August 19, 2021:
This is Part 2 of a discussion of questionable tariff practices by some PCB distributors in the United States. You can read Part 1 here.
As mentioned in Part 1, some U.S. brokers may not be entirely above board on the tariff charges they pass on to PCB buyers. That’s because the 25% tariff imposed on PCBs coming out of China applies only to the actual manufacturing cost of the exported board.
But what’s happening is that, even with their customers paying the Tariff-Related Expense (TRE), some brokers are playing games with their buy prices. They are unreasonably deflating the board prices listed on their purchase orders to vendors, while unreasonably inflating other charges—or creating bogus charges—they believe are not subject to the tariff.
For example, before the tariff, a PCB broker would issue a purchase order to a Chinese manufacturer with a single line item for 100 pieces of PCB123 at $.80 each. Now, some brokers are issuing a PO for that same part number at $.40 each, but with an extra line item for a so-called 100 pieces of Inspection/Test charges, also at $.40.
Same PO total, but the broker is misrepresenting the piece price to pay the tariff on a smaller portion of the actual cost. At the current tariff rate of 25%, the broker is only paying half of the required tariff.
Another way of trying to get around the tariff is to add a separate line item with unusually high engineering/tooling charges on every PO, in the mistaken belief these charges are exempt from the tariff. The non-recurring engineering charge (NRE) that used to appear only on the first PO seems to have morphed into a recurring engineering charge on every order.
It’s important to note that because a PCB cannot be built without a tooling package, the Gerber files the manufacturer receives are considered a technical assist; therefore, engineering/tooling charges are subject to the tariff as well.
And the truth is, brokers who are fudging the numbers like this are playing with fire. Because this is customs fraud. They are putting themselves at risk. And you, as the PCB customer, are also being put at risk.
“Typically, the broker (the importer in this case) is only required to pay tariff on the price paid, or payable, on the merchandise itself,” says Elon Pollack, a customs and international trade lawyer who has taught global logistics, importing, and exporting at Cal State and UCLA for more than twenty years. “But the broker must be able to demonstrate the price they declare is the price actually paid. Wild changes in prices from past purchase orders or from similar prices paid by other brokers for the same part can trigger a review.”
Pollack points out the penalties for customs violations exceed even those from the IRS for tax violations. If a broker who is misrepresenting PCB buy prices or adding bogus charges to every order gets caught, significant fines and operational delays are likely.
And that means if your broker is misrepresenting the numbers in this way, your supply chain could well be disrupted. Worse, you could be on the hook for tariff violations.
“Penalties could range from two times the lost revenue upward,” Pollack says. “More importantly, the government has the ability to look downstream at customers and individuals involved in the transaction to recover lost duties and penalties.”
Stop for a moment and let that sink in. You, as the customer, could be held responsible for the actions of your broker.
So it is very much in your company’s interests to ensure your broker is applying tariffs legally and appropriately.
Have an honest discussion with your PCB broker and ask if best practices are being employed in the purchase of circuit boards from China.
But also ask whether the broker is paying the tariff on the true cost of the board, as required by law.
And since your company is participating in an activity managed by another party (the broker), you should put into place a hold-harmless agreement, releasing you from any possible legal claims.
Have tariff-related questions? I can help. Reach out to me at firstname.lastname@example.org.