UPDATE: We have had a lot of questions regarding TAA Compliance and Substantial transformation so we have added some additional information:
When dealing with TAA compliance, substantial transformation is a topic that often comes up. A lot of questions are raised when determining whether a product is substantially transformed.
Substantial transformation occurs when an imported article emerges from processing as a new and different article, with a new name, character and use. Goods are substantially transformed in a country if they were grown or produced in that country. The term means that the item underwent a fundamental change in form, appearance, nature, or character, which adds to its value amount or percentage that is significant in comparison to the value which the item had when exported from the country in which it was first made or grown.
For example, if lemons were from country A, sugar from country B, and ice from country C are taken to country D and are manufactured to result in lemonade. The inputs were substantially transformed into a product of country D, therefore a new type of good resulted from processing.
If all your products are made in the United States, you don’t have to worry about TAA compliance. If not, do you know if the countries you work with are accepted under the Trade Agreements Act (TAA)? TAA compliance is a major part of GSA Schedules because it can significantly impact your contract if you violate the terms.
There are specified countries that are banned under the TAA, and TAA compliance requires that your business has nothing to do with them while you’re under a GSA Schedule. The big ones to avoid are China, Russia, and Indonesia. Having products that you’re selling to federal agencies directly sourced from there can have a major negative impact on the state of your contract.
Remaining compliant with the TAA rules can be difficult for businesses who are unfamiliar with the act and it’s rules, and especially for those whose products are traveling through more than one country before they reach the United States.
In this instance, there is a rule that states a product must be “substantially transformed” in a TAA approved country before it’s shipped to the U.S., meaning that at least half of the product must be changed in either the U.S. or a designated country in order to fall into TAA compliance.
What Are the Consequences of Failing to Adhere to TAA Compliance Rules?
The most frequent consequence of not adhering to TAA compliance is that your initial application for a GSA Schedule will not be accepted. In order to receive a GSA Schedule, your business has to prove that it is able to comply with the TAA.
Businesses with a schedule that exceeds $193,000 will need to make sure that they are fully aware of TAA compliance standards. If you end up making a choice that causes one of the products you sell through your GSA Schedule to no longer be TAA compliant, you run the risk of being charged with hefty fines that could go as high as $1 million (or more), or significant penalties such as having your entire contract revoked.
In recent years, GSA has made a point to crack down harder on companies who aren’t complying with the TAA, so it isn’t worth risking the contract you worked hard to obtain.
Knowing whether your business is TAA compliant can be tricky because there are a lot of moving parts to work through to reach confirmation. The best, and easiest thing you can do for your business is to simply go through the process of obtaining all the documentation you need as part of your application for a GSA Schedule, and then continue to adhere to it throughout the life of the contract.
But if you’ve reached a point where you’re already into your contract and you’ve realized that one or more of your products might not be TAA compliant, what do you do?
If you know one of your products is not TAA compliant, don’t continue to sell it through your GSA Schedule. Instead follow these steps to avoid fines, penalties, or worse.
- Remove anything that is not TAA Compliant from your GSA Schedule as soon as possible
- Take the proper steps to update GSA Advantage! so the product is no longer available for purchase
- Prepare and submit a request for a contract modification to have the products that are not TAA compliant permanently removed from your GSA Schedule
- Submit an updated price list
As a contractor, it’s your duty to alert the GSA that your products are not TAA compliant and accept any fines or penalties that are put against you. You’re the one who knows best about where materials are made and where they’re coming from, so ultimately it’s designated your responsibility to report issues and correct them.
With hundreds of countries accepted by the TAA, it might not be a big deal for your business to make sure it remains compliant. However, if you’re not familiar with the TAA regulations, it can easily become a problem if your business is obtaining materials from restricted countries.
Similar to the TAA is the Berry Amendment, which works in the same manner as the TAA, but only applies to purchases for the Department of Defense (DoD). The Berry Amendment requires that all products purchased for the DoD through a GSA Schedule are made solely in the U.S. In this case, designated countries don’t apply, and businesses providing products in this sense need to be aware that they can run into trouble if their products are being made anywhere else besides the U.S.
Understanding TAA compliance can be tricky, but with good knowledge of the regulations your business will be able to focus on making sales. If you’re doing business outside the U.S., be sure that you have all the documentation required and you’re not working through a restricted country and you’ll sail through TAA compliance with ease.