By John F. Di Leo
You’ve decided to start an import/export business, or to expand your existing business by importing goods from abroad and reselling them. Wonderful! America was founded on import/export business (nearly all the reasons behind our War of Independence had to do with disagreements with England on how we should manage our international trade), so your entrepreneurial choice has a good and long pedigree!
But there’s a lot to know, and a lot more to manage in your business, once your purchases or sales start crossing borders.
No matter who you import from – a small company or a large one, a related company or an unrelated company – there will need to be an import clearance. Very few shipments are excluded from the import process (articles from space, corpses in caskets, business records, telecommunications); almost every import shipment must be cleared through the Bureau of Customs and Border Protection (CBP).
This fact creates a division of responsibilities in your import activities.
- On the one hand, you have the carriers who are responsible for transporting the goods. Freight forwarders, containership lines, airlines, truckers and railroads can all handle the movement of goods from country to country, and their focus is normally on speed, cost and service.
- By contrast, Customs brokers handle the government approval aspects of those moves – the accurate filing of documents, proper acquisition of permits or other approvals, and the calculation and payment of duties, taxes and fees on your behalf. Their focus is on accuracy and legal compliance, which takes time, and therefore has the tendency to slow down the speed of your shipment and increase its cost.
Since most companies in the freight forwarding world handle both aspects – the transportation of goods and the import/export government filings on your behalf – this often provides a tug-of-war between their departments. When your vendor has a tug-of-war concerning your interests, you lose either way. Always remember, therefore, that a late shipment may make you suffer a little, but trouble with a government agency makes you suffer a lot… so always pay attention to the compliance side.
In the USA, Customs does allow an importer to file his own import entry, on his own behalf. It’s legal, but not often recommended, unless the importer is already an expert. There is so much to know about the classification process, and the many odd rules of importing, from country of origin to valuation to HTS classification, you are usually better off selecting a Customs broker, at least at first, to ensure that everything is done right on your behalf. Brokers have computer systems with helpful warning flags and built-in triggers that protect you from missing an anti-dumping duty, tariff change or any other government agency requirements.
One of the first decisions your broker will ask you to make is whether to buy a continuous Customs bond or to just do business using Single Entry Bonds (SEBs). The SEB can be purchased on the spot, while a continuous bond takes weeks, so let’s spend some time understanding what this item is all about.
The Purpose of the Bond
Even though, as the importer, you’re the one paying for it, the Customs bond isn’t really for you. Customs bonds are taken out to protect the government, to ensure that the government will get every penny of the duties, taxes and fees that they expect from your shipment.
In the old days, Customs required importers to pay their import duties before the goods would be released from port. If you needed a couple weeks to get the money together, your cargo would sit in port (accumulating storage charges) while you gathered the money. In addition, as Customs rules became more complicated, and as the duty rate differences between products grew to fill an entire book, the industry found that one often needed a week or two just to calculate the amount owed on each shipment.
Customs therefore established the concept of a two-step import clearance process, so that importers could import their goods, file a preliminary entry (in the US, it’s called a CF-3461) and then receive their goods immediately. We can then take our time, with up to ten business days to calculate our entry summary (in the US, it’s called a CF-7501). Most countries have some version of this two-step process, to give the importers and their agents enough time to get their filings right.
But Customs isn’t happy about letting cargo go without collecting their money up front, so this two-step process usually requires a bond (only very low-value “informal entries” are excluded).
Why Customs Requires You to Have a Bond:
- It puts the importer on record with Customs, so they can find you if they want to. It includes your business name, your EIN, your address, ownership, and in some cases, your history with Customs.
- It enables Customs to allow you to pick up your goods without paying your duties right away, and gives you two weeks to work with your broker and get it filed and paid correctly.
- It gives Customs a guarantee to collect more money, if they should recalculate the entry later.
Let’s think about this last one a moment. Customs knows that nobody’s perfect, and their rules are often confusing. Even after you’ve made your final filing, Customs isn’t done with you yet. They generally have up to a year to review your work (or your Customs broker’s work) and see whether or not they agree. If Customs decides your entry was wrong in that time, they can bill you for the additional amount caused by this correction.
