When the Loophole Closed for four days: Ecommerce Brands Face Uncertainty

Key takeaways for ecommerce brands:

1. The U.S. has removed the de minimis exemption for shipments from China, Canada, and Mexico, meaning ecommerce brands must now pay import duties on low-value shipments. On Friday February 7th, the exemption was temporarily reinstated.

2. Assuming the de minimis exemption removal will be implemented, the increased costs for ecommerce businesses will ultimately be passed down to consumers, potentially leading to reduced demand for low-cost imported goods and changing shopping behaviors in the U.S.

3. While major platforms like Temu and Shein may adapt, smaller ecommerce brands relying on parcel shipping from China will struggle with higher costs, inventory management challenges, and the need for more complex financial tracking.

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Amid the escalating trade war between the U.S. and its three biggest trading partners, one development remains a bit under the radar: President Donald Trump’s tariffs against China, Canada, and Mexico include a provision that suspends the de minimis exemption for shipments originating from these countries, a reform that could have significant ramifications for ecommerce brands. On Friday February 7th, due to a huge backlog on the customs front, the Administration temporarily walked back on this, and reinstated the exemption.

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 China. Census Bureau data shows that low-value shipments were the eighth-largest U.S. import category from China at $4.7 billion in 2023, more than doubling since 2014.

Higher Costs, Tougher Choices: Small Sellers Face the Fallout

The de minimis loophole allows ecommerce giants Temu and Shein to maximize the “direct-from-China” business model. By shipping millions of low-cost parcels straight to consumers, they bypassed tariffs and sold products at floor prices. This made them incredibly popular in the U.S., especially among young people. According to a recent survey, Shein and Temu are the most used Chinese shopping apps among Gen Zers, with 44% and 41%, respectively, making at least one purchase on these platforms monthly. 

While there's no doubt Shein and Temu profited the most from the de minimis loophole, “there’s a lot of sellers that do use it, and it works for them,” said Phil Masiello, the CEO of revenue acceleration agency Crunchgrowth. However, unlike both platforms, which are expected to weather the storm, the impact of the reform on smaller brands, if it actually goes through, will be more pronounced. 

One of Masiello’s clients, for instance, fulfills orders for electric razors in China and ships them directly to customers in the U.S. Now, this business will have to import from another country or manufacture its razors in the U.S. – both significantly more costly options. And if there is any lesson from the tariffs imposed in Trump's first term, it's that consumers will be the ones who pay the price.

“We're going to see higher prices for consumers, period,” said Maggie Barnet, CEO of LVK, a third-party logistics company. “That's the easiest way to solve this issue for those brands.” According to Barnet, the higher prices could change online shopping in the U.S., as “people are going to start to see that it's not great to be consuming this much and maybe it'll help them think twice. Like, hey, I would spend $8 for that, but not $18.”

Again, this is all assuming that the actual exemption is revoked. In short, everything is a mess.

Beyond Price Hikes: Navigating Post-Exemption Accounting (for 4 days)

For ecommerce brands reliant on parcel shipping from China, higher prices and consumers' reactions to them are just one part of the equation. Without the de minimis exemption, these brands 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, the de minimis loophole enabled DTC operators to keep inventory lean but still respond quickly to demand. “Fundamentally, this model is run by the efficiency of inventory management,” said Izzy Rosenzweig, founder of ecommerce fulfillment company Portless. Closing the loophole compromises 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 forces 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, (and) having to navigate a customs broker relationship that they don’t have today,” said Cindy Allen, CEO and managing director of the consultancy Trade Force Multiplier. 

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.   

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 landed 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 ecommerce bookkeeping system – to reconcile their books and gain visibility into the business’s financials. And again, if this actually goes through, this can cause a huge mess.

Financial Clarity: The Key to Post-Reform Survival

The four (!) day suspension of the de minimis exemption marks a huge mess in U.S. trade policy. Will it have ripple effects extending far beyond major players like Temu and Shein? Will smaller DTC brands face a challenging transition as they grapple with financial management complexities, from import duties to tracking their landed cost per unit?

If the reform does indeed go through, in order to navigate the complexities introduced by the de minimis reform, ecommerce brands must prioritize financial clarity. The best way to achieve this is by emphasizing ecommerce accounting and leveraging an advanced ecommerce bookkeeping service. These tools can accurately track costs, manage inventory effectively, and help brands maintain their profitability in a post-de minimis reality.

If the reform does not go through, it is just a telltale sign of the possible mess that awaits us all. And when a storm is coming, make sure your financials are ready.