by Trey Boring
In the second installment of this three-part series, Trey Boring, Senior Vice President of IMS Worldwide, Inc., continues the overview of major issues companies must address to operate a compliant Foreign Trade Zone (FTZ). Boring is an expert in the field, and his firm is an internationally recognized authority on the establishment, marketing and operation of Foreign Trade Zones. Part 2 discusses zone activities and the documentation that captures these activities.
Types of merchandise manipulations include repackaging, picking, packing, inspecting and, in some cases, repairs. Your inventory control system must possess traceability for all of these manipulations. So, if you create work orders to do repackaging, or if you have a pack/pick list that’s transmitted to the floor for picking, you must possess documentation that can serve as justification should Customs conduct an audit or focused assessment.
Managing manipulations is important, but then, too, is tracking manufacturing or production. Here, it is critical that your manufacturing systems properly communicate with your zone software. So, for example, if your end-product is a widget that uses five item As and five item Bs from your FTZ inventory, combined with items C, D, E and F, you have to be able to track all that material from inventory and be able to justify to CBP exactly where all the merchandise went. That is, you must be able to track the building material backward and be able to tell CBP that when I enter a widget it contains five of A and five of B. You’ll also want to apply the value for five As and five Bs with the duty rate of the finished good, if that’s the way your process works.
So, traceability is critical within your inventory control process for manipulations and manufacturing.
As items leave the FTZ, the key inventory control questions are:
- What are you doing with the merchandise when it’s leaving the zone?
- Is it being exported? If it’s being exported, how is it being exported? To where? Do I have documentation?
- Am I shipping to domestic customers? If so, am I correctly accounting for it in my process?
- Or, are you temporarily removing inventory?
Let’s say you have to send something out of the zone, but will bring it back into the FTZ. Maybe it’s going to be painted or tested. You need to understand the nature of what is being done to the product when it is released to properly account for these temporary removals. In some instances, a 216 document will suffice. It allows qualified inventory to leave, have something done to it and be brought back into the zone without a duty payment. In some companies, products are received back under a different part number. They must be sent domestic status. You need to know what you’ll do with the merchandise when it leaves the zone because it dictates what closing documentation you’ll need to have.
The next key question is: What is the nature of the merchandise when ultimately leaving the FTZ? The distribution environment is much simpler when it comes to merchandise leaving the zone, especially where there are boxes in and boxes out. Here, you are bringing in product A and product A is always going to be product A, even when sent out of the FTZ to a customer. For production, as talked about earlier, components or raw materials are coming in and finished goods are going out. Understanding the nature of the goods informs the import and export documents created, and also increases one’s ability to trace the imported components within a shipment.
The other big question is: How do you withdraw merchandise? Are you in a port city and immediately exporting something, or are you first transporting it to a port from elsewhere in the United States and then exporting it? Use the 7512 IE when doing a straight export. However, if you’re based in the Midwest and shipping product from there to the Port of Houston for export, use the T&E.
The 06 is the consumption entry whereby the actual payment of duty is made on goods shipped into the United States. How you withdraw the merchandise is the way you close the loop of accountability. The audit trail begins upon admission or receipt and extends until merchandise withdrawal. The entry can be an export entry or a consumption entry, but an entry must be made to show CBP what happened to that merchandise at the end of the process.
On the inbound side, when we talked about our zone admission, I mentioned that you need to record the MID code, commercial invoice value and so forth. If you operate an inland zone, you potentially have a 7512 IT in-bond transport document. Returning to the Port of Houston example, if I did not operate an FTZ I would pay duty based on the commercial invoice. I would close out the ocean bill or the air bill at the time of acceptance, depending on how the shipment came into the country. I would potentially have a packing list and other information telling me what’s in the shipment. But I would be using those two elements, especially the commercial invoice and the bill of lading, to make entry in Houston if I didn’t have a Foreign Trade Zone.
