Tariffs 101

For example, he and Stephen are going to talk about the de minimis rule, and the enforcement has been delayed due to challenges from Customs and Border Protection, particularly the USPS. There's also talk of rolling out new tariffs on steel and aluminum.

And while they are going to touch on a couple of current events, the bulk of this episode is talking about the mechanics of tariffs, and things that don't change as policies change. So dive in, enjoy, and hopefully this will help you navigate the changing landscape.

0:31 Stephen Brown

Welcome to the Ecommerce Finance Podcast. I'm your host, Stephen Brown, COO and co-founder at LedgerGurus. In this episode I have Bryce Judy, the CEO and founder of Tarifflo, with me to discuss tariffs.

Bryce, good to have you.

0:44 Bryce Judy

Thanks for having me on. I'm excited to talk with you today.

0:48 Stephen Brown

I want to thank Bryce before we get in. Bryce has bronchitis in probably one of the most epic tariff weeks in recent modern history, and we had to postpone this recording, and here he is. So thank you for joining me despite recovering from bronchitis.

1:04 Bryce Judy

Yeah, I'm glad you had me on. Sorry, my voice is still a little bit shaky, but it just started coming back yesterday. So figured we should do this as soon as possible with all the changes.

1:13 Stephen Brown

Yeah, give us a little background on your history, and specifically your experience around tariffs, and maybe tell us a little bit about what you're doing with your company, Tarifflo.

1:25 Bryce Judy

Yeah, for sure. So this was a world that I had never planned on getting into. I got recruited out of college to work for KPMG. I was working in the trade and customs division there. It was new when I started there. And my role specifically was, I would contract with these companies and I would classify their items for tariffs and kind of manage that whole front of the customs clearance process.

And that's where I got first exposed to the side of the world that I didn't even know existed, honestly. So as soon as I got exposed to this, I realized that there was a lot more that went into this process than I had previously understood. And that's kind of where the idea for Tarifflo started.

So just about a year ago, me and my co-founder started working on this. Basically it's just a platform to automate your tariff classifications, so that you can get that high level perspective of how much your duties are going to cost, where your codes are going to be to whatever markets that you're shipping into.

2:23 The de minimis changes

Stephen Brown

Awesome. Well, obviously this is a very timely topic, and we're going to talk about some of the recent changes, but we also want to talk about some of the things that won't change.

So we're going to start talking about some of the changes. And if you want to skip over that, we are recording this on February 7th, so it's going to be dropping in a few days. Who knows what's going to change between now and the time we release the episode. But if you want to skip ahead, we are also going to spend a lot of time on just the logistics, the intangibles of tariffs, and what an ecommerce seller should be thinking about in regards to tariffs.

2:55 Stephen Brown

But let's talk about the big changes. Obviously, President Trump was going to impose tariffs on Canada and Mexico of the tune of 25%. That got postponed for 30 days, we'll see what happens. But there was a 10% tariff on China that has stuck, and there are threats of tariffs across, sounds like almost everybody. We'll see. It looks like he wants to take care of those three first.

What else has changed, Bryce?

3:33 Bryce Judy

Yeah, so actually I want to bring us back before Trump passed his executive orders, or this was really the hot topic in the news. So actually before Trump even started talking or signing these documents, Customs and Border Protection and the Department of Treasury sent out a notice of proposed rulemaking.

So basically they sent out these 321, 201, and 301 exceptions. And this is the low value, de minimis shipping. So any shipment coming in that's under $800 in value, basically anything that falls under these previous extra duties for China would not be exempt to the duty free treatment that they were. And so this is something that's been coming from two fronts.

4:21 Bryce Judy

Trump's new executive order also kind of goes after this. But this is something that Customs is looking at doing more systematically as well.

So basically what this means is, any of these low value shipments from China, you'll have to pay duties on. And you'll also need to provide the 10 digit HTS code to determine the eligibility for shipping. So that just adds a lot more process to the current process. And this is where it started with Customs.

