Foreign Trade Zones are incredibly beneficial to a few different types of companies in the U.S. Import tariffs and duty taxes are a major inconvenience for importers – especially those importing large volumes of products. However, the concept of tariffs being used to help control international vs. domestic production of certain goods or materials doesn’t always help the U.S.
For example, tariffs on steel may help to control domestic production and U.S. machining, but may inadvertently harm U.S. based companies who need to import steel parts.
Due to this effect, federal programs have created land masses that are governed separately from U.S. Customs; essentially creating land which is considered to be outside of U.S. Customs territory. These areas are referred to as “Foreign Trade Zones.”
Foreign Trade Zones
Foreign Trade Zones were created to reduce the negative effects that U.S. Customs import tariffs may have one certain businesses. It was enacted back in 1934 to protect and encourage businesses who are dealing with large volumes of imports.
The tax benefits of Foreign Trade Zones are very significant. Firstly, those who are allowed to import to Foreign Trade Zones forego the requirement to pay tariffs. But in addition to the break from paying Customs duties, importers may receive major tax breaks in the form of “inventory tax.”
Inventory tax is “Business Personal Property Tax,” and is usually regulated and controlled by local tax authorities like school districts or the county. However, since Foreign Trade Zones are meant to serve as land outside Customs territory, it also carries certain tax benefits.
Local tax municipalities will work with federal programs to issue certain tax discounts to FTZs in order to reduce inventory tax for importers using those spaces. These can range from 0% to 100%, and the variance will just depend on which FTZ you are importing to and what the local tax authorities in that area have decided to do for the FTZ.
Who is Eligible to Use Foreign Trade Zones?
Obviously, import tariffs are important. The U.S. government uses the money made from tariffs to staff ports and U.S. Customs workers, pay for border control, and a host of other important activities. The benefit of Foreign Trade Zones, then, is not meant for everyone but rather to alleviate businesses facing a specific challenge from tariffs that would negatively affect U.S. production.
Businesses who are eligible to us Foreign Trade Zones (FTZs) are:
- Large exporters moving $5 million or more annually of any product.
- Manufacturers using more than $10 million annually in imported parts.
- Major retailers with 100,000 square feet or more of imported retail inventory.
Given those criteria, you can imagine how many of the world’s largest companies take advantage of Foreign Trade Zones!
Starting to Use Foreign Trade Zones
To start using Foreign Trade Zones, you can either lease space for storage in an existing public FTZ space, or you could create or authorize an existing FTZ space for your own use. As you would expect, using an existing public FTZ means significantly less paperwork and time investment since you won’t be functioning as an FTZ operator.
If you’re interested in learning more about the topic, please don’t hesitate to reach out to one of our team members and we’d be happy to help answer any questions you might have!