What could have gone wrong? Well, even if you try to be diligent, and even if your Customs broker tries to think of everything, there are a number of common reasons why the first filing might be incorrect.
- Valuation: Customs may discover that you had dutiable assists (additional payments, or payments-in-kind, to your foreign vendor) that your broker didn’t know to include. This increased value would increase your duties and fees.
- HTS Classification: Customs may disagree with you and your broker on the HTS code. As hard as the regulators tried to make the Harmonized Tariff Schedule user-friendly, there are thousands of codes that are very nuanced, and thousands of products that simply aren’t clearly provided for. Even the most careful importers will occasionally get a code wrong, or have a legitimate disagreement with Customs on it.
- Origin: in the USA, we assess the same basic duty rate on all MFN countries (virtually every country on earth except two), but we have lots of programs that are specific to the country of origin of goods, both in providing duty-free benefits and in assessing punitive additional anti-dumping or countervailing duties on them. Customs could discover that you claimed duty-free benefits under GSP, CBI, NAFTA or another such program without deserving it, or they may discover that your vendor lied about the origin of the product to avoid an anti-dumping case. You could therefore see a product you thought was duty-free get an additional bill for five or ten percent of the value, or worse, see a product hit with an anti-dumping duty of 10%, 25%, even 50% or 100% or more.
- Date Changes: Yes, even a date error can cause an additional bill from Customs. The USA usually makes its major changes at the first of the year, but anti-dumping duties and the special punitive rates on steel, aluminum, and Chinese goods that entered the marketplace in 2018 (known as Section 301 and Section 232 Duties) can be implemented at any time. Since Customs brokers usually file import entries in advance of arrival (to ensure that goods don’t sit in port awaiting clearance), they sometimes guess wrong on the arrival date. If a broker said something was going to arrive on February 9, but the ship actually arrived on February 10, the day that a duty rate changed or a new punitive case became effective, then Customs would have to issue an additional bill, perhaps weeks later, perhaps months later.
For these reasons and more, Customs insists that importers have a bond in place. Again, it’s for their protection, not yours. You just get to pay for it!
Single Entry Bonds vs. Continuous Customs Bonds
In most cases (not all), Customs gives you the choice of buying one bond per shipment (an SEB) or buying a renewable bond for the year (a Continuous bond). For all intents and purposes, any import shipment worth over $2500 must have one or the other.
The SEB can be issued on the fly. Every Customs broker has a supply of blank forms and a contract with a Customs-approved surety company to issue them. The broker makes a commission on every bond he sells, and for many brokers, yes, they do use this as a small profit center… but Customs brokers truly don’t think of them that way. The additional work involved in generating an SEB isn’t usually worth the commission to them; they’d rather have you be a successful importer, so that you have more shipments for them to handle in a more cost-effective manner.
The SEB is based on the value of your import shipment plus the expected duty payment, and is priced per thousand dollars of value, with a minimum floor. Even a relatively small import shipment of just a few thousand dollars might therefore require an SEB with a $40 or $50 or even $100 price, depending on your broker’s pricing approach and the deal he has with his bond broker.
The sole true advantage of an SEB is that it can be done quickly and easily. If you import multiple shipments per year, or any shipments at all of very high value, it becomes cost-prohibitive.
The Continuous bond, on the other hand, is issued for a whole year, and can be automatically renewed. Most small importing companies can get a Continuous Customs bond for between $500 and $1000 per year, with these advantages:
- It’s good in all US ports, no matter how many shipments you have.
- It’s attached to you, not to your broker, so you can use one broker for ocean, another for air, another for truck crossings, and still only need the one bond (but note that it’s generally recommended that businesses keep the number of Customs brokers they use as low as possible, so that all your entries are handled the same way).
- If your business has multiple divisions under the same ownership (say, for example, one spouse operates a toy and board game importing company, and the other spouse operates a clothing and knick-knack importing company), you can cover the multiple entities on the same bond, as long as all the EINs, business names, and DBAs are identified as co-principles when the bond is filed.
