De Minimis Reform: The Hidden Threat to Ecommerce Brands

Key Takeaways for Ecommerce Brands:

1. New import duties and fees threaten to cut into profits, reshaping how DTC brands handle landed costs and overall pricing.
2. Without the de minimis exemption, managing lean inventory will become more complex, pressing brands to rethink their supply chain strategies.
3. To thrive amidst these changes, brands will need advanced bookkeeping solutions that track landed costs, streamline COGS calculations, and ensure financial clarity.

The US is on a mission to upend Chinese ecommerce giants Temu and Shein – that's how recent efforts to crack down on de minimis shipments were framed in American media. However, while another chapter in the ongoing US-China trade war generates clicks, the real story is how it will impact smaller DTC brands.

An amendment to the Tariff Act of 1930, the de minimis exemption permits merchandise shipments with a retail value below a certain amount to be imported duty and tax-free. In 1938, when the amendment was introduced, that amount was $5. Over the years, the de minimis value threshold increased incrementally until it reached $800 in 2016 with the passage of the Trade Facilitation and Trade Enforcement Act (TFTEA).

Under TFTEA, de minimis shipments ballooned from 134 million in 2015 to over one billion in 2023. Not surprisingly, most of these shipments arrive from East Asia. Data from US Customs and Border Protection revealed that between 2018 and 2021, 60% to 80% of de minimis imports originated from China and Hong Kong, with Temu and Shein accounting for more than 30% of all the packages shipped to the US.

Leveraging the de minimis exemption allowed Shein and Temu to sell products at bargain prices and effectively corner the DTC ecommerce market. This is especially true among young people; according to a recent survey by ecommerce marketing platform Omnisend, Shein and Temu are the most popular Chinese shopping apps among Gen Z with 44% and 41% of respondents, respectively, making at least one purchase on these platforms monthly. 

The Impact of Scrapping the de minimis on DTC

While the plan to cut off de minimis shipments could prevent Shein and Temu from offering products at ultra-low prices, both platforms are expected to weather the storm. The impact on smaller ecommerce businesses, on the other hand, will be more pronounced. If the de minimis exemption changes are realized, brands reliant on parcel shipping from China may face significant challenges involving inventory management, import duties, tracking landed cost per unit, and calculating the cost of goods sold (COGS).

On the inventory front, taking advantage of the de minimis loophole enabled DTC operators to keep inventory lean but still respond quickly to demand by shipping a wide range of SKUs from factories directly to the consumer. “Fundamentally, this model is run by the efficiency of inventory management,” said Izzy Rosenzweig, founder of ecommerce fulfillment company Portless. Closing the loophole will compromise the model's efficiency, leaving brands hard-pressed to find the inventory sweet spot.

Brands might be hard-pressed for cash, as well. Scrapping the de minimis exemption will force DTC brands to pay a slew of fees they are currently exempt from. “They’re going to be impacted by having to pay more duty, having to navigate a customs broker relationship that they don’t have today,” said Allen. “They’re going to have to pay higher costs.”

But it goes much deeper than higher costs. Tariff duties, customs brokerage fees, and processing fees are all part of a brand's landed cost per unit, which includes the direct and indirect costs per SKU. These costs become COGS in the profit and loss statement (P&L), one of the main ecommerce accounting documents of every business.

Decoding Landed Costs for DTC Brands

To maintain an accurate P&L, you need to know how to calculate your landed cost per unit – or the real costs of getting your inventory to your warehouse and not just the product cost. These costs include:

• Direct net unit cost of inventory purchases (purchases of ready-for-sale items or raw materials)

• Estimated manufacturing/assembly costs (direct and indirect labor, contract manufacturers, manufacturing overhead)

• Product-related packaging per unit (a bulk cost divided by the unit quantity per product)

• Indirect costs to get items to your warehouse

Among the indirect costs of getting items to your warehouse are:

• Vendor fees

• Insurance

• Shipping surcharge

• Customs fees and services

• Duties and tax

In a world without the de minimis exemption, many DTC brands will have to incorporate import duties and customs fees into their P&L statement. Unfortunately, many operators don’t even know what's in a profit and loss statement and struggle – whether due to manual practices or an antiquated bookkeeping software  – to reconcile their books and gain visibility into the business’s health and potential.

Gaining this visibility requires placing an emphasis on ecommerce accounting and adopting advanced an ecommerce bookkeeping service. One that can automatically calculate your landed cost per unit, track COGS in real-time, provide insight into what's in a profit and loss statement, and – most importantly – ensure DTC brands thrive amidst the shifting regulatory landscape.