FTZ for Textile/Apparel/Footwear Distribution:

Fear of the Unknown?

Lesley Couch, AZS, LCB, CCS

Focus of Seminar

• Background

• Evaluating FTZ Savings Potential

• The Application Process

• The Activation Process

• Operations in FTZs

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BACKGROUND

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What is an FTZ?

• A foreign-trade zone is an area where

foreign and domestic merchandise or

commodities are considered to be in an

international commerce zone and not

within a U.S. Customs territory.

• It is a restricted-access site authorized by

the Foreign-Trade Zones Board. Upon

activation under regulations of the U.S.

Customs Service, FTZs are secure areas

under U.S. Customs supervision. These

zones are at or near U.S. Customs

ports of entry. Formal customs entry

procedures do not apply in these zones,

although FTZs are within the territory and

jurisdiction of the United States.

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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What can you do with Goods in an FTZ?

Receive

Store

Manipulate

Exhibit

Relabel

Test

Destroy Sample

Export

Repack

Assemble

Mix with Domestic Goods

Manufacture*

*with approval from FTZ Board

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What is Prohibited in FTZs?

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•Retail Sales

•Activity Outside Grant of Authority

FTZ Regulatory Sources

Foreign-Trade Zones Act of 1934

•19 U.S.C. 81a-81u

•15 CFR Part 400 - FTZ Regulations

•19 CFR 146, Customs Regulations

FTZ Manual Operator’s Procedures

Manual

Administrative decisions

CATAIR: Customs and

Trade Automated Interface

Requirements

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FINANCIAL BENEFITS

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Zone Benefits

Zone Benefits

State Inventory/ Property

Taxes

Consolidated Entries into

US Commerce

Re-exporting Duty Deferral

Scrap

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11

Consolidated Entries

• Only one entry per week for zones

• Maximum MPF per entry is $485

• Maximum MPF payable from an FTZ annually:

– $485 x 52 = $25,220

• Substantial savings for high volume importers

• How does that work?

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Reduced MPF

Case Study

Assumptions:

• Number of entries per year: 2,400

• Average MPF per entry: $350

Calculation:

(average MPF per entry X entries per year) - (52

weeks X $485 maximum MPF per entry)

(350*2400)-(52*485) = $814,780

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Export Savings

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FTZ

#1 Imports from Asia at 2.6%

Export to 3 locations in Canada

Export to UAE FTZ

#2

FTZ

#3

Major U.S. Retailer

Export Savings Calculator

Case Study Assumptions:

• $90,000,000 annual import volume

• 5% re-exported

• Weighted Average Duty Rate = 12%

Calculation:

(annual cost, dutiable imports) X (% re-exported) X (weighted

average duty rate)

(90,000,000 * .05 * .12) = $540,000

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On-Going Duty Deferral

Received in June

Shipped in October

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Duty Deferral Calculator

Duty is paid only when (and if) products are shipped

into US territory from a zone.

• Assumptions:

• 4 Inventory Turns per year

• 4% opportunity cost of capital

• 12% weighted average duty rate

• Calculations:

• [(annual cost, dutiable imports) ÷ inventory turns per

year] X (weighted average duty rate) X (opportunity cost

of capital)

• [(90,000,000)/4 *.12 *.04 = $108,000

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Scrap Calculator

Scrap

Product destroyed in a zone is non-dutiable

Must have no salvageable value

Assumptions:

3% of inventory is scrapped

Calculation:

(annual cost, dutiable imports) X (% reject or

scrap) X (weighted average duty rate)

(90,000,000 * .03 * .12) = $324,000

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Returns from Stores

How are Store Returns Processed?

• If returned to overseas vendor

• If scrapped

• Then DRAWBACK!

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Returns from Stores

Assumptions:

• 5% of total US inventory is returned to DCs annually from stores

• Of that inventory, 75% is foreign-sourced.