Since I have an FTZ – and didn’t close those documents out with an entry – those critical data elements have to come forward now and be addressed. I close the bill of lading with a 7512 IT that says the shipment is going to my zone. Because the CBPF 214 alerts Customs that the merchandise is going to the FTZ, it closes the loop on the information provided by the freight forwarder/broker/shipping line. This document package is what you need to set up as your in-bond or 214 file, and the data elements in all these documents are critical to laying the groundwork for your inventory control process.
The next key question is: How do I get that all that information into my automated system? In most cases, you’re looking at two options: electronically fed or manually inputted. I wish I had a magic way to make either option work great, but they are very specific to your business operation and your functionality. I deal with companies every day that are large enough to have somebody feed all this data via EDI and others that pay people to key data. It’s just one of those things. The information that comes from these documents has to get into your system and it can only happen in one of two ways.
While goods are in the zone, a couple of other customs documents come into play. A little earlier I talked about temporary removal via the 216 document. FTZs use this same document on an annual basis to get a blanket approval for the simple product manipulations they’re approved to do. More commonly, the 216 is used to account for merchandise destroyed within the FTZ. So, the 216 is how you define what has been removed temporarily and how you report an approved destruction process to Customs, as you will not be paying duty on those items.
Another key document is the 214, the same document used for zone admission. Say, for example, your cycle counting process identifies five extra items. Since they are not reflected in the inventory system, they must be added. So to make a positive adjustment to the system, you use a 214. For negative adjustments, you use the 06. Withdrawals from the zone can be done individually or weekly, depending on how you set up the process.
The other key document is the 7512. You must have a 7512 for every export sent out of the FTZ. So, for example, if I have a trailer load going to Canada, the 7512 exportation document I prepare will show the goods leaving my facility and heading to Canada; that document will close everything out from an inventory perspective at the border when that trailer crosses into Canada. And, of course, we talked earlier about the two types of exportation, that is, an immediate export and the transportation and exportation. In either case, we have to maintain copies of the documentation because it closes the inventory loop.
The Audit Trail
The audit trail serves as documentation of the movement of the merchandise from admission to withdrawal and everything in between. Documents such as the 214, 7512, 7501 and 7512 need to be in the right place and in the correct file because they serve as evidence CBP wants to review. Here, again, the importance of physically matching the inventory is paramount.
With your 214, you need to have your billing commercial invoice, any in-bond documentation, the packing list if you’ve got it and your consumption entry. You need to have the cargo release from ACE, the 7501 and the withdrawal documentation from your automated system, spreadsheet or other tracking method. For exports, you need the 7512 document and the withdrawal.
Every year you’re required to do an annual reconciliation, system review and an annual report for the FTZ board report and grantee. Always keep these three things in a file, because Customs may come in and ask for them. Regarding the reconciliation and system review, you’re required to send a certification letter to Customs 10 days after completion to advise them that the items have been done and are ready for review. Customs has assessed thousand-dollar-plus fines in certain ports if they’ve not seen the certification letter.
Last, there is the blanket 216 that we talked about earlier for standard manipulation and manufacturing.
Operating a foreign trade zone requires a level of inventory compliance and recordkeeping that can seem like a daunting task. However, the Foreign Trade Zone program is the most flexible bonded facility program. With bonded warehouses, for example, special permissions are often needed, and there are restrictions on what can be done. FTZs are designed to work with your operation. Inventory control is the cornerstone of FTZ compliance. If you do not manage inventory correctly, you will not be able to manage compliance correctly.
CBP documentation continues to move forward with the implementation of the Automated Commercial Environment (ACE), and more and more of these documents are moving toward electronic filing. For example, the 214 is slotted to move to ACE this year. ACE makes it easier to deal with these processes.
Last, FTZ compliance is all about the data relative to merchandise in the FTZ. CBP trusts you to hold these goods, and you need to be able to prove that you can identify every item and its disposition from admission to withdrawal.