Known trade compliance risk areas can take many forms and often require multi-disciplined specialists to help keep you in compliance. As you know, U.S. Customs and Border Protection (CBP or Customs) is responsible for enforcing compliance at all ports of entry—and there are areas that are well-known in the trade community for being at risk for noncompliance.
De Minimis, Customs valuation, and duty rate are three known areas that receive added scrutiny from CBP.
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You cannot calculate the value of your goods and determine the duty rate without knowing a few things first.
Accurately calculating your Customs value for imported goods is critical to trade compliance, and since it affects your duty rate, it's integral to assessing your total landed cost. Improperly calculating your value could mean penalties and higher than expected duty rates.
De minimis allows some importers to avoid duties if the shipment's value falls under $800, although there are some exclusions. Thanks to eCommerce, the number of these types of shipments is booming.
Remember: the importer of record (IOR) is the responsible party for paying applicable duties and taxes.
De Minimis Rule Permits Some Importers Exemption from Duties
De Minimis, or Section 321, allows most shipments with a total value of $800 or less to be imported into the US without worry of government fees or duties. There are some exceptions to this rule for goods that fall under special regulations.
When importers have an opportunity to bring in shipments under the de minimis threshold, it can speed up the shipping cycle because the clearance procedures are minimal. Keep in mind, however, that at any time your shipment can be held and/or examined by CBP.
With the rise of eCommerce, CBP has identified de minimis shipments as an area requiring greater scrutiny. As of January 1, 1919, CBP will begin requiring truck shipments of Section 321 merchandise to file advance electronic manifests. Previously, these shipments were exempted through a CBP policy decision.
Evaluating Components of Valuation
Calculating proper Customs valuation can be an area of confusion for many importers. Customs valuation is the process of assigning a monetary value to your imported goods, resulting in the duty rate you must pay to CBP upon import.
The most commonly used technique for calculating valuation is the Transaction Value method. This method refers to the actual price paid or payable by the importer, but it includes and excludes certain costs in the import process.
If you are calculating valuation for an unrelated transaction, then things are relatively simple and generally only require you to pay any applicable duties on the price you paid for the product.
Related Parties Can Confuse the Valuation Calculation
Imported goods involving related parties may bring additional confusion to calculating valuation. Some examples of related parties include companies under the same corporate "family tree," those with overlapping officers or employees, and companies employing members of the same family (i.e., relatives).
CBP's Informed Compliance Publication "Determining the Acceptability of Transaction Value for Related Party Transactions" states: "Transaction value between a related buyer and seller is acceptable if the importation meets either of two tests: 1) circumstances of sale or 2) test values."
The first test reviews the sale of imported goods to ensure that the price paid or payable was not influenced by the relationship between the buyer and seller. CBP substantiates this by analyzing the relationship between the buyer and seller and how they arrived at the price. Under the second method, "test values," an importer must demonstrate that the transaction value closely approximates similar goods that were imported around the same time frame.
When related parties import goods, it adds complexity to the value of the sale and is often identified as an area of risk. Therefore, asking a third party, such as a Customs consultant, to do an analysis or assessment would be beneficial and demonstrate steps toward reasonable care.
Can I Deduct Components from the Price I Paid when Calculating Valuation
There are times when you are allowed to deduct components from the price you paid, such as the cost of freight and insurance. For example, charges for foreign inland freight may be deducted from the price if it's included in the price actually paid. Charges for freight after importation may also be excluded from transaction value if they are identified separately from the price.
Freight can only be deducted when, and only when, the actual freight costs are included in the price. Not the estimated freight cost, but the actual freight. Only then, can this amount be subtracted from the total invoice
Demystify the Customs Valuation with this Simple Trick
When determining your imported goods' value, remember this acronym, and you'll be in a good place: PPSRA. PPSRA stands for "Proceed to Pack and Sell Your Royal Assets."
Proceed - Any proceeds from the sale (after arrival in the United States) that the buyer pays to the seller must be added to the value.
to Pack - Packing costs are the cost to pack your goods before shipping; this amount must also be added to the value.
and Sell - Any selling commissions paid must be added to the value of the goods.
your Royal - If any royalties have to be paid, then they also have to be added to the value.
Assets - Short for assists; which are also required in the Customs value.
What exactly is an assist? Let's review the example below:
An Austrian company makes skis and sells them to a buyer in the US. The US buyer wants bindings installed on the skis, so they send the bindings to Austria for installation. When the finished product arrives in the US it looks like the price they paid was $200; however, this amount did not cover the cost of the $100 bindings. The actual value of the goods, from the point of view of Customs, is $300. Duties will be based on the value of $300, not $200 (i.e., the cost of the skis alone).
When you've added in each of the PPSRA components to the price you paid, less any freight costs or deductions, you can then determine your Customs value.
Determining Your Duty Rate
The Harmonized Tariff System (HTS) provides duty rates for nearly every item that exists. The delicate part of calculating duty rates is not simply reading the HTS tome, it's determining the correct HTS classification based on a thorough description of the merchandise. It's also knowing if the goods come from a country that qualifies it for duty-free treatment or additional duties.
We suggest first talking to your Customs broker to assist you in identifying your duty rate. They are experts in this arena, and you can use their expertise and insight to give you a clearer picture of your estimated costs.
Here's a list of things you'll need to provide your broker to help determine your duty rate:
- The total price/value of your shipment.
- The price you paid for your product per item.
- Are ACTUAL freight costs included in the amount you paid to the seller? If so, provide the amount.
- Remember PPRSA. Are there any proceeds, packing costs, royalties, selling commissions, or assists?
- What is the general description of the product(s) being imported?
- What is the Harmonized Tariff System (HTS) classification?
Once you have all of this information and have provided it to your Customs broker, they will work with you to determine the accuracy of your HTS classification and valuation. From there, they will give you an estimated cost of duties at the time of import. These known trade compliance risk areas don't have to be a CBP gamble with the right information and guidance.