4:50 Bryce Judy

Fast forward to the fourth, this extra 10% went into effect on top of the imports. And I want to talk about what that means. So this is country of origin of China. So not just any shipment that comes from China directly, but let's say you have a shipment from Sweden and you've got four items in it, right? One of those items, if its country of origin is China, was manufactured there. Even if it shipped through Sweden and put in a package with different items, because it's included in that, it's going to remove you from being able to file this as a duty free shipment. So that entire shipment, even the items not manufactured in China, are going to be dutiable.

5:35 Bryce Judy

And then on top of that, you're going to have the extra duties that were put into place in 2018 for the shipment from China. On top of that, you're going to have the extra 10% that got added on. So this is a massive change. It's probably going to affect around 80%. If Mexico and Canada follow suit, this is going to be about 80% of these low value shipments that we're seeing coming in across the borders.

5:57 Stephen Brown

I'm glad you brought this up. I talked about this in our inaugural episode of the Ecommerce Finance Podcast, the de minimis rule changes, something that was in the works before the Trump administration.

And just to reiterate what you said, this was an $800 limit that allowed you to bring in things duty free. And the most tangible application that we've seen was in Temu and Shein, right? A lot of their stuff fell under the de minimis threshold, which allowed them to bring in really cheap crap without having to pay those duties and customs, thereby preserving that low price and making it really hard to compete.

Now, just to clarify, the executive order that Trump signed, the threshold was specifically for products country of origin from China at this point. Is that correct?

6:52 Bryce Judy

At this point, yes.

6:54 Stephen Brown

But they're talking about doing it across everywhere, right? Getting rid of the de minimis threshold for all imports, if I'm not mistaken.

7:03 Bryce Judy

Yeah, so that's definitely been talked about. And then Mexico and Canada are the first ones that we would see impacted by this, with the executive orders that would go into effect next month on the fourth. But those were delayed.

7:16 Stephen Brown

One of the things that I thought about for ecommerce, I talked about and I'll just reiterate on this episode, is it's kind of a double-edged sword. If you are somebody that's been drop shipping, this is going to be really bad. So if you've been drop shipping product from China, or you've been drop shipping from other regions, this advantage could go away. If you have been competing against drop shippers, it's probably a positive thing, because they will no longer have that economic advantage over your products.

So do you think that's a fair assessment, Bryce?

7:54 Bryce Judy

Definitely, yeah. It is going to impact ecommerce, especially drop shippers, in a big way.

8:01 Stephen Brown

Yeah. So I'm glad you brought up the de minimis rule, because this is something that I have been watching and telling people to keep their eyes on. There are a number of people that do this, especially China based sellers. Amazon Haul I think is going to have to overhaul Haul, because they were basically trying to compete with Temu and Shein using this de minimis exception.

What else? Any other changes that we should talk about before we get into the fundamentals of tariffs?

8:29 Entry types and duty drawback

Bryce Judy

Yeah, I guess just the biggest thing with this is, first off, you're not allowed to do this type 86 entry. So this really fast entry. You're going to have to file either an informal or a formal entry, which adds a lot of paperwork. So there's the time aspect of that. There's going to be a lot more information required for each shipment to get it cleared. There's going to be merchandise processing fees. That's going to add a minimum of a couple of dollars on top of your shipping costs, right? So all of these things are playing into that.

9:00 Bryce Judy

And then kind of like the icing on the cake, or the last thing there, is the duty drawback for these items is not going to be allowed. So duty drawback is basically, you're shipping something into the US but it's not going to end up being here in the end. So you're either having it as part of something else, or you're shipping it out of the country for whatever reason. You can file and get those duties back. But the shipments from China are not going to be eligible for duty drawback.

However, because this is exposing more items that aren't country of origin of China to be dutiable, it does mean more products are going to be eligible for duty drawback. So companies that haven't really thought about that, this is definitely something to think about moving forward. Can I get this duty money back if I'm shipping this out to other countries eventually?

9:58 Stephen Brown

So help me understand duty drawbacks. If I hear you right, if you're moving product through the United States to another country, you have the ability to say, hey, I shouldn't have to pay the duties on this. Is it like a refund process? How does that work?

10:14 Bryce Judy

Yeah, so it's a refund process. You can get back 99% of what you paid on duties for importing it.

