As we all know, the recent moves by the administration to increase tariffs on a variety of products, including alcoholic beverages, have raised a number of questions from importers and wholesalers on how to manage and, if possible, mitigate the impact of the tariffs. Although the nature and extent of the tariffs seems to move on almost a daily basis, there are a variety of both legal and business strategies that businesses involved in the importation and sale of imported alcohol might want to consider. While most of these strategies are applicable to a wide variety of imported products, there are certain strategies that have greater applicability to the importation of alcohol than to other products.
When a product is imported in the United States, the importer is required to file a declaration with the U.S. Customs and Border Protection which includes the transaction value of the products being imported. Transaction value is generally defined in the regulations as the “price actually paid or payable” for the imported merchandise. The tariff is then paid as a percentage of the transaction value.
While there are some strategies to reduce the impact of the tariffs, importers should remember that any liability, whether civil or criminal, for violation of the customs laws is born solely by the U.S. importer. As is discussed below, importers might be wise to view suggestions for tariff avoidance from foreign supplier with a grain of salt since the U.S. importer, and not the foreign supplier, bears the risk of any violation of law.
A nonexclusive list of strategies that might be considered include the following:
- Indirect allocation of tariffs. While most strategies are applicable solely to the importer, indirect allocation of tariffs is a strategy that could be used throughout the supply chain. The tariff on alcohol, while paid by the U.S. importer, could be absorbed by the foreign supplier, the U.S. importer, the wholesaler/distributor, the retailer, or the consumer. How the tariff is ultimately allocated is primarily a question of the market strength, but is something that will likely be spread amongst a variety of parties. Importers, in particular, have the ability to negotiate with foreign supplier to reduce the price of the product in an effort to have the foreign supplier share in at least a portion of the U.S. tariff. Likewise, the wholesaler, retailer and consumer may ultimately share in the tariff cost.
- Frontloading inventory. While it appeared several weeks ago that the strategy of importing substantial amounts of inventory into the United States prior to the imposition of the tariffs would no longer be possible, the administration's agreement to delay the impact of a majority of the tariffs for ninety days does provide importers and wholesalers with the ability to import and store a substantial amount of inventory prior to the impact of the higher tariffs. While this is certainly a strategy more applicable to wine and distilled spirits, as opposed beer due to its limited shelf life, it is a strategy that could be used by importers of wine and distilled spirits. In the event that the importer or wholesaler does not have the warehouse capacity to hold a substantial amount of inventory for an extended period time, another option would be to explore the possibility of a bonded warehouse that is permitted to hold alcohol. While there is additional cost of the bonded warehouse, there is an additional benefit that under the payment of tariff can be deferred until the product is released from the bonded warehouse.
- Supply chain diversification. A practical strategy is to simply move the supply chain from a high tariff country, to one with lower tariffs that can supply a suitable alternative that consumers will accept. Unfortunately, until the entire tariff regime is determined on a country by country basis, it is difficult to know which countries might have lower tariffs on alcohol.
The more practical solution for wholesalers will be look at their portfolio and determine whether it might be advisable to reduce their inventory of imported product and move to a U.S. product where there is no tariff (although for those involved in the beer industry, there may be an impact from aluminum tariffs). This decision should be made in conjunction with U.S. suppliers and retailers to determine if the market will accept an increase in the foreign sourced product due to the tariffs. While some foreign source products that have single origin protection, such as tequila, Scotch whiskey, champagne, etc… may benefit from an inelastic demand curve due to there being no direct U.S. substitute, many alcohol products imported United States, including most wine, beer and distilled spirits, do have reasonable U.S. alternatives in the marketplace. As we have seen over the years in times of recession, consumers are often willing to move to a lower price point for a similar product when prices for their favorite product have increased. Unlike automobiles where a consumer may make a decision to defer the purchase of a new automobile for a year or two until the tariffs are removed, most consumers are unlikely to defer consumption of alcohol for several years in hopes the tariff will be reduced or eliminated. They may, however, be willing to move to a non-tariff product to avoid the price increase.
- First sale. One potential strategy is the concept of determining the “First Sale” of the product. In certain circumstances, where there is a foreign middleman involved in the distribution process, it may be possible to use the price paid to the foreign supplier by the middleman, rather than the price paid by the U.S. importer to the middleman, thereby reducing the transaction value by the markup paid as part of the final sales to the U.S. importer. This will likely have limited application in the alcohol the world, but is something that should be kept in mind.
- Changing the country of origin. We have already seen a variety of foreign manufacturers and suppliers (particularly Chinese) suggest to U.S. importers that they could avoid tariffs by changing the country of origin through a method known as transshipping. The concept is to have a product shipped from China, for example, to a country with a substantially lower tariff. This is generally not an acceptable method of reducing the U.S. tariff. The concept of changing the country of origin through transshipping involves compliance with a variety of federal regulations, but generally is based upon there being a substantial transformation of the product in the intervening country. That is unlikely to occur with respect to the production or delivery of wine, spirits or beer. This is a strategy that if employed, needs to be carefully examined.
- Valuation stripping. Yet another theory that various foreign suppliers are suggesting is a process known as valuation stripping, or separating the price into smaller pieces. For example, wine suppliers may suggest that they would strip out part of the value of the product by incorporating various fees, such as bottling fees, packaging fees or other consulting type fees. Unfortunately, the federal regulations make valuation stripping a difficult tactic to employ. The regulations specifically state that the “price paid or payable" by an importer must include a variety of additional amounts, including packaging costs, selling commissions, and royalty or licensing fees. On the more positive side, the definition of “price actually paid or payable”, is defined to exclude any charges, costs or expenses, incurred for transportation, insurance and related services incident to the international shipment of merchandise from the country of exportation to the place of importation in the United States. However, the regulations require that the importer must be able to demonstrate that such costs are individually itemized on the invoice, and adequately supported by underlying records that the importer has in their possession, at the time the product is imported in the United States.
- Other strategies. There are variety of other strategies that likely have little application to the importation of alcohol. For example, there are duty drawback programs which allow an importer to obtain a return of certain tariffs if the products are later exported to a third country, and tariff engineering which involves a change to the product in order to qualify for a different tariff code that might have a lower assessed tariff. Most of these strategies, including the concept of transshipping and changing a country of origin, have greater application to come to the more complex manufactured products than to alcohol.
All importers, wholesalers, and retailers in the U.S. supply chain need to pay close attention to the tariffs and the impact on their business. While the history of tariffs has been that they generally do not last for an extended period time, being aware of the alternatives in dealing with the tariffs has become an important part of managing businesses in the United States.
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