Bonus Episode: Tweaking Tariffs to Maximize Margins Legally with Izzy Rosenzweig

Izzy Rosenzweig

Only when we ship the package, the individual order that you collected money from the customer, and that order passes our customs,  then you pay the import tax. And that is a way better cash flow model. 

Chase Clymer

Welcome to Honest Ecommerce, a podcast dedicated to cutting through the BS and finding actionable advice for online store owners. I'm your host, Chase Clymer. And I believe running a direct-to-consumer brand does not have to be complicated or a guessing game. 

On this podcast, we interview founders and experts who are putting in the work and creating  real results. 

I also share my own insights from running our top Shopify consultancy, Electric Eye. We cut the fluff in favor of facts to help you grow your Ecommerce business.

Let's get on with the show.

Hey everybody, welcome back to another episode of Honest Ecommerce. Today, I'm excited to bring back to the show Izzy Rosenzweig, the CEO of Portless. Izzy, welcome back.

Izzy Rosenzweig

Chase, thank you so much for having me. It's great to be here again. 

Chase Clymer

Absolutely. So I've got one of those Word of the Day calendars sitting next to me. And today's Word of the Day, you wouldn't even believe it. Tariffs. Do you know anything about those? 

Izzy Rosenzweig

Oh, really? That is wild. Yeah. That's a fun word. 

Chase Clymer

Yeah, I know. And it's a word that a lot of people don't know what it means. And now they are learning, unfortunately, and it's affecting businesses big and small all over the place. Literally yesterday, I read that Canon, who is the manufacturer of I don't know if you know this, you're either Canon or you're Nikon and it's like to the death like your sports teams. 

Anyway, so Canon said that they're raising their prices on everything, which is terrible. But also I just bought it. I knew some of this stuff was happening. So I bought a bunch of new stuff the other day. Anyways, today Izzy is going to share with us a ton of information about tariffs, about some of the other recent changes that are going to affect global supply chain and profitability and all sorts of stuff. So quickly, guess, before we dive into those specific questions, why should people listen to you? How are you an expert on this stuff? You're not lying to me, right? 

Izzy Rosenzweig

Well, I say I'm not. You got to speak to more than one person and use every person's data point. But I happen to do a De minimis model and the direct from China to the US for over 12 years.

So I've been doing it a long time, have shipped millions and millions of packages, both in De minimis and the world after De minimis, including the world of tariffs. So happened to be living and breathing this for a very long time. You know, I have a perspective on it for sure. 

Chase Clymer

All right. First and foremost, explain what De minimis was and what recently changed. 

Izzy Rosenzweig

Absolutely. So De minimis was, it was a law that existed for, it still does for outside of China, close to a hundred years, which is any package that is valued under $800 is import duty free to the United States. It is not a loophole. It is the law. So people started to leverage it actually probably about 30 to 40 years ago by having facilities in China, in Mexico and Canada and bringing parcel by parcel over the border. But then the model direct from China also started growing over the last 15 years. And then it got really big. 

So everyone knows Shein and Temu. These are two big Chinese companies that leveraged it. But really there were hundreds if not thousands of American companies that also leveraged it. And that's what Portless does. 

We actually enable American brands to leverage the minimum and direct supply chain model  over the last many years. So a customer could essentially store their goods in the China model near the factory. They'll get an order. The order will be pick packed. The customer will get a tracking number within 24 hours, USPS, one of the other regional carriers. And on average, six days later, a driver will leave it at their front.

So, USB-S driver, on track, whatever the carrier is. So, the consumer gets a very local and normal DVC experience, but the branch just massively improved their cash flow. So, they went from waiting, we used to be waiting two months to put your goods on water and not being able to sell it, and having enough inventory to last with that buffer, so four to six months of inventory,  that is just a ton of money out the door, day one, and it's brutal cash flow. 

This model, your goods sit near your factory. So you can have much less inventory because you can restock so quickly and you're getting cash out really quickly. One day post-production, you're starting to sell and you're getting money from the customer so quickly. So De minimis was the method of entry into the country. So De minimis, import duty free. The method of entry was called Type86. That is how you did customs clearance with the CBP. It was import duty free. And that is how this model existed for many, many years. That was De minimis until May 6th.

Chase Clymer

Which was as of recording 4 days ago.

Izzy Rosenzweig 

Exactly. So then I'll give you direction from the administration. Already since September of 2024 with Biden, he said, we're going to get rid of De minimis. We don't like the fact that all these orders are coming in, we're duty free. Yes, it's the law, but we want to get rid of it and change the law. Fair game. You could change the law. So we knew that  the world of De minimis was going away. So the question is, what changes now?

