De Minimis Tariff Exception Ends for China, Incentivizing Fraud
For several years, most imports have entered the country duty-free, thanks to the de minimis exemption codified under Section 321(a)(2)(C) of the Tariff Act of 1930, which was amended in 2016 to apply to a much greater number of imports. Thanks to the raised threshold from $200 to $800 per shipment, an ever-increasing number of imports have entered the country without tariffs, and more and more businesses have relied on the de minimis exception.
By executive order, the de minimis exception has been eliminated, or essentially changed, for imports from China or Hong Kong. Under the new rules, express shipments, such as those via FedEx, UPS, and DHL, will be subject to the 145% base tariff now in place for imports from China, as well as product-specific duties that depend on HTSUS classification. Postal shipments will be subject to somewhat less scrutiny, and will be subject to either a 120% ad valorem duty or a flat fee of $100 per item (which will increase to $200 after June 1, 2025).
Some companies, at least in the short term, have compensated for new duties with supply chain adjustments. In particular, businesses who kept inventory abroad to take advantage of the de minimis exception may move inventory to U.S.-based warehouses, since importing many of the same goods in bulk may no longer result in more significant tariff burden. Other companies have begun to pass costs along to customers, although the price hikes from some do not seem to offset the full impact of the current tariffs.
Other companies, however, may turn to fraud actionable under the False Claims Act. Since most of the tariff burden comes from ad valorem duties, importers may be tempted to falsely understate the value of goods that are suddenly facing new tariff burdens. It would also be actionable for a whistleblower if, for instance, a company falsely routed Chinese goods through a third country before import to try to evade tariffs — leading to marking duties, in addition to underpaid tariffs.
The de minimis exception has been the subject of False Claims Act cases before. In 2018, British knitwear retailer Pure Collection Ltd. settled allegations that it split shipments exceeding this threshold into multiple smaller packages to falsely qualify for the exemption, thereby evading applicable duties. The end of the de minimis exception for China imports doesn’t lead to the same set of incentives, but the precedent is there.
Take, for example, a company that has been used to sending imports from China directly to consumers in the U.S. to take advantage of the de minimis exception. That company could be tempted to send shipments to a third country instead, such as Canada or Mexico, to keep its business model as similar as possible — continuing to send smaller imports directly to consumers, and trying to continue to take advantage of the de minimis exception. Companies could also conceivably try to take advantage of the somewhat lower burdens on postal shipments by using express carriers from China, and then shifting imports to postal channels.
Under the False Claims Act, people with knowledge of fraud on the United States, including underpayment of customs duties, can sue under seal on the government’s behalf, in exchange for a 15%-30% share of the recovery. At Greene LLP, we have represented False Claims Act whistleblowers since 1992, and customs cases since 2011.
