December 9, 2022

Duty Minimization through E-Commerce and Low Value Shipments

E-commerce is projected to grow to $2 trillion by 2030 and experienced a phenomenal surge in sales over the COVID19 pandemic. With the increase in online stores and availability of consumer goods via social media applications, e-commerce has escalated to unprecedented levels and will continue to do so.

E-commerce is one of the most intricate supply chain processes due to the nature of speed to market and incorporates different elements such as how shipments need to be picked, moved, cleared, and delivered, especially when using this shipping strategy for duty minimization benefits. 

Strategic targeted advertising impacts everyone, also known as 'click bait' i.e. targeted adverts that align with our persona and entice us towards a purchase. For example, you see a social media advertisement for that cool $20 magnetized golf towel that can be flung at a golf bag and immediately sticks on–you decide to buy it because you know you are going to look awesome flinging that towel. But, do you really think of what goes into the purchase of that order? We see the advertisement, we click, we buy, and it gets delivered, right? Wrong. 

That $20 golf towel was probably worth less than a dollar when it was initially entered into the U.S. For importers and shippers to take advantage of e-commerce duty saving strategies, orders entered need to be valued under $800. So that golf towel came with hundreds of its little twin golf towels with a 200% mark up with the goal to spice up golf bags everywhere. Once Customs decided to increase the de-minimis value of an item from $200 to $800, importers in the U.S. and shippers abroad have taken full advantage of the change.

It has allowed for a growing volume of goods moving from point A to point B due to the demand behind the de-minimis rule. More of what you want can be brought into the country, duty-free; which is great news for the importer, as well as the end consumer. However, the evolution of e-commerce has posed challenges to Customs organizations all over the world that they were not ready for due to the issues of transparency and compliance with government regulations. 

An e-commerce Customs entry (known as a Type 86 Entry) is fast and usually automated, as one Bill of Lading could be carrying thousands of House Bills. The main issue is that the data input is limited and leaves out several data points that are required on a traditional Customs entry. Due to the volume and speed with how e-commerce moves, having an up to date and viable compliance program that addresses key items are of utmost importance. Importers can leave themselves open to several issues that include:

• Inaccurate classifications,
• Incoterm issues that might affect profitability and clearance,
• Exposure to risk assessments,
• And more....

When the de-minimis value was raised from $200 to $800 in the United States, sellers started splitting shipments into smaller parcels to increase volume shipped, but this also left the importer open to risk of product loss in the case of an exam or seizure. If Customs determines there is an incorrect classification or valuation of a product (not to mention other requirements that may be needed), they could demand a correction on the entry which could turn into paying additional duties and taxes or ultimately rejecting entry of the goods into the country. This turns out to be a very large pain not only from a Customs standpoint, but from a warehouse management and distribution perspective.

Going back to our initial example, imagine having to pick that small shipment of golf towels in a warehouse that is housing thousands of house bills of lading - not a warehouse operator’s ideal scenario. Now imagine if that small shipment of golf towels is denied entry into the U.S. An importer will need to either destroy, re-export, or abandon that shipment, which is another step in the supply chain process that needs to be addressed, but, can be avoided.  

From an Incoterms standpoint, most commonly used on these types of transactions are DAP and DDP, with DDP being the most popular incoterm.

• DAP carries additional risk to the buyer as they become the importer of record. If a product undergoes an exam at the port of destination, this causes delays in distribution, resulting in potential losses in profit- not to mention the compliance risks posed if the importer of record is not familiar with their product. 
• DDP will indeed carry a risk to the seller as it does add extra costs to the bottom line, but they know their product and the end goal for the seller is to gain speed to market using the e-commerce strategy. This really turns out to be a business decision for the party using the e-commerce model, but the main point here is to address the risks and benefits of what incoterm is going to be used. 

This leads to why internal compliance processes need to dictate how the goods are entered, especially if those goods are being entered with a duty minimization benefit, such as a Type 86 entry used for e-commerce.

Commercial documents and Purchase Orders must accurately reflect the value, incoterms, and classification of what is being shipped with a real scope of analysis on the valuation of the product due to the $800 rule.

Products that do not pay duties when entering the U.S. are heavily scrutinized during Customs audits because of the loss of revenue to the government and are usually the first thing that is going to be looked into.

Companies must conduct random audits of their products, educate, and talk to their procurement teams, ensure that manuals are up to date, and that the shippers are using the correct valuation methods when selling these products. 

It is important to have Trade Compliance experts on staff or hire external consulting companies that can help address the intricacies that come with e-commerce shipping and receiving.

Crane Worldwide's E-Commerce product, along with our in-house Trade Advisory specialists, can help get you where you need for your shipping and consulting needs. You can reach out below with any enquiry you may have. 

Alexandra Kleinschmidt 

Alexandra Kleinschmidt is Crane Worldwide Logistics' Regional Vice President of Sales and Corporate License Holder.

Alexandra is a licensed customs broker, and certified customs specialist and has experience in leadership roles covering customs brokerage, compliance, ocean product and sales.  

Crane Worldwide Logistics trade advisory team can support your e-commerce business with international expertise.