Insights

Section 321 De Minimis Imports Can Pose Compliance Risks

Date: 12/07/2023

            In 2016, the United States implemented legislation revising 19 U.S.C. § 1321 (“Section 321”) and thereby increasing the de minimis amount for imports into the United States from $200 to $800, meaning an importer is not required to pay duties if the merchandise has a fair market retail value at or below $800. In 2018, the U.S. began imposing a 25% tariff on most goods from China. The convergence of these two issues – the ability to import duty-free under $800 and the steep duties applicable to Chinese goods – led many vendors of Chinese merchandise to take advantage of Section 321 de minimis treatment for certain imports.

            Due to its obvious utility for low value shipments, Section 321 is widely used by eCommerce companies, including the largest players in the industry from the United States, China, and elsewhere. But there are growing calls from members of Congress and U.S. domestic industries to restrict the applicability of Section 321, especially with respect to Chinese imports. These interested parties argue that Chinese companies are at best abusing the system and at worst entering illegal or even unsafe merchandise into the U.S. commerce.

            With the above as background, this article will discuss the requirements for using Section 321, common errors to avoid, and criticisms of (and potential challenges to) Section 321 from Congress and industry.

Section 321 Description and Requirements

            Section 321 and its implementing regulations establish that U.S. Customs and Border Protection (“CBP” or “Customs”) will admit merchandise free of duty, “but the aggregate fair retail value in the country of shipment of articles imported by one person on one day and exempted from the payment of duty shall not exceed . . . $800.” Per Section 321’s implementing regulations at 19 C.F.R. § 10.151, imports that qualify for Section 321 treatment are entered as informal entries. This means that Section 321 entries do not require a CBP Form 7501 Entry Summary or other types of documentation required for formal entries. Instead, a Section 321 entry is typically entered only using a manifest. Therefore, there is no importer of record as with typical informal entries and formal entries.[1]

            The purpose of Section 321 is to minimize inconvenience to the government disproportionate to the revenue collected. But the use of Section 321 does have conditions that limit its use. Failure to adhere to these requirements can subject involved parties, including the merchandise owner (foreign seller), U.S. carrier (named consignee), and/or the U.S. purchaser, to an enforcement action by CBP. An enforcement action in this context can include the revocation of Section 321 privileges, the placement of holds on certain shipments, and imposing a formal entry requirement for as long as CBP deems necessary.[2]

            As stated above, Section 321 generally applies to merchandise valued at or below $800 imported by one person on one day. Importantly, Section 321 is not applicable to certain imports despite having a value below the $800 de minimis amount. The following types of merchandise are ineligible for entry under Section 321:

  • Merchandise subject to antidumping and countervailing duties (“AD/CVD”). 
  • Merchandise subject to quota.
  • Merchandise subject to a tax imposed under the Internal Revenue Code that is collected by other agencies on imported goods, i.e., alcohol and tobacco products.

            In addition to the broad exclusions outlined above, it is important for parties utilizing Section 321 to understand the language applicable to the subject entries.

Fair Retail Value

            Although the relevant statute and regulations include valuation in terms of “fair retail value,” Section 321 entries are valued like other import transactions. The Customs valuation statute is found in 19 U.S.C. § 1401a and requires the value for imports to be based on transaction value, if applicable, or various other methods contained in the statute where transaction value cannot be used due to a related party transaction or other factors.[3]

One Person Per Day

            As previously mentioned, Section 321 privileges apply to merchandise imported by “one person on one day.”[4] Importantly, the party considered to be the “one person” may differ depending on the nature of the underlying transaction. Generally, for shipments of merchandise sold directly to a U.S. party, the purchaser will be considered the one person when determining Section 321 eligibility. However, when imported merchandise has not yet been sold to a purchaser and is instead shipped to a warehouse or other intermediate party for inventory, the person may be identified on relevant documents (manifest, bill of lading, etc.) as a foreign owner of the merchandise or a named consignee.[5]

Shall Not Exceed $800

            Section 321 treatment is available for aggregate shipments collectively valued at or below $800. Per CBP guidance, under Section 321 “one person may import multiple shipments on one day so long as the aggregate fair market value of the shipments does not exceed $800.”

