Back in 2019 when Second Chances Farm was looking at opening for business, its founder Ajit George was working on a plan to lessen or avoid taxes on importing parts to run its hydroponic farm.
Second Chances Farm operates in Wilmington’s Riverside community, growing vegetables in an indoor farm and exclusively hires people who have left prison. Because the startup needs LED lights from China and other hardware to control the temperature in the vertical farm from Ireland and Poland though, it faces significant duties and taxes before it could start making revenue.
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Caleb Brown checks on some of the plantings at Second Chances Farm in Wilmington. The company is receiving increasing investment and attention. | DBT PHOTO BY JACOB OWENS[/caption]
In seeking a solution, George found a little-known tool to avoid that added cost. He applied to turn Second Chances Farm into a foreign trade zone (FTZ) to avoid paying tariffs on any parts he imports and will use on site.
“It’s purely a defensive measure because 80% of the parts we require come from China, and depending on the current [presidential] administration, the tariffs levied can go as high as 33%,” George told the Delaware Business Times. “We estimate that we’re saving $300,000 on every million. If we’re talking about revenue in the $3 million to $5 million range, that’s serious money.”
Congress passed the Foreign Trade Zone Act of 1934 as part of the New Deal reforms, namely to allow companies some respite from bringing imported goods to shore and store them without paying tariffs, so long as they were not sold domestically. FTZs help manufacturers compete in a global market, especially when necessary parts for a product can cross international borders.
There are nearly 300 FTZs across the country. In Delaware there are nine, ranging from general purpose warehousing — such as Bayshore Fine Art and the Delaware Freeport — to production authority like the Delaware Refinery and manufacturing. The Port of Wilmington is designated as a FTZ magnet site, or one designated to attract and serve multiple users.
In 2018, Delaware exported $4.4 billion in manufactured products. Top exports included chemicals ($1.6 billion), transportation equipment ($864 million), machinery other than electrical ($367 million), and petroleum and coal products ($353 million).
In a FTZ, companies can import components but defer payments until that component leaves for the U.S. market. In some cases, companies can avoid tariffs if that component is exported overseas again.
For example, if a warehouse is approved to import batteries and flashlights separately, it could defer paying the duties — approximately 5% — while the imported materials are sitting in the warehouse.
“They would pay the 5% duties in this example on any materials they shipped outside the FTZ to allow it to ‘enter’ U.S. commerce, such as shipping to local department stores as inventory,” said Patricia Cannon, who oversees the state’s FTZ program. “But if they shipped from the FTZ back outside the U.S. to another foreign country, the U.S. would not collect the 5% duties.”
The other significant benefit for Delaware manufacturers may be inverted tariffs, or when the duty rate for the overall finished good is lower than the duty rate of the component parts. Hypothetically speaking, a car manufacturer may face a 2.5% duty rate on cars and radios with a 5% duty rate. When the radio is installed in the car, the company will pay a duty rate of 2.5% on the whole car.
Sussex County Economic Development Director Bill Pfaff is banking on these incentives to fuel even more growth at the rising Delaware Coastal Airport Business Park, a 175-acre industrial park which has recently been designated as a FTZ.
“We’re the only one in Sussex County and the Eastern Shore with this designation, and it makes it highly attractive for businesses who need to ship things across the country to manufacturers,” Pfaff said. “No one has activated these benefits yet, but we’re hoping that with some discussions that will change. If you have the opportunity to ship things with no tax, that can make it very attractive for businesses to come here.”
ALOFT AeroArchitects, one of the industrial park’s oldest tenants that designs and installs auxiliary fuel systems in commercial aircrafts, has its own arrangement, Pfaff said. The lure of an airplane manufacturer could inspire more to follow.
But for now, Pfaff said his sights are on a new venture that would make the Delaware Coastal Airport Business Park a possible freeport for southern Delaware and the lower Maryland shore.
“We hope to launch a warehouse where businesses can ship several parts to store and defer tariffs,” he said. “If you’re a manufacturer, this can be attractive to roll in your tax with the price, and make it way more profitable on the bottom line.”
