As tariffs become more common, Arizona businesses seek foreign trade zones for tax relief
As tariffs become more common, Arizona businesses seek foreign trade zones for tax relief
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Nogales, Arizona, imports much of the produce on grocery shelves
Guillermo Martinez, a fruit and vegetable importer, explains why we eat so much produce from Mexico and how tariffs could impact our grocery bills.
The Republic
Threats of increased tariffs and ever-changing federal deadlines have left businesses that rely on importing and exporting products with uncertainty and questions, but a program created during the Great Depression could help some businesses with planning.
Foreign trade zones are special areas that act as an 'island within U.S. commerce,' where goods can be imported and components can be manufactured into finished goods, and the items are not subject to duties and taxes until they leave the zone, said Melissa Irmen, director of advocacy and strategic relations for the National Association of Foreign Trade Zones.
The program was created by Congress in 1934, but the recent establishment of new tariffs and additional threats have grown interest from businesses, Irmen said.
Delayed taxes can aid planning
Items transported out of the foreign trade zone and into the marketplace still pay duties and taxes, but instead of paying them when they enter the country, they are paid when the item is sold, allowing the business owner to pay those fees when they are receiving money for the item, James Peacock, founder and CEO of Chandler-based SKU Distribution said.
Peacock's company is the first Arizona third-party logistics company to be designated as a foreign trade zone, meaning clients that import or export products can have their items stored in SKU's warehouse to take advantage of foreign trade zone status.
'The benefit is cash management,' Peacock said. 'It allows companies to buy more goods and have more goods on hand, and they only pay the taxes at the point of sale, when they are receiving money from their customers.'
SKU Distribution's foreign trade zone was activated in 2023 and has 250,000 square feet of indoor storage and an outdoor storage yard that are covered by the program.
The International Trade Administration, part of the U.S. Commerce Department, lists 21 businesses actively using Foreign Trade Zone 75, which covers most of the Valley. Several other businesses are in the approval process. Some of the businesses using the program include PetSmart, Honeywell, Avnet, Lucid Motors, TSMC, Intel, Tractor Supply Co. and Puma North America.
Items that don't leave trade zones aren't charged fees
If the items do not leave the foreign trade zone or are exported again out of the zone, the duties and taxes are not charged, Irmen said.
That can save a business a lot of money when dealing with items with a shelf life, Peacock said, recalling a customer that had millions of dollars worth of lithium-ion batteries it was storing in a warehouse that was not a foreign trade zone. The company paid more than $50 million in duties and taxes when the batteries were imported, but demand for the finished item dropped and the batteries remained in storage longer than planned. Many of the batteries expired, and the customer had paid millions in taxes on items that had to be discarded.
Machinery or equipment imported into a foreign trade zone is also not subject to duties and taxes until it is put into use, Irmen said.
Many large businesses in Arizona, like Taiwan Semiconductor Manufacturing Co. and Intel, have foreign trade zone designation on their properties.
In Arizona, properties with the foreign trade zone designation also receive a steep discount on their property taxes. Businesses in approved and activated zones are eligible to have property taxes reduced from an 18% valuation to a 5% valuation.
City, federal government must OK applications
Phoenix is the Valley's foreign trade zone grantee, meaning it is the entity that must sponsor foreign trade zone applications within the established zone, which covers most of Maricopa and Pinal counties, and a section of Yavapai. Mesa is not included in the coverage area and operates its own foreign trade zone.
To use a foreign trade zone, a company can work with a third-party logistics provider, like SKU Distribution, that already has the designation or apply for it on its own.
The business must work with the economic development entity that oversees the zone, which in most cases in the Valley is Phoenix. The business and the city will craft the application to show the economic benefit that would be created and what the products will be that use the zone. The application is then vetted by the Foreign Trade Zone Board, also part of the U.S. Department of Commerce.
The business must then ask U.S. Customs and Border Protection for activation. CBP comes to inspect the facility, including security and materials control. Once a site is activated the business can bring in foreign products, and it is regularly reviewed by CBP, Irmen said.
Irmen said she has seen applications rejected because of CBP's stretched resources and lack of available capacity.
Peacock said as tariffs become more of a commonplace concern, he expects to see interest from businesses across industries in foreign trade zones grow, adding the zone can benefit any business that is regularly importing goods or materials.
Reach the reporter at cvanek@arizonarepublic.com. Follow her on X, formerly Twitter: @CorinaVanek.
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