You’ve decided to start an import-export business or expand your existing business by importing goods from abroad and reselling them. Wonderful! America was founded on import-export business – nearly all the reasons behind our War of Independence had to do with disagreements with England over how we should manage our international trade – so your entrepreneurial choice has a good and long pedigree.
But there’s a lot to know, and a lot more to manage in your business, once your purchases or sales start crossing borders. One of those things is how a Customs bond works and how to obtain one.
The Purpose of a Customs Bond
Even though, as the importer, you’re the one paying for it, a Customs bond isn’t really for you. Customs bonds are taken out to protect the government and ensure it gets every penny of the duties, taxes, and fees that it expects from your shipment.
In the old days, customs required importers to pay their import duties before the goods would be released from port. If you needed a couple of weeks to get the money together, your cargo would sit in port accumulating storage charges while you gathered that money. In addition, as Customs rules became more complicated, and as the duty rate differences between products grew to fill an entire book, the industry found that an importer often needed a week or two just to correctly calculate the amount owed on each shipment.
So Customs established the concept of a two-step import clearance process so that importers could import their goods, file a preliminary entry (called a CF-3461 in the U.S.), and then receive their goods immediately. They could then take their time, with up to 10 business days to calculate their entry summary (called a CF-7501). Most countries have some version of this two-step process to give importers and their agents enough time to get their filings right.
But Customs isn’t happy about letting cargo go without collecting their money upfront, so this two-step process usually requires a bond – only very low-value “informal entries” are excluded. A bond does a few things:
- It puts the importer on record with Customs so that Customs can find them if they want to. It includes your business name, EIN, address, ownership, and in some cases, your history with Customs.
- It enables Customs to allow you to pick up your goods without paying your duties right away and gives you two weeks to work with your broker and get the entry filed and paid correctly.
- It gives Customs a guarantee to collect more money should they recalculate the entry later.
What Happens If Your Entry Is Incorrect
Customs knows that nobody’s perfect and their rules are often confusing. Even after you’ve made your final filing, Customs isn’t done with you yet. They generally have up to a year to review your work – or your Customs broker’s work – and see whether or not they agree. If Customs decides your entry was wrong within that time frame, they can bill you for the additional amount caused by this correction.
What could have gone wrong? Even if you try to be diligent, and even if your customs broker tries to think of everything, there are several common reasons why the first filing might be incorrect.
- Valuation. Customs may discover that you had dutiable assists – additional payments, or payments-in-kind, to your foreign vendor – that your broker didn’t know to include. This increased value would increase your duties and fees.
- HTS Classification. Customs may disagree with you and your broker on the Harmonized Tariff Schedule (HTS) code or codes in your shipment. As hard as regulators tried to make the HTS user-friendly, thousands of codes are highly nuanced, and thousands of products don’t have a clear classification. Even the most careful importers occasionally get a code wrong or have a legitimate disagreement with Customs over one.
- Origin. The U.S. assesses the same basic duty rate on all MFN (Most Favored Nation) countries – which, for Americans, is virtually every country on earth except Cuba and North Korea. But it has lots of programs that are specific to the country of origin of goods, both in providing duty-free benefits and in assessing punitive additional anti-dumping or countervailing duties on them. Customs could discover that you claimed duty-free benefits under GSP, CBI, NAFTA, or another such program without deserving it, or that your vendor lied about the origin of the product to avoid an anti-dumping case. As a result, you could see a product you thought was duty-free get an additional bill for 5% or 10% of the value – or worse, see a product hit with an anti-dumping duty of 10%, 25%, 50%, or even 100% or more.
- Date Changes. Yes, even a date error can cause an additional bill from Customs. The U.S. usually makes its major changes at the first of the year, but anti-dumping duties and the special punitive rates on steel, aluminum, and Chinese goods created in 2018 can be implemented at any time. Since Customs brokers usually file import entries in advance of arrival to ensure that goods don’t sit in port awaiting clearance, they sometimes guess wrong on the arrival date. If a broker said something would arrive on May 9, but the plane actually landed on May 10 when a duty rate changed or a new punitive case became effective, then Customs would have to issue an additional bill, perhaps weeks or months later.
For these reasons and more, customs insists that importers have a bond in place. Again, it’s for their protection, not yours. You just get to pay for it.
Obtaining a Customs Bond
No matter who you import from – a small company or a large one, a related company or an unrelated company – you will need an import clearance. Very few shipments are excluded from the import process. Exceptions include articles from space, corpses in caskets, business records, and telecommunications. Almost every import shipment must be cleared through the Bureau of Customs and Border Protection (CBP). Virtually all countries have similar import processes through similarly named agencies, such as Canada’s “Canada Border Services Agency.”
This fact creates a division of responsibilities in your import activities.
- On the one hand, carriers are responsible for transporting the goods. Freight forwarders, containership lines, airlines, truckers, and railroads can all handle the movement of goods from country to country, and their focus is normally on speed, cost, and service.
