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The ecommerce market is viewed by many as a quick entry into starting a business without a huge amount of upfront capital. However, for businesses planning to rely heavily on imports, an in-depth understanding of ecommerce customs clearance practices is crucial.
Key Takeaways:
This article will help you make sense of the legal requirements (and loopholes) currently in effect that can help your business succeed when leveraged properly.
All businesses and individuals bringing merchandise into the United States need to meet established entry standards. The process by which any product is accepted for entry can be referred to as customs clearance.
Ecommerce customs clearance has come to specifically refer to regulations that govern retail shipments of businesses operating international direct-to-consumer (D2C) online stores.
These can be established brands that may also have physical stores, or digitally native start-ups looking to establish themselves. What they have in common is the practice of shipping orders direct to consumers.
Shipments are often small parcel types and can come directly from overseas manufacturing in other nations. Another segment of the industry keeps products at warehouses and fulfillment centers in the country of origin, where storage is less expensive, and then ships by parcel to the U.S.
In the interests of keeping things focused, this article is specifically geared to customs regulations and procedures that would affect businesses in this industry sector.
For a review of general customs clearance and import regulations, please check out A Commercial Importer’s Guide to Clearing Customs: Advice from a Customs Broker.
Online businesses operating D2C operations need to go about things differently if they want to keep their overhead costs low and still compete with domestic brick-and-mortar stores.
In the past, it was harder for small to medium businesses (SMB) to have success with ecommerce while acting as their own importer, mostly because of the customs process. Between the need for various specific documents, processing time in customs, and duty payment, importing can be expensive and time-consuming.
Bulk shipments a few times a year, followed by warehousing in the U.S., was typical. Small shipments were possible, but very expensive, so low-cost items (even ones that could be marked up at a decent rate) were difficult to profit from.
Three major changes to the import process changed that:
With these changes, ecommerce businesses could free themselves of much of the red tape associated with entry procedures and import more items for less. These benefits, along with changes in consumer spending habits, continue to drive the ecommerce market ever upwards.
The next sections will review how such a thing is possible, with a focused look on how these changes specifically impacted the ecommerce industry.
The U.S. de minimus rules establish the value threshold for entering items without needing to pay entry duty. In 2016, the Trade Facilitation and Trade Enforcement Act (TFTEA) was passed. This changed the current de minimus value from $200 to $800.
How does this impact ecommerce?
Import duties are a significant aspect of international shipping and importing. Many ecommerce businesses are SMBs. When the de minimus was set to $200, these couldn’t justify frequent shipments because of the cost or a single large order for the same reason. Buying from a wholesaler that handled the import process was simpler and less expensive.
After updating the duty-free limit to $800, an importer could now enter more at a time without paying duties. Even with shipping costs, enough product can be brought in to justify the order.
However, there is more to the import process than just paying a fee, and there is still the matter of who and what actually qualifies. That’s when we take a closer look at Section 321.
While de minimus is the actual term for the duty-free threshold, it exists because of Section 321. This provision allows low value shipments to be imported duty free at the limit of one shipment, per one person, per day.
Initially, ‘one person’ was strictly one individual. Not so great if you’re an ecommerce retailer trying to sell direct to consumers. It limited the importer in several ways, making it difficult to fulfill multiple orders in a day or even overly large orders. With such restrictions, it’s difficult to grow.
Thankfully, in 2019, CBP expanded the definition (and therefore eligibility) to include entities as well as individuals. The following can now also file their low-value imports under Section 321:
This isn’t an exhaustive list, but for those interested in ecommerce market expansion, it’s where the new eligibility has made the most difference.
This is because the entries of a business and the entries of an individual follow slightly different rules. Why does this matter?
Consider: a business that can only import one $800 shipment per day can only satisfy so many customers, even if they had a shipment coming in 365 days a year.
However, under the expanded definition, a business can now fulfill multiple orders a day as long as the orders are going to different recipients.
