Podcast: The Truth About Trump's Tariffs - What You Should Do Now

Written By Sherilee Maxcy

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair speaks with Izzy Rosenzweig, founder and CEO of Portless, about the evolving landscape of cross-border fulfillment and the implications of recent tariff changes. They discuss the benefits of the de minimis exemption under Section 321, the impact of new import tax regulations, and strategies for managing cash flow and inventory in a rapidly changing economic environment. Izzy shares insights on how American brands can leverage Portless's model to enhance their operational agility and financial performance. In this conversation, Izzy Rosenzweig and Jon Blair delve into the complexities of the postal system, import duties, and trade laws affecting brands today. They discuss high-level recommendations for brands, including tax deferment strategies and the importance of consulting trade lawyers. The conversation also covers the significance of customer experience in supply chain decisions and the potential for global business opportunities. Izzy emphasizes the need for brands to optimize their operations and explore every advantage in a competitive landscape.

Key Takeaways

  • The future of de minimis and global trade is uncertain but evolving. The postal system has complex import duties that can be misleading.

  • Exploring global markets can provide new opportunities for growth.

  • Transaction value is key in determining import duties, not retail value.

  • Brands need to adapt to changing regulations to remain competitive.

Meet Izzy Rosenzweig

Izzy Rosenzweig, a 10-year veteran of the DTC industry, launched his first company, Browze, in 2012, successfully shipping over 2.5 million home and kitchen products worldwide. After opening a China-based fulfillment center to improve customer experience, he identified an opportunity to help other e-commerce brands with direct shipping, leading to the creation of Portless. With Portless, Izzy is revolutionizing e-commerce by optimizing direct fulfillment to significantly boost cash flow and profit margins for businesses.

Transcript

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00:00 Introduction to Portless and Current Economic Climate

03:00 Understanding the Cross-Border Fulfillment Model

05:53 The Impact of Section 321 and De Minimis Exemption

09:05 Navigating Changes in Import Tax Regulations

11:48 Cash Flow Management and Inventory Strategies

14:58 Comparing Shipping Costs and P&L Implications

18:06 Future of De Minimis and Global Trade Dynamics

20:44 Understanding Postal System Complexities

22:55 High-Level Recommendations for Brands

25:20 Navigating Trade Laws and First Sale Law

26:11 Assessing Import Duties and Transaction Value

30:41 Evaluating Supply Chain Decisions

32:08 Crawling Before Running: Testing Supply Chains

34:14 Balancing Cost and Customer Experience

35:42 Creating a Localized Consumer Experience

38:40 Exploring Global Business Opportunities


Jon Blair (00:00)

Hey everyone, welcome back to another episode of the Free to Grow CFO podcast where we dive deep into conversations about scaling a profitable DTC brand. I'm your host, Jon Blair, founder of Free to Grow CFO. We're the go-to outsource finance and accounting firm for eight and nine figure DTC brands. And today I'm here having quite the timely conversation with my friend Izzy Rosenzweig, founder and CEO of Portless. Izzy, how are you, man?

Izzy (00:26)

Doing good, I say it's definitely been a fun couple weeks, not boring. I can't say it's good for the economy, but definitely not a boring couple weeks. Doing good, thanks for having me.

Jon Blair (00:31)

Yeah.

For sure, depending on when you're listening to this episode, what we're referring to, let's see today as of this recording, it's April 7th, 2025. We're just days after, you know, big announcement of a bunch of big sweeping Trump tariffs that have been enacted. There's been several, you know, actually enacted changes over the last several days. And then some, there's a lot of confusion about what is in place, what isn't in place, when does it happen, right? And so we're definitely gonna get into some of that stuff today, but the reason why I mention this is so timely, know, Izzy and I had this interview scheduled many weeks back before this was all going on, and this couldn't be a better time to bring Izzy on given his background and what he's doing over at Portless. you know, with that being said, Izzy, before we get into the meat of the conversation, run the audience through your background, your journey to founding Portless and what you guys are doing over there.

Izzy (01:34)

Absolutely. So I ran a consumer business for over 10 years and I ran almost all of those 10 years I ran it through the cross border model. So people might be familiar with the cross border de minimis model. There's a few ways to run the de minimis model. You can run it through Mexico, Canada. The other popular one is directly from China. So I ran it directly from China for the last 10 years. That model is essentially instead of manufacturing your goods, putting on a boat, waiting two months to get it, finally getting it, paying import tax at the port day one, then selling your goods and shipping your goods on the four to seven average delivery time from across the states.

Jon Blair (02:07)

Mm-hmm.