So let's say you're importing a $5,000 machinery part, and that part is going to go in as part of an x-ray machine that you're shipping to Germany. So you're going to pay the duties upfront for that part as it's coming into the US. And then you make it into this finished good, you ship it out. You file your paperwork with the government and you can get that money back. Let's say it was 10% of $5,000. You can get that $50 back when you ship it out. Well, I guess it would be 1% less than that. But that's kind of the concept behind duty drawback. And this is going to impact a lot of these shipments from China.

11:01 Stephen Brown

Got you. So the duty drawback is something that sellers should be aware of, because as these get applied to these new shipments, they really should be considering that as part of their process.

11:14 Bryce Judy

Yeah, for sure. Especially if they're shipping a lot of goods together, if they're doing a high volume of shipments and some of those goods are country of origin of China and the rest of them aren't from China. Let's say you're shipping a lot from Germany, or you're shipping from all over, and a lot of them are low value shipments, but you have mixed in with these packages some items from China. That's going to expose a lot more of your items to duties. If you're shipping them out of the US eventually, you can get that back.

So that's something that people should be aware of and considering, kind of the impact on their supply chain and on their cost per good, as they're looking to move forward and do these duty mitigation strategies.

11:58 Stephen Brown

Do you have a sense for how big the imports that were using the de minimis exemption are? As a percentage of imports, do you have any idea how big that is?

12:11 Bryce Judy

So it looks like it's about a billion shipments per year that have been falling under the de minimis exception.

12:18 Stephen Brown

Whoa, that's a lot.

12:20 Bryce Judy

So it's a lot of items.

12:51 Classification, duties, and entry types

Stephen Brown

Let's talk a little bit. I want to walk through the key components of trade compliance. Let's not go too deep and lose people, but talk me through what it means to bring a product into the United States, and what processes are involved, specifically as it applies to tariffs.

13:13 Bryce Judy

Yeah, for sure. So I guess to start out, you need your classification for the items.

Let's say you have a manufacturing sheet of this product that you're manufacturing. Let's go with a surgical instrument, like an endoscope. So you have all the technical specifications, what it's going to be used for, what it's made of, all these things that are part of the manufacturing sheet.

So based on that, you need to go through and look through the Harmonized Tariff Schedule for the United States. And that's basically just a massive list of codes that apply to different types of items. So once you classify that, it's going to be a 10 digit code that goes along with that item. Then that will give you your duty rate. It will outline any free trade agreements, preferential trade agreements with reduced duty rates. And that will give you a sense for how much you're going to be paying as this is clearing through customs.

14:15 Bryce Judy

So I think that's kind of the first step that you should look at when you're sourcing something, when you're looking at shipping things in. Should we be sourcing from this country for this item? Should we be sourcing from elsewhere that has free trade agreements? That's the first step, in my opinion.

14:29 Stephen Brown

So if people are thinking about moving their supply chain, that would be a really smart thing to consider, what is the treatment based on different countries.

Who determines that classification? Is it the importer? How does that not get abused?

14:45 Bryce Judy

Yeah. So traditionally there are a couple of ways that you can get your code, and really it's different throughout the industry. So you can have a customs broker do it, and that's really the safest bet, is to have somebody that's a licensed professional go through and classify these items. You can classify it yourself. And actually the importer of record is the one responsible for an accurate classification. So you can do it yourself. You can ask your manufacturer for it.

15:20 Bryce Judy

And this is kind of an interesting issue, and this is why Tarifflo exists, to automate the process through these documents, looking at precedent rulings, getting you your most accurate HTS code.

Because there's only about a 70% accuracy rate currently for goods coming in using the correct tariff codes. So there's about 30% of the trillions of dollars worth of goods coming in that are either over-dutied or under-dutied. If they're being under-dutied, you're subject to fines and shipping delays if you get audited. If you're overpaying, then that's money that you could be saving by being more accurate. So it's an interesting problem for a lot of these importers.

15:59 Stephen Brown

I want to ask you a quick definition. What is the difference between a duty and a tariff?

16:05 Bryce Judy

That is a good question. So tariff is the added on, duty is what you pay, is kind of how I see it. You have a 3% tariff, and then the money that you're actually paying is your duty.

16:17 Stephen Brown

Okay. So you go through the classification process, your product gets shipped with the HTS codes applied to them. And most people have multiple products, so they probably have multiple HTS codes in a shipment potentially.