- It allows your Customs broker to file Customs entries and obtain clearance in advance of arrival of goods, so there should hardly ever be Customs delays on your shipments (other than the random customs inspection or documentation question, of course).
- The bonding company can provide free, detailed tracking reports for your import activity, conveniently enabling your internal compliance audits as your business grows… and gives you the opportunity to discover if someone else is illegally importing in your name and on your bond (Yes, this does happen, in this era of rampant identity theft).
As you can see, once you decide to become an importer, one of your first calls to your Customs broker should be to order a Continuous bond. As long as you calculate it right, it will automatically renew and give you peace of mind, and smooth importing practices, for years to come.
The Application Process
A Continuous Customs bond is traditionally calculated very simply: add up your expected import Customs collections over the past year (that’s duties, taxes and fees), and select a figure that covers ten percent of that number. Note that the SEB pays attention to the value of the goods, but the continuous bond (normally) only pays attention to the Customs payments. You could theoretically import many, many millions of dollars worth of goods, and if they’re almost all duty free, still satisfy your obligations with a minimum level bond.
Traditionally (and this could change), the minimum level for a Continuous bond is $50,000 per year, which covers up to $500,000 per year in Customs payments. You could have another shipment every day – 365 shipments a year – and if you’re importing goods that are mostly duty-free, either conditionally (by using a free trade agreement or trade promotion program) or unconditionally (by importing HTS codes that carry a zero duty rate), then your $50,000 bond will be enough.
By contrast, if you import high value goods that are dutiable, you may need a more significant bond, though for the small businesses in our readership here, this is reasonably unlikely.
Still, if you’re importing large quantities of goods hit by the traditionally high textile duty rates, or goods hit by the new punitive 10% and 25% additional duties on Chinese goods and many steel and aluminum raw materials as mentioned above, then it adds up quickly and you will indeed need a higher bond amount.
Perhaps over the course of a year, you will import ten million dollars worth of goods hit by a 25% duty. That’s a $2,500,000 annual Customs collection (a bit more, actually, considering the fees). Since we need to cover 10% of the annual collection, and we always round up to the next hundred thousand, such an importer would need a $300,000 Customs bond.
So it does depend to an extent on the products you intend to import, as well as on the sheer volume. Out of our hands completely, as predictors, is the question of what duty changes may arise as the current process of trade changes continues. Two years ago, most steel and aluminum raw materials were duty-free, and they jumped to 25% and 10% last year. These rates could go away in the future, or they could be joined by other products that become new targets for reasons of economics, politics, or foreign policy.
Refiling to increase a bond level is a lot of work; better to estimate high and be sure that your bond is sufficient.
Once you’ve figured out how much coverage you need, the rest of the process is simple. Your Customs broker will give you a Customs form to fill in. It must contain the information mentioned before – names, DBAs, EINs, owners, addresses, past import volume, line of business, most commonly imported commodities – and also some financial information about the owners. Have you or this business ever filed for bankruptcy? Have you ever been the subject of a Customs fine or penalty? Be prepared to discuss this sort of thing with your broker. It’s not a dealbreaker; you just need to be honest or the bond company could have grounds to refuse coverage. This is a legal document; it must be signed by a corporate officer, and you will need to give your Customs broker a standard limited Customs power of attorney to file the documentation on your behalf.
Suspension or Cancellation of a Customs Bond
If a business changes its address, that’s easy; a bond rider will satisfy Customs. If you change your name or EIN, however, you may need to cancel the existing bond and start from scratch with a new one.
For a business that’s in start-up mode, therefore, perhaps still considering a couple of different DBAs or a couple of different EINs (in the case of a family operating a couple of different businesses simultaneously), the best choice is usually to list all the possibilities, so they’re all covered. Maybe you have both a mail order business and a gift shop? List them both, even if today only one expects to import. The only thing that affects your cost is the amount of money you’re paying to Customs; it doesn’t hurt to include the other family businesses on the bond, just in case.
