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Shein and Temu’s Use of Tax Loophole Attracts Scrutiny

Shein and Temu’s Use of Tax Loophole Attracts Scrutiny
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As Shein and Temu grow their foothold in the US, analysts and lawmakers are paying close attention to both companies’ use of a special tax rule that some say should be eliminated completely.

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The provision, known as “de minimis,” allows importers to avoid paying duty and tax on shipments that are going to individual consumers and are worth less than $800 in total.

Shippers using de minimis also do not have to provide as much information to US Customs and Border Protection as shippers using more traditional methods would. Opponents of the rule argue it creates unfair competition, and the lack of in-depth screening could allow for the import of goods containing banned materials like cotton from Xinjiang, where forced labor is common.

De minimis has been around since 1938 when Congress introduced the rule in order to speed up the processing of items that were so cheap that they would not generate significant tax revenue for the government. The limit for eligible items has been raised many times over the years, most recently going up to $800 from $200 in 2016.

Two bills aimed at reforming de minimis were introduced in Congress last June. One, introduced by Rep. Earl Blumenauer, aims to limit companies in “nonmarket” economies  or countries where prices do not follow market dynamics, such as China and Russiaand countries on priority watch lists from using de minimis shipments. The other bill, from Sen. Bill Cassidy and Sen. Tammy Baldwin, would ban de minimis shipments from China.

But some experts say it’s unlikely the provision will go away anytime soon.

A US trade law and policy expert interviewed by Bank of America analysts put the odds of Blumenauer’s bill passing the Senate at more than 50% but said it had a roughly 30% chance of passing overall “given issues in the House,” according to a research note the bank published on January 5. The same expert said the bill introduced by Cassidy and Baldwin was unlikely to pass in Congress.

“While many retailers are likely in favor of these bills, groups like the US Chamber of Commerce or the Express Shippers Association may not be in favor of them since they generally are looking for fewer tariffs, not more,” UBS analyst Jay Sole wrote in a research note in August. “Also, direct carriers, direct importers, and logistics companies may not be in favor of a change since their businesses may benefit from the $800 rule.”

The provision is more likely to change — a prospect that both Shein and Temu have said they support.

A ‘paradigm shift’

Shein and Temu are not the only companies to use the de minimis provision, but they have gained the attention of advocacy groups and lawmakers in part because of how quickly they have grown in the last year.

Shein, which was founded in China in 2008 but moved its headquarters to Singapore in late 2021, filed confidentially for a US IPO in November. It’s reportedly looking for a valuation of $90 billion.

Temu, meanwhile, is owned by Chinese commerce giant Pinduoduo Holdings and headquartered in Boston. It has grown extremely fast since launching in the US in September 2022, outpacing many more established e-commerce companies in terms of app downloads and engagement.

flat lay image of Temu package, checkered pants, and pink heels

Goods bought on Temu.
Jennifer Ortakales Dawkins/Insider

Shipping consultancy ShipMatrix estimates that Shein and Temu each ship more than a million packages to the US daily.

An interim 2023 report from the US House Select Committee on the Chinese Communist Party said that Shein and Temu “likely” account for more than 30% of all shipments made to the US under the de minimis provision. It added that almost 50% of all de minimis shipments to the US come from China.

Shipping directly from manufacturers to individual consumers helps Shein and Temu keep prices low. Wired reported in May that the average order on Temu was about $25, while Shein’s was about $70 as of April, according to Barron’s.

The Bank of America analysts wrote in their research note that if de minimis were to change or go away completely, it could be disruptive for these companies.

“Changes to the exemption could create a paradigm shift for retailers like Temu and Shein,” Bank of America analysts wrote in the note. “The discount prices charged by both retailers are aided by the absence of duties and the lack of trade and customs infrastructure that would be required if this regulation did not exist.”

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The analysts added that they “wouldn’t expect price increases to be well-accepted by the consumer.”

Representatives for Shein and Temu pushed back on the notion that their businesses have relied on de minimis to grow and said that they support reforms to the provision if they are fair.

“Our success has come from our ability to leverage on-demand technology to bring the latest styles to customers efficiently and at an affordable price,” a spokesperson for Shein said.

In a July letter to the American Apparel and Footwear Association, Shein’s executive vice chairman, Donald Tang wrote that the company supports “responsible reform of the de minimis exemption.”

“SHEIN believes the de minimis framework should be reformed to create a more level, transparent playing field — one where all retailers play by the same rules, and where the rules are applied evenly and equally, regardless of where a company is based or ships from,” he wrote.

A spokesperson for Temu said its “supply-chain efficiencies and operational proficiencies” have been the primary drivers of its rapid growth.

“We are open to and supportive of any policy adjustments made by legislators that align with consumer interests. We believe that as long as these policies are fair, they won’t influence the outcomes of competitive business dynamics,” they said. “We also see such reforms as potential avenues to alleviate concerns among various stakeholders, fostering greater comprehension and emphasizing the significance of each player in the market ecosystem.”

The two companies also detailed their practices for remaining compliant with import laws. The Shein spokesperson said that the company has a “zero-tolerance policy for forced labor” and requires its manufacturers to only source cotton from approved regions. The Temu spokesperson said it requires its sellers to sign an agreement that they will maintain compliant business practices, and that “the use of forced, penal, or child labor is strictly prohibited.”

‘If you can’t beat ’em, join ’em’

Other opposition to de minimis has come from US retailers and trade groups concerned about their ability to compete with companies shipping cheaply from China. Many retailers manufacture their products abroad and then ship them to the US in large quantities, meaning they can’t use the de minimis provision as easily as Shein and Temu have.

“The textile industry is probably the biggest proponent against de minimis because they’ve got all their mills, they’re making shirts, pants,” said Steve Story, executive vice president at Apex Logistics International, which specializes in de minimis. “I can order a shirt from China at a quarter of the price, or I can go to Macy’s, Nordstrom’s, or Walmart and buy it.”

He said that companies like Shein and Temu do not have to serve as the importers of record and are therefore not responsible for certifying the origin of items on their platforms.

“However, they’re facilitating the sale for export to the United States, so they do have a financial interest in the merchandise,” Story said. He serves on several committees exploring possible changes to de minimis, including a customs bond that would allow customs to make a claim in the event of a policy violation.

While many apparel retailers have spoken out against de minimis, an expert interviewed by UBS’ Sole said that many retailers outside clothing are taking an “if you can’t beat ’em, join ’em” approach and exploring ways they, too, can use de minimis to lower their costs instead of changing the rule altogether.

Satish Jindel, founder and president of ShipMatrix, said companies could lean on de minimis to lower their own prices.

“The companies who think it is not helping them should be looking at it and saying, how do I utilize that opportunity to revise and refine my business model to lower the cost of operating,” Jindel said.

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Got a tip? Contact this reporter at mstone@insider.com, mlstone@protonmail.com, or on the secure messaging app Signal at (646) 889-2143 using a non-work phone. 

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