What is a Bonded Warehouse?

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Bonded warehouses are a unique proposition that the owners of the bonded warehouse and the Customs Border Patrol share responsibilities in its operation. They are an extension of an area where the CBP has a level of control over, but the day-to-day operation of the Bonded Warehouse is outsourced to its proprietors. What is a Bonded Warehouse?

The short version is that a bonded warehouse is quintessentially similar to any other warehouse. It is a dedicated space where merchandise (either bound for international trade or not) is placed for further processing such as storage, manipulation, destruction, loading, unloading, packaging, and repackaging. Whereas any warehouse provides such service, a bonded warehouse is for merchandise where proper filing and clearance by CBP are not performed yet. In other words, the merchandises in the bonded warehouse are not “imported” yet by the definition of the Customs Border Patrol.

The application for a bonded warehouse is deemed to be a privilege, not a right of the applicant. This means the issue of a bonded warehouse is strictly at the privy of port directors and the CBP. They consider several factors when approving an application for a bonded warehouse, but the most convincing factor is that a new application will enhance the local community and contribute positively to the state and federal economy. Let’s look at the features, purposes, uses of a bonded warehouse, and how have bonded warehouses improved logistics administration as a whole.

Bonded Warehouse

Features of a Bonded Warehouse

First and foremost, there are many types and classes of bonded warehouses. But essentially, a bonded warehouse can either be publicly-owned/privately-owned or general purpose/specialized.

The Customs Border Patrol has designated 12 classes of bonded warehouses which helps identifies what type of bonded warehouse is there.

As we mentioned, Customs Border Patrol has a level of custody over the bonded warehouse, and the day-to-day operation is managed by the proprietor of the warehouse. What this implies is that the CBP has stringent guidelines that warehouse operators have to adhere, and at the cost of the warehouse operators as well.

Moreover, the expense from the CBP’s supervision and compliance check is borne by the warehouse owner.

The responsibilities, reporting, and bookkeeping requirements of the CBP to maintain a bonded warehouse is extensive, to say the least.


Responsibilities of Bonded Warehouse Owners

The responsibilities of the bonded warehouse owners are primarily: –

  1. Take custody of merchandises instructed by the Customs;
  2. Provide a facility where security, storage area, safety, sanitary are up to the CBP’s requirement;
  3. Provide equipment or apparatus such as forklifts, pallets at the request of the Customs;
  4. Adhere to all merchandize recordkeeping, as well as extensive reports as listed in the permit file folder and audited accounts;
  5. Be ready to receive regular visitations from auditors and compliance officers sent the CBP.

The list above is, by no means, an exhaustive list. However, those are the primary responsibilities that a bonded warehouse owner has to provide, with no exceptions.

So Why Do Proprietors Apply to Operate a Bonded Warehouse?

As extensive as the responsibilities of the bonded warehouse proprietors carry, so are the application hurdles that the applicants have to jump over.

Apart from the supplementary documents such as fire insurance cover, warehouse blueprints, description of construction material, the applicants also have to go through a series of warehouse surveys, background checks and provide fingerprint cards record as well.

With all this hurdle ahead, one would wonder, why even bother applying to operate a bonded warehouse in the first place.

The answer lies in the intended use of the bonded warehouse. A bonded warehouse costs the cargo owners relatively more than just using a general warehouse.


Benefits of a Bonded Warehouse

Deferred Tariff Duty Payment

Defer Duty Payment

When merchandise is imported, a customs broker undertakes the task of performing proper filing and the Customs Border Patrol will “clear” the cargo for delivery and domestic consumption.

The Custom Border Patrols will make sure that all the supporting documents of the merchandise fulfill all relevant partner governing agencies such as the US Department of Agriculture and the US Food and Drug Administration. Also, the CBP ensures that the proper HS Code is applied and the tariff duty is paid for before releasing the merchandise from the CBP’s custody.

Additional Reading: How Does HS Code Work

What if, the consignee of the merchandise, either does not have the cash flow to pay for the tariff duty?

This is especially the case when merchandises demand high tariff duty or that the commercial value of the cargo is high. Moreover, the merchandise’s consignee is not the intended buyers but acts like a middle person in the supply chain.

The merchandise consignee may want to receive payments from the intended buyers first, before undertaking the risk of paying the tariff duty to clear said merchandise. The consignee can enlist the help of bonded warehouses to store its merchandise and defer clearance obligations until the consignee has received payments.

If the consignee expects to receive payments for the merchandise within 15 days, they can choose to leave the cargo at the harbor or port instead of transporting it to a bonded warehouse at the consignee’s expense.

Because, the CBP allows 15 calendar days after the date of importation, as 19 CFR § 123.10 states: –

“Any merchandise or baggage regularly landed but not covered by a permit for its release shall be allowed to remain at the place of unlading until the fifteenth calendar day after landing.”

Furthermore, if the merchandise is imported by a shipping agent using a general container, there are port demurrage charges incurred after the “free days” state in the Bill of Lading contract of carriage. The merchandise’s consignee has to be mindful of the hidden costs of delayed clearance.

 Manipulate Imported Merchandises

Cargo Manipulation, Bonded Warehouse

We have covered this matter to a degree in our post below: –

Additional Reading: What is a Free Trade Zone

Merchandise manipulation is just a term to describe that the merchandise in question has undergone some value-added services. Though there are many instances of manipulation, the merchandise is commonly sent to a bonded warehouse to do packaging or repackaging. Those services may include: –

  1. Merchandise Bottling (Spirit/Alcohol)
  2. Product Bundling (Consolidating Cargos)
  3. Product labelling (Marking and Nutritious value labelling)
  4. Product de-consolidation (breaking down merchandize item into loose items)

The reason why these services performed, apart from deferring tariff duty payment, is that the merchandise may be intended to be re-exported to another country. In that sense, since the cargo is not intended for domestic consumption, the consignee is not obligated to pay local tariff duties.

