The Foreign-Trade Zones Program was created by the U.S. Congress with passage of the Foreign Trade Zones Act of 1934, as amended (19 U.S.C. 81a-81u). Enacted during the Great Depression, the FTZ Act was intended to “expedite and encourage foreign commerce and other purposes.” The Act allows the authorization Foreign-Trade Zones as secure areas at or near U.S. ports of entry that are under the supervision of the U.S. Customs and Border Protection but are considered to be outside of the Customs territory of the United States for the purposes of payment of duty. Under FTZ procedures, foreign and domestic merchandise may be admitted into FTZs for operations such as storage, exhibition, manipulation, destruction, assembly, manufacture and processing, without being subject to formal CBP entry procedures and payment of duties, unless and until the foreign merchandise enters the Customs territory for domestic consumption. The importer ordinarily has a choice of paying duties either at the rate applicable to the foreign material in its admitted condition, or, if used in production, manufacturing or processing, at the rate applicable to the emerging product. Merchandise moved into zones for export (zone-restricted status) may be considered exported for purposes such as federal excise tax rebates and drawback. Foreign merchandise (tangible personal property) admitted to a zone and domestic merchandise held in a zone for exportation are exempt from certain state and local ad valorem taxes.
Authority for establishing these facilities is granted by the Foreign-Trade Zones Board under the Foreign-Trade Zones Act of 1934. Federal regulations concerning FTZ Board activity are contained in 15 CFR Part 400. The FTZ Board consists of the Secretary of Commerce, who is chairman and executive officer, and the Secretary of the Treasury As set forth in 15 CFR 400.11, the FTZ Board has authority to: (1) Prescribe rules and regulations concerning zones; (2) Issue grants of authority for FTZs and subzones, and approve modifications to the original zone project; (3) Approve manufacturing and processing activity in FTZs and subzones; (4) Make determinations on matters requiring Board decisions pursuant to 15 CFR 400; (5) Decide appeals in regard to certain decisions of the Commerce Department’s Assistant Secretary for Import Administration or the Executive Secretary; (6) Inspect the premises, operations and accounts of Grantees and Operators; (7) Require Grantees to report on FTZ operations; (8) Report annually to the Congress on zone operations; (9) Restrict or prohibit zone operations; (10) Impose fines for violations of the FTZ Act and this part; (11) Revoke grants of authority for cause; and (12) Determine, as appropriate, whether zone activity is or would be in the public interest or detrimental to the public interest. The Executive Secretary of the FTZ Board is appointed by the Secretary of Commerce, as chairman of the FTZ Board, to be the chief operating official of the Board. The Executive Secretariat is part of the Import Administration within the International Trade Administration of the U.S. Department of Commerce. Foreign and domestic merchandise may, subject to FTZ Board and CBP regulations, be moved into zones for operations not otherwise prohibited by law, including storage, exhibition, manipulation, and manufacturing. The Board’s regulations require a case-by-case review for all manufacturing activity to be conducted in FTZs. Visit the FTZ Board’s website for further information on foreign-trade zones.
A Grantee is a public or private corporation to which the privilege of establishing, operating, or maintaining a zone project has been given. The principal responsibilities of a Grantee are to: (1) Provide and maintain facilities in connection with a zone; (2) Operate the zone as a public utility with fair and reasonable rates and charges for all zone services and privileges, and afford to all who apply for the use of the zone and its facilities and provide uniform treatment under like conditions; (3) Make annual reports (and at other such time as it may prescribe) to the FTZ Board containing such information as the FTZ Board may require; (4) Maintain books, records, and accounts; (5) Apply to the FTZ Board for a grant of authority to establish a subzone or to expand or otherwise modify its zone project; (6) Permit the erection of buildings necessary to carry out approved zone projects; (7) Operate, maintain, and administer the zone project under the FTZ Act, and laws and regulations administered by CBP for other agencies or administered directly by other agencies, and the schedules of rates and charges made and fixed by the Grantee; (8) Make written application to the Port Director for approval of a new Operator; (9) If acting as the Operator, makes application or must provide concurrence to a request for activation, de-activation or reactivation.
Grantee corporations must be either public corporations or private corporations organized for the purpose of establishing a zone project. Examples of public entities that might receive an FTZ grant include: a political subdivision (including a municipality), a public agency, or a corporate municipal instrumentality of one or more states. Qualified private corporations must be chartered for this purpose under a law of the state in which the zone is located. Consistent with FTZ Board regulations, grantees are allowed to charge fees to recover costs from the services they offer to operators and users in their zone.
