The Section 301 tariffs of 25% continue to exist and are not going to go away no matter who is in charge of the government. In light of this, many people are looking for ways to circumvent these tariffs, and they have legal ways to do so, particularly with regard to another section called Section 321. Section 321 refers to the de minimis threshold of $800 set in the United States.
In this article, I’ll talk about Section 321 and the $800 de minimis threshold and how companies can use it to reduce tariffs.
Biden updates de minimis rules against China (September 2024)
President Joe Biden clearly read our article and shortly after it came out, he released a new proposed rule to get rid of de minimis for goods from China. He also called on Congress to review the current de minimis rules. The information published here is current as of September 10, 2024, but is subject to change (and possibly very quickly), so be careful when it comes to de minimis rules.
What is Section 321 and De Minimis?
The de minimis threshold sets the minimum value of imported goods below which they are exempt from customs duties and taxes. Each country sets its own threshold to simplify the process of importing low value goods. In principle, every country has a de minimis threshold, but what makes America unique (and enforceable) is the level of that threshold.
| Country | Minimum threshold for duties | Minimum threshold for taxes |
|---|---|---|
| Canada | $150 CAD | $40 CAD |
| UK | £135 | £15 |
| Australia | $1,000 AUD | $1,000 AUD |
| USA | $800 USD | 800 USD |
In America, the de minimis threshold is $800 USD after the Obama administration raised it in 2016 thanks to the Trade Facilitation and Trade Enforcement Act. This threshold is more formally known as Section 321 (not to be confused with Section 301, the section that imposes additional duties). In Canada, for example, the minimum threshold is $150 for duties and only $40 for taxes.
If you send less than $800 worth of goods to America, you avoid all duties (not just the extra 25% under Section 301).
How to use the De Minimis threshold to avoid Section 301
Most companies use warehouses in Canada and/or Mexico to reduce duties through the $800 de minimis threshold; however, direct shipments from China are also possible. Here are three ways to use de minimis to avoid duties:
- They make direct shipments from China in shipments of less than $800 per shipment
- Shipments from China first to Canada and then to America on shipments under $800
- Shipments from China first to Mexico and then re-export to America in shipments less than $800
This works pretty well, but there are pros and cons:
- Shipping shipments under $800 from China is impractical by sea and too expensive by air
- Shipments from Canada/Mexico require Canadian/Mexican duties (which can then be refunded)
- Shipments from Canada/Mexico require payment of shipping costs from Canada/Mexico to the US.
- When shipping on FBA, the maximum amount you can claim is $800 per day ($292,200 per year assuming you shipped the item 365 days per year)
As mentioned, shipping to warehouses in Canada and Mexico is the most common method (as opposed to direct shipping from China). However, Canada and Mexico also have their own challenges, in particular, you still have to ship goods across the border. We will discuss this in the near future.
De Minimis’ strategy is based on having a warehouse in geographical proximity to America
Let me start by saying that the strategy for using the Section 321 de minimis threshold of $800 to avoid duties when using Canada/Mexico is based on one thing: the location of your goods in Canada/Mexico must be geographically close to America. And by close, I mean a distance of a few miles. Basically, the strategy involves using low-cost couriers that transport goods across the border (and there is an entire industry of such companies). If you are shipping goods from Mexico City to San Diego (which is over 1500 miles apart), you will lose any savings on shipping costs.
The good news is that both Mexico and Canada have many cities located along the US border (Tijuana and Vancouver are two examples), and there are many logistics companies that are engaged in using de minimis to avoid duties.
And what about NAFTA – there’s no $800 limit there, right?
Now you’re going to say… but Dave, who cares about this de minimis stuff, there’s NAFTA! I’ll just import to Canada/Mexico first, and then re-export my Chinese goods duty free and unrestricted. Unfortunately, it doesn’t work that way – your goods are made in China anyway, and that’s the main, not last, place of export.
How to avoid US tariffs in e-commerce – individual customer orders (D2C/FBM) and FBA
There are two scenarios in which eCommerce sellers want to use de minimis to avoid duties: shipping on individual customer orders and shipping on Amazon FBA.