Common Pitfalls When Importing Subject to Section 321

Undervaluation

            As referenced above, Section 321 entries must be valued according to the normal rules of Customs valuation. Because the requirements are strict as to the $800 de minimis limit, some exporters will artificially undervalue shipments to evade the payment of duties. Knowingly engaging in artificial undervaluation can lead to a violation of 19 U.S.C. § 1592, a criminal smuggling violation under 18 U.S.C. § 545, or a False Claims Act violation, exposing the violator to whistleblower actions.

            In some cases, the U.S. consignee or purchaser may be unaware of intentional valuation manipulation by the foreign vendor. Nevertheless, willful blindness by the party effecting the entry of an intentionally undervalued Section 321 shipment will not preclude liability if the involved party should have known the true value of the merchandise. Even worse, if a U.S. consignee engages in a scheme with the vendor to avoid duties, both parties are subject to liability, and the U.S. party will be an easier target for CBP or other enforcement agencies, e.g., the Department of Justice.

Misclassification

            Every import, including Section 321 imports, require classification of merchandise under the Harmonized Tariff Schedule of the U.S. (“HTSUS”). Misclassification issues are not uncommon in import transactions. Although most misclassification errors are inadvertent, some parties will intentionally misclassify products to avoid payment of, for example, Section 301 duties on Chinese-origin items. Misclassification can lead to the same potential liability described above for undervaluation.

Artificially Dividing Shipments to Obtain Section 321 Benefit

            The regulations pursuant to Section 321 provide that the relevant port director will allow duty-free entry for goods valued at or below $800, “unless he has reason to believe that the shipment is one of several lots covered by a single order or contract and that it was sent separately for the express purpose of securing free entry therefor or of avoiding compliance with any pertinent law or regulation.” Separate Customs guidance reinforces that Section 321 treatment “will not be granted in any case in which merchandise covered by a single order or contract is forwarded in separate lots to secure the benefit.”

            It may be tempting for vendors to break up a single order valued at more than $800, but this activity in the pursuit of evading necessary payment of duties was contemplated by CBP in drafting Section 321’s implementing regulations. CBP maintains the authority to request that an importer provide a purchase order or other form of documentation to verify whether an order has been improperly divided. As previously stated, such manipulation of shipments can lead to refusal by CBP to grant Section 321 treatment or penalties, depending on the nature of the violative conduct.

Type 86 Entry Programs

            In 2019, CBP instituted a pilot program specifically aimed at the use of Section 321. Only nine companies, including Amazon, FedEx, UPS, and other large ecommerce or carrier companies, were invited to the pilot program. However, the program has expanded and now accepts additional participants.

            The pilot program created a new informal entry type (Type 86) for shipments qualifying for Section 321 treatment. The new entry type formalizes the clearance of Section 321 shipments through the Automated Commercial Environment (“ACE”). Importantly, the program allows certain data to be reported that is mandatory under Partner Government Agency (“PGA”) data requirements. Before this program, shipments subject to PGA requirements, even those that qualified for Section 321 treatment, had to be entered using the informal entry type 11 or formal entry. However, the creation of the Type 86 entry now allows these shipments to be entered through a “less complex” and expedient process.[6] However, many companies continue to import shipments not subject to PGA requirements informally outside of the Type 86 program. For now, Entry Type 86 remains a voluntary test.

Criticism of Section 321

Congressional Action

            On June 15, 2023, members of both the Senate and the House introduced the Import Security and Fairness Act,[7] which would effectively make goods from China and Russia ineligible for Section 321 de minimis treatment. The proposed legislation would instead require shipments of any value from countries that are (i) a nonmarket economy and (ii) listed on the United States Trade Representative’s Priority Watch List to be entered into the United States through formal entry processes. In addition to formal entry requirements for shipments from China and Russia, which are the only two countries currently meeting the stated criteria, the proposed legislation would also increase the burden on de minimis shipments from other countries. CBP would be required to collect additional information on all entries subject to Section 321, including information regarding value, merchandise description, and the identity of the shipper and importer. The proposed Import Security and Fairness Act is only the most recent of multiple Congressional challenges to the use of Section 321 by Chinese companies.

            In addition to proposed legislation, various members of Congress show an active interest in the use of Section 321 by Chinese companies. For example, a June 28, 2023, letter from Congressmen Mike Gallagher (R-WI) and James Comer (R-KY) to Postmaster General Louis DeJoy requested all available records related to de minimis shipments from China to the United States, among other records. The congressmen cite reports that allege “Chinese companies routinely break large shipments into numerous smaller ones in order to take advantage of the de minimis threshold and avoid customs duties and tariffs.”[8] The letter followed a report from the House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party (“Select Committee on China”) on interim findings from an investigation into Chinese fast fashion companies Shein and Temu. The investigation report described those companies’ reliance “on the de minimis exception to ship packages directly to U.S. consumers, allowing them to provide less robust data to CBP, avoid import duties, and minimize the likelihood that the packages will be screened for [Uyghur Forced Labor Prevention Act] compliance.”[9]

Industry Backlash

            Congress is not the only party concerned about abuse of Section 321. A recent New York Times article highlights the growing calls from U.S. retailers to amend Section 321, particularly with respect to China.[10] The president of the National Council of Textile Organizations supports the proposed Import Security and Fairness Act and its restriction of eligibility for Section 321 treatment for Chinese merchandise.

            Unsurprisingly, other groups have different proposals to combat the detrimental effect of Section 321 faced by certain U.S. companies. The Ship Safe Coalition focuses on another drawback of Section 321 for U.S. industry: the inability of U.S. retailers to receive the duty-free treatment available to foreign companies, which led some U.S. companies to move distribution offshore. The Ship Safe Coalition’s proposed solution is to allow duty-free de minimis treatment for merchandise in foreign trade zones, which are areas within the U.S. considered outside of CBP territory where merchandise can be entered without being subject to CBP entry procedures or applicable duties. Currently, foreign trade zones do not receive the benefit of Section 321 treatment for goods valued at or below $800. Although providing a different solution to the “321 problem,” both industry groups, and many others, agree that some action must be taken.

Conclusion

            If you have discovered potential Customs violations related to the use of Section 321 and these violations led to the underpayment of duties to Customs, you may wish to consider filing a prior disclosure with CBP to receive mitigation of any possible penalties resulting from the underpayment. Additionally, if you receive an inquiry from CBP regarding import practices related to Section 321, we strongly encourage seeking legal counsel to determine whether the items qualified for Section 321 benefits. (For further information on responding to international trade regulatory agency inquiries, please see our previous article BIS, DDTC, OFAC, and CBP Subpoenas and Requests for Information – Tips to Comply.)

            If you have any questions about Section 321 imports, Type 86 entries, past or future challenges to Section 321, or import compliance generally, please do not hesitate to contact the attorneys and advisors at Torres Trade Law.

 

[1] See 19 C.F.R. § 143.23(j)-(k).

[2] See CBP FAQ Administrative Ruling Related to Domestic Warehouses and Fulfillment Centers, “How is CBP enforcing this ruling?,” available at https://www.cbp.gov/trade/basic-import-export/e-commerce/administrative-ruling-FAQs (last modified Aug. 7, 2023); See also CBP FAQ E-Commerce, “Can carriers be subject to penalties if they are unable to limit customers from exceeding the $800 threshold per day?,” available at https://www.cbp.gov/trade/basic-import-export/e-commerce/faqs (last modified Oct. 20, 2023).

[3] 19 C.F.R. § 152.1(d).

[4] 19 C.F.R. § 10.151.

[5] See CBP FAQs E-Commerce General Questions, available at https://www.cbp.gov/trade/basic-import-export/e-commerce/faqs (last modified Oct. 20, 2023); See also CBP FAQs Administrative Ruling FAQ Administrative Ruling Related to Domestic Warehouses and Fulfillment Centers, available at https://www.cbp.gov/trade/basic-import-export/e-commerce/administrative-ruling-FAQs (last modified Aug. 7, 2023).

[6] Test Concerning Entry of Section 321 Low-Valued Shipments Through Automated Commercial Environment (ACE), 84 Fed. Reg. 40079 (Aug. 13, 2019).

[7] Import Security & Fairness Act, H.R. 4148, 118th Cong. (2023).

[8] Letter from Mike Gallagher, H.R. Select Committee on China & James Comer, H.R. Committee on Oversight & Accountability, available at https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/6.28.2023-letter-to-usps-china-select-oversight-cmte.pdf (June 28, 2023).

[10] Jordyn Holman, U.S. Retailers Say an Old Trade Law Puts Them at a Disadvantage, New York Times (Nov. 4, 2023), available at https://www.nytimes.com/2023/11/04/business/dealbook/us-retailers-say-an-old-trade-law-puts-them-at-a-disadvantage.html (requires subscription).

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