Izzy (02:12)

We take a different path. We say instead of putting in a boat, send it to our facilities. We have two in China, one in Vietnam. We'll probably get it one to two days post production. Then you could start selling your orders. We have Shopify integrations or integrations with any tech stack you're on, ERPs. And you'll sell the order. We'll pick pack either in a custom poly bag or a non-branded poly bag. We'll have a last small carrier on it. Think USPS OnTrack, LSO, things like that. And we'll deliver the goods on average of six to seven days across the United States dates. The customer gets a tracking number within 24 hours. They'll have, you know, anywhere from five to seven days later, their local driver dropped off at their front door, a 100 % local DTC experience. But the brand just went from, you know, cash conversion cycles that were terrible, that were months later, to now days post-production, getting cash out of inventory. But it also means you could restock. So if you're seeing good sales data on one of your, on a best-selling item during Christmas season, let's say November, go back into production. You can

Jon Blair (02:59)

Mm-hmm.

Izzy (03:12)

still catch Christmas season. So the idea of going out of stock is a thing of the past amazing cash flow, game changing from a cash flow perspective, again, months lead time to days, and many other advantages. So that's how I built the consumer business. Over the last three years, we actually shifted the consumer business to a B2B business. We no longer run a consumer business, but all what we do is we empower American brands to leverage the same model. So if you're American brand doing eight, nine figures we could support you. You could go from a cashflow, is again, months to days. Your customer gets the same local experience, but now you're a way more agile business. So that's what Portless does. We work with many different DTC brands, hundreds of DTC brands, and they can leverage this direct model where consumer gets the same experience as the as yesterday, but the brand has an extremely strong edge when it comes to cashflow, tax deferment in the new world, and agile inventory.

Jon Blair (04:14)

Okay, so there's a lot that I wanna unpack there. That's a great introduction to our discussion. So when you're first walking through that fulfillment model, right, you were referring to de minimis. A lot of the brands that we work with, there's definitely a handful that moved their fulfillment to Mexico or were fulfilling direct from China to take advantage of this de minimis exemption.

Izzy (04:25)

Yes.

Jon Blair (04:37)

some of you listening probably have heard this, referred to as Section 321 right? Can you walk everyone through before Trump changed things recently? What was that exemption and why does that enable this, cross border model or fulfilling direct from another country?

Izzy (04:55)

Absolutely. To give the high level, Section 321 is a law that is almost 100 years old. It says any package, again, the value of the package change over time, but any package since 2016 that is worth under $800 retail value comes into the country import duty free. It is not a loophole. It is the law of, or was the law, it still is a law today actually, of the United States of America, which means you can ship a package, the consumer gets it, and they drop the import tax.

Under Section 321, there's many different components. There's two that are important. One, de minimis, which is the law around anything under $800 is import duty free. And then there's the method of clearance, which is called Type 86. Type 86 is the method where you get into the country, you give certain data points. In the early days, there wasn't that many data points. They asked for more data points over time. But method of into the country, Type 86, under de minimis, no import duties. Those are the two things that really matter to a lot of people. Now, it actually started before Trump.

It started with Biden. Biden in September announced, we plan to remove de minimis because we don't like Shein and we don't like Temu Easy Chinese owned companies, fastest growing companies in the history of commerce because of this model, not because of the taxes. And we'll get into the details. But either way, Biden says we're going to remove it. Now, Biden followed the traditional path of removing any taxes through Congress. cannot just remove import tax because you want to with one exception, Emergency Act. But Biden wasn't taking the Emergency Act path. He was saying, I want to go to Congress. We're going to give a 60-day comment period. And it would probably have taken six to nine months to remove it. But there was guidances being removed. Trump got to office and says, no, I'm not waiting that long. I am enacting an Emergency Act. It was the IEEPA Emergency Act and saying, and that is the only exemption to skip Congress. And what did he?

Jon Blair (06:45)

Interesting.

Izzy (06:46)

What did he tie the emergency to? Fentanyl. Fentanyl is horrible. Everyone agrees it's horrible. But he used fentanyl to give the emergency act not only on China, which is probably the worst part of the whole thing, but also to Canada and Mexico. And Canada probably has their issues on fentanyl, is probably a fraction. Is it really emergency? Probably not. But either way, it was enough of a legal emergency to say, do not need to wait for Congress. I am taking it away. So he took it away on February 5th.

Jon Blair (07:05)

Yeah.

Izzy (07:17)

But what happened was, so then the model moved to a different model. I'll just quickly, before I talk about where the model moved, just kind of give the full what happened. Quickly, the CBP was not ready for this new model, which we'll talk about in a second. And on February 9th, Trump said, we're gonna bring back to de minimis until the CBP is ready. Interesting enough, it got posted on February 9th, but it was officially back on the 7th. So, know, funny timelines across the board.

But that was, that is what was existing. So we knew it was going away since September. He sped up the process and he brought it back until CBP is ready. And now he's removing it again on May 2nd. Now let's talk about where the model's going. The model's going, if you remember under Section 321, there's de minimis and Type 86, so the law of under $800, but also the method of entering the country. Type 86 has no way to pay import duties. It is not built for an import duty paying mechanism. There's two other main ways to enter in the country. It's called a Type 11 and a Type 01. These are the type of customs clearance into the country that have more data, HSCodes, descriptors, more on your raw materials and transaction value. More data in brackets helps fight fentanyl, which is a great thing. And also has the ability to pay import duties. Type 01, every Maersk ship that comes across the shipping ports is using mostly, a Type 01.

