Key takeaways
- The importer of record pays the duty, not the foreign factory. Who absorbs that cost commercially is a separate question from who is legally liable for it.
- Your duty rate comes from two things settled at design and sourcing time: the HTS classification and the country of origin. Origin is where the last substantial transformation happened, not where the goods shipped from.
- The broad IEEPA tariffs were struck down by the Supreme Court in February 2026, but Section 301, 232 and 122 authority remains available, and each moves at a different speed and notice period.
- Tariff engineering, duty drawback and foreign trade zones are documented legal mechanisms rather than loopholes, but each carries real conditions you have to meet.
The importer of record, not the foreign factory, is legally responsible for declaring a shipment’s value and classification and for paying the duty owed to U.S. Customs and Border Protection. Who bears that cost economically is a separate question: it can be absorbed by the supplier through a lower price, by the importer through thinner margin, or passed to the end customer through a higher price. Both matter to a founder planning a manufacturing budget, and they are not the same thing.
Who actually pays a tariff
Under 19 U.S.C. §1484 and the customs regulations that implement it, the importer of record must declare the value, classification, and country of origin of imported goods, and that party is legally on the hook for the duty regardless of shipping terms. Whether a contract is DDP or DAP only allocates who fronts the cost commercially between buyer and seller. It does not change who the government holds responsible.
- Legal liability: the importer of record, which can be the owner or purchaser of the goods or a licensed customs broker designated in writing.
- Economic incidence: whoever ends up absorbing the cost after pricing adjusts, which could be the factory, the importer, or the end customer.
How a duty rate is determined
Classification and the HTS code
The Harmonized Tariff Schedule, maintained and published by the U.S. International Trade Commission, is the hierarchical structure that assigns a duty rate, quota status, and statistical category to every category of traded good. Classification proceeds under the General and Additional U.S. Rules of Interpretation, starting at the 4-digit heading level and working down to the most specific applicable provision.
| Level | What it identifies |
|---|---|
| 4 and 6 digits | International Harmonized System category, shared globally |
| 8 digits | U.S.-specific legal rate line |
| 10 digits | U.S. statistical reporting category, not itself a legal classification |
Country of origin is not where it shipped from
Origin is a legal conclusion, not a shipping fact. The International Trade Administration’s substantial transformation standard requires that a good undergo “a fundamental change in form, appearance, nature, or character” through processing in the country claiming origin, adding value that is significant relative to the input. Simple combining or packaging operations, or mere dilution with water or another substance, are explicitly excluded. Assembly may or may not qualify, depending on the complexity of the operation: the standard looks at what actually happened to the product, not at which port it last left from.
What changed in the current trade environment
On February 20, 2026, the U.S. Supreme Court ruled 6-3 in the consolidated cases Learning Resources, Inc. v. Trump and Trump v. V.O.S. Selections, Inc. that the International Emergency Economic Powers Act does not authorize tariffs, since the statute’s text never mentions tariffs or duties. The ruling struck down both the earlier trafficking-related tariffs on Canada, Mexico, and China and the broader country-by-country tariffs imposed under that law. Collection stopped on February 24, 2026, and a refund process for amounts already collected began in April 2026, with litigation over the refunds still active.
This does not mean tariff authority disappeared. Several other statutes remain available and were not affected by the ruling, each with a different process and speed.
| Authority | What it requires |
|---|---|
| Section 301, Trade Act of 1974 | USTR investigation into an unfair trade practice from a specific country, with public comment and advisory-committee consultation |
| Section 232, Trade Expansion Act of 1962 | National-security investigation by the Commerce Department, generally completed within 270 days, with a presidential decision required within 90 days after |
| Section 122, Trade Act of 1974 | Temporary balance-of-payments surcharge, capped by statute at 15 percent and limited to 150 days |
| Section 338, Tariff Act of 1930 | Retaliatory duty authority for discrimination against U.S. commerce |
Separately, the duty-free de minimis exemption for shipments valued at USD 800 or under was suspended for all countries effective August 29, 2025, under Executive Order 14324, and a further 2026 notice tightened treatment specifically for shipments arriving through the international postal network (mail), establishing a new postal informal entry process; a separate rule covers non-postal shipments. A founder importing samples or small component batches directly should confirm de minimis status for each shipment against current CBP guidance rather than assume it from past experience.
How tariffs move the offshore versus domestic breakeven
A tariff is one line item in landed cost, and it scales with declared customs value and HTS classification rather than with labor, freight, or tooling cost. When a duty rate on an offshore-made component or product changes, it shifts the total landed cost of that option relative to a domestic quote without touching anything else in the comparison. That effect is distinct from currency movement, freight rates, or labor cost, and it belongs in the model as its own line rather than folded into a general “overseas is cheaper” assumption. It also feeds directly into the choice between staying with manufacturing in China and nearshoring to Mexico, since the two options carry different duty exposure even before freight and labor are compared.