More concerning is when Customs suspends or terminates your bond against your will. There are two primary reasons for this:
- Bond Insufficiency: If you were low in your estimation when you set it up, Customs can act as if you don’t have a bond at all. Customs tends to be decent about this, and especially in 2018, when it happened a lot (because of the high number of unexpected jumps from zero to 25%), Customs and the bonding companies worked with the importers to ensure that they had time to get replacement bonds in place. But don’t count on that; it is still the importer’s obligation to track this sort of thing and stay ahead of it. You don’t want a shipment stuck in port, suddenly without bond coverage.
- Sanction List: Customs periodically issues additional bills to importers when they discover that the wrong duty was paid. If the importer processes this bill promptly, there’s no problem. Unfortunately, such bills are often lost, or simply not recognized, and are therefore not handled at all. The smaller the business, the less of a risk this should be; a sole proprietor, for example, opens all his own mail, so there’s no confused mail room clerk to blame. Just be aware: if Customs sends you a bill – any bill – immediately call your broker to discuss it. Some are late filing errors that your broker will absorb; others are additional duty bills that you must pay. Either way, don’t let these bills sit. Deal with them immediately or you could lose your import privileges entirely.
Can I get out of having a bond at all?
Well, yes and no. As we’ve shown, a bond has considerable uses, so if you want to be in the import-export business, you really are almost always better off having a continuous bond on file.
But yes, there are ways to avoid it.
You can sell imported goods without being the importer yourself, for example. You might find a wholesaler in the USA who imports in great bulk, maximizing the advantages of volume buying and volume logistics, and can sell them to you as domestic orders. You will still have some of the Customs obligations associated with imported goods (such as country of origin marking requirements), but you would then not be the importer of record, so you wouldn’t need a bond.
Another way to avoid it would be to only order in tiny increments. Small, low-value shipments that are ordered through small package companies and couriers may be exempt – if each shipment’s true value is low enough
(Note: Never lie about a Customs value. Never!). But international small package airfreight is among the most expensive modes of transportation, often ten or twenty times the rate of full container oceanfreight, so for most products, this is not an option. But yes, your carrier can often import these low-value air shipments and clear them without a bond, so if you’re starting out with low value samples, maybe you can put off the bond a bit.
Just remember that once you start needing SEBs, you’re probably throwing money away, so get ready for that cost-effective continuous bond.
Other Bonds
There are other bonds in the Customs world, so we don’t ever just say the word “bond” alone. Be aware of these major ones, for example:
- Drawback bond: This is a special bond for importers who utilize a duty drawback program, such as the manufacturer’s drawback (allowing a clawback of previously paid duties when exporting manufactured goods).
- Foreign Trade Zone bond: This is for companies that operate a customs-bonded manufacturing center, allowing them to import materials for manufacturing, then to postpone duty assessment on them until that manufacturing is finished, allowing them to assess duty rates based on the finished product instead of their imported condition.
Both of the above are unlikely to be relevant to a small business, though of course anything’s possible.
- The ATA Carnet bond: This one, however, is very cool, and could well be useful to a small businessman who travels globally, displaying your product at trade shows. Every shipment of display materials, samples and handouts, must go through Customs, both inbound and outbound. You will pay a mint in transportation as you handle these moves in and out of the world’s huge convention centers. The ATA Carnet bond – good for a year, no matter how many shows it’s used for – can reduce the complexity and cost of those in-and-out Customs clearances, eliminating the need for temporary import bonds. It has a lot of strings attached, and you must be sure to never lose the original document packet… but the ATA Carnet bond is indeed very handy for the movement of displays. Your Customs broker can sell you one of these too, but be sure to understand every single requirement before going through with it.
So there we have it. If you’re going to operate an import business, you will find the benefits of a continuous bond among the keys to success. Select a good Customs broker, provide all the information he might need, and enjoy the excitement of going global!
Copyright 2019 John F. Di Leo
Originally published in MoneyCrashers, February 2021
John F. Di Leo is a Chicagoland-based Customs broker and trade compliance trainer. He has been working in international trade, in various capacities on both the manufacturing and service sides of the desk, for forty years now.
Note: this is a short summary of a very extensive topic, and does not constitute legal or tax advice. Readers are encouraged to use this as one of many resources to learn about the subject and to utilize major international Customs brokerages and freight forwarders to ensure compliance and success.