But if the value of goods is under $2,500 value of transaction value, you actually go under Type 11, which is easier and a little faster. One other side note, Type 11, if your goods are under Section 301 from China, it actually goes down to $250 maximum. But either way, Type 11 and Type 01 is very traditional method of CBP. And it's the method shipping containers use. So we, since September out of China, have been ready doing experiments with Type 01 and Type 11, and it works excellent.

Jon Blair (09:04)

Mm-hmm.

Izzy (09:11)

It is just that.

Jon Blair (09:11)

I saw your LinkedIn post about it and I watched your videos of you talking through this stuff. It was fascinating.

Izzy (09:17)

It's really just a different entry. So you need to have better data. So if you're a Temu you probably have no data, which is, you know, they got to their act together. But we only work with American brands and let's say European brands. Let's have very clear data, understand their factories, understand their supply chain. So we have all the clean data. We've been using Type 11, Type 01. They both work really, really well. The model's moving towards more of a Type 11. the fundamental difference between pre and post, could you pay import taxes? And at Type 11, you could. As Portless as the facilitator of moving goods,

We lay it out and we bill it, we invoice our customers accordingly. Prices doesn't change in our model. It's simply, you must start paying import tax. So that is the high level. Now I'll throw in Mexican Canada a little bit. Mexico had its own problem where the president of Mexico said, I am done being the warehouse of United States. Cause people would basically boat in, in a free trade zone in Tijuana, store the goods and do Section 321 to the United States. What the president of China wants is, I want to manufacture. So you may have seen data points, Mexico is, you know, one of the highest parcel of trade with like apparel. They weren't manufacturing in Mexico. They were bringing it from China and Vietnam. So she wanted to say, I don't want it into the country. So there's two parts. She says, you want to come to United States, go Section 321, pay me import tax. No free trade zone for you guys. So that was a Mexico problem. Canada didn't have that, but Canada was still able to lever Section 321. So, but either way, in the world where Section 321 goes, there's less of a value in Mexico than Canada.

Jon Blair (10:22)

Yeah. Yeah.

Izzy (10:46)

There still is value, there's still tax deferment, but you still have that two-month lead time, right? So again, the whole model's moving towards a Type 11 model, Type 11 slash Type 01, Type 11 being the main model, and you can no longer avoid taxes, you're gonna have to pay your tax, but at least you only pay your tax after you already sold the goods to your customer in our model. So A, we're right near your factory, be more agile with inventory, you could get an order.

You're sitting in our facilities not paying import tax. Only when you got the order, collect the money and then you ship it, then you're paying import tax at entry.

Jon Blair (11:21)

Okay, let's break this down really quick, because this is fascinating. This is something that we've been talking about with several of our clients who were leveraging the de minimis exemption within Section 321. So let's talk about the taxes, and I'll break this down for the audience to understand here. What Izzy is saying is that the, not loophole, it was legal, but the ability to not pay import tax on goods that had a retail value of less than $800. That's been closed or removed for now, But let's differentiate two different scenarios. One is the scenario where you put all your goods that are made in China into a container, right? You ship them to the US, you store them in a 3PL at the US. That's scenario one. Scenario two is you use a service like Portless.

Your product gets made in China, it stays in a warehouse in China, and it gets shipped as orders get fulfilled direct to the consumer, right? You're still paying import taxes in scenario one and two. But in scenario one, let's say you've got 10,000 units, you're paying the per unit import tax times 10,000 units just to get the goods in. So by the time they're at your warehouse, you have been billed for and paid import taxes on all product that you're holding.

What Izzy is saying is if you fulfill direct to consumer straight from say a Portless warehouse that's in China, you're paying it one unit at a time or one order at a time, right? As that single order gets imported into the US. And so if you think about the cash flow impact, right? On the US fulfillment scenario, scenario one, you're actually hanging up thousands of dollars on the balance sheet, right, that you've paid in import duties that are sitting in that unsold inventory. Whereas if you're doing the Portless model, the cross-border model, you've taken the order on Shopify, you've collected the cash, right, and so you actually have cash from a customer order to pay that single order's worth of import taxes. Do I have that right, Izzy?

Izzy (13:25)

You nailed it. And these numbers are crazy because you think about the tariffs he announced on April 2nd, it was 34% on top of 20% on top of Section 301 on top of traditional import tax. So we know a brand that was about to put about 400 grand on the boat. They would have had to come up about three, because there were close to 80% import tax. They were going to have to come up with $300,000 they didn't count for. And not like that. So either it's tax deferment, but then there's always excessive inventory that you liquidate or you try to shift to other countries around the world.