Well, the foundation of why people use this model is all about cash flow. Sure, you could save import tax on your $5 cost of goods t-shirt, which, you know, depending on the tariff could be, you know, little or a lot. But at the end of the day, why people use the model is agile inventory, your next year factory, can stock really quickly, less money in inventory and cash back really fast. So that's why people use the model. 

So what happens when it goes away and we had direction for a long time? So two things change. One, you have to start paying import tax. Now everyone pays the same import tax. Okay, no problem, but you still get the cash flow benefits. Two is how you enter the country. You could no longer use type 86, which was the method under De minimis. Now you have to use something called type 11 or type 01, informal entry or formal entry. There you need your HS codes, you need descriptors, you need your transaction value. But as long as you have that data, you get into the country just as efficiently. So the consumer, the end consumer, still has the same six day delivery timeframe.

So nothing changes from their end, but now the brand has to pay import tax. But there is one big new advantage that now exists in this model. If you're a typical brand and using normal supply chain, not the portal supply chain, and you buy a million dollars of goods, because you want to hit a, you know, whatever, $4 million Q4, you put on a boat, the day it gets to the CVP, you got to put your checkbook and write a check for 1.4 million dollars or more, you're talking 144% taxes, you know, just in reciprocal  on top of base. 

Most brands will go bankrupt with that model. So the need to pay taxes upfront is a death sentence for most brands that just don't have that money sitting around. They got to pay their employees. You got to pay the rent. On the Portless side, what's nice is you don't need to pay those taxes day one. The goods are staying outside of China. Your million dollars of goods are in our warehouse.

And then only when we ship the package, the individual order that you collected money from the customer and that order passes our customs, then you pay the import tax. And that is a way better cash flow model. So de minimis being removed, the new world is T11, T01. Just another method of entry to the country where you're able to pay taxes. But De minimis is not the problem. The trade war is the problem now. And that is a really big problem.

Chase Clymer

Absolutely. And just to parrot it back to you as a layman, just to make sure that I got everything. Yeah. So, De minimis was a way to import goods that were under $800 in value for the last forever without having to pay import taxes. And now that has gone away. Now import taxes are different from tariffs, correct?  

Izzy Rosenzweig

You're paying import taxes on tariffs. So it is interconnected. Okay. When you import something to the country, the import of record must pay a tax. Now, what is that tax? A tariff is essentially another word for tax. So there's your base tax, which is like, oh, slippers pay 6%. But then there's now reciprocal and fentanyl and all the other stuff. And all of that is starting to compile. So import tax, like what do I got to pay? Well, there's all these different types of tariffs. And now you got to pay all of them. 

Chase Clymer

And where it is coming from is another key to this wild, wild, wild west of import taxes and tariffs. Alrighty. moving on from Debenemis, let's talk about tariffs and mean, there's numbers for all sorts of different countries. But the biggest one is China, which is also the number one manufacturer for most goods of most brands. 

Izzy Rosenzweig

100%. So the first thing that people don't realize is China is no longer the cheapest place to manufacture back in the day, no longer the case. India is 5 times. The cost of labor is 5 times 2.

20% of the current labor in China. It is much, much cheaper. Vietnam, not that much cheaper, but still much cheaper. So it's no longer about what labor costs are, it's now expertise. 

China simply had 50 years building expertise on sewing, on hemming, on buttons, on the manufacturer buttons, on different types of zippers, on embroidery,  machines that do the embroidery. Then there is the ecosystem, then there's the fabric mills. Like, there is a world that needs to happen.

Chase Clymer

So now this old misconception that made in China is inferior goods is actually potentially wrong.  

Izzy Rosenzweig

It was true, but it did evolve. The classic example is the iPhone. But you also may not see this on US or Canada or even many streets. But the cars coming out of China now are actually beautiful. The BYD cars are really high tech, beautifully fully autonomous production.

They have upped their game. Listen, they have 50 years doing this, right? And as you make more money, the country got wealthier, then they're making more for the local market as well. Just great, beautiful quality products. So bring it down to like the consumer goods that US people buy. The clothing, if you try to make the same clothing in Vietnam, it'll take you longer, because the fabric mills won't sell your roll fabric under 400 minimum order. So which means you're buying your fabric from China, they'll sell you one roll of fabric. 

Then it's okay, do they have the same machines, the same expertise in sewing and hemming. That you can't just build overnight. And Vietnam's at it for 20 odd years. 

Chase Clymer

You know, and I'm now just derailing our conversation. And politics aside, and you and I already agreed we're not getting into politics in this conversation. It's bringing manufacturing back to the states. The quality won't be there for some time too, which is something I don't think anyone has talked about. 

Izzy Rosenzweig

100%. I would say even beyond quality. The raw materials don't exist. The ecosystem doesn't exist.  And for me, I always say, I'm a big believer. Anything national security, we need to own. So you want semiconductors. If we lose semiconductors, that is very scary for the US. But cosmetics don't matter to the US for national security. So I think anything around national security, I think you will see a very tough stance on tariffs forever.

