In the last installment of PARCEL Counsel, we looked at the meaning of the phrases F.O.B. Origin and F.O.B. Destination. Exploring the meaning of these terms is an essential first step; however, an understanding of the meaning of the terms begs the question, “Which one is the best for my company to use?” The answer, in classic lawyer fashion, is, “It depends.” This is because there are many factors in play…or not in play…for any particular company. With this in mind, the following questions can be used as a starting point to develop criteria for your own company.
1. Do you want to be able to route the freight yourself to reduce congestion by having control over delivery and pick-up schedules?
2. Would your company be able to negotiate better rates on your outbound or inbound traffic if you had additional volume?
3. Do you want to bear the risk of loss and damage?
4. Are you or your vendor/customer in a better position to adjust claims for loss and damage to cargo?
5. Is your company willing to pay carriers directly, and thus sooner (e.g. 30 days), than your company now has to pay vendors for product and add-on freight charges (e.g. 60-90 days?) Put another way, are the dollar savings in freight charges that might result from a direct negotiation with a carrier more or less than the time value of the money paid to vendors for add-on freight charges?
6. What effect, if any, would the term of sale have on your company’s liability for state sales taxes?
7. What effect, if any, would the term of sale have on your company’s liability for state use taxes?
8. What effect, if any, would the term of sale have on your company’s liability for state property taxes?
9. Are there freight allowances available for commodities being purchased “F.O.B. Origin” that aren’t available for those purchased “F.O.B. Destination”?
10. What is the total cost effect of controlling your inbound freight?
11. Does your company have personnel who are willing and able to audit the freight bills or to monitor inbound compliance to the routing guides?
12. How would the term of sale affect the dollar value of your inventory levels on any particular day?
13. How important is it to your company to have the certainty of a “delivered price” with a “F.O.B. Destination” term of sale as opposed to the possibility of paying a lower (or higher) total cost based on the cost of the goods plus the actual cost of the transportation?
It should be kept in mind that many businesses are both consignors and consignees. For instance, a manufacturer receives raw materials or component parts and ships manufactured items. If such a company wanted to have total control over its transportation, it would specify an “F.O.B. Origin” term in contracts with its vendors. However, it would specify an “F.O.B. Destination” term in contracts with its customers.
Finally, it should be noted that a new issue has arisen since the above list was developed a few years ago: Consignee chargebacks and consignor chargebacks. Accordingly, when considering whether to use an F.O.B. Origin or an F.O.B. Destination term of sale with a particular vendor or a particular customer, consideration should also be given to whether the choice of the term of sale could eliminate, or at least mitigate, the financial impact of such charges.
Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A. and the Senior Editor of transportlawtexts, inc. Previous columns, including those of William J. Augello, may be found on the PARCEL website. Your questions are welcome at brent@primuslawoffice.com.
This article originally appeared in the September/October, 2019 issue of PARCEL.