- On the other hand, Customs brokers handle the government approval aspects of those moves. These include accurately filing documents, acquiring permits or other approvals, and calculating and paying duties, taxes, and fees on your behalf. Their focus is on accuracy and legal compliance, which takes time and therefore has a tendency to slow down the speed of your shipment and increase its cost.
Since most providers in the freight forwarding world handle both aspects – the transportation of goods and the import-export government filings on your behalf – it often causes a tug-of-war between their departments. And when your vendor has a tug-of-war concerning your interests, you lose either way. Always remember that a late shipment may make you suffer a little, but trouble with a government agency makes you suffer a lot, so always pay attention to the compliance side.
In the U.S., Customs allows an importer to file their own import entry rather than having a broker file it for them. But although it’s legal, it’s rarely recommended, unless the importer is already an expert. There’s so much to know about the classification process – and the many odd rules of importing, from country of origin to valuation to HTS classification – that you’re usually better off selecting a Customs broker, at least at first, to ensure that everything is done right on your behalf. Brokers have computer systems with helpful warning flags and built-in triggers that protect you from missing an anti-dumping duty, tariff change, or other government agency requirements.
Single Entry Bonds vs. Continuous Customs Bonds
In most cases, Customs gives you the choice of buying one bond per shipment (a single entry bond, or “SEB”) or buying a renewable bond that lasts a year (a continuous bond). As a general rule, any import shipment worth over $2,500 must have one or the other.
Single Entry Bonds (SEBs)
An SEB can be issued on the fly. Every Customs broker has a supply of blank forms and a contract with a Customs-approved surety company to issue them. The Customs broker makes a commission on every bond they sell, and many of them do use this as a small profit center, but they really don’t think of SEBs that way. The additional work involved in generating an SEB isn’t usually worth the commission to them. They’d rather have you be a successful importer so that you have more shipments for them to handle more cost-effectively.
An SEB is based on the value of your import shipment plus the expected duty payment. It’s priced per thousand dollars of value with a minimum floor. Even a relatively small import shipment of just a few thousand dollars might, therefore, require an SEB with a $50 or even $100 price, depending on your broker’s pricing approach and the deal they have with their bond broker.
The sole real advantage of an SEB is that it can be done quickly and easily. If you import multiple shipments per year or any shipments of very high value, it becomes cost-prohibitive.
The continuous bond, on the other hand, is issued for a whole year and can be automatically renewed. Most small importing companies can get a continuous Customs bond for between $500 and $1,000 per year, with these advantages:
- It’s good in all U.S. ports, no matter how many shipments you have.
- It’s attached to your business, not to your Customs broker, so you can use one broker for the ocean, another for air, and another for truck crossings and still only need the one bond. Generally, however, you should keep the number of customs brokers you use as low as possible so that all your entries are handled the same way.
- If your business has multiple divisions under the same ownership – say, for example, that one spouse operates a toy and board game importing company, and the other operates a clothing and knickknack importing company – you can cover the multiple entities on the same bond, as long as all the EINs, business names, and DBAs are identified as co-principles when the bond is filed.
- It allows your Customs broker to file Customs entries and obtain clearance in advance of goods’ arrival, so there should hardly ever be Customs delays on your shipments other than the random Customs inspection or documentation question.
- The bonding company can provide free, detailed tracking reports for your import activity, conveniently enabling internal compliance audits as your business grows. It also gives you the opportunity to discover if someone else is illegally importing in your name and on your bond. It does happen in this era of rampant identity theft, and it’s a genuine risk.
As you can see, once you decide to become an importer, one of your first calls to your Customs broker should be to order a continuous bond. As long as you calculate it right, it will automatically renew, giving you peace of mind and smooth importing practices for years to come.
How to Apply for a Customs Bond
A continuous Customs bond is traditionally simple to calculate: Add up your expected import Customs collections (duties, taxes, and fees) for the next year, and then select a figure that covers 10% of that number. Note that an SEB pays attention to the value of the goods, but a continuous bond typically pays attention only to the Customs payments. You could theoretically import many millions of dollars’ worth of goods, and if they’re almost all duty-free, still satisfy your obligations with a minimum-level bond.
Your appropriate bond level depends, to an extent, on the products you intend to import, as well as on the sheer volume. Traditionally, the minimum level for a continuous bond is $50,000 per year, which covers up to $500,000 per year in Customs payments. You could have a new shipment every day for a year, and if you’re importing goods that are mostly duty-free, either conditionally (by using a free trade agreement or trade promotion program) or unconditionally (by importing HTS codes that carry a zero-duty rate), then your $50,000-minimum-level continuous bond will be enough.
