Sales tax implications on Storing Products in Foreign Trade Zones

Foreign Trade Zones (FTZ) are specific areas located within the United States where goods can be stored, processed, and manipulated without being subject to immediate customs duties. These are typically located near the ports of entry. 

These zones facilitate international commerce by deferring duties until goods are formally entered into U.S. commerce for domestic consumption. Merchandise within an FTZ may be exported, destroyed, or moved into U.S. commerce under specific regulatory conditions, impacting how state and local taxes apply.  

Such products may be subject to sales tax, depending on the laws of the State in which they are stored. For example, mere storage of products in a free trade zone does not create any sales tax nexus in California. This may require additional requirements, such as selling those products from the free trade zone to customers based in California.

Example: 

Widget Co., a German electronics manufacturer. Widget Co. sends electronics to the U.S., storing them in a Foreign Trade Zone (FTZ) at the Port of Long Beach, California. 

While Widget Co.’s electronics are in the FTZ, they are not likely subject to U.S. customs duties. This allows for storage, assembly, or processing without incurring customs duties immediately. 

However, there may be sales tax implications for storing goods in the FTZ in California, by Widget Co. Let’s discuss them in the next section, which includes the following: 

Sales Tax Implications of Widget Co. in California: 

When products of Widget Co. are stored in an FTZ in California, there may be sales tax implications if the following circumstances are met. 

• Sales Inside California: Let’s say the electronics items of Widget Co. stored in FTZ California are sold to customers in California, and the items are delivered from FTZ to the customer in California. In such a case, sales made from the FTZ to customers in California are subject to California sales tax.

• Sales Outside California: Sales shipped to customers outside California from the FTZ are not subject to California sales tax, aligning with rules for interstate and foreign commerce. This tax exemption works the same way whether the retailer ships the goods directly or uses carriers, brokers, or forwarding agents. 

From the above discussion, it means products that pass through a Foreign Trade Zone (FTZ) and are sold to customers in California are subject to California sales tax. However, if these products are shipped to customers outside of California, no California sales tax applies. 

Therefore, if Widget Co. sells products from an FTZ to customers in California, it should likely register for a sales tax permit in California. Then, it should collect sales tax on transactions with California customers. However, if Widget Company merely stores the products without selling them, it is likely not subject to sales tax obligations in California.

Operating within an FTZ offers benefits such as deferring customs duties and potentially mitigating certain tax exposures. But it does not exempt Widget Co. from state sales tax obligations when selling to in-state customers. This situation highlights the need to comprehend both the strategic benefits of FTZs and the associated sales tax implications.

Next, let’s understand the sales tax implications when foreign companies provide various services to clients in the United States.