Semiconductors, drone technology, pharmaceuticals. I think there will be a very tough stance when it comes to tariffs. And you can understand it. It's now security related and they have to make that call because of what they know. Anything outside of it simply doesn't exist. Like you do not have the fabric mills to support it. You do not have the expertise. There's a ton of people on Twitter saying I went to a local factory and need to wait eight months longer than my China factory. It cost me eight times more and the quality is nowhere near as good.

It just doesn't exist. Now you could start today and be ready in 30, 40 years from now, but you can't make that transition overnight. That just doesn't work. And  do we want that?  I would argue we'd want more sophisticated manufacturing abilities. Do you want people to start learning sewing again? I would like to think like if they're good at it and trying to be an on let them do it. Let us become the best at robotics. Let us become the best  at rocket engines and semiconductors. So again, not to decide what we should or shouldn't do. But definitely, this is not a national security product and the ecosystem does not exist. 

Chase Clymer

Alrighty. And now we circle back to tariffs on China goods. 

Izzy Rosenzweig

So I have a thesis on it. And I do think a lot of brands see it the same way. If the US truly wanted to decouple China, let's say it's what they're doing, but not lose millions of jobs across the states, they most likely would have said, alright, everybody, we're going to increase tariffs 25% every quarter until it hits 200%. 200% is obviously not, 144% is not sustainable. Businesses go bankrupt. But if you give people, let's call it 12 to 18 months, there would have been a strategic shift out of China to India and Vietnam and Cambodia, etc. But the fact that the administration went zero to 144%, it's more of, I think, the argument of the deal. Get extreme leverage, make a deal. 

Don't allow American businesses to go bankrupt and still collect revenue. So the direction we're hearing is most probably land between 20 to 50%. He went extremely strong to get as maximum leverage as possible. Again, was it the right move or the wrong move? But my pay grade. But definitely, it does not feel like if we truly wanted to decouple and not lose millions of American jobs, it probably would have done it a different way. 

Chase Clymer

Yeah. A tiered approach. A timeline-based approach. 

Izzy Rosenzweig

Yeah. You could accomplish the same thing and not lose millions of American jobs.

Chase Clymer

Also, other things I had read on LinkedIn, Twitter, etc. whatever place you want to get information from strangers, the same result could have happened with incentivizing manufacturing in the states versus basically disincentivizing manufacturing elsewhere. 

Izzy Rosenzweig

Yeah. Personally, I'm a big believer in free markets outside of national security. Important stuff. But yeah, I agree. I think there could be a lot of other ways to do it. Now, I believe Trump wants to just generate revenue, right? He may have a plan to remove income tax, which sounds really cool to me. I don't know how doable it is, but it sounds cool. But you have to drive revenue somewhere. So if you bring it to 144%, there is no revenue because no business, everyone's bankrupt. But if you bring it down to 20, 50%, business still exists. Yes, it'd be inflationary. They may balance that with income tax reduction. That could work. But today, where we are today is not sustainable.

So what we're seeing brands do is we are seeing a segment of brands starting to go to Vietnam, starting to go to India. Again, I hope there's enough time for them,  you know, we're not going bankrupt between then and now because we live in the world of atoms, we live with all the physical goods. 

That stuff doesn't happen overnight. But most of the businesses are just waiting for direction. Like giving them direction. Let them know what the plan is. If it's a hundred forty percent forever, okay, we'll make action. But right now it's on notice and businesses need certainty. No matter what you decide. So that's the place we're at and it's a hard place to be. 

Chase Clymer

Yeah, we see that on the agency side of things. We've had a lot of deals basically just put on hold indefinitely. And they're like, we just can't make a choice right now because we don't know what the right choice is. And it's just that uncertainty is affecting all sorts of things across the market, not just in Ecommerce, but in housing and in all sorts of other stuff. So I think you're right. It needs to shake out and finalize and stop changing. Then people can start to, again, work on building their business, which is only going to build the economy.  

Izzy Rosenzweig

100%. 

Chase Clymer

Alright. So all this stuff is happening above our pay grade. What strategies have you seen brands implementing that seems maybe something smart or how they can stay competitive or just stuff for other brands to look into. 

Izzy Rosenzweig

Absolutely. So again, this is what I say most brands are doing right now. They're optimizing in place. Because again, moving to new countries is a huge risk. You only want to do that once you have certainty. So for most brands, I think there's 3 buckets that they're looking at to optimize. One is HS code audits. So back in the day, where import tax was 6%, 10%, 12%, you didn't think twice about your HS codes. Your factory said H code is X, you just trust that or you do a little Googling, okay, this sounds like the right HS code. But it might be time to do a better audit. The difference between one HS code could be 6% or 5% versus 35%, again, base tariffs, everything reciprocal is on top of that. But that's a lot of money. 

So take your time, look at your products and say, did I get my HS code right? You can speak to HS code auditing consultants, trade lawyers very often, if you're bigger, get involved in that as well. But make sure you have the right HS code. 

So you know you're paying the right tariff. That's one thing you should be doing immediately. Second thing is we're seeing people trying to get even more sophisticated, which is what they call tariff engineering. So tariff engineering is the example famously quoted is Converse shoes  as over as felt to their soul, over over 50% of the other soul is felt. Now, it disintegrates really quickly, like you wear your shoes and the felt disintegrates.

Why do they do it? It has nothing to do with comfort. Once felt, once there is over 50% felt on the sole of your shoe, it is legally considered a slipper. Don't care what it looks like. Don't care that it has laces. 50% felt, it is legally a slipper. Well, the base of a slipper is about 6%, the base taxes versus a shoe is over 30%. Brilliant move. So it's kind of like being a capitalist and saying, what do I gotta tweak slightly to be smarter about my import? Getting 100% legal.

But you know, garbage can, can I add an electronic component? Well, the electronic component on a garbage can has a different tariff than a regular garbage can. Are you selling a microwave? Does this microwave have the ability to add an air fryer component? Well, if it does, an air fryer is cheaper than a microwave. So this is like where historically no one went too deep, but now you got it. You got no choice. You have to optimize every single part of the supply chain. So tariff engineering, I would say is a big number two.

A big number three is what we offer, which is tax deferment. Because right now, only the best operators will survive and the ones that survive will eat market share. If your competitors are putting a million dollars, paying the CBP a million dollars upfront, and you're holding that back, and you're only paying it as you collect money, you could do marketing, which CPMs will be cheaper. You could hire people, you could be strategic with how you use that capital. 

So tax deferment strategies, Portless, and that's what Portless right now is super busy with a lot of brands is a massive advantage for a customer. So those are the fundamental ones. There's one last one, a fourth one. I'll say it's a little more sophisticated for larger businesses. It's called the first sale structure, which is very often when you're buying goods from a trade partner, that trade partner is buying it from a factory. Well, that trade partner is making margin. So there was a case over 40 years ago, which said you could use the invoice between the factory and the trade partner.

So let's say you're buying a t-shirt from the trade partner for 10 bucks, but the trade partner is buying it from the factory for seven bucks. Theoretically, you could pay import tax on the seven, not the 10. Now you need a third party. I know KPMG offers services around it. It is not cheap, but if you're doing enough volume and they can start separating the line item, making it the first sale invoice, there's a ton of money to be saved there as well. So these are, would say the four big areas of optimization we're seeing brands really start to lean into.

Chase Clymer

Absolutely. And then just like on my side, obviously, you're on the supply chain side of things  and  really, really directly  affected by De minimis and tariffs. On my side, I'm seeing a lot of brands. Like I said, it's a holding pattern. The capital investments in larger projects, like redesigns, are on hold right now. So a lot of people are doubling down on optimizing what they already have. We're doing a lot of conversion rate optimization, a lot of just general optimization sprints. People want to know what they're paying. They want to know when it's going to be done. 

Izzy Rosenzweig

Yeah. 

Chase Clymer

So that's what we're seeing on our side of things. But what is funny  is migrations.  The pain of not being on Shopify outweighs the unknown of what's going on with the economy. That's what we've been seeing. The migrations haven't stopped. 

Izzy Rosenzweig

It's a savings. When I ran my consumer business, I was a Magento. I saved, I think it was over a million dollars a year in engineers once we transferred and restructured that team. I was saving a million dollars a year. So moving to Shopify is a cash saving, besides making your life much easier. 

Chase Clymer

Oh, yeah. Do we just hear like, they're like, Oh, it took us 2 hours to do this thing. We're like, well, that's like 3 clicks of a button. Do you know how to change your Facebook profile picture? It's basically that easy on this thing. Izzy,  it's so great to chat with you. I'm sure we'll probably be connecting again soon because I don't see this topic going away from the zeitgeist anytime soon. 

Izzy Rosenzweig

Yeah. 

Chase Clymer

Let people know where they can get a hold of you, where you hang out on the internet. 

Izzy Rosenzweig

Totally. So I post a lot of content on LinkedIn, as well as X. You can visit our website, portless.com. We have tons of blogs on for sale or tariff strategies. Or if you want to learn about our services, feel free to reach out either to me on LinkedIn or on portless.com. Contact us.

Chase Clymer

Awesome. Thanks so much, Izzy. 

Izzy Rosenzweig

Thanks so much for having me.

Chase Clymer

We can't thank our guests enough for coming on the show and sharing their knowledge and journey with us. We've got a lot to think about and potentially add into our own business. You can find all the links in the show notes. 

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