• Export Licenses Are Now C.O.D. - Department Of State Modifies ITAR Registration Fee Structure to Increase Fees and Provide For More Consistent Revenue Stream
  • October 24, 2008 | Authors: Anne B. Perry; David S. Gallacher
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • Effective September 25, 2008, the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC") – the agency that administers export control regulations under the International Traffic in Arms Regulations ("ITAR") (22 C.F.R. Parts 120-130) – issued a final rule modifying the ITAR registration procedures and increasing the registration fees based on a company's need for licenses.  See 73 Federal Register 55349 (amending ITAR § 122.2, 122.3, and 129.4).  The goal of these changes is to try to self-finance DDTC licensing requirements.

    Changed Registration Renewal Period

    • The new rule applies to brokers, manufacturers of defense articles, and exporters.
    • Previously, companies were able to register with DDTC for up to two years at a time.
    • The new rule requires annual registration.
    • The new rule provides that a reminder notice will be sent to companies at least 60-days prior to the expiration of the current registration.

    Increased Fees

    • Since 2004, companies paid a flat fee of $1,750.00 per year to register with DDTC.
    • The new rule creates three "tiers" of registrants, with fees varying at each tier:
      • Tier 1 – New Registrants and Non-exporting Manufacturers: $2,250.00 per year – for new registrants, registrants required to register by law (i.e., companies that may manufacture defense articles, but which do not actually export any products), and registrants for whom DDTC has not reviewed, adjudicated, or issued a response to any application within the prior twelve months.
      • Tier 2 – Low-Use Exporters: $2,750.00 per year – for registrants for whom DDTC has reviewed, adjudicated, or issued a response to no more than 10 applications within the prior twelve months.
      • Tier 3 – High-Use Exporters: $2,750.00 per year + an additional fee ($250.00 x the number of requests above ten) – for frequent exporters, those for whom DDTC has reviewed, adjudicated, or issued a response to more than 10 applications within the prior twelve months.  This Tier 3 fee is capped at 3% of the total value of the applications that DDTC has reviewed, adjudicated, or issued a response to within the prior twelve months.
    • License applications, agreements, and amendments will all be considered separately in determining the total number of "applications" a company has submitted for purposes of determining the registration fee.  DDTC will not consider, however, applications that are "returned without action" or "denied" in calculating the total number of applications.  Additionally, DDTC will not include the submission of required reports, notifications, commodity jurisdiction requests, or disclosures in calculating the total number of applications.
    • Tax exempt organizations (such as universities) may be released from the higher-tiered pricing and required to register only at the Tier 1 level.
    • Registrants may not establish new entities for the purpose of reducing registration fees.
    • All payments must be in U.S. dollars, and must be payable through a U.S. financial institution.

    Conclusions and Criticisms

    • While the new fee structure tries to "align registration fees with the cost of licensing" and place the heaviest fee burden on the heaviest users of the DDTC program, this new fee structure potentially drives up registration costs significantly.  While a "high-use" exporter was previously able to register for $1,750.00 per year, its new cost is, quite frankly, incalculable and potentially very large.   Consider the following:
      • A new company can register for a "mere" $2,250.00.
      • However, if in the next year DDTC processes and approves 100 license applications through DDTC in a given year, its total registration fee for the following year will be nearly $25,250 ($22,500.00 + $2,750.00) – all for the privilege of registering with DDTC and having them issue approvals to sell products overseas.
    • Additionally, a company's re-registration cost will vary from year to year depending on a company's sales volume, which will make it very difficult for companies to effectively budget from year to year.  Consider the potential impact on a small business where its registration costs may vary by tens of thousands of dollars each year.
    • Moreover, one wonders how, exactly, a company should calculate the "3% fee cap" based on the total value of all of its approved exports within the last year (including the value of any TAA or MLA), other than by rolling up its sleeves, breaking out a calculator and – ultimately – opening up the check book.  Consider a company that submits for approval to DDTC a single Technical Assistance Agreement valued at $50 million, in addition to many single license applications.  The "cap" to its registration fee would be as high as $1,500,000.00.  That does not sound like much of a "cap" at all – especially considering that DDTC's administrative effort in approving a single TAA is hardly more than a million dollars.
    • Plainly, selling ITAR-controlled products in international markets just got more expensive.  We hope that companies will be able to absorb this extra cost and administrative burden without losing their competitive advantage.