By Steve Givens
Companies, especially eCommerce retailers, are under a lot of financial pressure. Not only are they competing against other brands in getting eyes on their products, but fulfillment and shipping costs are a huge factor in determining margins and sales success. Charge the buyer too much for shipping and they will buy from the competitor. Charge too little, and the retailer loses money. And if the eCommerce retailer offers free shipping, the financial stakes can be even higher.
The good news is that online retailers importing goods have a potential legal loophole to reduce costs if they take advantage of it and use it properly. That loophole is Section 321 (a)(2)(c) of the Tariff Act of 1930, commonly referred to as Section 321. It allows companies to avoid paying duties and tariffs on goods imported into the U.S. with total order values of $800. In addition to better-managing costs, this helps brands increase customer satisfaction to grow their business.
I’ve been in the fulfillment and transportation solutions industry for over 30 years, currently as managing director of fulfillment optimization at Shipware. My team and I help eCommerce brands optimize their third-party logistics (3PL) fulfillment relationships to reduce cost, improve service and enhance the customer experience. We also help 3PLs optimize their small parcel and LTL/FTL freight solutions to lowering costs by choosing the best carrier options while reducing transit times and delivering the maximum customer value.
I give you this background to say that Section 321 is a tool that more eCommerce brands need to understand to provide their clients better service and grow their businesses.
Section 321: An Overview
Under Section 321 of the Tariff Act of 1930, companies are not required to pay duties and tariffs on goods imported into the United States if the aggregate fair value of the goods is less than $800 in the country they are shipped from. This is referred to as the de minimis tax exemption, a Latin phrase meaning it is negligible or trivial. The de minimis amount used to be $200, but the government raised it to $800 (excluding shipping costs) in 2016.
While this seems like a boon for eCommerce companies (and it is!), ultimately, it is also helpful for the government. That’s because the government can more quickly clear lower-priced goods from U.S. Customs and Border Protection’s (CBP) plate and get them on their way without backlogging their system.
Why Businesses Need to Understand Section 321
If an eCommerce company, or any company for that matter, uses Section 321 properly, it can ultimately lower the prices of goods offered to customers and/or increase profit margins, as merchants avoid paying taxes and duties on imported goods. That results in cost savings, which can be passed along to customers and positively affect the company’s bottom line.
Understanding the Section 321’s Business Impact
In addition to saving on taxes and duties, eCommerce brands can save on 3PL and fulfillment services. They can do so by leveraging direct-to-consumer product fulfillment services in Mexico and Canada, which tend to be lower than the same services offered in the U.S. Fulfilling goods in Mexico can reduce costs by an average of 20% to 40% while fulfilling in Canada can offer average savings of 10% to 25%. These are due to lower warehousing and labor costs.
With savings like these, eCommerce brands can reduce logistics costs overall, giving them the financial room to scale their business more quickly. The savings add up even as the total amount is $800 or less per shipment. And these costs can be passed on to customers, lowering the prices you quote and gaining customer loyalty.
Who Should Use Section 321
Most companies that use the Section 321 strategy are mid-sized and enterprise companies. At Shipware, we’ve seen that many of the cross-border fulfillment companies have minimum volume requirements. That rules out some smaller eCommerce brands, who don’t have the order volume to make these Section 321 fulfillment solutions effective.
That said, even small merchants should understand the opportunity and benefits of cross-border product fulfillment optimization. As their business grows, they will be positioned to take advantage of these solutions in the future.
Not using a Section 321 game plan when it is a good option can put the company at a disadvantage. Fulfilling products in the U.S. has many advantages but also costs more. That additional fulfillment cost can hold back companies whose competitors outsource the service internationally and take advantage of Section 321.
Current Trends Around Section 321
While Section 321 has been in force since 1930, it was less commonly used until 2016, as the maximum for tax breaks was only $200. Once the higher limit was imposed, it provided a greater advantage.
Along with the higher de minimis threshold, Mexican and Canadian fulfillment solutions have grown significantly in the last seven years. The combination makes this cost-saving solution viable, a one-two punch.
The Importance of Reducing Fulfillment Costs in Today’s Economy
It’s no shock that eCommerce and the product fulfillment market have grown significantly in the last two decades. Even in the last five years, that growth has escalated, not just because of the pandemic. Brands need to understand the logistics better and the financial issues, challenges, and opportunities associated with importing and fulfilling direct-to-consumer and business-to-business goods. Unfortunately, it’s not as easy as just reading an article, though that may be the first step!
One reason for the price concerns is that labor shortages have vexed domestic fulfillment companies and warehouses. These operations have struggled to attract and retain workers in the past few years. Some geographic areas have been impacted more than others. But overall, it has been a big issue impacting many companies. As a result, domestic fulfillment services have gotten significantly more pricey, compared especially to cross-border options. Combined with tremendous growth in fulfillment volumes, some 3PLs have had difficulty meeting service level agreements (SLA) for inventory receiving and order turn times.
Mexican and Canadian cross-border fulfillment companies have not experienced the same labor constraints and staffing issues as the U.S. Consequently, they have not had the same SLA compliance issues. With this in mind, more brands are considering or actually moving to cross-border facilities that can meet their needs while relying on Section 321 for additional savings.
How Shipware Can Help
With thousands of 3PL fulfillment options now available, it can be difficult to understand that market and the options for Section 321 to reduce costs and improve service. That means consulting with outside experts who can provide a thorough understanding of the eCommerce brand’s specific goals, needs, and situation as it pertains to shipping and fulfilling from inside or outside the U.S.
Shipware can provide that expertise and strategic guidance to develop the best fulfillment solutions support strategy. Shipware has significant expertise in the import logistics and fulfillment optimization strategies available for cost reduction and service improvement. That includes domestic fulfillment, cross-border fulfillment, and Section 321. Our company has significant market expertise and relationships with the best fulfillment providers. We offer preferred pricing relationships, knowledge of which providers not to use, and proof from our numerous clients who are already benefiting from these solutions.
When partnering with Shipware for fulfillment optimization services, we manage the fulfillment request for proposal (RFP) and the partner selection process, pricing negotiations, contract terms, implementation support, and ongoing strategic consulting support. We optimize the company’s programs which deliver significant value. It could not be easier for an eCommerce brand or other company to save money and provide great customer service.
If your company is sourcing goods from outside the U.S., we invite you to contact us. Cross-border fulfillment and leveraging Section 321 is a great strategy for delivering fulfillment, duties, tariff cost reductions, and a powerful competitive advantage. You don’t have to do it alone.
Want to connect with me to discuss shipping cost reduction in more detail? Connect on LinkedIn here.
Sources:
CBD.GOV. Section 321 Programs. Article referenced from: https://www.cbp.gov/trade/trade-enforcement/tftea/section-321-programs.
