With manufacturing frequently occurring offshore, and export sales growing, U.S. companies may find it inefficient to bring the products back to the U.S., only to then export them. So, why drop not ship the products directly from your supplier or contract manufacturer (let’s say in China) to your distributors in Israel, Singapore, and Turkey?
You’ll want to have adequate checks in place to make sure the goods are the right items, in the right quantity and of the right quality. You’ll also want to be clear about title transfer and risk of loss, as well as knowing exactly when you should book the sale.
But what about U.S. customs and export compliance obligations? Since the goods never come into the U.S. or the commerce of the U.S., what – if anything – do you need to do?
Interestingly, the answers we got were all over the place. Two freight forwarders with international claiming international shipping expertise told us there were no export compliance obligations, paperwork or anything. A U.S. Commerce Department representative said there was no U.S. export documentation required, but didn’t indicate there might be other export compliance obligations.
A smaller 3rd-party logistics firm both insisted that the U.S. seller is the U.S. Principal Party in Interest in the transaction, and not only needed to do all the U.S. export compliance checks, but also file a Shipper’s Export Declaration. Another export compliance whiz wasn’t sure what would apply.
Not getting a clear answer, I did the only logical thing: I called the U.S. Census Bureau hotline (1800-549-0595 — a useful number, by the way, for professionals and newbies alike – always helpful and free U.S. import and export compliance advice). The Census Bureau administers the Foreign Trade Regulations of the United States.
According to them, in this situation, the U.S. company is NOT the Principal Party in Interest, because the products in this hypothetical never “enter the commerce of the United States,” citing 15 CFR 30.2A. So in these situations, there is no U.S. Principal Party in Interest. And therefore, there is no legal obligation to complete any U.S. import or export paperwork, and therefore, this type of shipment is not a routed transaction, according to the U.S. Foreign Trade Regulations.
But remember, the Census Bureau is only one U.S. agency that is concerned with exports. The Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. State Department also regulate exports, and they are much more interested in the fact that a U.S. company is arranging and invoicing the transaction. (Note: BIS will also field questions at 202-0482-4811, and the State Department as well: 800-540-6322).
Even though the product never touches U.S. soil, and is not made using any U.S. technology, the U.S. company still needs to:
- Make sure none of the companies or individuals involved are on any U.S. denied party list
- Make sure the transaction does not involve any sanctioned countries or types of transactions (unless the necessary licenses are obtained) – so, for example, the U.S. company currently can’t arrange a sale to Iran of healthcare products without a license;
- Check to make sure none of the products require a U.S. export license, or have your foreign customer or supplier sign paperwork that states they will take responsibility for this (unlikely in our scenario above).
- To make sure all of the above is correct, you’ll need to make certain the item is has the proper ECCN classification, and
- Review all documentation for any prohibited anti-boycott language, and track and report anything required by the U.S. boycott regulations
Why? Because the company or entity booking the sale is a U.S. company, and is still “exporting” from the U.S. under the Commerce Department’s and State Department’s U.S. export regulations., even if the items never touch U.S. soil, and contain no U.S.-origin technology. In the case of both the anti-boycott regulations the ITAR regulations, the U.S. selling entity is a “U.S. person,” and so is subject to these requirements.
You’ll also be responsible for proper classification of the item, correctly determining its country of origin, and declaring its proper value. However, each of these responsibilities would be determined based on the shipping country and the destination country, and are not governed by U.S. export compliance regulations.
So, what does this example tell us? First, U.S. export regulations related to an international drop ship can be complicated. Second, when the answer isn’t clear, don’t be afraid to pick up the phone to call colleagues and even government agencies involved to get the correct answer. Third, ask the question generally: “What are my export obligations,” not just “Do I need to file any export paperwork?” Finally, don’t just grab the first answer you get, even if it’s what you want to hear!
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