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Duty-Free DTC: The Pros, Cons and Outlook for the De Minimis Provision

As the direct-to-consumer fulfillment model is taking off courtesy of changing shopping behavior and Covid-19, so too is the use of the de minimis provision.

Packages that are being sent to an individual can be eligible to avoid duties provided they fall within the de minimis value for the destination country. In 2016, the United States raised its de minimis threshold from $200 to $800, creating one of the most generous tariff-free policies for low-value shipments.

Using de minimis, outlined in Section 321 of the Tariff Act of 1930, to bring merchandise into the country can save companies money and drive sales volumes by passing along lower retail prices to consumers. As of 2019, about 1.8 million shipments per day were being released by U.S. Customs and Border Protection (CBP) via Section 321, with most entering the country via air or truck.

“This is the future. You’re already seeing brick-and-mortar stores shift from holding inventory, paying property taxes, paying inventory taxes, paying carrying costs, building leases,” said Steve Story, executive vice president, customs and international trade at Apex Logistics International, Inc. “They’re going direct. It’s only going to increase every month from here on out.”

In response to the volume of packages entering the U.S. this way, CBP has created new tools and processes. As of September 2019, the agency began testing Entry Type 86, which allows an importer or customs broker to electronically file an informal entry for a Section 321-eligible shipment via CBP’s Automated Commercial Environment (ACE).

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Importing goods via the de minimis provision comes with the added benefit of speed. Story estimates that end-to-end transit times are typically between four to seven days for manifest release and three to five days for Entry Type 86.

Direct-to-consumer shipments can also help companies have a pull rather than push inventory strategy, allowing demand to dictate what merchandise moves where. “Being able to fulfill orders from your origin only with the products that are selling is a huge benefit,” said Jeff McCauley, manager of customs business development at Apex Logistics. “You’re not shipping products that are going to end up in a warehouse that you need to figure out what you’re going to do with in another six months when the product’s no longer desired in the marketplace.”

Risk factors

Despite the benefits, de minimis has some detractors in both the industry and in politics.

While companies that outsource production and bring merchandise in from overseas save money from de minimis, firms that create American-made products don’t see the same benefit when they ship goods abroad. Since offshore labor is less expensive, de minimis can heighten the pricing advantage of goods made in markets such as Asia. Douglas Hand, partner at Hand Baldachin & Associates LLP, partly attributes the move away from U.S. manufacturing to the nation’s high de minimis value.

“If you were to canvass the industry writ large, I think there would be more manufacturers and brands that feel hurt and at a competitive disadvantage with a high de minimis threshold than the opposite,” Hand said.

There are also potential quality and intellectual property risks related to de minimis imports.

De minimis shipments don’t go through the formal entry process that larger imports undergo. Compared to traditional large shipments, CBP has noted issues with having enough advance knowledge of Section 321 packages to accurately target potential risks. In addition, because of the setup of e-commerce businesses with intermediaries such as deconsolidators, CBP says it can also be missing data such as the name and location of the final recipient.

Given these challenges in data collection and oversight, counterfeits or mislabeled goods could slip through.

“There’s an increasing desire for consumers to know both the method of production and its eco-friendliness, or not, and its labor friendliness, or not, which can be obscured if both the labeling and the overall source of origin is perhaps not caught at customs,” said Hand.

Customs is working to heighten the visibility of the packages coming into the country via this direct-to-consumer model by launching a 321 Data Pilot to combat intellectual property theft. The participants, including Apex, provide additional information to customs than what is normally on the manifest, such as the URL for the e-commerce listing. This data then enables customs to better pinpoint packages that could have issues such as intellectual property infringement.

Within its own practice, Apex also weeds out intellectual property issues by only accepting trademarked merchandise from companies that own the authorization. “Everybody thinks there’s a lot of IPR violations coming in and that’s not necessarily the truth,” said Story.

Even though CBP has the right to inspect anything crossing the border, the logistics of searching individual packages is different. As opposed to targeting a large crate, this might mean having to stop a truck to find a single parcel. “If you’ve got 10,000 packages on the truck and one of them is flagged for an inspection, it holds up the whole truck,” said Tom Gould, vice president of customs and trade advisory at freight forwarder Flexport.

De minimis also eliminates the use of domestic warehouses. And often, these fulfillment and distribution centers undergo final checks for product quality and safety. Gould gave the example of using a metal detector to find pins that may have accidentally been left on baby clothes. Without these final inspections, apparel made with inferior materials could also make it through to the end consumer.

Logistics guide

There are also risks related to establishing de minimis capabilities, since this requires a supply chain shift. Some companies ship directly from the manufacturing location to the end consumer, but Gould has mostly seen firms set up nearshore warehouses in locations such as Canada or Mexico to be able to execute speedier direct-to-consumer deliveries.

Because of this warehousing model, there are costs associated with relocating facilities out of the U.S. and setting up an international direct-operated or third-party distribution center.

For a company with an omnichannel presence, allocation could also prove complicated, since retailers need to know which products to hold outside the country to be shipped directly to consumers and what they need to send to a store for both in-store sales and e-commerce pickup.

A best practice for companies that want to use Section 321 is gaining the trust of customs through transparency. Gould suggests becoming part of the Customs Trade Partnership Against Terrorism program to reduce the number of inspections. “Show them your procedures, show them what you’re doing to be able to support the customs mission of preventing bad stuff from getting into the country,” he said.

Outlook and obstacles

Aside from these potential risks, de minimis has also become a political issue.

Currently, merchandise originating from China that would otherwise be subject to Section 301 tariffs is exempt if it enters the U.S. and qualifies for the de minimis provision. In September, CBP proposed amending these regulations so that Section 301 duties would still apply to de minimis imports.

Story is skeptical that this proposed change will go through, citing the more than $100 million dollars that de minimis has saved small- and medium-sized enterprises each year. But Gould sees a good chance that the allowance for Section 301 tariffs via de minimis will end, noting that Democrats have typically been more protectionist than Republicans.

However, if the exclusion were to end, it would not only subject goods to additional duties. It would also render the direct-to-consumer shipping process less cost effective since companies would need to file a formal entry. “The only way to pay the China duty is to go through the normal process of customs, which is designed for scale,” Gould noted. “It’s more economical to bring in 1,000 products in one shipment than it is to bring in one product in one shipment without using the de minimis provision.”

Gould also sees the potential for the de minimis value to be lowered in the future, given the disparity between the U.S. and other countries as well as the now outdated original argument for a high threshold. “The idea was that it was going to cost more than the duty that would be paid on the $800 to process a shipment. Well today’s modern age, with things automated, the cost to process a shipment through customs has gone down, so that argument is no longer as strong as it used to be.”

The possibility of a smaller de minimis value adds another layer of complexity for companies as they consider overhauling their supply chains to take advantage of Section 321.

Hand believes that consumer pressure will make it more challenging for politicians to change the current de minimis value. “For rank and file consumers, the high de minimis threshold has led to cheaper goods, ultimately, and that would be politically difficult to start to tamper with,” said Hand. “I think they’ve got a lot to evaluate, and I hope they come up with a plan that protects our brands and our manufacturing facilities here in the U.S.”

There is no crystal ball, but even if the de minimis threshold is lowered, it would likely not affect apparel as much as other higher cost sectors.

“Once you go above $800, for most apparel items you’re talking about luxury. And that is usually a consumer group that is not as price sensitive,” said Hand. “When you’re talking about apparel items that are in the $60 to $150 range, that’s the bulk of apparel items that are being sold, and they all come in under the threshold.”