Operating in a foreign trade zone

Streamlined approach opens option to more companies

Among the many advantages Dallas-Fort Worth has to offer is access to Foreign Trade Zones, which can save companies millions of dollars in taxes. A new fast-track approach opens the program up to more companies—and reduces the cost.

For Dallas-Fort Worth, this has led to a boost in FTZ participation and import volume. Approved in January 2010, the expedited procedures were created to help make domestic businesses more competitive internationally. Called Alternative Site Framework, or ASF for short, the program is available to companies that aren’t located inside pre-designated FTZ sites but are within the eight-county Dallas-Fort Worth service area. Those companies must submit an application to the U.S. Foreign Trade Zone Board in Washington, D.C., to designate their building as a “usage-driven site.” 

Companies that are located within a pre-designated FTZ site simply need to file an activation application with U.S. Customs and Border Protection, a process that also comes with assistance from the FTZ grantee. An FTZ grantee sponsors companies that are working to get FTZ designation. As such, they file necessary applications on behalf of the company. They don’t assist monetarily in the process. In fact, a company that applies has to pay the grantee a fee (see checklist for fees) to file and review the applications and assist the company through the process. Grantees also help manage and maintain FTZ designations throughout the metro area.

Under the new system, the time to gain approval for an FTZ designation has been shortened from about a year to 45 days, or sometimes as quickly as three weeks. 

Created in 1934, FTZs allow businesses to delay, reduce, or eliminate customs duties on material, parts, components, or finished products imported from other countries. This, in turn, lowers the cost of engaging in international trade. Other benefits include paying no state or local personal property taxes on imported inventory or domestic inventory held for export.

Since the ASF was put into place, there has been an increase in demand from companies applying to establish zones within the service area. Zones are essentially the same as an FTZ and are established and operated within the confines of a company’s warehouse. Officials with the Dallas-Fort Worth International Airport FTZ, known officially as Foreign Trade Zone No. 39, said that between January 2010 and April 2014, the DFW Airport Board, which is the grantee for No. 39, has set up 11 new zones in the area, with two more in the works. By comparison, in the 31-year period between August 1978 (when DFW became a zone grantee) and January 2010, a total of 16 zones were established.

Although DFW officials credit the streamlined movement for a large part of that uptick, they said other factors, such as an economic upturn and the growth of industrial development  on airport property, also played a role. 

DFW officials helped six businesses set up company-specific FTZs, or subzones, outside of the pre-designated FTZ areas, between 1978 and 2009, before the ASF was in effect. Since 2010, four companies have established usage- driven sites, and two additional companies are currently working through the FTZ application process. 

Bill Methenitis, global director of customs and international trade at EY LLP who specializes in FTZs and works closely with DFW and FTZ applicants, said the streamlined procedures have encouraged more companies to consider operating in an FTZ. “We’ve seen more activity from medium-sized companies that previously had faced too many significant barriers in terms of up-front costs and the length of time of the approval process,” Methenitis says. “The return  on investment for these smaller companies has been significantly accelerated.”

Christina Wood, manager of lease and property management at DFW Airport, says companies should first undertake an internal due-diligence process to make sure that the savings associated with operating in an FTZ justify the set-up and ongoing maintenance costs associated with the benefit. Although the status can provide a significant cost benefit for certain companies, it’s not for everyone. “Across the board, it really depends on their business model and whether they can reap enough of the benefits to offset the costs that come with setting it up,” she says. 

Methenitis points out that those costs have been reduced from tens of thousands of dollars to between $5,000 and $10,000. In addition to applying to get the geography of the FTZ approved, companies can expect to incur costs to set up internal controls, systems, and reporting procedures that are necessary to stay in compliance.

In the case of Coppell-based Matrix Network Inc., a manufacturer and distributor of closed circuit television equipment to the video security and surveillance industries, that initial outlay of time and money made sense, considering that the company imports about 95 percent of its CCTV products from Korea, then packages and distributes them throughout the United States from its FTZ. But about four months after receiving approval to operate as a “user-driven site” within a designated FTZ service area, Matrix Network got an unexpected boost by the passage of the Korean Foreign Trade Act, which provided much of the same duties benefits to the company.

Still, Andi Hemann, Matrix Network’s vice president of operations, says the company continues to benefit from its designation in the form of reduced property taxes and merchandising processing fees. “We still save money in other ways,” she says. “It has been a real benefit to us.”

Because both the cost and the time frame have been reduced, Methenitis and Wood say the potential user base for FTZs has been considerably expanded. Companies that might only benefit from one smaller aspect of the FTZ may still find it a money-saving proposition. “The focus of the program has been broadened so that a wider set of companies are going to be interested,” Methenitis says. “We’ve seen more activity in the past two years than we have in a long time.”

Steve Boecking, vice president of Hillwood Development Corp., which, through Alliance Corridor Inc., is the grantee of FTZ No. 196, says the ASF has essentially eliminated a barrier for entry for companies that are not sitting in a designated FTZ area but are within a service area, which covers most of the Dallas-Fort Worth area.

In the past, he says, it would typically cost a company thousands of dollars and could take up to 18 months for approval if the business was not already sitting in an FTZ, and the long approval process was extremely onerous.

Boecking says the service-area rules helped the region retain a Fortune 500 company. The company was located outside Alliance’s FTZ zone but within the service area. The business was expanding, and was going to consider moving out of state if it didn’t win approval as a user-driven site, Boecking says. But after receiving a quick approval under ASF, the company opted to stay and expand in Fort Worth. 

In another case, a medical company that had moved into the area but was not in a designated FTZ also quickly gained approval through ASF.

“Neither of these two companies would still be players in our area if it weren’t for ASF,” Boecking says. “This really opens up the world to us.”

Methenitis says the DFW area has been a model for the rest of the country in terms of taking advantage of its status as an eligible FTZ area and of the increased ease of gaining approval that was brought on by the ASF rules. He adds that the executive director of the FTZ board was very complimentary of the region’s utilization of the program during a trip to North Texas about a year ago.

“There was a lot of positive feedback about how the DFW area embraced the new program and used it to provide maximum benefits,” Methenitis says. “It’s something that is not paralleled anywhere else in the country.”