The ABCs of the FTZ Program

Lesley Couch Director, Foreign-Trade Zone Services

© STTAS 2012 1

Agenda

• Benefits Calculator

• Examples of Real-World Scenarios

• Costs of entering the Program

• Application Types

• Activation Criteria

• Operational Issues

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What is an FTZ?

Usually located in or near Customs Ports of

Entry at industrial parks or terminal warehouse

facilities

An FTZ site or park is a specially designated

and secured area operating under U.S.

Customs supervision

Almost any type of good may be brought in duty

free for any kind of manipulation.

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Establishment of FTZs

Foreign-Trade Zones were established:

To encourage and expedite U.S. participation in

international trade

To increase global competitiveness of U.S. based

companies

To expedite exportation of domestic goods with

foreign and domestic content

To defer payment of duties until goods enter into the

commerce of the U.S.

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Level Playing Field

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FTZ

FTZs are on level playing

field with foreign

competitors. By being

outside the US territory,

FTZs are not restricted by

duties/taxes, but can invest

resources in the US and add

jobs. Imports to the

Zone Shipments

into US

territory Exports

Exports

What can you do in an FTZ?

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What is Prohibited in FTZs?

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•Retail Sales

•Activity Outside Grant of

Authority

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Would I benefit from FTZs?

Consolidated Entries into US Commerce

Inverted Tariff

Duty Deferral

Re-exporting

Scrap

Drawback

State Inventory/Property Taxes

Supply Chain Velocity

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Savings Formulas

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Duty Savings from Inverted Tariff Benefits* (Value, dutiable imports) X (Weighted avg duty rate of components – weighted avg duty rate of Finished Good)

*requires approval by FTZ Board

Duty Savings as a Result of Exports (Value, dutiable imports) X (% re-exported) X (weighted average duty rate)

Duty Savings on Reject or Scrap (Value, dutiable imports) X (% reject or scrap) X (weighted average duty rate)

Savings from Ongoing Duty Deferral (Value, dutiable imports ÷ inventory turns per year) X (weighted average duty rate) X (opp. cost of capital)

MPF Savings Under Weekly Entry Process (Average MPF per entry X entries per year) - (52 weeks X $485 maximum MPF per entry)

Brokerage Fee Savings under Weekly Entry Process (Average Brokerage Fee per entry X entries per year) - (Average Brokerage Fee X 52)

Example 1: Large DC

• Gadgets, Inc.—A large electronics retail

chain

• Average duty rate, 2.8%

• DC supplies all 400 stores in the US

• Imports approx. $200 million each year

• Inventory turns 4 times/year

• Processes 3,000 entries per year

• Does an FTZ make sense?

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Gadgets, Inc. Assumptions

Assumptions: Value of Dutiable Imports, Annual 200,000,000 Weighted Average Duty Rate 2.8%

Percent Scrap or Rejected Merchandise 0.25% Percent of Merchandise Re-exported 2%

Inventory Turns per Year 4.00 Opportunity Cost of Capital 4%

Average MPF per entry 140.00 Average number of entries per year 3,000.00 Annual Growth Rate 3%

Number of Activated Distribution Centers 1.00 One IOR per facility

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Plug ‘N’ Chug

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FTZ Benefits & Expenses By Type Year 1 Year 2 Year 3 Year 4 Year 5 5-Year Total

FTZ Benefits

Re-Exports 112,000.00 115,360.00 118,820.80 122,385.42 126,056.99 594,623.21

Reject and Scrap 14,000.00 14,420.00 14,852.60 15,298.18 19,887.63 78,458.41

Ongoing Duty Deferral 56,000.00 57,680.00 59,410.40 61,192.71 63,028.49 297,311.61

MPF Savings 394,780.00 407,380.00 420,358.00 433,725.34 447,493.70 2,103,737.04

Brokerage Savings 368,500.00 379,750.00 391,337.50 403,272.63 415,565.80 1,958,425.93

Total FTZ Savings 945,280.00 974,590.00 1,004,779.30 1,035,874.28 1,072,032.62 5,032,556.19

FTZ Expenses

Internal FTZ Operations Expenses 200,000.00 103,000.00 106,090.00 109,272.70 112,550.88 630,913.58

