By Brent Dawkins
FTZs are one of the oldest tricks in the book. Brought about with the Foreign-Trade Zone act in 1934, savvy companies have been saving money on duties, tariffs, merchandise processing fees (MPF) and more for nearly a century. However, countless companies have avoided FTZs due to government complications.
Like any government program, FTZ management brings lots of paperwork and regulations. However, companies today are finding innovative ways to streamline the FTZ set up and management using new software solutions.
The Benefits of FTZs
Foreign-Trade Zones are areas within the U.S. that are considered outside the U.S. by U.S. Customs and Border Protection for duty purposes. You encounter them at airports and ports-of-entry. They bring a host of benefits, including:
Because FTZs are considered outside U.S. territory, companies do not pay duties on imported goods until they leave the zone and enter the U.S. market. This helps improve cash flow and allows for tax free storage of inventory.
Instead of paying duties on individual imported parts, companies pay duties on finished items entering the U.S. market. Not only does this reduce the number of items which incur duties, but oftentimes the finished product will have a lower duty rate than the individual parts, resulting in even greater savings.
Sometimes products end up being entirely duty free. For instance, say a vacuum: instead of paying 4.3% on the motor and wheels, then 3.4% on the lithium-ion battery, the finished vacuum might incur zero duties.
Merchandise Processing Fee bundling
When goods are imported into the U.S., each import incurs an MPF. This is currently (2022), rated at 0.3464% of the cargo’s value.
- The minimum charge is $27.75.
- Charges are capped at $538.40.
In an FTZ, MPFs can be bundled into weekly fees at a maximum rate of $538.40. For companies with high value or high volume shipments, this can result in massive savings.
Setting up an FTZ
The process can be daunting for those attempting it manually and without expert guidance. Setting up an FTZ requires submitting complex application paperwork to the U.S. Department of Commerce International Trade Administration, paying a $3,200 fee, and even publishing a notice in a local newspaper. Prior to all of this, companies first need to determine if the benefits cover the cost for their unique situation.
Companies are turning to FTZ providers who can perform cost/benefit analyses, submit paperwork, and manage the entire application process. By partnering with FTZ experts, companies gain access to a wealth of experience which streamlines the application process and maximizes the benefits.
Managing an FTZ
Ongoing management of FTZs requires meticulous recordkeeping.
FTZ operators must keep records of all items currently in the zone as well as all items transferring from the zone. These records must specify by zone lot number or unique identifier:
- Location of merchandise
- Zone status
- Cost or value of merchandise
- Beginning balance, cumulative receipts and removals,
adjustments, and current balance on hand by date and quantity
- Destruction of merchandise
- Scrap, waste, and by-products
For tracking inventory leaving a zone, the paperwork trail must be able to demonstrate that the products leaving the zone entered the zone in compliance with U.S. CBP authorized inventory methods. Failure to do so can jeopardize FTZ status and lead to regulatory action.
On top of this, FTZ operators are required to prepare annual reconciliation reports. These reports contain information regarding all merchandise on hand at the beginning of the year, transfers made throughout the year, inventory on hand at the end of the year. They also need to be available at all times for spot checks and audits.
What You Need for Software:
Without the right tools, the management needs of an FTZ can balloon overhead and cut into margins. However, specialized software tools make managing an FTZ drastically easier. Here are a few features to look for in FTZ management software:
1. Integration with CBP’s ACE system
CBP’s ACE system is the means by which the trade community enters import and export data as well as interacts with CBP personnel. When looking for FTZ management software, it’s imperative to make sure that the software’s inventory control and record keeping system (ICRS) integrates with ACE. Otherwise operators will be duplicating work and spending excess time on reporting. Operators can extend the power of ACE with automated country code updates, HTSUS updates, Lacey Act APHIS declarations, and much more.
2. Proactive notifications
FTZ software can send notifications and alerts regarding upcoming reports and CBP deadlines. The most innovative solutions will allow for user customization to send emails, texts, and reports to the appropriate personnel, ensuring that all parties are up to speed and ready for whatever’s next.
3. Advanced built-in reporting
Having visibility over operations shouldn’t mean scrolling through endless spreadsheets. Using built-in reporting features, FTZ software allows operators to quickly visualize the flow of inventory. Furthermore, this built-in reporting helps operators ensure audit readiness at any time by storing documents and backing up all data.
Old tricks, new methods
Sometimes, the best way forward isn’t blazing a new trail, but learning to travel well-worn paths in new ways. For nearly a century, FTZs have been a readily available way for U.S. companies to obtain massive savings and enhance supply chain operations, but this path looked daunting. Today, companies can travel the path easier than ever by partnering with FTZ software providers and experts to be on their way to finding a competitive advantage.
Brent Dawkins is product marketing director at QAD, an industry-leading provider of global trade and transportation execution solutions.