In our experience at Inventornest, offshore manufacturing was never simply about the lowest unit price to begin with. A supplier still needs practical testing of its components against the actual application, not just the datasheet, regardless of what a tariff does to the landed cost math. Component procurement is also a major source of schedule pressure independent of tariffs, which is one more reason to build sourcing risk and schedule slack into a plan before a rate change forces the issue.
Worked example structure for your own numbers
- Unit cost at the factory
- Freight and insurance to the U.S. port or border
- Duty, based on the HTS classification and country of origin
- Merchandise Processing Fee and Harbor Maintenance Fee, which are separate, non-tariff CBP charges
- Customs brokerage and domestic distribution to your warehouse or fulfillment partner
Run the same list for a domestic quote, where duty and MPF/HMF drop out but labor and material costs are typically higher, and compare the two totals line by line rather than comparing unit prices alone.
Legitimate ways companies reduce tariff exposure
None of the following are loopholes. Each is a documented, legal mechanism with real conditions attached.
- Tariff engineering. A manufacturer may legally design or modify a product to qualify for a more favorable classification, a right recognized since the Supreme Court’s decision in Merritt v. Welsh, 104 U.S. 694, which held that a manufacturer has the right to make goods as it pleases unless Congress has specifically barred the practice. The line is between designing the product differently and making a sham or temporary modification solely to defeat classification at the border; courts have penalized the latter.
- The first sale rule. Under 19 U.S.C. §1401a(b)(1), an importer in a multi-tiered transaction (factory to trading company to U.S. buyer) may declare customs value based on the earlier factory sale price rather than the final price paid to the middleman, provided that sale was bona fide, arm’s length, and the goods were already destined for the United States.
- Foreign-trade zones. A foreign-trade zone is a designated site, physically in the U.S. but treated as outside U.S. customs territory until goods formally enter. Duty is deferred until goods leave for consumption, waived entirely on re-export, and an “inverted tariff” provision can let a manufacturer pay the finished product’s lower rate instead of the combined rate on its imported components.
- Duty drawback. Under the modernized drawback program, CBP allows a refund of duties, taxes, and certain fees when imported merchandise is later exported or destroyed, whether unchanged or after being used to manufacture a different article that is then exported.
What to ask a customs broker before you commit
- What HTS code will you use for this product, and under which rule of interpretation?
- What country of origin will you declare, and on what substantial-transformation basis?
- Does the first sale rule apply to my supply chain, given how many parties are between the factory and me?
- Would a foreign-trade zone or bonded warehouse make sense at my volume?
- Am I ever likely to re-export or destroy unsold inventory, and would drawback apply?
- Who is named as importer of record, and what documentation will you expect from me to support “reasonable care”?
Building tariff volatility into your pricing
Because the broadest tariff authority was just invalidated by the Supreme Court, the remaining statutes carry different speed and notice profiles. Section 122 can move fast but is capped at 15 percent for 150 days. Section 232 requires a formal investigation that typically runs 270 days plus a 90-day presidential decision window. Section 301 requires an investigation with public comment. A realistic pricing clause should reflect which authority is actually plausible for your product’s origin country, not treat all future tariff risk as equally sudden.
Frequently asked questions
Who legally pays a US import tariff?
The importer of record is legally responsible for declaring value and classification and for paying the duty, regardless of who fronts the cost under the shipping contract.
Does country of origin mean where a product shipped from?
No. Origin is determined by where the last substantial transformation occurred, meaning a fundamental change in form or character that adds significant value, not by the country a shipment last departed from.
Are the tariffs imposed in 2025 still in effect?
The tariffs imposed under the International Emergency Economic Powers Act were struck down by the Supreme Court in February 2026 and stopped being collected shortly after. Tariffs under other statutes, including Section 301 and Section 232, were not affected. Check current CBP guidance for your specific product and origin country rather than relying on what applied last year.
What is tariff engineering, and is it legal?
Tariff engineering is designing or modifying a product to legally qualify for a more favorable duty classification, a practice recognized by U.S. courts since the 19th century. It becomes a problem when a modification is a sham made only to defeat classification at entry rather than a genuine change to the product.
Can a small hardware company recover tariffs already paid?
Possibly, through duty drawback, if the imported goods or the products made from them are later exported or destroyed. This is a documented CBP program, not an exception, and it has specific eligibility conditions worth reviewing with a customs broker.
How do tariffs affect the choice between offshore and domestic manufacturing?
Tariffs add a landed-cost line item to the offshore side of the comparison that does not apply domestically, but they do not change labor cost, tooling cost, or lead time on either side. Our manufacturing location decision guide covers the fuller set of tradeoffs beyond tariffs alone.
Where Inventornest fits
Tariff exposure is one more reason we treat component selection as a practical testing exercise rather than a spec sheet exercise, wherever a part is sourced from. If you are weighing where to source and manufacture a new product with today’s trade environment in mind, our OEM services team can help you think through the landed-cost picture alongside the engineering one. Get a quote to talk through your specific product and sourcing plan.