What is the process that Customs and Border Protection goes through in processing those imports?

16:41 Bryce Judy

Yeah, so it depends on what type of entry this is. So you have formal entries, you have informal entries, and then you've got these type 86 entries, which all of those have different processes for clearance.

So the type 86 is these de minimis shipments that we're looking at, right? And that's very streamlined, very fast, no scrutiny. Basically you file, it goes through with minimal to no documentation.

17:15 Bryce Judy

The next is the informal entry. Basically you file your information, it requires more information than a type 86 entry. Valued under $2,500, it's really not that complex of a process to get it filed in. There's no real back and forth with customs. You're going to file these and it comes through.

Formal entries, that gets a little bit more technical. You have to file more documents with that. You need your commercial invoice, you need your entry summary, which includes your bond information, your manufacturer information, your importer information. And then this gets filed to customs, and then you'll get information back from them as your shipment, if it's cleared, if it's delayed, if they need more information.

So that's kind of the general process for those three different types of entries that we see across the border.

18:01 What value gets tariffed, and compliance

Stephen Brown

In addition to LedgerGurus, I own a small Italian organic skin care company. We've learned a little bit about import issues. There was a change in regulation that affected us, we had to handle that, and so we've been getting deeper into the process.

One of the things we're learning about is bonds, right? So the bonds are what are used to pay the fees when a product comes in.

Here's something that I want to clarify. I've done some research, but I'd love for you to clarify this. What value is used to calculate the tariff? The concept I came across was customs value. What is customs value?

18:43 Bryce Judy

Yeah, so for the US, if you're doing an informal entry, it's the manufacturing cost. If you're doing a formal entry, it's the retail value.

18:54 Stephen Brown

Really? So you have to specify your retail value of the product, which you're going to get tariffed?

18:56 Bryce Judy

Yes. Yeah, that's pretty much how it works.

19:06 Stephen Brown

All right, let's just go over this one more time, because that's a big difference, right? If your cost of goods sold is like 20%. So informal, if I heard you right, that only works up to about, what'd you say, $2,500 of import value?

19:12 Bryce Judy

That's right.

19:25 Stephen Brown

But anything over that, which is going to be the case for most of the larger sellers that we work with, they apply that against the retail value of the product. Wow, that's a huge hit.

19:39 Bryce Judy

There's something to make sure that we're understanding correctly here. So the retail value, there's this program called First Sale, right? So the retail value, if you can trace back to the first time it was sold from a manufacturer to a distributor, you can use that first cost, that first price that was set.

So let's say you're a couple steps down the supply chain when you're buying and importing this in. You don't have to use the retail value that you paid for the items. You might be able to, if you can get a document trail, go down to the original manufacturer and figure out how much it was sold for in that first sale.

20:15 Stephen Brown

Okay. Let me make sure I clarify this, because terminology is really important here. Retail value is the price that you would pay the manufacturer, especially if you can exclude all the middlemen for the product. So it's not the price you're selling the product, it's the price you're paying. We would probably call that in the accounting world the manufacturing buy price or something like that.

So just to clarify again, tariffs in the US are calculated off of the original manufacturing cost, the, did you say insurance?

20:52 Bryce Judy

Insurance, yeah, and freight.

21:00 Stephen Brown

And freight. That's the, sometimes I've seen it from research called the customs value. Is that correct?

So then you apply whatever that tariff rate is for that product onto that cost, and that gets paid out of the bond.

And every country is different, right? So if you are selling in multiple geographies, we're talking very specifically around US sellers, but a lot of US sellers will sell into the UK, they'll sell into Australia, Canada. There are going to be different tariff procedures and calculations in each country. And as the US is going into, for lack of a better word, a trade war, we're probably going to see a lot of changes in terms of importing product into those countries as well.

21:44 Bryce Judy

That's right. And really the hard thing here is each country has their own regulations, they have their own sites, they have their own classification processes. There's no real centralized location for this stuff. And so it becomes like a massive headache for anyone that's doing cross-border shipping, especially to multiple markets.

22:04 Stephen Brown

Let me ask you a question around compliance. What is to prevent somebody from putting in a false cost of manufacturing in an effort to try and reduce what they're going to be tariffed?

