions/comments? Post below or email me at clark.deanna@gmail.com

What is a Foreign Trade Zone?

The question of placing certain imports or exports into a foreign trade zone (FTZ) occasionally arises in my international trade practice. While conceptually I understand its purpose, I decided to explore the “ins and outs” of it to better understand why they exist.

An FTZ is a customs supervised zone that is considered outside the Customs territory. Therefore, requirements that would normally be applied to imports are suspended as long as the goods remain in the zone. In an FTZ duty payment is deferred on imports which are later entered and sold in the U.S. market, and for those that are re-exported, duty-free treatment is allowed.

It is also a zone for which an export may be placed in while certain legal requirements are met. An example of this would be where military jeeps are delivered to the port for exportation to the army of a foreign government, but is still in need of a verification by Customs of the requisite export licenses.

Other advantages of using an FTZ include what is known as “inverted tariff relief,” which occurs when imported parts with a higher duty rate are incorporated into a final product which has a lower duty rate than the parts themselves and is ultimately imported. Likewise, merchandise imported and held in an FTZ for repacking, assembly, storage, exhibition, sorting, grading, mixing, manufacturing, cleaning or processing can be held in a zone for exportation, either in its original state or after undergoing one of these processes and is exempt from State and local ad valorem taxes.

There are 2 types of FTZs: (1) A “General Purpose” zone whose facilities are available for use by the general public and are typically located in a port complex, raw land or an industrial park, and (2) a “Subzone,” which is a single purpose site that allows for operations that cannot be feasibly moved to, or accommodated in, a general purpose zone, such as automobile manufacturing or oil refineries.

Interestingly, despite the ability to undergo the above activities on goods placed in the zone, certain other operations may not be done in an FTZ. These include, the manufacture of watch and clock movements, as well as the manufacture of products subject to internal revenue tax including sugar, tobacco, alcoholic beverages and perfumes containing alcohol, to name a handful of them.

In order for products to be admitted into a zone, Customs Form 214, or its electronic equivalent, must be completed and a permit granting admission is issued by the Port Director. Only a person with a right to make entry of the goods is allowed to make an application for zone admission, however, with a proper power of attorney on file, a Customs broker or zone operator may prepare and/or file the application on that party's behalf.

Along with Form 214, a filer must submit evidence of a right to made entry, the commercial invoice(s), a Release Order (executed by the carrier which brought the goods to the port), an application to unlade (Customs form 317), and any other documentation required by the Port Director.

Customs approves most low-risk shipments without an examination of the cargo, however it may conduct an exam to ensure full compliance with all applicable rules and regulations or to reduce the need for further examination at the time when the goods are entered into the US Customs territory for consumption or into a warehouse.

In certain cases direct delivery of the goods into an FTZ without a prior application (Form 214) may be done provided a written application is made with the appropriate port director at least 30 days before it is to be effective, and provided a description of the merchandise and the type(s) of processing that will be undertaken in the zone are explained.

Merchandise cannot be subject to Customs examination or documentation review prior to its arrival at the zone nor be of the type that is restricted. The FTZ operator must be the owner of purchaser of the goods, and the operations to be conducted must not only be known in advance, but also should be stable and predictable over the long term.

When the merchandise is ready to leave the zone for U.S. consumption, normal entry, classification and appraisement procedures covering foreign merchandise are used. For answers to specific questions, you should contact the local Port Director where the zone is located. US Customs has more than 300 ports of entry in the US, Puerto Rico and the US Virgin Islands.

Authority for establishing an FTZ is found in the Foreign Trade Zone Act of 1934, as amended (19 USC 81a-81u). The regulations governing the Foreign Trade Zones Board are published in 15 CFR Part 400, and US Customs regulations governing zone operations may be found in 19 CFR Part 146.

Questions/comments for me? Post below or email me at clark.deanna@gmail.com

ISF (“10+2”) Enforcement Begins 1/26/10 – Updates Given at JFK Quarterly Broker's Meeting

To date:
- Over 4.5 million ISFs have been filed
- Over 2100 filers have participated
- There has been a 95% acceptance rate across filings
- 85% of ISFs are submitted through ABI
- 12% of ISFs are submitted through AMS

On Thursday I attended the quarterly Customs Brokers meeting at JFK which provided updates on matters under US Customs (CBP) , US Dept. of Agriculture (USDA), and the Food and Drug Administration’s (FDA) jurisdiction.

The topic everyone wanted to hear about was provided by Joe Mortella from US Customs, who has been giving seminars on 10+2 throughout the New York port area and possibly beyond. He gave a detailed update on the Importer Security Filing (ISF) [19 CFR Part 149], the enforcement of which begins next week on January 26, 2010.

Also known as “10+2,” this refers to the filing of data elements (for ocean cargo) no later than 24 hours before the cargo is laden on board a vessel at the foreign port.  [See my Sept. 29, 2009 blog post for more information]

Mr. Morella stated that the enforcement of 10+2 will be a graduated one for the first 6 months, with warnings being issued to those who are non-compliant. During the first 6 months, there are no current plans to issue liquidated damages (a rule that is subject to change), and for the first year, all penalty and liquidated damages claims will be reviewed by Customs Headquarters. For those entities that are already in compliance, Mr. Morella indicated his belief as to a “seamless transition” for those parties, once the enforcement period begins.
 
An update to the Lacey Act and its amendments under the Food and Conservation Act of 2008 was also provided. These amendments mandate the identification and declaration of various elements about imported plants and plant products, including its scientific name, genus, species and country of origin.  These elements must be declared at the time of importation on CBP Form 505, or through Customs’ Automated Broker Interface (ABI).
 