For a direct-to-consumer business plan, this is essential. It means that you can ship an order directly from an overseas supplier to a customer in the USA without needing to arrange for additional warehousing. It also means that you can do so for as many customers as you need to.
As a quick example, you can arrange the shipments of 10 customers for the same day and have each order qualify under Section 321 so long as they are each under $800 in value. The only major barrier remaining is that you can not arrange more than one shipment per customer per day if the total of the shipments exceeds $800.
Now, Section 321 is simply the law that allows these duty-free entries to be possible. To actually reap the benefits of said law, you need to file the proper documentation with the CBP. I’ll go over this next in reviewing the process that is Entry Type 86.
The general purpose of increasing the de minimus threshold and expanding the eligibility of who and what could qualify under Section 321 was to facilitate growing international trends in ecommerce.
To make it viable, it also had to be done in a way that didn’t overburden an already intense import process. The introduction of Entry Type 86 easily identifies shipments as qualifying under section 321 and can be filed via the Automated Commercial Environment (ACE). It also comes with other perks.
What does this mean for ecommerce customs clearance?
By allowing de minimus shipments to be filed as informal entries, importers benefit from a process called ‘release from manifest’. It means the CBP will base its inspection on the shipment manifest or Bill of Lading (BoL). This allows for a much faster clearance process (great for CBP), which helps ecommerce minimize shipping times for clients (great for business).
While goods subject to PGA requirements, such as meeting standards for the Food and Drug Administration (FDA), aren’t eligible for ‘release from manifest’, they can still enter as informal entries which does speed up the process.
Finally, the automated data collection that the ACE system makes possible improves the safety of the entire process. CBP still wants to ensure that Intellectual Property Right (IPR) laws are followed and that dangerous items are staying out of the United States. After all, low-value goods are still subject to the same laws as everything else.
By automating the process, red flags are more easily caught and issues can be sorted out faster. Again, for a business, this means items spend less time in holding and minimizes storage fees and transit times.
For more specific information on qualifying for Section 321 and Entry Type 86, visit: ‘Section 321 Shipments: Can You Say Tax-Free?’
Having established how the U.S. and CBP have made it easier for ecommerce businesses to leverage low-cost imports, we want to add that easier isn’t the same as being easy.
Importing products requires you to have knowledge of sourcing, shipping options, and certain product specific entry procedures. Things can go wrong at multiple points along the way.
Following a few guidelines can save you money, time, and stress as you build up your business.
Knowing the $800 de minimus limit is one thing, but following the rule is another. Planning ahead is critical. Remember, you’re saving money on the import duties, but only as long as you follow the rules.
If you plan on using this for building an inventory and are importing the products as an individual, consider the following:
Also be aware that CBP monitors shipments that are being divided for the sole purpose of avoiding import duties. Shipments of the exact same product, from the same supplier, all arriving within a few days of each other, is likely to raise a red flag.
Should you find yourself needing to import such a large order at once, it may be better to keep it consolidated and pay the duties rather than face potential CBP penalties and scrutiny.
For businesses operating D2C models, make sure shipments are clearly labeled for each customer. Your status as a business allows for multiple entities of low-value shipments, but only if they go to different recipients.
Although the clearance process is now automated through ACE, the system still relies on accurate data input. If you forget to file a low-value shipment as an Entry Type 86, the system won’t do it for you.
This means you potentially lose out on the benefits of informal entry, as well as ‘release from manifest’ if available. It may still be recognized as qualifying for Section 321 because of the provided value, but even that isn’t a guarantee, and you may still end up on the hook for the import duties.
If this were to happen for a shipment that’s meant to go directly to a customer, it can cause serious transit delays and likely lead to a very unhappy client.
Even though the idea behind Section 321 filing is to avoid duty payment, you still need to identify the HTS codes for any and all products in a shipment.
Recall that importers are still responsible for any fees that may be due to a PGA regulation on products, for which HTS codes are needed. Having correctly classified items will also speed up the clearance process. Shipments entering with incorrect or missing codes are more likely to be held for additional inspection, and you are likely to get charged a reclassification fee.