22:19 Bryce Judy

Yeah, this is something that you hear talked about actually quite a bit in the background. People working out deals with their manufacturers, and they're paying a design fee to their manufacturer so that they can lower their unit cost per item and have a lower cost that's getting dutied at the border. So there are a lot of different strategies that people will try to do, which are not legal, or not something that you should be doing necessarily, but they are more common practices than you would think.

22:48 Stephen Brown

How does customs prevent that abuse, and what are the risks associated? How would they identify somebody who's doing what you said, like, hey, I'm going to pay you a big number in design consulting or whatever, and then you're going to lower my invoice for the unit costs. How would customs catch that?

23:08 Bryce Judy

That's the thing, it's a tough thing to trace, right? But if you do get caught for something like that.

Ford Motor Company, in 2024, so just last year, they had intentionally misclassified one of their cargo vans that they were shipping across the border. And basically what they did is, it was a six-seat van and they removed two seats from the back, and so they imported it as a four-seat car. And then they went and installed those seats in once it was across the border, and they're saying, look, it's only four seats, we didn't do whatever. They ended up with like a $365 million fine in back payments.

23:50 Bryce Judy

So it definitely exposes you to a lot of risk. You have a 5% for negligence up to 100% of the domestic value of the goods that you can face in fines for misclassifying goods or intentionally trying to go around these regulations.

24:07 Working with an expert, and building a strategy

Stephen Brown

Kind of like taxes. We talk to customers about taxes, we specifically support sales tax, and it's one of those things where you can try and cheat, but if you get caught you're going to be in a world of hurt.

Okay, so you've talked a little bit about some best practices for managing compliance and tariff classifications. Sounds like probably the best thing to do would be work with an expert. Or manufacturers oftentimes already know what their products' HTS codes are. Is that probably the best two things to look at, talk to your manufacturer or work with a customs expert?

24:42 Bryce Judy

Yeah, I think definitely the latter of the two. Working with an expert is going to be a lot better than just going off of what your manufacturer says. A lot of times they don't actually know, they're just throwing out a number, they're using the general classification. It's a lot better to bring that in-house, do your own classifications, get an expert or use Tarifflo, and get those actually correct, get some precedent behind it, get some court rulings that support that. Because if you are to be audited, it's great to have that backing for it.

25:15 Bryce Judy

And as well, we were working with a company just a couple of weeks ago. We were just running through a couple of items for them, showing them how our system worked. And one of the items, they're like, this HTS code is different than what we're using. And they looked, and it was very specific to their item, classified it, and they're like, yeah, we're overpaying by 10% in duties for this one thing, which is about $15,000 for them per year. So just like a quick fix for them, they're saving $15,000 per year now. And so it's definitely worth it in the grand scheme of things to do it right the first time. Make sure these are as correct as possible.

25:50 Stephen Brown

Let me ask you a question around what happens, let's say you get in a dispute with Customs and Border Protection and they said, you classified it wrong, and you're like, no, I did it right. How would you handle those disputes?

26:04 Bryce Judy

Yeah. So if it's about a classification issue, they're going to request more information.

So what we used to do at KPMG is, for each classification we would write a rationale. And basically that rationale would cite your section notes, your chapter notes, your explanatory notes, your court or previous CBP rulings. And it basically builds up a precedent for the classification that you used.

In case you're audited, you can send that to them, and then they have at least that you performed reasonable care in making that classification. If they decide to reassign you and say that it's something different, then that's all right. You won't get that 5% fine to 100% fine, and you can just switch over to the new one. So that's kind of how we used to handle that process there.

26:53 Stephen Brown

Okay, so if you have good intent and you get in a dispute and you lose, you're not going to pay the penalties, but you're going to have to be prepared to back up why you assigned a classification the way it was.

27:05 Bryce Judy

Exactly.

27:07 Stephen Brown

So we talked a little bit about this, but people are scrambling. They're like, what do I do, what do I do?

What would you recommend to somebody who's importing product about how to approach tariffs in a way that is not going to get you into trouble? Are there any best practices, or are we just like, it is what it is, you're going to have to figure it out?