Well, you paid import tax on that. Now what? That's gonna hit your, not only your cash flow but your bottom line.

Jon Blair (13:57)

Yeah, and you're not getting it reimbursed when it leaves the country, you know?

Izzy (14:02)

You could do it by the way, it is complex.

Jon Blair (14:06)

I know some people who have done it and they end up having to hire a service to process it for you because it's so complicated. Okay, so this is interesting, right? Because I think everyone is for sure super concerned about the P&L impact, which generally speaking, in this case, we are talking about the per unit landed cost increase of these additional tariffs.

Izzy (14:11)

Yes,

Jon Blair (14:35)

Don't get me wrong, that's a significant impact. But what Izzy's laying out here is that you actually have to think about the P&L and the balance sheet, right? And this tax deferment kind of aspect to all this, that's a balance sheet. That's a balance sheet management tactic. Now, that's super important because in both of those scenarios I just laid out,

Izzy (14:51)

correct.

Yep.

Jon Blair (15:00)

the P&L impact is generally about the same. It might be slightly different because of the, you you've gotta actually move it twice. You've gotta do inbound freight to get to your US 3PL and then outbound freight. So we have to consider that as well. But if we just remove the freight for a second and we just talk about the duties impact, there's a much bigger hit to the balance sheet when you're buying big lots of inventory, importing them, paying the taxes all at once upon import and then those taxes are sitting on your balance sheet in the form of inventory that hasn't moved yet, right? Let's talk a little bit, I'm curious about the shipping cost, right? So if we sit down and we kind of compare, and I know it depends on brand specific and product category, but what do you generally see? If you had to compare the two scenarios, scenario one is just, one outbound freight cost that basically goes from your 3PL directly to the consumer and then maybe a small inbound freight cost because it's a domestic move from the factory to your 3PL. Comparing that to scenario two, which is like a much larger inbound freight cost because you're importing it, you're sending it over on a boat or even air shipping it to the US and then you're fulfilling it again out of your 3PL. What are you guys seeing? When you're talking to prospects or clients, when they're analyzing those two scenarios, how is that playing into these decisions?

Izzy (16:23)

Yep,

so let's move into P&L. I wanna answer this question, I wanna wrap up the de minimis, because there's one area we didn't finish. But let's first answer this question specifically. Freight costs for most of our customers, our value lives in lighter weight goods. So think of apparel, shoes, we don't do fridges and we don't do furniture. Now, for the lightweight goods of our business, it's usually close to apples now, apples and apples, sometimes we're cheaper. But how does that work? If you have an East Coast and West Coast, East Coast or West Coast or East Coast and West Coast, you still have Zone 1 through Zone 8 through United States shipping zones, which means you're gonna ship in New Jersey. If you're in New Jersey, you'll be cheaper Zone 1. But if you're shipping it to San Diego, all of a sudden you're paying Zone 8. So you got shipping rates all across the board, you're gonna have an average. In our model, we're always Zone 1, Zone 2 because when we hand over through aircraft, we're always handing over seven injection points. LA, Chicago, New York, Arizona, Texas, Miami, Atlanta. Which means your rates are always Zone 1, Zone 2. Never beyond that, or very rarely beyond that, very little. So those rates last month were always much better. But then there's air cargo.

Well, let's give extreme example. If let's just say you're in the jewelry business, you're selling earrings, you can have 100,000 individual orders in a single pallet. And that flight is not to stop over into your US facility that has US OpEx and US labor. The flight is halfway to the customer's front door, right? So our shipping rates started under $5. We can ship a pair of earrings for about $4.90. Door to door, customs clearance, everything baked in. But as the item gets bigger, then it gets more expensive.

Jon Blair (17:58)

Yeah.

Izzy (17:58)

T-shirts, you know, might be six bucks with us. So Zone 1, Zone 2, last mile you might find, if your item is very light, you actually might find savings with us. If your item is in that apparel shoe space, you're probably looking apples to apples pretty similar. So it's less of a P&L impact, but there's other ways to look at P&L. It's more about cash flow, lead time. So we would more say, how much excess inventory do you have? In our model, you should go from double digits to single, low single digits. Which also, the excess inventory also has a world of tariffs who's also hitting your P&L. Because now you're gonna write off inventory which you pay tariffs on.