An Operator is a corporation, partnership, or person that operates an FTZ or FTZ subzone under the terms of an agreement with the Grantee. For CBP purposes, the term “Operator” includes a Grantee that operates its own zone. Activation of a zone requires the execution of an Operator’s bond, which insures the principal’s agreement to comply with the pertinent laws and CBP regulations and delineates the particular responsibilities of the Operator.
A User is a corporation, partnership, or person that uses a zone under agreement with the Grantee or Operator for storage, handling, processing, or manufacturing of merchandise in zone status, whether foreign or domestic. Usually, the User is the entity which requests a permit to admit, process, or remove zone status merchandise. In subzones, the Operator and User are usually the same entity. They may be permitted by the Grantee to construct their own buildings or structures in which they conduct their own business. An Operator may authorize a User to maintain its own inventory system and procedures manual. However, the Operator remains responsible to CBP for inventory control unless the User posts its own Operator’s bond.
Service providers in the FTZ sector are companies that provide important FTZ-specific services to grantees and operator/users. Examples of such services are legal representation, consulting, bond insurance, zone management, inventory-control and recordkeeping software, customs brokerage, and third-party logistics. Service providers are an important element in the soft infrastructure that allows the FTZ program to operate efficiently.
The principal interest and concern of CBP in zones is control of merchandise moving to and from the zone, the protection of the revenue, and to ensure that zone procedures are in compliance with the FTZ Act and all laws and regulations pertaining to zone use. Regulations of U.S. Customs and Border Protection concerning zones are contained in 19 CFR Part 146.
The Port Director is the local representative of the FTZ Board. The Port Director may call upon local representatives of other government agencies for advice in matters pertaining to the operation, maintenance, and administration of zones. The Port Director is responsible for conducting general oversight of the zone, its processes and procedures and the activities of the Grantee, Operator and Users, and to report exceptions to the FTZ Board. The Port Director will consult with and make recommendations to the FTZ Board on any zone boundary modification upon request of the Grantee or the FTZ Board staff. CBP laws are codified in 19 U.S.C., including the Harmonized Tariff Schedule of the United States. Merchandise of every description, except that prohibited by law, may be brought into a zone and stored or processed there under certain circumstances without being subject to CBP laws of the United States.
Since the FTZ Act specifically excludes, under certain circumstances, only the application of CBP laws, most other federal laws are applicable in zones, such as those affecting public health, immigration, labor, welfare, and income tax. Many laws and regulations governing exportation which are enforced by CBP are applicable in zones. Furthermore, various federal regulations may be applicable to FTZs, many of them dealing with specific kinds of merchandise or activities concerning merchandise in zones. The FTZ Board shall cooperate with CBP and such other federal agencies that have jurisdiction in ports of entry. Federal agencies with the most direct involvement with FTZs include Alcohol & Tobacco Tax and Trade Bureau (TTB); Federal Communications Commission (FCC); Environmental Protection Agency (EPA); Food and Drug Administration (FDA); Department of Agriculture (USDA); and Fish and Wildlife Service (USF&W). All such agencies normally have specific regulations, guidelines, etc., that directly relate to FTZ activity.
Generally, state and local laws are applicable in zones, except to the extent that they would contravene the Constitution and federal laws under the Constitution. The FTZ Board is directed to cooperate with the state, subdivision, and municipality in which an FTZ is located in the exercise of their police, sanitary, and other powers. The U.S. Constitution reserves to Congress the power to regulate commerce with foreign nations (Article I, Section 8, Clause 3) and prohibits states from levying duties on imports and exports (Article 1, Section 10, Clause 2). Federal law may implicitly preempt state law to the extent that state law conflicts with federal regulations. The FTZ Act specifically prohibits state and local ad valorem taxation of imported tangible personal property stored or processed in a zone, or of tangible personal property produced in the U.S. and held in a zone for exportation in either its original or its processed form. Some states have specific legislation conferring certain benefits on FTZ Users. The FTZ Act provides an exemption for certain merchandise held in an FTZ. Some states have other laws that may apply to the merchandise. FTZ Board regulations require that all states have specific legislation conferring authority to submit applications to the FTZ Board. As part of its review, the FTZ Board will analyze the legislation and specific state-by-state requirements to ensure that the organization has the legal authority from the state to submit an application to the FTZ Board.
U.S.-based companies locate in foreign-trade zones for a variety of reasons. The common thread among all FTZ-using companies is that they are importing merchandise for warehousing and distribution or for production into final products for sale domestically or for export. Companies that import parts, inputs and products from international markets are attracted to FTZs due to huge savings in time and costs. A FTZ candidate is looking for duty deferral or duty elimination opportunities and also wants to reduce or eliminate duty drawback processes and expenses, brokerage fees and associate merchandise processing fees. Companies that both import and export should seriously consider the benefits of FTZ status.
Many types of companies use FTZs to gain a competitive advantage, including: