Jan 2nd, 2024

Cannabis Industry Players Need To Take Control Of Their Supply Chains

Supply chain planning is important to players in the legal cannabis industry. Processing and harvesting equipment which might be lawful to own in one state might be prohibited “drug paraphernalia” in another. This requires industry members to take care in routing domestic movements of their wares.

As the industry emerges from the legal shadows and matures, one area where companies need to pay greater attention to their supply chains is in arranging the import of their merchandise. For years, many firms concerned with possible Customs interdiction of their goods purchased goods on “Delivered Duty Paid” (DDP) terms, or allowed their foreign suppliers to arrange shipping and Customs clearance of their goods. Now, even as concerns about the admissibility of this merchandise are receding, new problems are coming to light.

In some cases, foreign shippers, anxious about having their own names associated with the importation of cannabis-related articles, designated “straw man” companies to act as U.S. Importer of Record – companies which are not part of the commercial transactions. Since the Importer of Record must be the “owner” or “purchaser” of the merchandise, Customs often rejects entries on the ground that the named IOR lacks the right to make entry. Worse yet, in cases where Customs detains or seizes goods imported by a “straw man” importer, the U.S. purchaser – who may have spent large sums on purchasing the goods – finds itself in the uncomfortable position of coming forward and proving its interest in the shipment.

In a number of recent cases, it has come to light that shippers have falsely undervalued merchandise – in some cases, by extreme margins (in one case, a roughly $6,000 value declared for goods the importer paid over $400,000 for). The purchaser may be able to reclaim its goods, but will need to file a new Customs entry and pay more duties than it had budgeted for the transaction. If the goods are of Chinese origin, and subject to Section 301 tariffs of 25%, the duty bill may be high enough to call into question the viability of the company’s business model.

In the past, undervaluation may have gone undetected due to CBP’s unfamiliarity with cannabis-related merchandise – for example, is a component for a vaping device worth five cents or five dollars? But as more of these goods are imported, CBP is moving up a learning curve that will allow it to more readily spot undervaluation of these goods.

Companies in the legal cannabis industry need to start taking a detailed look at their import supply chains and Customs clearance procedures.

Please contact a Neville Peterson LLP professional if you have questions concerning these subjects.