A Loophole for E-commerce? De Minimis Customs Entries Are Getting a Bad Rap Despite Compliance Requirements. Let Us Explain.

Insights A Loophole for E-commerce? De Minimis Customs Entries Are Getting a Bad Rap Despite Compliance Requirements. Let Us Explain. T. James Min II · A Loophole for E-commerce? De Minimis Customs Entries Are Getting a Bad Rap Despite Compliance Requirements. Let Us Explain. Chelsea Ellis · March 20, 2024

I. Introduction

The growth of e-commerce has been undeniable over the past decade, steadily increasing from $1.3 trillion in retail sales in 2013 to $5.8 trillion in 2023 – a 346% increase. This growth is not only attributed to the ubiquitous platforms, e.g., Amazon’s and Alibaba’s of the world, but also to the emergence of new innovative players who are reshaping the e-commerce industry. Predominantly originating from China, new companies such as Shein, Temu, and TikTok (through its TikTok Shop feature) are tapping into the American penchant for fast fashion and more, while navigating anti-China sentiments. Yet, they share a common regulatory approach: utilizing the U.S. de minimis rule, Section 321(a)(2)(C) of the Tariff Act of 1930, 19 U.S.C. § 1321, (the “De Minimis Rule” or “Section 321”) to benefit from the streamlined customs clearance processes exempt from customs duties.

a. De Minimis Entries
Recent data reported by the Wall Street Journal indicates a significant surge in the use of the De Minimis Rule, particularly by e-commerce platforms such as Temu and Shein. The De Minimis Rule allows for the duty-free and less scrutinized entry of packages valued under $800. So far, in fiscal year 2024, at least 485 million shipments entered the U.S. under this provision, marking a notable increase from years prior – 685 million shipments in all fiscal year 2022. The De Minimis Rule has helped facilitate the rapid growth of e-commerce platforms by allowing them to benefit from duty free treatment and less stringent import procedures for lower value goods.

Companies like Temu and Shein have recently drawn attention from lawmakers and regulators for strategically utilizing Section 321. Critics center on the potential to undermine U.S. economic interests, evade tariffs, and possibly circumvent bans on goods allegedly produced with forced labor. However, criticism of the use of the De Minimis Rule is not limited to these recent Chinese targets of political scrutiny nor was the rule established recently just to accommodate cross border e-commerce.

b. Shein And Temu
Shein, which began as a small online apparel company, has evolved into a major global fast fashion enterprise in just a few short years by leveraging aggressive social media campaigning and an innovative supply chain model to offer a massive clothing inventory at competitive prices. Similarly, Temu, owned by PDD Holdings, has recently entered the e-commerce market and has quickly become a formidable competitor for other platforms – boasting over $16 billion in revenue in 2022. Compared with Shein, Temu, which is more akin to Amazon and AliExpress, focuses not only on fast fashion products but also on an array of affordable home goods, amongst many other items.

c. TikTok: Integrating E-Commerce And Social Media
TikTok has integrated e-commerce into its social media platform by creating a digital marketplace that leverages its vast user base (currently over one billion and counting) and engagement metrics. In September 2023, TikTok opened its TikTok Shop feature in the U.S., which allows TikTok users to click and shop as they consume content. Using its new feature, TikTok aims to bring in $17.5 billion in merchandise volume in 2024.

d. The Anti-China Undercurrent
While Shein, Temu, and TikTok have all taken the e-commerce industry by storm, they have not gone unnoticed by U.S. politicians and regulators. An undercurrent of anti-China sentiments which has gripped U.S. history periodically, has seemingly re-emerged, stirring debates over data privacy, intellectual property rights, and broader geopolitical tensions. This sentiment, reflected in the public discourse and legislative actions, highlights the complex interplay between global e-commerce growth and the geopolitical landscape, underscoring the need to understand the challenges and opportunities presented by the rise of Chinese and other e-commerce platforms in the global market.

II. History Of De Minimis Entries

While the growth of e-commerce has highlighted the De Minimis Rule, it is not a new phenomenon. In fact, it has a long history that is part of the era of encouraging free trade and trade facilitation at the global, regional, and bilateral levels.

a. Statutory
The current De Minimis Rule sets the threshold at $800 per day per person, however, the rule originated long ago in 1938 when the de minimis threshold was set at $5. It was raised to $200 by the Customs Modernization Act in 1994 coinciding with the completion of the WTO Uruguay Round. In 2016, Congress raised the de minimis threshold to $800 through the Trade Facilitation and Trade Enforcement Act. The logic behind the De Minimis Rule is that for low-value goods, the customs procedures are overly burdensome for both the importer and Customs, which outweighs potential benefits to the government of revenue collection. It was also meant to streamline the importation process so that Customs can focus on other higher-risk imports.

b. FTAs
In many of the Free Trade Agreements that the U.S. entered into, a de minimis provision was integral to the Customs Chapters of these bilateral trade agreements. For instance, the U.S-Korea Free Trade Agreement, adopted in 2007, contains a de minimis provision under the Customs Chapter at Article 7.7(g) to provide for duty-free clearance for express shipments valued at $200 or less. Other FTAs include similar provisions.

c. WTO Trade Facilitation
More globally, the World Trade Organization (“WTO”), after failing to muster support for the Doha Round, pivoted to completing a Trade Facilitation Agreement (“TFA”), which entered into force in 2017. The WTO supporters of the TFA argued that the implementation of the TFA, which includes de minimis customs clearance, could reduce trade costs by an average of 14.3% and boost global trade by up to $1 trillion per year, with the most significant gains in the poorest countries. The TFA, in Article 8.2(d), provides global rules for customs clearance, including the provision, where possible by WTO members, of a de minimis rule for expedited shipments.

d. Trade Facilitation And Trade Enforcement Act (Increase To $800)
In 2016, with years of lobbying by business interest groups and with momentum building in support of the WTO TFA, Congress passed the Trade Facilitation and Trade Enforcement Act which included a provision to increase the de minimis threshold to $800. Soon after the passage of the law, however, many interest groups with the political wind beginning to turn against e-commerce giants pressured Customs and Border Protection (“CBP”) and others to question the benefits of the De Minimis Rule. However, because Congress had raised the limit by statute, only Congress could reverse the increase of the threshold. Instead, what resulted from this momentum was greater enforcement of the De Minimis Rule’s conditions by CBP. And now, with the headwind growing against Chinese imports into the U.S., compliance with the conditions of the De Minimis Rule is more important than ever for e-commerce companies, logistics companies, and importers.

III. Compliance Requirements For E-Commerce Companies

With the burgeoning growth of e-commerce, CBP also implemented certain pilot projects to receive more data on Section 321 entries while at the same time making it possible to accommodate the e-commerce flow.

a. Test Pilots
In July 2019, CBP announced a voluntary pilot program to collect certain advanced data related to shipments under Section 321. Under the program, participants transmit certain data elements pertaining to these shipments to CBP prior to arrival. Such data can then be used by CBP to better enforce its regulations as well as study what types of data generally not collected previously may be effective in enforcing customs laws. Separately, CBP rolled out a test entry type called Entry Type 86, which allows for Section 321 entries to be filed via the Automated Broker Interface (“ABI”) that customs brokers normally used for formal entries. Type 86 entries also allow for the filing of imports regulated also by other agencies, such as the FDA or Fish & Wildlife Service (“FWS”), that normally could not be done with a manifest clearance.

b. Privileges
Section 321 affords several privileges that benefit e-commerce platforms, logistics companies, and others. These privileges streamline the import process and provide competitive advantages and duty-free treatment to entities utilizing this rule.

  1. Manifest Clearance
    The De Minimis Rule allows for manifest clearance, a streamlined customs procedure that permits the clearance of shipments based on the information provided in the shipping manifest, without the need for submitting customs entry documents for each package. This expedited process reduces administrative burdens and accelerates the delivery of goods to consumers, enhancing the efficiency of e-commerce platforms, customs brokers, and logistics service providers that manage high volumes of international shipments.
  2. No Duties
    One of the most direct benefits of the De Minimis Rule is the exemption from customs duties for eligible shipments. This exemption reduces the cost for both cross border e-commerce platforms and consumers, enabling competitive pricing and broader market access for a wide range of products. This privilege plays a crucial role in fostering a diverse and dynamic e-commerce ecosystem by lowering the financial barriers to entry for small and medium-sized enterprises.
  3. Nominal Consignees/IOR
    The De Minimis Rule permits shipments to be addressed to nominal consignees (e.g., carriers, freight forwarders, and express consignment operators), thus allowing them to be the importer of record (“IOR”). Nominal consignees can make customs entries (declarations) on their behalf. In contrast, for formal entries (declarations), U.S. customs law generally allows only a party with a financial interest or legal title to the goods to qualify as an IOR. This flexibility is particularly advantageous for B2C platforms that facilitate direct-to-consumer shipping from international suppliers, simplifying the import process and reducing compliance complexities for individual buyers. Under the test Type 86 Entries, a license customs broker can also serve as the IOR if authorized with a power of attorney by the owner, importer or consignee.

IV. Compliance Requirements/Needs

Section 321 entries offer significant advantages for e-commerce and other imports valued under $800, but they come with specific compliance requirements and considerations. These rules are essential for entities looking to benefit from Section 321 treatment while ensuring adherence to U.S. customs regulations.

a. Discretion Of The CBP Port Director
The application of the De Minimis Rule is subject to the discretion of the CBP Port Director at the point of entry. This means that the Port Director has the authority to deny de minimis status to shipments if there are concerns about compliance with U.S. laws and regulations or if the shipments are suspected of evading duties and taxes. Entities must be prepared for the possibility that their shipments could be subject to additional scrutiny or denied the benefits of the de minimis provision based on the judgment of the CBP officials or if the rules are not followed.

b. One Person/One Day
Currently, Section 321 treatment is available for aggregate shipments collectively valued at or below $800. Under the De Minimis Rule, one person may import multiple shipments on one day so long as the aggregate fair market value of the shipments does not exceed $800. If any single shipment imported that day exceeds the $800 ceiling, then none of the shipments imported that day may be entered under Section 321. This rule applies regardless of the port of arrival. Compliance with this rule requires careful planning and coordination of shipments to ensure that the total value of goods imported by one person does not surpass the set limit within a single day. It is also important that importers do not undervalue shipments to qualify for the De Minimis Rule as it is not only a violation of Section 321, but can also incur penalties for violating customs valuation regulations.

c. IPR Still Enforceable
Intellectual Property Rights (“IPR”) enforcement remains a critical aspect of customs regulation, regardless of if the goods entered the U.S. using the De Minimis Rule. Shipments that violate IPR laws, such as counterfeit goods, are subject to seizure and penalties, even if they fall below the $800 threshold. In Fiscal Year 2023, CBP and Homeland Security Investigations (“HSI”) seized 19,522 shipments containing counterfeit goods, totaling nearly 23 million items, with an estimated genuine value of over $2.41 billion. Additionally, in 2023, ICE-HSI made 434 arrests, secured 327 indictments, and received 206 convictions for IPR-related crimes. CBP alleged that goods from China remained the primary source economy for counterfeit and pirated goods seized, accounting for a total estimated MSRP value of over $1.48 billion. Accordingly, Chinese companies may need to anticipate increased scrutiny of their entries, potentially more so than those from other countries.

A recent seizure by CBP at the Port of Louisville exemplifies the risks associated with the misuse of the De Minimis Rule to introduce illicit goods into the United States. In March 2024, CBP intercepted a shipment valued under the de minimis threshold, ostensibly to benefit from duty-free treatment. The shipments, originating from Hong Kong, contained 35 Richard Mille counterfeit designer watches and was destined for a residence in Puerto Rico. Despite its low declared value, the items were inauthentic and would have had a combined MSRP of over $11.7 million had they been genuine. This incident serves as a stark reminder that the De Minimis Rule does not exempt shipments from compliance with IPR.

d. Other Government Agencies’ Rules Still Enforceable
The De Minimis Rule does not exempt certain imported goods from other agencies’ regulatory authority and requirements, such as for tobacco products, alcohol, and goods subject to import quotas. Enforcement against goods subject to Withhold Release Orders (“WRO”) for forced labor or those subject to the Uyghur Forced Labor Prevention Action (“UFLPA”) would not be exempt just because of the value of the goods. Data transmission requirements for other government agencies, such as FDA or FWS, are still required.

e. Section 301, But Not AD/CVD
While Section 321 entries can be utilized for goods subject to Section 301 tariffs (also known as China tariffs), they cannot be used for goods subject to anti-dumping/countervailing duties. This is an important point because the IOR is legally responsible for AD/CVD duties, but due to the significant financial exposure, it can often lead to litigation by IORs seeking to recoup the AD/CVD duties from other parties involved in the importation, including e-commerce platforms.

f. Ultimate Consignees
An additional compliance requirement for Section 301 imports is the issue of who qualifies as and is listed as the ultimate consignee, which is not always the same as the IOR. This requirement has been a cause of enforcement actions by CBP against e-commerce companies. Customs provided guidance on who can qualify as the ultimate consignee in a Customs Directive that can be complex and fact-based. Generally, the ultimate consignee is the party in the U.S. that the goods were sold to by the overseas shipper. However, if the imported goods have not been sold at the time of importation, the consignee in the U.S. where the goods will be delivered can be listed as the ultimate consignee. In any case, it is important to review the guidance and ensure compliance with it.

V. Conclusion

In the post-Covid world, where online orders and e-commerce have become almost a daily necessity for many, the business opportunities for B2C and B2B sellers and service providers will likely not decrease. The convergence of technological advancements and enhanced logistics capabilities are providing great opportunities for businesses and consumers alike. With the increase of the U.S. de minimis threshold to $800 (which is higher than allowed by most countries) and given Americans’ voracious consumerism, the business opportunities for cross border e-commerce will likely continue to increase. However, given political and regulatory pressures, it is important for e-commerce and logistics service providers to know the rules surrounding Section 321 entries and to implement strong regulatory compliance measures to reduce their business and operational risks.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

James Min is a partner with Rimon, P.C., in the Washington DC office where he specializes in international trade law including those related to customs, e-commerce, supply chain/logistics, economic sanctions, export controls, and CFIUS. James advises large U.S. and Chinese e-commerce companies, multinational logistics companies, 3PLs and technology companies on trade law and regulatory matters. James was previously the global head of trade law for DHL and also worked as a senior trade attorney for FedEx Express. Earlier in his career, James served as a trade attorney with the U.S. Department of Commerce, Treasury and Homeland Security. Read more here.

Chelsea Ellis is an associate with Rimon, P.C. in the New York office where she specializes in international trade law including customs, supply chain/logistics, e-commerce, economic sanctions, export controls, and CFIUS matters. She has advised multiple e-commerce and supply chain companies on customs and e-commerce regulations including the INFORM Act, data privacy, etc. Earlier in her career, she worked as a contract attorney and trade analyst in the Office of the U.S. Trade Representative. Read more here.