Trading Spaces

Tax advantages spur growing interest in FTZs

Tax advantages spur growing interest in FTZs

Mic Smith
The Post and Courier

A truck goes down I-26 by the sign for the Foreign Trade Zone 21.

The Post and Courier

Dotted around the Lowcountry are industrial parks that look like any other distribution center or manufacturing site. But these properties are foreign territory, at least as far as U.S. customs laws are concerned.

They're called foreign trade zones, or FTZs, and thanks largely to the Port of Charleston, the three-county region gets a bigger economic boost from them than most other parts of the country.

As a result, the area is poised to become home to many more companies that qualify to operate within their boundaries. They're so popular, in fact, that 20 new Lowcountry industrial parks have applied for FTZ status.

Overseen by the U.S. Commerce Department, FTZs were launched in the 1930s as part of President Franklin D. Roosevelt's New Deal. Doing business in an FTZ means U.S. firms can defer, or in some cases eliminate, duty paid on imported parts or goods, hopefully providing them with a leg up on overseas competition.

FTZs in the Palmetto State account for billions of dollars of trade a year and provide thousands of jobs. But they are almost a world of their own.

"People drive down the highway at Jedburg and wonder what that sign is that says 'Foreign Trade Zone 21,' " said Suzan Carroll-Ramsey, foreign trade zones manager for the State Ports Authority.

The SPA is the agency charged with establishing and overseeing FTZs in South Carolina, with the exception of the Columbia zone, which is the responsibility of the Columbia Airport Authority. Only government agencies or nonprofits can oversee FTZs, to avoid conflicts of interest.

While the concept seems a little complicated at first glance, the driving force behind the FTZ program is job creation, Carroll-Ramsey said. A business that fits the mold can shave "a considerable amount" off its bottom line, she said.

Fujifilm, for example, brings in raw materials through the port to make disposable cameras at its Upstate plant. Those goods usually would be subject to import taxes — but not if they're transported directly from the ship to an FTZ.

In most cases, an FTZ tenant's final product is taxed once it leaves the zone to be sold on the domestic market. But that same item can remain duty-free if "re-exported" out of the country.

Although tax revenue might be lost at the front end, the idea is to recoup it in the long run because, by attracting employers to the state and a particular region, jobs are created. Those workers in turn pay local and state taxes, and spend their paychecks with local businesses.

But FTZs can't be created just anywhere.

"We have to justify that it's going to generate jobs and benefit the public in general," Carroll-Ramsey said.

In the zone

South Carolina ranks high among states that operate FTZs. According to federal data, the Palmetto State is 11th in annual volume, fourth in exports and 15th in employment generated by FTZs.

For at least one Charleston firm, being located in a zone paid handsome dividends recently.

Kontane Logistics, which operates a 200,000-square-foot warehouse in the Charleston Regional Business Park off Clements Ferry Road, secured a contract that it otherwise might not have won if it were not in an FTZ.

The Charlotte-based company opened its facility here in November 2005 after a six-month search for a suitable location. Until that time, the company was largely unfamiliar with the foreign trade zone concept, said Kevin O'Neill, Kontane Logistics' sales manager in Charlotte.

"The more we got educated about it, the more we realized it would be a benefit," O'Neill said.

Kontane's business is third-party logistics — import distribution, export packaging and warehousing. It employs about 20 people at its Charleston warehouse, which is part of site No. 9 within FTZ 21.

A recent contract with what O'Neill described as a large Charleston manufacturer illustrates how companies can use FTZ status, even if they don't enjoy the benefits directly.

By using Kontane's Charleston warehouse, the manufacturer can import parts to the FTZ and enjoy the tax benefits for itself. Previously, the company used its own warehouse facility and a third-party-run location, neither of which was in an FTZ.

Those incentives almost certainly led to the manufacturer choosing Kontane's facility, O'Neill said, and the tie-up means the company can consider expanding its Lowcountry operations.

"This project is really important to us and our future down there," O'Neill said.

Moving parts

It's a sales tool that works well for companies like Kontane and developers of industrial parks alike.

Charleston's Quattlebaum Development Co. built the Lowcountry's first FTZs in the late 1970s. Called Tri-County Industrial Park in Summerville and Cainhoy Park in Charleston, the sites are Nos. 1 and 2, respectively, within FTZ 21.

For a time, one of the sites was used by auto giant General Motors as a staging area for imported parts from France. The shipments were repackaged before they were sent to GM plants in Tennessee and Kentucky, also within FTZs.

Because the parts were moved from one zone to another and didn't pass through U.S. Customs, GM didn't pay excise duty until they shipped the finished cars. The arrangement worked well for GM because auto parts are taxed at a rate more than eight times higher than finished vehicles.

"In a big operation it really adds up," said Alex Quattlebaum III, a principal at Quattlebaum Development. Finding a location in an FTZ has become "something on a lot of people's checklist," he said.

In coming years, an FTZ site may be easier to find.

Last week, United Arab Emirates-based Jafza International acquired 1,322 acres near Santee in Orangeburg County, where it proposes to build a massive warehouse and transportation hub. Jafza, which says the development could generate up to 10,000 jobs and cost more than $600 million to complete, has applied to extend FTZ 21 to include the site.

The property, near Interstate 95 and U.S. Highway 301, is slightly more than an hour's drive from the Port of Charleston, a factor that was considered a key attraction for Jafza.

And a development company run by Ross Perot Jr. is seeking approval to transform more than 760 acres along Interstate 26 near Summerville into what likely will be the largest industrial park ever built in the Charleston region. Perot's company, Hillwood, also has applied for FTZ status.

One of the newest Lowcountry FTZ sites could be in Berkeley County, where the New York-based Rockefeller Group is looking to develop about 400 acres along Interstate 26 near Jedburg.

The company has applied for the project to become a general-purpose FTZ site, said Ed Guiltinan, regional director for the project. Berkeley County has yet to give the project the green light, but Rockefeller officials hope to break ground during the first or second quarter next year, depending on the approval process, Guiltinan said.

If granted, the park's FTZ status likely will feature prominently in the company's sales literature. The park will offer four buildings totaling about 2.7 million square feet of top-of-the-line, big-box industrial space.

"It's an amenity that makes our development more attractive to tenants," Guiltinan said.

Reach Peter Hull at 937-5594 or phull@postandcourier.com.