Enforcement of this declaration began in April 2009, however Customs expressed that it has not been, nor plans to, hold up shipments where a CBP Form 505 has not been submitted.  The reason for this, we were told, is because the USDA is the agency responsible for investigating unsubmitted or incorrect information, and therefore that agency would be the one to prosecute violations.
 
Joanne Alba Foster, a USDA supervisor at JFK airport’s Plant Inspection Station (and Plant Protection Quarantine) invited the trade community to contact either herself or, another supervisor, Victor Jacobson, both at (718) 553-3500, with any questions relating to issues involving the Lacey Act, including:

- Propogated material
- Bio-tech regulatory services permits
- Plant pest products, or
- Phyto-sanitary certificates (for exports)
 
Moving onto the FDA, John Moore advised the trade community to pay close attention to the labels on shipping boxes to ensure compliance with the federally regulated cosmetics, drugs, and nutritional acts, as non-compliant labels are a major cause of delays and detentions.
 
Mr. Moore specifically mentioned that he wanted to dispel what he called, the “urban legend,” that there was a “50 Mile Radius” rule when it came to moving cargo off of the pier to be held for an FDA inspection.  He said that as long as cargo was under a bond, it could be moved to a warehouse or the importer’s designated facility (which may be at a location more than 50 miles away from the port) rather than staying on the pier and accruing demurrage. 

Curiously, when answering a broker’s question, John Moore of the FDA, said that should the cargo be moved outside of the port’s territory, in this case, the example was specifically to Boston, that due to the distance, if they were unable to get another FDA office to do the inspection for them, that they (his FDA office) would have to decide if an inspection “was really necessary,” and might decide in the end that it was not necessary to do so given the time and manpower it would take to conduct an inspection at a distant location.

Lastly, Mr. Moore said that routine assessments for compliance with ISF filings (“10+2”) were being conducted on paperless filers.  For those filers with an error rate of 11%, corrective action plans were done together with him personally, and thereafter an assessment of the corrective action plan was later done.  He invited the trade community to email him with questions about ISF Filings and corrective actions at john.moore@fda.hhs.gov.

Questions/comments? Post below or email me at clark.deanna@gmail.com

Court Finds that US Customs Abused its Discretion

It is not often publicly stated that US Customs abused its discretion.

In an opinion dated December 15, 2009, this is precisely what Judge Jane Restani of the U.S. Court of International Trade (USCIT) stated in her decision in the case of Delphi Petroleum, Inc. v. the United States (Slip Op. 09-139).

This case deals with Customs denial of an extension of time for Delphi to file a drawback claim on certain petroleum products it imported, and then exported, as finished petroleum derivatives which qualified as an acceptable substitute. It was undisputed by Customs that Delphi was entitled to drawback of 99% of the duties it paid on these petroleum products under 19 USC 1313(p), which is a specific provision dealing with finished petroleum derivatives.

Drawback, under 19 USC 1313(j), is the repayment of duties on previously imported products that are used in the manufacture or production of “commercially interchangeable” goods that are subsequently exported or destroyed.

Under 19 USC 1313(r)(1), a drawback claimant has three years from the date of exportation or destruction of merchandise to file a drawback claim. The final clause of this statute states that “no extension [of the 3 year filing limit] will be granted unless it is established that Customs was responsible for the untimely filing.

The USCIT found that Customs' failure to extend the time for Delhi to file its claims to that of when it ultimately did so during the post-liquidation protest period, was an abuse of discretion for the following reasons.

First, despite the statute providing for an extension, Customs had yet to create and publish a regulation that indicated the circumstances or protocols that would apply to an extension request where Customs actions caused a claim to be delayed. Therefore, requesting one was an impossibility as no administrative procedure existed for a claimant to do so. Citing Alyeska Pipeline Serv. Co. v. United States, 643 F.Supp. 1128 (CIT 1986) (which, under a non-drawback claim, permitted a Protest where Customs made the filing impossible), the USCIT found that Customs agreed that where Customs makes a filing “impossible,” an extension should be granted.

Secondly, Delphi sought clarification as to how to effectuate the proper procedure for an extension – to no avail. Ultimately, it relied upon the advice of the Port of New York's Supervisory Drawback Liquidator who explained a procedure to follow in light of the regulations not permitting the claims.

Though indicating its willingness to present complete claims, Delphi was instead told not to present the claims until other events occurred, namely, liquidation at which time a Protest could be filed. Specifically at issue was Delphi's exclusion of an application for drawback on harbor maintenance taxes (HMT) and merchandise processing fees (MPF) in its drawback claims, which the supervisor had advised Delphi to exclude from its application pending a resolution under the case of Texport Oil Co. v. United States, 185 F.3d 1291, 1296 (Fed. Cir. 1999).

When further inquiries were made by Delphi regarding the sufficiency of its drawback claims, that correspondence was subsequently routed to the same Supervisor, who agreeing with his own advice, provided no response in return to Delphi.

The USCIT therefore held that “[i]n light of these facts, under 19 USC 1313(r)(1), Customs [wa]s deemed responsible for Delphi's delayed HMT and MPF filings because Delphi had no clear administrative path to follow and a responsible official unknowingly misled Delphi as to the proper course.”

Any noncompliance was therefore Customs responsibility.

As an aside, this case involved five drawback claims which were filed between 1998 and 2002. While the full amount of duty drawback was refunded in May 2003, it's taken more than 8 years for Delphi to recover the HMTs and MPFs for these claims, and I can't help but wonder if the benefits of this decision outweigh the costs of obtaining it – in terms of both manpower and dollars.

Any thoughts? Feel free to write me at clark.deanna@gmail.com or post your comment below.