You're not getting that back. It's in your country, you're dumping your liquidate again. So that's on freight costs. I would argue most cases, most industries, pretty similar, very light, cosmetics, jewelry, accessories, potentially the savings. Now I want to go deeper into P&L, but I want to go back for a minute to de minimis So de minimis is around until May 2nd. May 2nd it's meant to be turned off only to China and Hong Kong. It is still open to Vietnam and every other country in the world. So right now, if you would ship a container out of Vietnam, you're going to have 43% import duties. But if you did de minimis with us, you'd have 0% import duties. And the direction is, it does plan to go away, but only when the CBP says it's ready, its systems are ready. Which begs the question, are the systems not ready? Which means you might see further delays come May 2nd, right? I'm not going to say, but it's either way,

Jon Blair (19:23)

Hahaha

Izzy (19:29)

So and to tie that to Mexico-Canada, if you have Vietnam product in Mexico, it still works. Until they take away Vietnam, right? So only China's being turned off on May 2nd. I don't care where you ship it from. I don't care if it's France or if it's from China or from wherever you ship it from, Mexico, Canada, China country of origin where it's manufactured. And that's a whole other long discussion, what defines country. I'd like to say country of origin where it's manufactured. That's what's being turned off. If it's manufactured in Vietnam, it is still operational. You can still do it, until there's direction that you can't do it.

Jon Blair (20:01)

Interesting that I did not know. and I, I think this is fascinating. This is exactly why I wanted to have you come on the show. Cause there and like, there's so much nuance, right? And unfortunately brand founders being so busy. A lot of times they can only consume news headlines or, know, whatever information is in any given article that they stumble upon. There's a lot more nuance. Like, are there any other.

Izzy (20:29)

kinder please.

Jon Blair (20:31)

big misconceptions about de minimis or any of the other tariffs that you've seen get enacted or not enacted.

Izzy (20:32)

Yes.

There's one other subject, which I'm literally giving context to reporters so they get their stories accurate, but I don't blame them, it's so complex. You'll see in the fact sheet that says any packages that's going through the postal system from Hong Kong or China is either 30% import duties or $25 or whatever is greater. So people are like, oh, one second, $25 per shipment, that's not sustainable. It's through the postal system.

Jon Blair (20:44)

Totally.

Izzy (21:06)

The postal system is under the UPU, the United Postal Union. That is where if I was in Canada, I'd give a package to Canada Post, it was delivered in the United States by USPS. That is country to country postal agreements. China and Hong Kong have Hong Kong Post and China Post. The early days of this model, de minimis, was actually built under the postal system. But in 2015, it actually shifted from the postal system, because the postal system sucks. The second you're doing government entity, it sucks. So it was a three week delivery, and it was Mandarin everywhere. So.

Jon Blair (21:30)

Yeah.

Izzy (21:34)

But the model we do is we do, just like Maersk does shipping containers, we do air cargo. There's no difference. We enter the country through a Type 11 or a Type 01 or a Type 86. It is not the postal union. We don't touch China Post. So there are noise about there, minimum $25. That is incorrect. It is under the de minimis. Almost nobody uses it. The only people that use it is bad actors. Why? Because the postal union has almost no data requirements. So you're shipping goods that meet FDA requirement. The postal system doesn't care.

You're shipping fentanyl, harder to find. So what that was trying to do is get rid of the post, you only should be shipping letter mail in the postal system. With de minimis, you're doing normal entry, you're just paying import duties, whatever you have done by shipping container. That's another thing that people are getting wrong.

Jon Blair (22:21)

That's fascinating, So what are, this is a loaded question, but let's just talk about some things that come to mind here. Like given what you've laid out here, and obviously the deep understanding that you and your team at Portless have about the current situation, what are some of the high level recommendations that you recommend a brand either consider, like to just consider at this point?

Izzy (22:47)

Yes.

Well, the one that we that like we've had more inbound than we've ever had since we founded the company. And this is baking into tax deferment for multiple ways. One we talk about the balance sheet, you know, you need cash to pay your employees and do marketing and do all that stuff. At a minimum, delay the taxes. Don't pay the taxes until you collect money from the customer. But by the way, it also plays into the future wild cards. We hope this is all negotiation. But if you brought a container today before the negotiation has been finalized, you're not getting them.

That was a legal tax requirement. It might land at 30%. It might land at 22%. We don't know. But don't expose yourself to all this, day one needs to give up. At a minimum, have better balance sheet, better cash flow, and defer to hopefully what will be a settled, wherever it may land. That's one. Two, this is a little more sophisticated for bigger brands, but there's something called the first sale law.

The first sale law is quite complex, but I'll give a very basic example. People very often don't realize when you're paying your factory, your factory has two entities. They usually have one in China, one in Hong Kong. They do that because taxes is better in Hong Kong than China. Which means there's different line items. In first sale law, both those entities are legally allowed to make money. Which means let's say your factory had one entity and it charged you $10 and had a gross margin of 20% and it did a little bit of marketing and it did a little bit of...couple other things. Well, in a first sale, but they also have a trade partner in Hong Kong. That factory is legally allowed to keep some of its profits in Hong Kong and some of its profits in China. It's legally allowed to have a marketing budget in Hong Kong, which means some of your baked in COG of your $10 t-shirt is allowed to stay in Hong Kong. And the first sale law is you're allowed to pay transaction value on the $7, let's say out of seven of your $10 t-shirt, there's...10% is gross margin that stays in Hong Kong, another 10% is a marketing budget that stays in Hong Kong, then you're only paying transaction value on $7, not on $10. So whatever import duties is, it could reduce it by let's say 20, 30%. It is complex, you need to know what you're doing. Some of the big accounting firms and law firms can help you set it up. But if you're at enough level of scale, you could be saving millions of dollars by implementing something like a first sale structure.

