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VOL. 35 | NO. 10 | Friday, March 11, 2011

Metro awaits free-trade zone expansion ruling

By Judy Sarles

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Metro might have to wait a little longer to find out if the foreign trade zone it has requested will be approved.

The U.S. Foreign-Trade Zones Board is expected to rule during this year’s first or second quarter. An application for the 2,700-acre expansion, which includes Ozburn-Hessey Logistics warehouse space in LaVergne and industrial properties in Clarksville and Gallatin, was submitted to the board in November.

Foreign Trade Zones, which allow companies to operate as if located outside the United States, are under the direct supervision of the U.S. Customs and Border Protection (CBP). The zones are created under federal law to encourage and speed up international commerce and make it easier for companies to go head to head with foreign competitors through the delay, decrease, or exemption of U.S. Customs tariffs, as well as through other savings. There are more than 200 zones throughout the country.

In the early 1980s, the arrival of Nissan North America in Middle Tennessee was the impetus to establish Middle Tennessee’s Foreign-Trade Zone No. 78. The Foreign-Trade Zones Board, within the U.S. Department of Commerce, gave Nashville a grant of authority to administer the local Foreign-Trade Zone program. No costs are involved in Metro’s administration of its FTZ program.

In its application to the board, Metro is seeking expansion of what is known as a general purpose zone, which is available for multiple commercial tenants who may need FTZ-designated space.

“If those tenants move and vacate that property,” says Charlie Williams, deputy director of the Mayor’s Office of Economic and Community Development in Nashville, “the Foreign-Trade Zone designation stays.”

The boundaries of a general purpose zone are 60 miles or a 90-minute drive from the U.S. Customs and Border Protection port of entry, which in Zone No. 78’s case is Nashville International Airport. To receive a general purpose FTZ designation, a property owner within a zone has to activate it through an application. A property can have the designation, but the designation may be kept inactive.

Besides a general purpose zone, another category within a Foreign-Trade Zone is a subzone. Local subzones are specific to a single company and can fall outside the 60-mile or 90-minute limit. Nissan, for example, is doing business in a subzone. If Nissan were to vacate its current location, then the subzone would cease to exist. If a company were to move into Nissan’s vacated location and wanted to do business in a subzone, it would have to file its own application.

Other than Nissan, the only other local companies with active FTZ status are Dell and Sanford, an office products unit of Newell Rubbermaid. Sanford also is doing business in a subzone, but Dell has its own special subzone designation, although it is reported as a general purpose zone. Each subzone pays Metro $23,000 in annual fees. In 2010, 8,200 people were employed in FTZ No. 78, and there were $915 million in exports from the zone, a substantial increase over the $527 million in exports in 2009.

For businesses, the benefits to being in an FTZ include:

  • Duty Exemption. No duties on or quota charges on re-exports.

  • Duty Deferral. Customs duties and federal excise tax deferred on imports.

  • Inverted Tariff. In situations where zone manufacturing results in a finished product that has a lower duty rate than the rates on foreign inputs (inverted tariff), the finished products may be entered at the duty rate that applies to its condition as it leaves the zone – subject to public interest considerations.

  • Logistical Benefits. Companies using FTZ procedures may have access to streamlined customs procedures (e.g. “weekly entry” or “direct delivery”).

  • Other Benefits. Foreign goods and domestic goods held for export are exempt from state/local inventory taxes. FTZ status may also make a site eligible for state/local benefits which are unrelated to the FTZ Act.

Public benefits of an FTZ include:

  • Help facilitate and expedite international trade.

  • Provide special customs procedures as a public service to help firms conduct international trade related operations in competition with foreign plants.

  • Encourage and facilitate exports.

  • Help attract offshore activity and encourage retention of domestic activity.

  • Assist state/local economic development efforts.

  • Help create employment opportunities.

For security and oversight reasons, zones must be within or near a U.S. Customs and Border Protection port of entry.

The application process for a company can be lengthy and costly, and duty savings must be at least $100,000 per year to be worth a company’s effort.

According to Rick Bond, a Vanderbilt University professor of economics, most economists would argue for establishing foreign trade competition in a broader fashion and not limiting it to foreign trade zones.

“Economists, I guess, sort of have mixed feelings about these types of things,” Bond says, “because generally economists believe that liberalizing trade is a good thing.”

One drawback to an FTZ is that local and state governments miss out on money if foreign goods and services are exempt from state or local inventory taxes. Williams says he wouldn’t characterize the exemptions as a loss of money for Metro.

“First off, our current users are out of county, except for Dell, and they’ve not had any goods pass through the zone in a number of years,” he says.

Williams says the FTZ exemption is no different than the 501(c)(3) status of a nonprofit that allows it to not pay property taxes. He says the nonprofit’s exemption wouldn’t be considered a cash loss or a rebate. Williams notes that a company in an FTZ would have an entirely different business model if it weren’t in a zone. The state of Tennessee has incurred no loss of money because companies are in an FTZ, according to Sara Jo Houghland, a spokeswoman for the state’s Department of Revenue.

“We are not aware of any companies that are in a Foreign Trade Zone (FTZ) for franchise and excise tax purposes,” says Houghland in an e-mail message. “As such, we are not aware of any revenue lost because of the FTZ.”

The main issue for Bond is what price local governments have to pay to attract businesses to their Foreign-Trade Zones. In some cases, the governments are competing against each other for the businesses, so they offer tax incentives to the businesses.

“So if you get a number of different states and counties competing against each other,” says Bond, “that leads to big gains for the corporation and not much for the county. They end up paying a very big price.”

There is a possibility an FTZ could lapse. It must be activated with the CBP within five years. However, if it does lapse, there is an 18-month period in which the zone can be reactivated.

Metro has filed the general purpose zone expansion application at the request of Clarksville, Gallatin, and Ozburn-Hessey and is awaiting the stamp of approval from the Foreign-Trade Zones Board.

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