Congress approved a de minimis tax exemption on low-value imports nearly 100 years ago in a bipartisan move to allow shipments to U.S. businesses and consumers valued under $800 to be imported tax and duty free. Now, as part of an overall shift in tariff policy, the Trump administration issued an executive order to eliminate the de minimis exemption on low-cost goods from China to tame the transfer of fentanyl. White House officials also cite the loss of tariff revenue for the U.S. as a reason for the repeal.
While the executive order to terminate the de minimis exemption has been paused to give the Department of Commerce and U.S. Customs and Border Control adequate time to determine logistics, middle market companies must consider what the change will mean for their business within the framework of other trade policy shifts.
What’s at Stake?
The de minimis exemption has allowed small and midsize companies, which often operate on thinner margins, to receive low-cost goods quickly and affordably and to skirt recent supply chain disruptions. Specifically, the de minimis exemption allows one shipment of goods per person, per day valued under $800 duty free. These savings are frequently passed on to customers and enable businesses to expand. The administration’s order could significantly impact pricing strategies and the ability to remain competitive. The change will especially pinch cross-border e-commerce retailers, since they rely heavily on low-value imports. Larger companies that rely on these goods will also likely see higher costs, supply chain disruptions and other operational complexities. However, they may be better situated to adjust than their middle market peers.
Alternative Operating Models
As with strategic adjustments necessitated by new tariffs, businesses should collaborate with their professional advisers to consider changes in their operating models to manage the elimination of the de minimis exemption before the pause is lifted.
1) Adjust Business Operations and Reporting
• Ensure your accounting and inventory systems correctly reflect qualifying thresholds.
• Examine how you track expenses to remain compliant with the new standards.
• Enhance your recordkeeping to prepare for more stringent reporting and compliance requirements.
• Determine whether business restructuring is an option that would allow more flexibility.
2) Review Supply Chain and Custom Duties Compliance
• Ensure your business remains in full compliance to avoid penalties.
• Consider automating customs compliance procedures, such as calculating duties and taxes, and examine opportunities to invest in more efficient production processes that could reduce the overall cost of goods sold.
• Understand the specific legal and regulatory developments and how they will affect your products to improve your ability to adjust your business strategies.
3) Reorganize Your Supply Chain Structure
• Determine options for domestic sourcing.
• Consider shifting some sourcing to countries with more favorable tariff conditions.
• Consolidate your shipments to decrease the frequency of lower-value goods subject to duties.
4) Optimize Allowable Deductions
• Work with your financial professional to identify other tax-advantaged strategies to minimize your tax burden, such as eligibility for tax credits you may be overlooking.
• Consider whether your entity structure is the most advantageous.
5) Create or Join a Co-op
• Benefit from working with similar companies in a co-op, which allows multiple companies to combine orders for volume purchasing and share the load on import taxes and transportation charges.
• Use third-party logistics providers (3PLs) that will consolidate shipments for their clients to reduce costs.
6) Take Advantage of Duty Drawbacks
• Investigate opportunities to benefit from a U.S. Customs program that allows a company to recover (in refunds) up to 99% of the import duties, taxes and some fees if those goods are later exported (or destroyed in some cases, such as unused inventory or retail operations).
• Learn the benefits of duty drawbacks if your company re-exports your finished goods.
7) Utilize the Advantages of Bonded Warehouses
• Explore the viability of deferring payments through the U.S. Customs and Border Protection (CBP), which houses or holds imports without charging duties or taxes until materials are removed for sale or use.
CBIZ: Your Partner in Tariff Strategy
At CBIZ, we understand that changes to the de minimis tax exemption adds tax for middle market businesses, Our interdisciplinary team of tax, trade and financial experts collaborates with middle market businesses to navigate these changes. We will continue to monitor action on the de minimis executive order.
Please contact our corporate tax team professionals with questions.