That is time and money you’re not likely to get back because the transaction with the client is already complete.
Regardless of the value of the shipment, the product entering the U.S. needs to meet all required quality standards. From clothing to electronics, roasted coffee to children’s shoes — there is a standard that must be met.
Quality and safety are some aspects. Some potential dangers may not become evident until reports start coming in from consumers. For instance, let’s say the wiring on a set of speakers you sold through your store are found to cause overheating, becoming a potential fire hazard.
An investigation conducted by the CPSC will want to double-check that the products met established standards. Various inquiries are likely to come your way.
You can be fined for importing potentially dangerous items, or even face legal consequences.
The other regulations to be aware of are those governing IPR laws. This is something importers need to self-check on. A supplier won’t get in trouble for breaking IPR laws, but you’ll get in trouble for selling products that do. Just because the supplier provides you with the option of adding a specific marking or design (like one already trademarked by another brand) doesn’t mean it’s okay for you to import it.
As you can see, the CBP takes these violations seriously and continues to enforce such laws year after year.
In short, know what regulations govern the products you offer and make sure to check with your suppliers regularly to ensure they meet them.
Related: Importing Trademarked Goods: Overcoming IP Import Hurdles
This should really go without saying, but if you’re tempted to try to pull a fast one on CBP and undervalue your goods to qualify for duty-free entry — don’t.
Simply put, it’s illegal. Misrepresentation of product value is a quick way to get in trouble with CBP and potentially have your rights as an importer taken away.
Whether you’re sourcing inventory or looking to sell D2C, you need a supplier that is both reliable and consistent.
For inventory, there are a number of web-based marketplaces. The whole-purpose of such sites is to connect importers with suppliers in other countries. However, quality-control isn’t guaranteed, so you’ll need to spend some time sifting through options.
Related: 18 Alibaba Alternatives for Product Sourcing
Since many of those marketplaces focus on selling in bulk, you’ll need something different for D2C sales. The greater diversity of products you offer, the tougher this is because it may require you to connect with and keep track of multiple suppliers.
You can also become your own supplier thanks to the de minimus rules allowing a company to enter multiple shipments a day as long as they go to different recipients. Establishing your own warehouse in the country of manufacture, whether it’s China, Vietnam, or elsewhere, allows you to consolidate the products you offer.
You’ll need more capital for this type of venture and local logistics services as well. The benefit is that you get to save on warehousing (since local rates are likely to still be less than U.S. rates) and be able to process orders for export as they come in.
To confirm to CBP that your shipment meets Section 321 rules for Entry Form 86 filing, you need to provide supporting documentation.
All entries, regardless of value, have similar basic document and information requirements.
Missing from the above list is a Customs Bond. These are required for products and shipments valued over $2,500. It’s an amount well above the de minimus value, so in many cases it’s a non-issue. The only time that may change is when a product falls under the purview of a PGA, in which case the bond is required no matter the product value.
Related: Types of Customs Bonds
A licensed customs broker specializes in import regulations and law. You may be very knowledgeable about your business and product, but not about basic customs regulations and laws.
The major changes we’ve reviewed still pose a challenge in many ways. A vast quantity of imports have gone from bulk containerization to small parcel, LCL shipments. Customs clearance services are working overtime to adjust to changing import styles while trying to minimize delays as much as possible.
A broker’s familiarity with product admissibility laws simply makes the process smoother and less prone to errors. This knowledge may prevent you from discovering too late that the product you have sitting in port will never make it through customs.
Starting a business is an exciting venture, but is not without its risks. Manage your risks through guidance from USA Customs Clearance and our licensed customs brokers.
USA Customs Clearance can provide you with a full range of brokerage services and one-on-on responses for your most immediate questions.
Call us at (855) 912-0406 to speak with a representative today, or send us a direct query through our contact form. Help for your ecommerce business is only a few clicks away.
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