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WTF is a FTZ?!

February 19, 2018
Strategy & Solutions
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WTF is a FTZ?!

By Ward Richmond & Cole Hooper

The Top 5 Things To Know About Foreign-Trade Zones

Welcome back readers and let me apologize in advance. If you thought the Triple Freeport article was a sleeper, it’s time to go prep a batch of Bulletproof Coffee and take an ice bath to get yourselves ready for our rundown on Foreign Trade Zones!

Cole Hooper, my business partner who specializes in the DFW Airport submarket encouraged me to write a blog about Foreign Trade Zones because they play such an integral role in making DFW such a popular place to be for big-time logistics companies!

Cole did some fantastic deep-diving research and then I tried my best to make this content as entertaining and concise as possible for all of you logistics nerds out there who keep forgetting about these wonderful zones and keep asking that same nagging question, WTF is a FTZ?!

WHAT IS A FTZ?

Foreign Trade Zones (FTZ’s) are secure areas under US Customs & Border Protection (CBP) oversight. FTZ’s were established by the US government under the FTZ Act of 1934 and they are the USA’s version of what are known internationally as Free Trade Zones.

FTZ’s are located in the USA and in or adjacent to a CBP port of entry—like DFW Airport!

The point of these “zones” is to provide a place to store commercial products without having to deal with formal customs entry procedures and payment of customs duties. Basically- FTZ’s are meant to make life easier and lower costs for companies based in the US engaged in international trade. Funny, that sounds a lot like our job description!!

WHAT ARE THE BENEFITS OF OPERATING IN A FTZ?

Duty Deferral- When foreign goods are imported into a FTZ, no customs duty is owed until those goods leave the zone and technically enter the U.S. for commerce. Simply keeping the imported product as inventory within a FTZ enhances the user’s cash flow by postponing the time duty must be paid.

  • EXAMPLE: A sailboat, which has a duty rate of 1.5%, is admitted to an FTZ and is stored in the FTZ for 3 months. The distributor of that sailboat does not have to pay the 1.5% duty on it until it enters the US for commerce!

Elimination of Duties —Customs duties are eliminated entirely on goods re-exported either in their original form or as components of finished products produced in the zone.

  • EXAMPLE: A screwdriver, which has a duty rate of 6.2%, is admitted to the FTZ from China, stored in the FTZ duty free, and later withdrawn from the FTZ for export to Europe with no duty payment required.

Inverted Tariff – When goods are manufactured into other products within the FTZ, the importer may elect to pay the duty rate applicable to either the imported part or the finished product, whichever is lower.

  • EXAMPLE: A windshield, which is dutiable at 4.9%, is admitted into a FTZ and later used in the production process of an automobile. The automobile (finished product), which is dutiable at 2.5%, is then withdrawn from the FTZ for entry into U.S. commerce at a duty rate of 2.5%. The total savings is 2.4% on the value of the windshield—making the FTZ a “purchase price variance” for manufacturers.

Improve Delivery Speed & Cost— Speed up and streamline the supply chain process by utilizing “direct delivery” and “weekly entry” procedures.

  • Direct Delivery – Ability to receive imported goods faster by bypassing normal customs procedures and moving them directly into a FTZ. Users can avoid customs clearance at ports of arrival which can often times eliminate delays from processing back-ups and can be especially valuable to business utilizing “just in time” inventory management system. This “Speed-to-Market” advantage is a 1-2 day advantage that is more pronounced in the DFW area because DFW is an inland port, not at a coast.
  • Weekly Entry — Allows goods to be shipped 24 hours a day, seven days a week, with just one entry filed each week and pay just one Merchandise Processing Fee (MPF) per entry, capped at $485. The Weekly Entry process can result in savings of up to 85 percent on entry and processing fees. Entry and Merchandise Processing Fees (MPF) can be paid weekly, rather than daily, saving time and brokerage fees, as well.EXAMPLE: An importer that typically files 10 customs entries per week, each subject to the $499 cap, would save $233,532 annually in MPF by using FTZ weekly entry procedures (10 entries per week x $499 per entry x 52 weeks = $259,480 per year vs 1 entry per week x $499 per entry x 52 weeks = $25,948 per year).

State & Local Tax Savings – A FTZ specifically prohibits state and local governments from assessing business personal property tax on inventory that has either been imported into a foreign trade zone and is being held in a foreign trade zone for export.

  • EXAMPLE: A speaker distributor adds a warehouse location in Grapevine, TX, which has a business personal property tax rate of 2.72%. Since the warehouse is located in a FTZ, the company does not have to pay business personal property taxes on any speakers that have been imported into the warehouse OR that are being held for export to another country.
  • These state tax benefits can bring hundreds of thousands of dollars of “extra margin” for the owner of the merchandise, or to put it into Real Estate terms, $1.++ per foot per year in lower occupancy costs.

HOW DOES YOUR COMPANY GET SET UP TO OPERATE IN A FTZ?

First, call Ward Richmond & Cole Hooper! Our team specializes in working with our customers to identify FTZ sites to maximize value and operational efficiency. As a general rule of thumb, FTZ’s must be located within 60 miles or 90 minutes driving time from the outer limits of a CBP port of entry.

Furthermore, there are third party consultants and/or attorneys who not only specialize in FTZ activation for companies but also provide expertise in conducting a feasibility analysis and are knowledgeable about the regulations, requirements, and all the different nuances involved in the activation process.

If you have interest in relocating to an FTZ but don’t know if the benefits outweigh the costs, our team has a vetted list of third party experts that we could recommend to help speed up the process so you avoid unexpected problems. Please call us to discuss!

WHAT TYPES OF COMPANIES UTILIZE FTZ’s?

The opportunity for lower processing costs and cutting logistics costs have become an important strategy for lowering the overall costs to the supply chain for several of the world’s largest manufactures and logistics related companies who operate in FTZ.

The primary manufacturing industries are oil refining, vehicles/automotive parts, consumer electronics, and pharmaceuticals. Logistics oriented companies can utilize FTZ’s for warehousing, labeling, salvaging and distribution related operations.

Due to the increased demand from users and importers, the nation’s largest developers and institutional landlords of “Big Box” industrial real estate including, Prologis, Duke Realty, Hillwood, and CenterPoint Properties, among others, are establishing and creating new FTZ sites to support their customers using the FTZ program to reduce importing costs and improve supply chain efficiencies.

A few major DFW tenants operating within FTZ’s include: Geodis, BMW of North America, XPO Logistics, Cartier, Fossil Watches, Apple, Dallas Cowboys Merchandising, Inc., DB Schenker, Dal-Tile and CEVA Logistics.

SHOULD YOUR COMPANY RELOCATE TO A FTZ?

FTZ status can provide a significant cost benefit for certain companies, but it’s not for everyone. Companies who should be considering FTZ opportunities typically have large customs duty payments, a high volume of entries into U.S., history of shipment delays, or plan to increase manufacturing capabilities.

Companies should first undertake an internal due-diligence process to make sure that the savings associated with operating in an FTZ justify the set-up and ongoing maintenance costs associated with the benefit.

As mentioned 3 times at least, feel free to give us a call if the FTZ program is something your company wishes to consider. We’d love to help provide any additional insight, identify strategic locations with FTZ status, and get you in touch with one of our 3rd party experts who truly understand what the hell they’re talking about!

For Additional Information, Check Out some Helpful Links to the FTZ Board’s Website Below: