Munish Gupta is Founder/CEO of Supply Chain Advisory Group, a logistics consulting firm specializing in aiding companies with global product distribution and international expansion
International trade is a complex aspect of ecommerce shipping. If you are a brand manufacturing product overseas, there are a lot of customs regulations you must keep up with regularly.
Some brands might try to choose to lower their import fees by re-directing shipments through other countries just to get around US customs taxes. Any brand who has been shipping products into Mexico and trucking them across the US border has been doing this to avoid certain US import taxes. This is known as Section 321 Loophole, or the China Tariff Loophole—brands using this routing method may need to rethink their supply chain strategy this year.
The US House of Representatives and Senate are currently reviewing proposed amendments to Section 321 to close the loophole on Section 321. Here is more about Section 321 and how the new laws may affect ecommerce companies.
What is Section 321?
When products are imported into the US the Customs and Border Protection Department (CBP) applies taxes and duties based on the current international trade laws that apply to the shipment type. As stated in Section 321 of the Tariff Act of 1930, CBP is authorized to provide exclude duties and taxes for shipments with goods that aggregate a value lower than $800 US.
This retail value threshold is called de minimis. Section 321 is commonly applied to shipments coming into the US. The de minimis threshold varies based on the country of import and the country of export—and it is determined by the government of the import country. Currently the Section 321 limit is <$800 USD but it was previously <$200 until 2015. De minimis is not to be confused with tariffs, which can also vary greatly depending on the country of origin.
What is the 321 Loophole?
As soon as any new import/export legislation gets passed, some companies find a way to circumnavigate it. Such is the case with Section 321.
Lower-value shipments need to comply with the de minimis threshold in order to be duty and tax free, but they also need to be imported in a manner that meets the rule.
The “Section 321 loophole” is when a merchant sends products that are manufactured internationally to Mexico or Canada, stores the products in Mexico or Canada, and then ships them across the US border. Products being trucked across the US-Mexico or US-Canada border are not subject to the same duties and taxes as those shipped in from other countries.
This loophole exists because of the trade agreements between the US, Mexico and Canada. Most experts agree that the loophole works best when fulfilling in Mexico.
The benefits of redirecting products through Mexico or Canada are obvious—a shipper won’t pay the same duties and taxes as they would if they shipped to the US directly from a foreign country and fulfilled in the US. Consumers benefit as well—lower fees for the merchant mean lower cost of goods for buyers.
But there are also many drawbacks to re-routing your supply chain to specifically avoid Section 321 are many. Here are a few:
- Products take longer to get from manufacturer to fulfillment center, and also from the fulfillment center to the end-customer.
- More hand-offs along the supply chain leave products more vulnerable to tracking issues, getting lost, mishandled, or otherwise damaged.
- With more partners in your supply chain your administrative load is much heavier.
In short it is incredibly cumbersome to fulfill products in Mexico or Canada just to save money on duties and taxes. The costs you spend on shipping alone may negate the attempt to bypass these import fees.
Proposed Legislation Changes to Section 321
Congress has proposed changes to Section 321 for a few years, primarily making it harder for businesses to use the “321 loophole”.
Most recently four members of Congress have proposed changes to Section 321 of the Tariff Act of 1930. The new amendment is called the Import Security and Fairness Act (“the Act”) on June 15, 2023. It would enact changes to the “de minimis” threshold making goods sourced from oversees (primarily from China and Russia, seen as adversarial nations) ineligible for de minimis treatment.
The new legislation may include some of the following:
- Prohibit the application of Section 321 to goods from non-market economies (i.e. China and Russia, but not limited to those only) and those on the Priority Watch List.
- Prohibit specific categories of goods.
- Limit Section 321 to apply to offshore distribution facilities.
- Require more collection of data for all de minimis imports (description of goods, transactional value, identity of the shipper and importer, and more). Data would also be sent to the Treasury Department.
What Should Merchants Do?
Any merchants importing products using the 321 loophole should be aware that legislators are looking for ways to limit this activity. The time, money, and effort put into creating a supply chain routed through Mexico or Canada might no longer be valuable. In fact, it may become a liability.
The US Federal Government is the recipient of the duty and tax money paid when products are imported, so bypassing that is, in their eyes, robbing them of the taxes they are legally owed.
Customs and border authorities have recently been busy with more pressing supply chain issues like port congestion, bottlenecks, and overflow due to the rise in online shopping and international shipping. They have not sought out ways to penalize merchants who are using this 321 re-direct, yet.
Currently there are no legal ways to fine or correct merchants who re-route products to cut out the 321 duties and taxes. But this new legislative proposal is a sign that there will be measures taken to close the 321 loophole. The actions will start to happen this year at the earliest. Merchants should be aware of how these new laws will affect them.
Merchants using section 321 should consider the fact that in the long term it might benefit them to use a US-based warehouse.
If you’re looking for international shipping advice and tax setup advice (GST/VAT etc.) for proper importation into 50+ countries, reach out to Supply Chain Advisory Group. They are a close partner of DCL Logistics and our teams can work seamlessly together to create a cohesive international supply chain strategy for your brand.