Grantee Fees 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 50,000.00

Total Expenses 210,000.00 113,000.00 116,090.00 119,272.70 122,550.88 680,913.58

NET BENEFITS 735,280.00 861,590.00 888,689.30 916,601.58 949,481.73 4,351,642.61

Example 2: Fleece Jackets

• ABC Clothing has an existing zone in

Dallas, TX

• Import fleece shirts/jackets year round

• Seasonal: In storage for 9 months of year

• Not enough capacity to store at the FTZ

• A GPZ at the port can store until needed

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Example 3: Small 3PL, Pick&Pack Ops

• Small Public Warehouse FTZ Operator

• Customer has new, low-priced Tablet PC

• 3PL installs battery, adds leather cover and

reboxes the “Set”

• FTZ Use for “inverted tariff” on the batteries and

the Leather cases

• For every $1mil in leather cases, saves the

company $200,000

• For every $1mil in batteries, saves the company

$49,000

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Example 4: Enable Compliance

• Acme Inc manufactures mp3 players in the US,

CN, and MY.

• The US location repairs all mp3 players globally

• The country of origin is not known at time of

import from overseas

• Received at a small public warehouse FTZ

operator

• Serial number is scanned; Country of origin is

determined; product is labeled

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Costs: How to calculate? (+ or - 30%)

• Personnel: 1 person, full time. Backup (part

time) trained to be fully operational. $60,000

– Operations can also be outsourced to a 3rd party

administrative company

• Software: Internal modifications or Bolt-On

System. Initial Investment $100,000, $25,000

per year.

• Security: $15,000 additional investment

• Management: Budget 1/20th time allocation

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Additional Costs

• Bonds: Budget $2,500 - $5,000

depending on issues

• Grantee Fees: Ask for Operator’s

Agreement from the local Grantee

• Networking/Education: $5,000

– Membership with NAFTZ

– Attendance at conference

• Recommendation: Keep Costs High,

Benefits Low

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Application Types

• Subzone: For special purpose sites where distance or

circumstances require it

• ASF Usage Driven: Only allowed in zones reorganized

under Alternative Site Framework (ASF), but becoming

more popular.

• Expansion or Magnet Site: “Industrial Parks” that have

overlaid zone status on buildings and land, so that

customers may use Zone status more quickly.

• Production: Any change in HTS must have prior

authorization from FTZ Board. New regulations in effect

May 2012 reduces the wait time for approval.

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Activation Criteria

• Application is only one phase of project

• Activation with local CBP port can be

lengthy

• Activities can run in parallel

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Activation

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Security Review

• Fencing

• Guard Shack

• Employee Card Readers

• CC Video

• Signage

Systems Implementation

• Interface with ERP

• User Training

• Electronic Submission to CBP

Written Request

• Operator’s Procedures Manual

• Blueprint

• Grantee Letter of Concurrence

• Background Checks

FTZ Operator’s Bond

FIRMS Code Creation

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Inventory Layering

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Date 214# SKU Country of

Origin

Quantity Unit

Value

HTS#

5/1/2012 00001 12345 ID 200 17.00 9022.30.0000

On 5/1/2012, you receive your first import of 200

X-ray tubes, Sku 12345, from Indonesia.

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Inventory Layering

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On 5/12/2012, you receive the second shipment

of X-ray tubes, Sku 12345, this time from China.

The quantity is 350 for a lower unit price.

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Date 214# SKU Country of

Origin

Quantity Unit

Value

HTS#

5/1/2012 00001 12345 ID 200 17.00 9022.30.0000

5/12/2012 00002 12345 CN 350 16.50 9022.30.0000

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Inventory Layering

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On 5/17/2012, you have your first shipment of

this sku, for a quantity of 150.

Following FIFO, the oldest layer is decremented

by this quantity. This is the layer reported on the

7501.

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Date 214# SKU Country of

Origin

Quantity Unit

Value

HTS#

5/1/2012 00001 12345 ID 200 50 17.00 9022.30.0000

5/12/2012 00002 12345 CN 350 16.50 9022.30.0000

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Special Entry Considerations

Special Program Declarations or “SPI Codes”

Cotton Fees

AntiDumping/Countervailing Duties

PGA reporting

Fish & Wildlife

FDA

ATF/TTB

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Contact Information

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Sandler & Travis Trade Advisory Services, Inc.

505 Sansome Street, Suite 1475

San Francisco, CA 94111

Lesley Couch, Director of FTZ Services

(248) 699-1586 (Direct Line)

lcouch@strtrade.com

© STTAS 2012