Jon Blair (24:59)

Yeah.

Izzy (25:12)

That is something, if you're big enough, talk to a trade lawyer, even if you're a decent size, talk to a trade lawyer. know, everything you do, you should be talking to trade lawyers now more than ever.

Jon Blair (25:19)

And those trade lawyers, look, they cost a pretty penny, but the good ones are good and they're worth their weight in gold. that's another thing, because I've dealt with this before at Guardian Bikes. Do not cheap out on trade lawyers when you're looking into this stuff, because it's very complicated.

Izzy (25:24)

They're good. They're good.

Because if you're wrong, somebody will knock on your door and say, is there arm's length? If it's not arm's length, how are you structuring the cost? What's the cost breakdown? It's not a problem. You just gotta go deeper. And very often, factories won't share the line item cost, so they do want a third party. So you're gonna look at, again, we've seen companies charge, let's say, $25,000 $35,000 per factory, but you might be saving a million dollars by doing first trade. that is, again, if you're big enough, definitely look at that.

Jon Blair (25:57)

Totally.

There's one other question I have that came up as you were talking, and this is something that one of our clients who was taking advantage of Section 321, fulfilling direct from Mexico, product made in China as apparel, they were confused about whether or not the import duties are going to now be calculated based on, so if they imported everything into US warehouse, they would pay the import duties at their cost, right? Whereas if they're fulfilling direct from Mexico, their assessment was that they would actually be paying duties at the retail value. How is that gonna play out from your understanding?

Izzy (26:37)

Yep. Yep. I just did an hour webinar with ST&R which is one of the largest law firms that, and the lawyers used to work at the CBP. And if everyone wants, can go on our website, you can submit, and it talks about this exact question the lawyer answers. And I'll give you his answer. Of course, I encourage everyone to talk to their own trade lawyers. And there was a lot of noise on LinkedIn, but they're not trade lawyers. That's just like, yeah, everyone's smart, but like to talk to a trade lawyer. The guidance we are getting, it is on transaction value. And why people have the word

Jon Blair (26:57)

Yeah, yeah, for sure. Yeah.

Izzy (27:06)

People don't like the word COG. What's the definition of COG? Is it the cost of raw materials? Is it the cost of raw materials plus the manufacturing? Does it include the marketing? Back to a first sale discussion. Transaction value. CBP will knock on your door and say, show me your invoice. On the import of record. On the Type 86 that was based off retail. On a T11, T01, it's who's the import of record and what is your transaction value. In a first sale, it could be the invoice on the first sale between the factory and the second entity, not even the trade partner.

What is your transaction invoice? Show me your invoice and show me your proof of payment. Those are the two most important things. So I'm not gonna say the word COG, because that confuses people. It is transaction value, which is a legal term, which the trade lawyers in which our webinar, they talk about it very clearly. Show us the transaction value invoice, the invoice where you paid it. So it lets us argue it is definitely not retail. Is it COG? Well, what's your definition of COG?

Jon Blair (27:48)

Yeah.

Izzy (28:06)

Are you using first sale, are you not using first sale? So of course talk to a trade lawyer, but it's definitely not retail. So transaction value, yes. It is, let's say closer to what you would expect on the word COG, but I don't want to use that word. I'll use transaction value. Show me an invoice.

Jon Blair (28:06)

Yeah.

That's interesting.

No, understood. Yeah, yeah, because cost of goods is a, really it's an accounting term and like, you know, there's varying definitions, informal definitions of cost of goods sold, but the GAAP accounting, right, definition of cost of goods sold is landed cost, right, which is inclusive. Basically, it's the total cost of everything that it requires to get the good into saleable and fulfillable state.

Basically, and that includes receiving it inbound and to the, to the final fulfillment location. Right. And so that, which, which, mean, when you're importing the container, you're not, it's not based on landed cost, right? You're actually duties are a part of the landed costs and those are being assessed on a different value. Right. So that

Izzy (29:09)

The lawyer said like this, if you want to put a higher price, the CBP will gladly take it. You're an idiot. So, so speak to a trade lawyer. It's on terms of transaction value, not COG to your point. It's an accounting term, not a import definition term. It is the invoice you're paying for the goods from your supplier, from the buyer and the seller. Now, who's the seller? Are you doing first sale? Are you not doing first sale. So, yes, it is not retail because there was a lot of direction like that.

Jon Blair (29:14)

For sure. Yeah.

Fascinating.

Izzy (29:38)

I'm not a lawyer, but we work with lawyers. You watch the webinar, you can hear it from the horse's mouth. It is not your retail. Nowhere near it.

