Customs Bonds Are A Silly Idea Anyway – But The US Tax System Works That Way

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The US tax system has one horrible little bit in it, that of demanding a bond for taxes that will become due at some future date. It’s bad enough that a business has to do the tax collecting in the first place but then to charge them for doing so? The sense of entitlement among the tax collectors is astonishing. This is also one area where the UK system is markedly better, not imposing such costs. Indeed, generally noting that VAT and PAYE collected but not yet paid over are the way that many businesses are able to finance their working capital arrangements. A much, much, better idea.

The specific story here is that the rise in tariffs on imports into the US means that businesses are now liable for more import tariffs than they used to be. OK, that’s obvious enough. But at the same time that they’ve got to dig deep to find that cash they’ve also got another drag on their cash flow, the costs of the guarantee bonds they’ve got to put up for those higher tariffs:

The cost of the guarantee – a U.S. customs bond – has shot up, an additional hit to importers already facing steep customs bills adding up to tens of billions of dollars for tariffs imposed by the Trump administration on incoming Chinese goods, as well as steel and aluminum imports.

So?

No importer can ship goods into the country without posting a customs bond. The bonds are set at 10 percent of the importer’s total estimated annual duties, fees and taxes. The Trump administration’s 25 percent import tariff on $50 billion of Chinese imported goods, and another 10 percent on $200 billion of imports, has added up. The annual tariff bill on Chinese goods alone stands at $32.5 billion – requiring $3.25 billion in additional customs bonds.

Way to go, eh? Just as they’re facing business problems anyway add another stress to their cash flow.

Other parts of the tax system operate in much the same manner. State equalisation boards – effectively, the people who collect sales tax – also demand such bonds. Some little hot dog stand might well have to deposit several thousand dollars with the board, or buy a bond which guarantees the same. The argument is that you’re collecting the sales tax, that sales tax money belongs to the State. While it’s in your till, not the state’s bank account, that’s at risk. We’ll have a bond please.

Of course, what this is doing is raising the working capital costs of near every business in the country. Making the economy less efficient, raising costs and so on. We’re reducing economic efficiency just because the taxman’s staring bug-eyed at what he hopes to collect.

This is one are where the British system is much better. You don’t put up a bond at all – nor do you on PAYE. And while you’ll not get official confirmation it’s well known and generally approved of that the tax collected and not yet paid over is a contribution to the working capital of the business. Sure, they’ll fine you if you take the piss but they’re also not demanding a bond for what you’ve collected. Because the general view is that reducing the working capital requirements of businesses means we have, for any particular level of capital available, more business. Which is good, of course. Better, even.

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TD
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TD

True. I got quite a shock once when starting a business at how much the state wanted deposited to cover potential sales taxes due on sales not yet made. Nothing more onerous than a state sales tax audit either.

timworstall
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timworstall

“I got quite a shock once when starting a business at how much the state wanted deposited to cover potential sales taxes due on sales not yet made.”

Me Too. Especially as I was telling the guy over the phone what I hoped revenue would be, not what it was….

TD
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TD

The lesson to be learnt is throw the business plan forecasts out the window when applying for insurance and a sales tax license and instead, guess low.