By contrast, if you import high-value goods that are dutiable, you may need a more significant bond – though for small businesses, that’s unlikely. Still, if you’re importing large quantities of goods hit by the traditionally high textile duty rates, or goods hit by the new punitive 10% and 25% additional duties on Chinese goods and many steel and aluminum raw materials, then it adds up quickly, and you will indeed need a higher bond amount.
Perhaps, over the course of a year, you will import $10 million worth of goods hit by a 25% duty. That’s at least a $2,500,000 annual Customs collection, and likely a bit more, considering other Customs fees. Since you need to cover 10% of the annual collection, and you always round up to the next hundred thousand, you would need a $300,000 Customs bond.
Bear in mind that duty changes may arise as the current process of trade changes continues. Most steel and aluminum raw materials used to be duty-free, but they jumped to 25% and 10% in 2018. These rates could go away in the future, or they could be joined by other products that become new targets for reasons of economics, politics, or foreign policy.
Refiling to increase a bond level is a lot of work, so it’s better to estimate high and be sure that your bond level is sufficient.
Once you’ve figured out how much coverage you need, the rest of the process is simple. Your Customs broker will give you a Customs form to fill in. It must contain the information mentioned above – names, DBAs, EINs, owners, addresses, past import volume, line of business, and most commonly imported commodities – and also some financial information about the owners.
Have you or this business ever filed for bankruptcy? Have you ever been the subject of a Customs fine or penalty? Be prepared to discuss this sort of thing with your broker. It’s not a dealbreaker. You just need to be honest, or the bond company could have grounds to refuse coverage. A bond is a legal document. it must be signed by a corporate officer, and you will need to give your customs broker a standard limited customs power of attorney to file the documentation on your behalf.
Suspension or Cancellation of a Customs Bond
If you change your business’s address, that’s easy – a bond rider will satisfy Customs. If you change your name or EIN, however, you may need to cancel the existing bond and start from scratch with a new one.
For a business that’s in startup mode, perhaps still considering a couple of different DBAs or EINs – such as in the case of a family operating a couple of different businesses simultaneously – the best choice is usually to list all the possibilities on your bond. If you own both a mail-order business and a gift shop, list both businesses or DBAs, even if only one expects to import at present. The only thing that affects your cost is the amount of money you’re paying to Customs. It doesn’t hurt to include the other family businesses on the bond, just in case.
More concerning is when Customs suspends or terminates your bond against your will. There are two primary reasons for this:
If you were low in your estimation when you set up your bond, customs can act as if you don’t have a bond at all. Customs tends to be decent about such inefficiencies. That was especially the case in 2018 when it happened frequently due to the high number of unexpected jumps from 0% to 25%. Customs and the bonding companies worked with the importers to ensure that they had time to get replacement bonds in place.
But don’t count on that leniency. It’s still your obligation as an importer to track duty changes and stay ahead of them. You don’t want a shipment stuck in port, suddenly without bond coverage.
Customs periodically issues additional bills to importers when they discover that the wrong duty was paid. If the importer processes this bill promptly, then there’s no problem. Unfortunately, such bills are often lost or simply not recognized and therefore are not handled at all. If that happens, it forces Customs to put your bond on hold, causing your future import clearances to go on a cash basis with Customs.
The smaller the business, the less of a risk this should be. A sole proprietor, for example, opens all their own mail, so there’s no confused mailroom clerk to blame. Just be aware. If Customs sends you a bill – any bill – call your Customs broker immediately to discuss it. Some bills are the result of late filing errors that your broker will absorb; others are additional duty bills that you must pay.
Either way, don’t let these bills sit. Deal with them immediately, or you could lose your import privileges entirely.
Can You Avoid Having a Bond at All?
Yes and no. A bond has several uses, so if you want to be in the import-export business, you’re almost always better off having a continuous bond on file. That said, there are ways to avoid it.
You can sell imported goods without being the importer yourself, for example. You might find a wholesaler in the U.S. who imports in great bulk, maximizing the advantages of volume buying and volume logistics, who can sell goods to you as domestic orders. You’ll still have some of the Customs obligations associated with imported goods, such as country of origin marking requirements, but you won’t be the importer of record, so you won’t need a bond.
Another way to avoid having a bond would be to order only in tiny increments. Very small, low-value shipments ordered through small package companies and couriers may be exempt if each shipment’s true value is low enough. (Reminder: Never lie about a Customs value – ever.)
International small package air freight is among the most expensive modes of transportation, often 10 or 20 times the rate of full container ocean freight, so for most products, this is not an option. But yes, your carrier can often import these low-value air shipments and clear them without a bond, so if you’re starting out with low-value samples, you may be able to put off the bond a bit.
Just remember that once you start needing SEBs, you’re probably throwing money away, so get ready for that cost-effective continuous bond.
If you’re going to operate an import-export business, you will find the benefits of a continuous bond among the keys to success. Select a good Customs broker, provide all the information they might need, and enjoy the excitement of going global!