The Complete Guide to Section 321 Fulfillment

Last Updated: October 15, 2024

Improving profit margins by reducing logistics expenses is essential for any successful business operation. However, controlling these costs becomes considerably challenging when it involves shipping products internationally, due to the complexities of customs, import duties, and taxes. 

For brands intending to import merchandise into the United States, optimizing your ecommerce supply chain for cost savings is possible by staying informed about and compliant with the regulations of the US Customs and Border Protection (CBP). 

A notable regulation from the CBP that ecommerce businesses frequently leverage is Section 321. This regulation permits shipments of low-value goods to circumvent taxes and duties, significantly lowering the cost of importing goods into the US. Section 321 speeds up border crossings and eliminates the import duties and tariffs typically associated with imported goods When a customer places an order, it’s picked, packed, and shipped — tax and duty-free — back into the U.S. 

What is Section 321?

Section 321 refers to a designation by the Customs and Border Protection (CBP) that enables goods to be imported into the United States without incurring customs taxes and duties. This provision specifically exempts shipments of low value from taxes and duties, provided they meet the criteria set by the de minimis value threshold.  

For instance, in the United States, the de minimis value has been set at $800 USD, meaning that most goods valued at or below this amount can be imported without paying duties, import taxes or tariffs.

The CBP tracks different shipments under different data pilot programs. Section 321 is released on the manifest data, while Entry Type 86 is a customs entry. Entry Type 86 extends the benefits of Section 321 to shipments that may require Partner Government Agency (PGA) oversight, utilizing the Automated Commercial Environment (ACE) system for enhanced compliance and by making an entry, gives the shipper/importer better visibility into their supply chain. Most commodities benefit from the rewards of Entry Type 86; however, it requires additional data elements. You can learn more about the difference between 321 and T86 here.

What is Section 301 and How is it Different from Section 321?

Section 301 of the Trade Act of 1974 has notably impacted U.S. companies importing goods from China, especially since 2018 when the U.S. Trade Representative (USTR) imposed tariffs on Chinese imports to counteract unfair trade practices like intellectual property theft. These tariffs, which levy additional charges ranging from 7.5% to 25% on nearly two-thirds of Chinese imports, have significantly influenced a wide array of industries, altering the cost structures and supply chain strategies of American businesses.  

In the wake of these changes, many U.S. importers have been compelled to reassess their supply chains, grappling with the increased cost of goods. To navigate these challenges, companies have looked towards alternative sourcing options, such as relocating production to countries not affected by these tariffs, or passing on the increased costs to consumers. Additionally, in anticipation of tariff hikes, businesses have been proactive in adjusting their inventory management, either by stocking up on essential items or by seeking tariff exclusions for specific products to alleviate some of the financial pressure. 

Amidst these adjustments, a significant strategy that has emerged is the utilization of Section 321 by U.S. companies as a direct consequence of the Section 301 tariffs. Section 321 allows for the duty-free entry of shipments valued at $800 or less, presenting a loophole for businesses looking to minimize their tax exposure amidst the 301 changes. By breaking down larger shipments into smaller consignments that fall under this threshold, companies can circumvent the hefty tariffs imposed under Section 301. This tactical approach not only offers a semblance of relief from the increased duties but also underscores the necessity for agility and adaptability in the current trade climate. 

Preparing a Section 321 Shipment: Steps for Businesses

To ready a shipment under Section 321, businesses should coordinate with their 3PL, carriers or customs brokers to ensure all necessary information is submitted prior to the shipment’s arrival at the border. This step is crucial for adhering to U.S. safety and security standards. Essential details include the shipper’s name and address, a clear description of the goods, their weight, quantity, and the consignee’s name and address. 

It’s important to note you are allowed only one tax-exempt import per day under Section 321. Submitting multiple claims in a single day could result in severe fines, with penalties reaching up to $5,000 in some instances. Ensure that your third-party logistics (3PL) provider is not making multiple Section 321 claims within the same day. 

Fulfillment Strategies Sellers Use to take Advantage of Section 321

One effective approach for sellers to maximize the advantages of Section 321 involves importing and warehousing their merchandise in neighboring countries, such as Canada or Mexico. This strategy positions their inventory nearer to the US border, facilitating swift order fulfillment and delivery to American consumers. 