One thing worth noting is that cargo manipulation is not the same instance as cargo manufacturing. The CBP has guidelines to follow when differentiation whether a value-added service is either manipulating a cargo or manufacturing new merchandise.

One of the methods used by the CBP to ascertain that is to determine whether the result of the value-added service will change the HS Code of the merchandise altogether.

Example listed in the Bonded Warehouse Manual are: –

  1. Cutting wires into parts for radio transmission;
  2. Assemble parts to form new merchandise;
  3. Distilling merchandise for public consumption.

Any form of cargo manipulation in a general order bonded warehouse has to be approved by the port director as well as the CBP.

For Cargo manufacturing, that process can be done on imported merchandises in a Foreign Trade Zone, on the condition that the activity has to be approved by the CBP. If the merchandise is bound for domestic use, then the lower tariff duty may apply (refer inverted tariff duty).

Cargo Destruction

Cargo Destruction in Bonded Warehouse

There are three reasons why a merchandise is due for destruction: –

  1. Merchandise is not claimed by the consignee after 5 years;
  2. Merchandise is corrupted and does not carry any value;
  3. Merchandise is imported illegally, or not to the standards of the CBP and partner governing agencies;

Whichever the case, the merchandise is either auctioned to recover expenses incurred from using the bonded warehouse and the CBP’s administration, or destroyed at the expense of the consignee.

Any merchandise destruction also requires the approval of CBP and port directors.


Primary Users of the Bonded Warehouse

Any importers or consignee can use a bonded warehouse for its merchandises. But the most common users of a bonded warehouse are: –

  1. High valued merchandises yet to have a final purchaser other than the importer;
  2. High tariffed merchandises yet to have a final purchaser other than the importer;
  3. Cargo merchandise where its final destination is not in the USA.

We discussed at length for merchandises falling into the categories above. Here are some examples of such merchandises: –

  1. High valued merchandises (Precious metal, commodities);
  2. High tariffed merchandises (Wine/spirit, Auto parts, Steel);
  3. Final Destination is not in the USA (manipulated for export to another country).

Private Warehouse vs Public Warehouse

What is a Bonded Warehouse. Types of Bonded Warehouse

Recall that we mentioned that a bonded warehouse can be either private or publicly owned?

Make no mistake, in both cases, the proprietors for both private and public warehouses are still responsible for the day-to-day operation, maintenance, security and recordkeeping duties of “co-owing” that warehouse.

Public Bonded Warehouse

For a public warehouse, it is open for the benefit of all importers or consignees of any merchandise. As long as the movement into the bonded warehouse is approved by both the warehouse operators and the CBP officers. Any importer or consignee intending to use the warehouse for reasons we listed above are welcome to use them.

Until the cargo is withdrawn from the bonded warehouse, it remains under the Customs Officer’s custody and any movement, manipulation, and destruction of the cargo have to be approved by the customs officer.

Public Bonded Warehouses are strategically located within a 35-mile vicinity of the servicing port or harbor. Any other public bonded warehouses further than that are rare and are often not permitted by the CBP, as they seek to reduce their administration cost by having bonded warehouses under their care near to their base of operation.

The proprietor of the bonded warehouse benefit from a consistent flow of merchandise instructed by the CBP, therefore benefiting from a steady income stream. However, an exception is made for the labor cost of handling merchandise, that labor cost is governed by local states and federal law.

Private Bonded Warehouse

As the name suggests, a private bonded warehouse is used specifically for merchandise belonging to the importer/consignee.

For a private bonded warehouse, the requirements of being near port or harbor vicinities are laxer and negotiable. Yet, a private bonded warehouse is treated by the CBP the same way as a public bonded warehouse.

The private bonded warehouse is still subject to regular compliance and audit check, and any movement, manipulation, and destruction of cargos in that warehouse have to be approved by the CBP.


More Information about Bonded Warehouse

What are General Order Merchandises?

General Order Merchandises are categorised by § 127.1 as: –

“Merchandise shall be considered general order merchandise when it is taken into the custody of the port director and deposited in the public stores or a general order warehouse at the risk and expense of the consignee for any of the following reasons:
(a) Whenever entry of any imported merchandise is not made within the time provided by law or regulations prescribed by the Secretary of the Treasury.
(b) Whenever entry is incomplete because of failure to pay estimated duties.
(c) Whenever, in the opinion of the port director, entry cannot be made for want of proper documents or other causes.
(d) Whenever the port director believes that any merchandise is not correctly or legally invoiced.
(e) Whenever, at the request of the consignee or the owner or master of the vessel or person in charge of the vehicle in which merchandise is imported, any merchandise is taken possession of by the port director after the expiration of 1 day after entry of the vessel or report of the vehicle.”

Do We Still need to pay MPF and HMF Fee?

Merchandise Processing Fee and Harbor Maintenance Fee are still applicable for cargos intended for a bonded warehouse storage. However, Merchandise Processing Fees are paid after the merchandise is withdrawn from the warehouse and proper filing and clearance have been made to the CBP.

Harbor Maintenance Fee, on the other hand, is due to the port regardless of when the cargo leaves the custody of the CBP.

Resources

https://www.cbp.gov/sites/default/files/documents/bonded_warehouse.pdf
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