Jon Blair (29:42)

Yeah, that's interesting. I definitely have a few clients to recommend, maybe they check out that webinar. By the way, if anyone's interested in that, do you know where that webinar is published?

Izzy (29:49)

100%.

It could be on our website already, Portless.com. We have lots of blogs and we have podcasts. Let me find out. Yeah.

Jon Blair (30:02)

Okay, we'll definitely direct people there for sure.

This is stuff that's changing, right, by the There's a couple things I want to touch on now. I was managing the supply chain for Guardian Bikes during the last Trump tariffs that were enacted during his first term as Izzy and I were talking about before we hit record here that like, you know, the founders are, and this is part of what makes them successful, they're very action oriented, right? They're very biased towards action and your gut reaction is to take swift action immediately to offset these tariffs, but you have to do so in a smart manner. You've gotta do your homework and you really have to assess the total effort and the total cost of making a full supply chain or fulfillment network shift. I'm not saying not to do it. I'm saying to not take them lightly. At Guardian, during the first round of Trump tariffs several years ago, we actually chose not to leave China. And a bunch of our competitors did and went to less developed countries. And even though we're paying a higher, you know, quote, landed cost, we just had more certainty in our supply chain. We were getting better quality. We were actually getting a steady flow of inventory. And we were actually able to gobble up some market share because some of our competitors stocked out because they were dealing with this lower cost but less reliable supply chain, right? So like that's one thing that I want to point out.

The other thing that I wanted to ask you about is like, you've got brands now, like you mentioned you guys have more inbound than you've had ever since you started Portless because of what's going on. What are some of the major questions that you get from brands when they're trying to effectively confirm that there's not gonna be an issue from the customer experience standpoint if they move to a cross-border model with someone like Portless?

Izzy (31:48)

100%. The first thing we say is crawl, walk, run. Like any supply chain to exactly what you were saying about your previous company, know, experience it. So we send samples first, you get the experience. Then you start onboarding maybe a drop or a portion of a business. Try it out. We do this, again, we've been doing this for 10 years. We do it for enterprise business and publicly traded and we do it for, you know, eight, nine figure brands all day. But you should get exposure. Expose yourself. At a minimum, expose yourself. So you have another tool in your toolbox.

And then regards to diversifying supply chain to your other point, I 1,000 % agree with that. And actually, I would say most of the brands that we're engaging with are not doing any big shifts. The people that have over the last five, you know, five to 10 years, you know, look at where they are now. Like, you know, 43% out of Vietnam. That being said, will it stay 43%, probably not. I don't know. even even so from a tax perspective, you may or may have not made the right move. But I do think from an ecosystem perspective, like what you said is so underrated. I'll give you example in the apparel space. So we do we have customers in China, we have customers in Vietnam. In the Vietnam ecosystem, it is good, not great. It is nowhere near China.

You know from embroidery to even getting fabric. And one example is the fabric ecosystem in Vietnam does not match the output of Vietnam. That means they say if you want to buy fabric from Vietnam you have to order 400 rolls. But in China you can order one roll. So if you want a new collection new design then they're buying it from China which means you have a 7 to 14 day delay of getting your fabric to your factory so you could do your new design and your new idea. Then once it's done how many embroidery suppliers are there how many zipper suppliers how many button suppliers are there. So Vietnam is good.

Jon Blair (33:13)

Yeah.

Izzy (33:28)

It's just knowing you're as sophisticated as China or even the expertise. The cost of labor is cheaper, but you're not necessarily gonna have the same output. So, you know, like you said, just I don't know if we should make any huge changes today. know, arguably if you did it in the last little bit, I don't know if you're better off both on ecosystem efficiency or even what Trump is doing, but it's always good to have a plan, a plan in place. It just doesn't always mean it's the better plan.

Jon Blair (33:54)

Totally.

Well, and I think if I could sum up a lot of the discussion we've had here, it's that there's not a single factor that dictates you should take a specific action, right? Like I think the kind of prevailing emotional responses, costs go up, like move supply chain, get costs down. That's a single factor, right? That's like making a brand feel like they should make a change. It's an important factor.

Don't get that wrong, right? But you have to look at P&L considerations and balance sheet considerations, specifically not just cost of goods sold, but cash flow, right? And what's really important in the DTC world is customer experience, right? Customer experience is ultimately, you know, I always say like,

You're not just selling a DTC product, you're creating a DTC brand and brand implies repeat purchase and repeat purchase implies relationship and relationship implies an exceptional experience, right? And it's not all just cost. So when you have someone who's concerned about something coming direct from China and I've heard this before, they're concerned about it looking like it's coming from China. Explain really quick the Portless process, which I think is great of like how you provide that more, that very domestic feeling experience to the consumer.

Izzy (35:20)

100%.