321 Fulfillment out of Canada

Utilizing Canada as a logistical hub is particularly advantageous for several reasons. The country boasts well-established shipping networks, especially in the Northeast, making regions like Ontario and Ottawa prime locations for distributing goods to the US East Coast efficiently and economically. Furthermore, by situating inventory in Canada, sellers gain the added benefit of accessing the Canadian market. This dual advantage allows them to expand their customer base while optimizing logistics for US deliveries, effectively serving two markets with one strategic move.

To ship under Section 321 through Canada, you can avoid customs duties in three main ways:

1. If your manufacturing country has a free trade agreement with Canada, you can import and even sell your goods in the Canadian market without incurring customs duties. You can find a list of the 51 countries that have such agreements with Canada here: Canada Trade Commission 
2. Certain goods may face high tariffs in the US but are subject to lower or no tariffs if the products(s) are sold in Canada.

3. Through a process known as Duty Deferral, goods subject to tariffs in Canada can be imported without immediate payment of customs duties. Importers notify the Canada Revenue Agency that the goods are primarily intended for export. Duties are only paid on goods sold within Canada, and payments are based on quarterly reports.

   It’s important to note that, in order to qualify for the deferral program, an importer must file a duty drawback and demonstrate a history of both import and export activities, supported by a Canadian duty drawback.

Canada Tax Rebate for 321 Sellers

When goods are imported from Canada, sellers may face an import tax of up to 5%. However, if the seller plans to market these goods in the U.S. and fulfill orders from Canada, they can reclaim the tax by applying for a general rebate under reason code 4 once the sales in the U.S. are completed. More information can be found on the Canadian government website under GST/HST Rebates.

For the rebate process, the calculation method is detailed in Part C – “Rebate Claimed” of the application. Sellers must submit Form GST189, General Application for Rebate of GST/HST, and they have a 1-year deadline to apply after the sale and entry of the goods into the U.S.

To streamline future transactions and eliminate the need for a tax rebate, it’s advisable to collaborate with your broker to classify the goods as zero-rated for tax purposes. This applies to non-excisable goods, such as non-alcoholic beverages and non-tobacco products, under the following conditions:

1. The buyer is not purchasing the goods for personal use.
2. The goods are exported promptly after delivery.
3. The goods are not consumed, used, or distributed within Canada before export.
4. No significant processing, alteration, or transformation occurs in Canada, except what’s necessary for transport.
5. The supplier provides conclusive proof of export, suitable for audit purposes.

This approach simplifies the tax process by avoiding rebates and ensures compliance with tax regulations for international sales.

Here is the tax process:

An importer registers for an import number and selects whether to register for GST or not. There are requirements based on business location, size, and sales amounts that dictate registration, but it is typically a business decision.

• If the importer does not register for GST, they must file FORM GST189 Section A for exports to recover the GST.
• If the importer registers for GST, they can file it as an input tax credit.
• If more than 90% of their products are exported out of Canada, they may qualify for the GST Deferral program through an application.

Learn more about how to use a Canadian Foreign Trade Zone (FTZ) for your import/export business.

 

321 Fulfillment out of Mexico

When importing goods into Mexico solely for the purpose of exporting them, you are not required to pay Mexican customs duties.

Mexico offers distinct benefits primarily centered around cost savings. The country’s lower labor costs make it an attractive option for fulfillment and storage, offering sellers competitive pricing for these essential services.

Moreover, Mexico’s sizable workforce is a crucial asset for fulfillment centers and warehouses, ensuring they can scale operations to meet increasing demand without the challenges of labor shortages. This combination of affordability and workforce availability makes Mexico an appealing choice for sellers looking to enhance their logistics operations while keeping costs in check. 

For 321 fulfillment solutions out of Canada or Mexico, the operations are invisible to the end customer; orders appear to have been shipped directly from within the US. This seamless process involves your third-party logistics provider (3PL) packaging orders in Southern Canada or Northern Mexico, then transporting them into the US. Once stateside, carriers like UPS, FedEx, DHL or USPS take over for final delivery, making it appear as though the shipment originated from cities like Buffalo, New York, San Diego, Seattle, or Texas.

Bottom Line

By leveraging the strategic geographic locations and specific advantages of Canada and Mexico, sellers can not only comply with Section 321’s limitations but also optimize their supply chain efficiency. This approach helps mitigate logistics costs and improves service delivery to the highly lucrative US market. 

If you’re in search of a 3PL partner proficient in Section 321 Fulfillment, DCL provides an array of services tailored to 321 fulfillment, details of which are available on our Section 321 fulfillment services page. To discover how we can assist in your company’s expansion, feel free to drop us a message.