Calculation:

• [Annual cost, dutiable imports X Returned Inventory X Drawback

eligible] X Weighted Average Duty Rate X .99

• 90,000,000 * .05 * .75 * .12 * .99

• $400,950

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Savings Summary

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$814,780 MPF $540,000 Export $108,000 Duty Deferral $324,000 Scrap $400,950 Drawback

$2,187,730 Total Savings

APPLICATION & ACTIVATION

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Types of Zones

General Purpose Zones (GPZ)

• FTZ open to multiple zone users

• Typically located near ports of entry or in industrial parks

Subzones

• Special purpose zones

• Approved for a specific use or for a specific company

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Alternative Site Framework (ASF)

A listing of current zone projects re-organized

under Alternative Site Framework (ASF) can be

found on the FTZ Board’s website at

http://ia.ita.doc.gov/ftzpage/letters/asflist.html

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From FTZB website

List of Zones Under the Alternative Site Framework (ASF)

(April 10, 2012)

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State Zone Number Location Service Area

Arizona 75 Phoenix Maricopa County and portions of Pinal and Yavapai Counties

174 Tucson Pima County

277 Western Maricopa County Western Maricopa County

Arkansas 14 Little Rock

Clark, Conway, Dallas, Faulkner, Garland, Grant, Hot Spring,

Jefferson, Lonoke, Montgomery, Nevada, Pike, Pulaski, Pope,

Saline, Yell and White Counties

California 3 San Francisco City and County of San Francisco and San Mateo County

50 Long Beach Orange County and portions of Los Angeles and San Bernardino

Counties

153 San Diego City and County of San Diego and the western portion of

Riverside County

205 Port Hueneme Ventura County

244 Riverside Western Riverside County

Florida 64 Jacksonville Baker, Clay, Columbia, Duval and Nassau Counties

General Purpose Zones

© STTAS 2012 26 Courtesy: Google Maps

General Purpose Zones

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Courtesy: Google Maps

Subzones

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Adjacency Requirements

GPZ

Within 60 statute miles or 90 minutes driving time

Subzone

Within 60 statute miles or 90 minutes driving

-OR-

CBP can properly oversee zone activity

electronically; and

Subzone agrees to CBP examination upon request © STTAS 2012 29

Timelines

Application Type Quoted Approval Time

Manufacturing Application “Production

Notification” (GPZ or Subzone)

12 months 120 days, unless a

controversy arises, then reverts

to full “application” process

GPZ Expansion and Non-Manufacturing

Subzone

10 months 3 to 5 months

Temporary/Interim Manufacturing Interim

Approval

75 days Applicant can request

interim approval until Board

takes action on notification.

Minor Boundary Modification 30 days

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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

OPERATIONS

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Inventory Discrepancies

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Shortages/Overages are a normal course of business in all industries

Shortages: Report on Weekly 7501

Overages: Report on Daily 214

An Annual Physical Inventory is Required, unless a Cycle Count

Program is in place

SKUS: Fungible Merchandise

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‘‘Fungible merchandise’’ means merchandise which

for commercial purposes is identical and interchangeable in all situations. 19 CFR

146.1(b)(12)

SKUS: Size/Color Grid

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Import Style Number: 12345 Sizes: Small, Med, Large Colors: Red, Blue, Black Country of Origin: China

Becomes:

12345SMLREDCN 12345MEDREDCN 12345LRGREDCN

ETC

Classification Issues: 2:1

1 SKU for socks

2 possible classifications

Of cotton: 6115.95.9000 @ 13.5%

Of Synthetic Fibers: 6115.96.9020 @ 14.6%

Fungible

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Courtesy: Talbots.com

Classification Issues: Sets

Pants Suit includes Slacks, Jacket, and Belt

3 lines on CBPF214 for admission – Value

– HTS

– Quantity

– Country of Origin

– MID

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Courtesy: Talbots.com

Classification Issues: Hangers

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Special Entry Considerations

Special Program Declarations or “SPI Codes”

Cotton Fees

Textile Categories

AntiDumping/Countervailing Duties

PGA reporting

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Sampling of FTZs

• The Apparel Group

• VF Corporation

• Gymboree Corporation

• Clark’s Shoes

• Kravet

• Abercrombie & Fitch

• Wolverine Worldwide

• Reebok

• Adidas

• Florsheim Shoes

• Nine West

• Academy Sports

• Lane Furniture

• Columbia Sportswear

• Urban Outfitters

• Hugo Boss

• Helly Hansen

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Contact Information

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Sandler & Travis Trade Advisory Services, Inc. 505 Sansome Street, Ste 1475

San Francisco, CA 94111

Lesley Couch, Director of FTZ Services (415) 490-1408 (Direct Line)

lcouch@strtrade.com