Using a foreign trade zone to postpone, reduce or eliminate paying customs duties on imported items has become more compelling in recent years due to changes to the federal program in Indiana.
It used to be that a company seeking to enter the protective bubble from customs duties would have few options. The firm might bring imported goods into an FTZ-designated territory such as the Greater Indianapolis Foreign Trade Zone’s five-acre site at Indianapolis International Airport.
Or, a company might have to endure tens or hundreds of thousands of dollars and spend up to a year on paperwork to have its site declared a “sub-zone” of a zone.
But back in early 2011, another alternative became available. Companies operating on land zoned business or industrial in most counties can obtain foreign trade zone status with much less paperwork or delay.
The sites operate under a so-called alternative site framework.
The sites come in two flavors. One is a “magnet” site. There are 13 in the Indianapolis area, including Duke Realty’s Park 100, AllPoints Midwest in Plainfield, and Lebanon Business Park.
For companies in the business of warehousing or distribution, the big advantage is there’s no need to go through an elaborate application process to obtain FTZ status.
Companies that manufacture at such a site have to apply and receive approval before enjoying FTZ status, and that can take six months or so.
The other type of newer alternative site is known as a “usage-driven” site, available in 39 counties.
Most usage-driven sites are being used for warehousing and distribution, said Kent Ebbing, general manager of the Greater Indianapolis Foreign Trade Zone.
For such use, an application must be filed with the Foreign Trade Zones Board, and most times takes only about 30 to 45 days for an OK.
Companies can also conduct manufacturing at a usage-driven site, but it can take six to eight months to get approval.
There are about two-dozen usage-driven sites in the metro area, operated by companies such as Redcats USA, at 2300 Southeastern Ave., and by Sentry Biopharma Services, south of Interstate 70 near the airport.
Such alternative site growth in Indiana in recent years makes Indiana among the most competitive and progressive states, Ebbing said.
“In Indiana, we’re taking a very assertive approach to working with the counties … Indiana was one of the first states to get so many of its counties involved” in alternative sites, said Jody Peacock, vice president of Ports of Indiana, which operates ports in Burns Harbor, Jeffersonville and Mount Vernon.
Those facilities have long been designated foreign trade zones, with Ports of Indiana the primary authority in Indiana for FTZs.
With the relatively new alternative site program, by reducing paperwork and costs, “you open up [opportunities] to some companies that were intimidated by the process,” Peacock added.
Foreign trade zones are considered outside of U.S. Customs territory. Inside a zone, imported items can be stored or modified with other materials. A finished product may be subject to reduced or no customs duties. There are no U.S. customs duties for products shipped outside the country.
Indiana is one of the top states in use of foreign trade zones. It ranks ninth in exports of products that used a foreign trade zone, at $1.4 billion, according to the most recent annual report by the National Association of Foreign Trade Zones.
Cars and pharmaceuticals are among the exports.
The state ranked 14th in the value of merchandise received in foreign trade zones, at $7 billion. This includes automotive components brought in by companies such as Subaru, which assembles cars in Lafayette.
Without the use of a foreign trade zone, each imported component for a car assembled in the United States would be assessed a duty. That ultimately would make a vehicle made here expensive relative to simply importing a car made outside the country.
But by bringing those imported components into an FTZ for final assembly—say into a car or a vacuum cleaner—a manufacturer can virtually eliminate a duty that would be assessed on a component.
Foreign trade zones were created in part to protect U.S. jobs against imported finished products that otherwise would have an edge under the tariff structure.
FTZ status has other advantages for companies.
Say a company imports parts from overseas that are stored in a warehouse. If the company had an on-hand average inventory value of $25 million, it would be looking at paying a customs duty of $1.5 million, assuming the duty rate was 6 percent.
As long as that inventory is in an FTZ site, it technically hasn’t entered the country and is not subject to duty until it leaves. There’s a time value to the extent one can delay having to pay the duty. One might calculate the cash flow savings by multiplying the $1.5 million by an interest rate had the money been borrowed—say 5 percent, resulting in a savings value of $75,000.
“It’s a conservation of capital,” Peacock said.
There are other potential benefits of importing product into a zone. For example, a company might import a chemical used in the manufacturing process. In some cases, the manufacturing process consumes or destroys a portion of that chemical. That portion isn’t subject to a duty.•