Customized orders (D2C or FBM)
Let’s say you’re an eCommerce seller who ships customized packages to your customers either from your Shopify site or through Amazon FBM. This is an ideal way to take advantage of de minimis benefits, as in most cases each customer’s order will be treated separately to count towards the de minimis threshold of $800 (meaning you could potentially exceed the $800 daily threshold). There are some nuances here, so consult with your customer broker for the exact specifics of your situation.
There are many logistics companies in Mexico and Canada along the American border that do just that. Examples include G-Global and Farrow Logistics. Again, the essence of this strategy is that you place your goods in warehouses near the US border.
The advantage of this strategy is that it potentially allows you to exceed the maximum amount of $800. The disadvantage is that the shipping speed may be slower than shipping directly from the US. In theory, these specialized carriers do deliver daily to the US, but there are inevitably delays. If you have a catalog of time-sensitive items, this strategy may not be practical for you.
Shipping bulk items on Amazon FBA
Let’s say you want to ship bulk items from Canada/Mexico to Amazon FBA. Let’s say you want to ship 200 garlic presses that cost $2 each (FOB China). Let’s say they have a regular duty rate of 7% 25% under section 301 tariffs. Let’s say they are shipped in boxes of 50 each (so you have 4 boxes).
There are two options. The first: you can simply ship the item via a common carrier, such as UPS or Canada Post, to FBA. However, there’s a big problem here – there is no partner carrier across the border, and shipping costs are usually very high. For example, let’s say your garlic presses come in boxes of 50 each, so you need to ship four boxes. You’ll actually spend more on increased shipping costs than you will on potential duty savings.
| Using a cross-border partner transportation company | Direct shipping from Canada using UPS | |
| Packages: | 4 boxes of 25 pounds each | 4 boxes of 25 lbs each |
| Duty Savings | $256 ($800 x 32%) | $256 ($800 x 32%) |
| Shipping costs | $90.90 ($70.90 (partner carrier) $20 cross-border shipping charge) | $360.32 (Canada Post) |
| Canadian duties | $80 ($800 x 10%) | $80 ($800 x 10%) |
| Potential savings | $165,10 – $85,10 | -$104.32 to -$184.31 (no savings) |
The alternative is to ship in bulk using a dedicated carrier that makes frequent flights across the Canadian or Mexican border and delivers to a UPS warehouse in the US, allowing you to use a partner carrier from Mexico/Canada with intra-US shipping rates. This may sound crazy, but there is an entire industry of carriers that do just that – like Stallion Express and Chit Chats from Canada.
This strategy has one significant potential caveat: there is a “single order” caveat to Section 321 (see below).
Duty Refunds from Canada/Mexico
One major disadvantage of this strategy is that you will have to pay Canadian/Mexican duties first. These are usually cheaper than U.S. duties (because of Section 301 tariffs), but still not insignificant. There are two ways to get around this problem:
- Bring the goods into a bonded warehouse (a warehouse where the goods don’t technically go through customs in that country)
- Claim a duty refund as a duty drawback
The problem is that in both cases it can be expensive. Bonded warehouses require a lot of administrative costs (for importing and exporting goods), and filing for duty drawback also involves administrative costs. Personally, we choose the duty drawback option (from Canada), but that means we only get back a portion of the duties paid in Canada.
Section 321 De Minimis – Single Order Regulations
There is one potential problem with using Section 321 to avoid duties on goods shipped in bulk to the US (e.g. Amazon FBA) and that is the “single order clause”.
The “single order clause” states that a shipment cannot be part of a larger order that has been broken down into multiple shipments so as not to exceed the $800 threshold. For example, if a customer orders $2,400 worth of merchandise, the seller cannot split the order into three separate $800 shipments and claim duty-free status under Section 321 for each. This would be seen as an attempt to circumvent the rules. The same argument can be made if you regularly ship items to Amazon FBA on a daily basis. If the shipments from Mexico/Canada to the US are part of a large, pre-determined plan to split a bulk order into smaller shipments to avoid duties, this could be seen as an attempt to circumvent the rules. Of course, Section 321 did not specifically address Amazon FBA, and you should discuss the risks/legality of using this strategy for FBA with your customs broker.
Conclusion
Section 301 tariffs may remain and an increase is not out of the question. Using Canada or Mexico to utilize the de minimis threshold of $800 may be a viable, albeit onerous, way to reduce the cost of these tariffs.
Would you use the $800 de minimis threshold to reduce duties? Let me know in the comments section below.
