Import duties are the unloved stepchild of the tax department at smaller companies. In short, there’s a lack of appreciation for the amount of tax planning small and midsize businesses can do with respect to import duties. As a result, companies are missing “significant opportunities” to lower their cost of doing business, says Mark Neville, an international trade and customs attorney with Smith, Gambrell & Russell.
Most of the savings can be gained by viewing import-tax policy as “low-hanging fruit,” contends Neville. And that can be captured once finance executives get past the common misconception that customs duties are set in stone.
Unlike income-tax rates, import duties can change dramatically. They may depend, for example, on the way goods or component parts are described, or the way products are packaged and assembled. Consider the classic case of microscopes used for surgery. In the early 1990s, the U.S. International Trade Commission classified surgical microscopes — those with built-in software for hands-free operation — in much the same way it classified laboratory microscopes, which meant the device carried a 7.2% U.S. import duty. Only when manufacturers importing the product successfully argued that the equipment was more akin to a surgical instrument — which is duty-free — than a piece of lab equipment did the government change the microscope’s customs status.
Just knowing that an importer has the ability to recategorize items — within reason — could make a big difference to a company’s bottom line. Indeed, says Billy Pymm, CFO of Maverik Lacrosse: “How you import products is actually a science. If you know the [importing] categories and how to work with the categories, you’ll save your company money.”
Part of the science is understanding the subtle differences involved in working with the tariff schedule. For instance, most U.S. clothing manufacturers that import goods know that an oversized cotton T-shirt for women categorized as sleepwear carries an 8.5% duty, while the same shirt marketed as swimwear (as a bathing-suit cover-up) would be saddled with a 14.9% duty. “Ignorance can be bliss, but it can be costly,” says Neville, adding that customs duties are more malleable than finance managers might expect.
Another case in point is the different duty rates associated with “retail sets,” a selection of products with a common theme. Consider a prepackaged gift, like a spaghetti dinner in a basket. The basket contains pasta, a tin of cheese, a jar of sauce, candles, an apron, and a red-and-white checkered tablecloth, all of it shrink-wrapped and classified as a retail set.
With a little planning, a company may find that assembling the basket outside of the United States and paying duty on a “pasta” retail set may be more cost-effective than importing each item separately and assembling the basket in a warehouse in Tulsa. Or the exercise may indicate the opposite. In either case, running the numbers is worth the time and effort, says Neville.
Strong supply-chain auditing may also help companies uncover savings by stripping out the tariffs levied on markups by middle men, adds Neville. For instance, a hypothetical U.S.-based wholesaler orders $1,000 worth of handbags from a Hong Kong vendor. The vendor, in turn, orders the handbags from a factory in Manila for $850. If the American wholesaler can show through purchase orders that there was an arms-length sale between the Hong Kong and Manila companies, and the handbags are clearly destined for the United States, the customs duties would be assessed against the $850, rather than the $1,000.