27:30 Bryce Judy

Yeah, I would say be very intentional with your tariff strategy. If you decide to go the route of doing tariff engineering as you're manufacturing goods. And tariff engineering is basically, you're changing the design of the goods to be manufactured so they're able to be shipped in legally as a lower tariff or a free tariff item. So if you're going through and you're trying to do things like that to change your HTS codes, make sure that you're doing it legally, that it's very intentional in the manufacturing process, that these goods are manufactured in a way that they're going to be able to be imported in that way.

28:10 Bryce Judy

So I think intentionality, if you're looking at doing tariff mitigation strategies, first off. And then second off is definitely get someone that's an expert, or get access to the data that has all of this in a unified place. It's so disjointed, and for each company you have different SKUs, you have these updates happening constantly. And being able to understand that for your business from a high level perspective will just give you so much more control and knowledge of how to go about and navigate these changes for your business specifically.

So I think, number one, being intentional. Number two is being able to see it from this high level perspective. And then number three, where you need help, where you have questions, definitely get an expert, get someone that's a licensed broker, get someone that is experienced in this area to help you navigate these changes. Because it's a lot cheaper to pay someone upfront than it is to pay it back in issues in the future.

29:03 Country of origin, and wrap up

Stephen Brown

Let me ask you a question that's probably going to be related to this, if somebody's thinking about switching their supply chain. What determines country of origin?

29:12 Bryce Judy

Yeah, so country of origin generally, and there are certain free trade agreements that provide exclusions for certain goods and whatever, that gets pretty in the weeds. But generally you're looking at the item, where it was originally manufactured, unless there was a tariff shift.

So for example, you have an O-ring that was manufactured in China. That O-ring is going to be a part of, we were talking about medical instruments, it's going to be a part of an endoscope that will be shipped into the US. So originally it's this O-ring, it gets shipped into Mexico, the country of origin will be China. And then it gets put in as part of a finished good, so the tariff code will shift to this new product, right? But at that point it's no longer a country of origin from China, it's going to be a country of origin from Mexico. So that's the general rule, of where it was manufactured, unless there was a tariff code shift, and then it's going to change.

30:12 Stephen Brown

So what's to prevent a company from saying, I'm just going to, there's one piece that I'm going to slap on this. So I'm going to do most of the manufacturing in China, and then Vietnam has been a common thing that you've seen over the last few years, I'm going to move that to Vietnam and then they're going to do some final assembly, and then country of origin is now Vietnam. What's to prevent that from happening as a way to circumvent country of origin China?

30:43 Bryce Judy

Yeah, so there are specific rules for each country that we have trade agreements with. There are certain things in place to try to prevent that from happening for certain goods. But for a lot of goods that's totally allowed. It's all shipped in from somewhere else, it's actually manufactured into the finished goods in Vietnam, and it can be shipped in from Vietnam at that new tariff code.

But yeah, that would be allowed. Something like transshipping, where you're just stopping at the port in Vietnam and then saying it's from Vietnam, that would be illegal.

31:14 Stephen Brown

That's where you're going to get into trouble.

And I think the big challenge, and it'd be fair to say, proceed with caution, because Trump has said tariff is his favorite word in the English language. And he's potentially looking at increasing tariffs across the globe. And obviously I would assume if they see this misbehavior they're going to go after it. So you've got to be careful about changing up your supply chain only to have, as what we've learned recently, tariffs can happen very quickly. Moving supply chain does not. So proceed with caution is probably the best advice, right?

31:53 Bryce Judy

Yeah, I think so. It's definitely going to be a bumpy road over the next couple of years in this space. Proceeding with caution, kind of looking at trying to project where things are going to go. That's a big challenge, because as we know from the last couple of weeks, things can change in the matter of hours.

32:12 Stephen Brown

Got you. Well, this has been awesome, Bryce. If somebody wanted to connect with you, what's the best way to do that?

32:17 Bryce Judy

Yeah, you can connect with me over LinkedIn, it's just Bryce Judy. Or send me an email, it's Bryce.Judy@Tarifflo.com.

32:25 Stephen Brown

Awesome. Well, thanks for joining us, and thanks especially for coming off of bronchitis. This has been super informative and hopefully helpful to those that are navigating this very nasty process.

32:37 Bryce Judy

Awesome, thank you so much Stephen.