Okay, so I'll just give one example. This is a tracking number that a customer that we serviced got. They made the order on March 13th, it was delivered on the 19th. It's a USPS tracking number, it's a USPS label, and it was either a non-branded or branded packaging based on what the customer wanted. This is a typical supply chain experience. This is it. Local delivery, And origin is LA, where we inject it.

Jon Blair (35:45)

Totally. Yeah, and what the origin looked like LA, right?

Yeah, got it.

Izzy (35:50)

because there is no scan. There was not a single thing of Mandarin. There's not a single thing of a tracking number outside of USPS. The scan, the brands see the scan of our injection points. So they're like, okay, you have a hub in LA, you a hub in Chicago, have a hub in New York, have a in Arizona, Texas, Miami, Atlanta. So it is a 100% a local experience, and that, I built this because I built a brand, not a business, brand for 10 years. So.

Jon Blair (36:16)

Yeah. So

you had to think about that firsthand. What does this feel like to the consumer?

Izzy (36:20)

I had to think about it. I'm not just a logistics provider, I was a brand builder, right? And I built the logistics off being a brand. And I thousand percent agree. If you can, and which is why this model, by the way, only got very efficient last couple of years. If you go back when I started, it was under, like I said before, the UPU. The UPU, you couldn't, you saw a Mandarin and it was a three week delivery. That is unacceptable from the experience. But since 2016, I went to the direct injection model where you're buying air-carburetor space, which means goods are in the United States within 24 hours or could be with a plan, you know, it could be two, three days, but you're also Zone 1 the second it hands over. So a thousand percent, the experience must feel a hundred percent local. And a lot of that, this is just the U.S. We have a five day delivery to the United Kingdom. And back into the tariff world, we're seeing brands saying, you know what, we're going to lean into marketing spend to these other countries. Cause there's de minimis in Australia, there's de minimis in Europe and in UK and Canada.

So we're seeing brands with one hub in Portless, sure they do in the US business because tax deferment and cash flow. But now you can spend your CPMs in cheaper countries and you can start shipping it. You know it's five bucks to Europe, it's six bucks to Germany. There's a very big world out there. And what's happening now is brands are saying I need to look at every single possible advantage I could have. So edges in many different areas. And I just got a call right before this call with another brand. says they actually are excited for this.

Because most of the competitors do not have operational excellence. But if you are a competitor and you're an entrepreneur and you could look at every single thing like, it's first sale for me, maybe I'm too small. But maybe I could do tariff engineering. Tariff engineering, the example we give is there's a very big shoe company that adds, I forgot what they were, fuzz or like a soft part of their sole to over 50%, which changed their classification from a shoe to a slipper, which went from 20% of import duties to 60% of import duties HS code, how good is your HS code? Is your HS code on a microwave where it should have been an air fryer? Well, that's a difference of 15%. Historically, your mergers just working, you're doing what you're doing. The operators got to step up. You got to look at every single advantage you could possibly get from the balance sheet to the P&L. How can I run better cash flow? How can I least tax a firm and should I do business in other countries? As crazy as it sounds, it's easier to do business in other countries than it is in the States. We're in a wild place to say that, but that's what it is.

Easy to do business in Europe and United States. Insane. But facts, it is true. Then you can look at tariff engineering. You can look at de minimis, HS code recommendations, doing a project around that. There are things you can do to hit both your P&L efficiency, cash flow efficiency, and maybe think beyond the United States.

Jon Blair (39:02)

Bam, mic drop, I love this. Izzy, this has been a fascinating conversation. We're gonna need to talk some more, I'm sure, at some point, if you're up for it. Before we land the plane, no pun intended, no, that wasn't a Portless joke, where can people find more information about you and Portless if they're interested in what we've been talking about here today?

Izzy (39:21)

Absolutely.

I post a lot of content on LinkedIn. So every time something's happening, I'm posting about it. I'm posting our opinions. I'm posting, you know, the conversation to have with trade lawyers. So I'm on LinkedIn at Izzy Rosenzweig. I'm on Twitter as well, or X at Izzy Rosenzweig, as well as Portless.com We're constantly doing blogs. We're constantly doing webinars like we just did with the trade lawyers. And our mission is to educate. There's lots of paths, you know.

I'd like to think at a minimum in this world, you should expose yourselves to all the different areas. Don't make any crazy bets, like move, I don't think you should move your supply chain overnight, but you should look at optimizations, because that could be your edge against your competitors. And we still live in a capitalistic world, and you should use every edge to up your competitors.

Jon Blair (40:01)

Totally.

100%.

Definitely check out Izzy's content. I'm not joking, I follow it myself. It's super informative. So definitely check that out. And don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free to Grow's accountants and fractional CFOs can help your DTC brand increase profit and cash flow as you scale, check us out at FreeToGrowCFO.com Izzy, thanks for joining, man. And I look forward to chatting soon.

Izzy (40:39)

Thanks so much for having me, I appreciate it.

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