Tariff Engineering Value-Added Classification

Larry Friedman

Barnes/Richardson

Try the other white meat?

• OK with wife?

• OK with kid?

• No other penalties or problems?

• Works for me

Apply that to tariff rates and you have

tariff engineering.

Merritt v. Welsh, U.S. S.Ct.

1882 • Importer sued the collector at the Port of

New York

• Merchandise was sugar

• Grading scale was “Dutch standard in

color”

– Up to 7: $0.0175/lb + 25%

– Above 7: $0.02 or more/lb + 25%

Background

• Collector believed the sugar was colored

intentionally with molasses

• Performed chemical analysis

• Found sugar to be of higher grade than

color indicated

• Applied higher rate of duty

Issue 1: What’s the Test? [I]n making its election, Congress did not leave any

room for doubt as to its meaning. It used apt terms to

express it; terms free from all ambiguity and obscurity.

If the test adopted fails to effect the desired object, the

inconvenience, or loss to the treasury, need only be

temporary: it can be changed at any moment. And it is

better to submit to a temporary inconvenience than to

set the laws all afloat by laying down a canon of

construction which leaves the plain words, and seeks to

spell out, or guess at, the supposed intent of the

legislature, contrary or supplementary to that which is

clearly embodied in the words it has used.

Issue 2: Is this Fraud? It may be that our tariff of duties is evaded by giving to

sugars, in the process of manufacture, a low grade of

color. If this be so, it is no more than every

manufacturer does; namely, so to manufacture his

goods as to avoid the burden of high duties, provided

he can do it without injuring their marketability, or

injuring it less than the duties involved. So long as no

deception is practised, so long as the goods are truly

invoiced and freely and honestly exposed to the officers

of customs for their examination, no fraud is committed,

no penalty is incurred.

U.S. v. Citroen, U.S. S.Ct. 1912

• 37 drilled pearls

• Divided into five lots

• When sold in Paris, they were strung into a

necklace

• ¶ 434 “Articles commonly known as jewelry . . .

Pearls set or strung . . . .” 60%

• ¶ 436 “Pearls in their natural state, not strung or

set . . . .” 10%

Decision • Classification is ascertained by an examination of the

imported article itself, in the condition in which it is imported.

• This, of course, does not mean that a prescribed rate of duty can be escaped by resort to disguise or artifice.

• When it is found that the article imported is in fact the article described in a particular paragraph of the tariff act, an effort to make it appear otherwise is simply fraud on the revenue and cannot be permitted to succeed.

Holding

• ¶ 436 “Pearls in their natural state, not

strung or set” includes drilled pearls

– “Not strung” implies that pearls may be ready

for stringing

– Pearls are often drilled immediately after

being removed from the shell

• ¶ 434 requires that the pearls be “set or

strung”

House Slippers, 2002

HQ 965752

• Slipper with upper of textile material with outer sole composed of unit-molded rubber plastics over which was “thin layer of textile fabric”

• Material could wear off in short period of time

• Customs ruling classified as “other footwear” 6405.20.90, 12.5%

• Domestic shoe industry lost business

• Petitioned for reclassification, slippers with rubber/plastic soles, 6404.19.20, 37.5%

Commercial Reality While there is little case law concerning finding tariff

engineering to be a fraud or artifice, there are many Customs rulings on this issue. The general position taken by Customs in these rulings is that if Customs finds the article, at the time of importation, is a commercial reality, then the tariff engineering will not be considered a fraud or artifice. In the cases in which Customs has found that the tariff engineering was a fraud or artifice, Customs concluded that the article was not a commercial reality because the article was not sold or otherwise entered into the stream of commerce in the condition as imported.

Ruling

• Customs ruled for the importer

• “No apparent deceit” as to nature of the slippers

• Slippers imported and sold with textile material in tact

• Even if textile material wore off quickly, consumer wore it with textile embedded into outer sole

• Introduced into stream of commerce as entered

• Commercial reality

What is ‘Disguise or Artifice’? • For an importer to benefit from tariff engineering, the article

must be a “commercial reality”, have a “commercial identity” or “commercial use” in its imported condition

• Or it must be a finished product traded or used in its condition as imported

• The product, as entered, must be part of a “genuine step” in the manufacturing process

• If the added feature of the product that allows the importer to obtain a lower duty is removed shortly after importation, the tariff engineering is an “artifice”

Ford Transit Connect Vans?

Background

• Heading 8703 “motor vehicles principally designed for the transport of persons” 2.5%

• Heading 8704 “motor vehicles for the transport of goods” 25% (the “Chicken Tax”)

• Vans imported with four doors, rear bench seat with seatbelts, and rear side windows, importer classified as passenger vans.

• Also available as a wagon model.

Ford Transit Facts As

Imported • Swing-out front doors

• Second row sliding doors

• Second row windows

• Swing-out rear doors (some with windows)

• Second row bench seat – No headrests — No tumble lock

– No “comfort wires” — Inexpensive fabric

• Second row seatbelts

• Child locks, carpeted rear footwells, dome lights, full cloth headliner

Conversion • After CBP clearance, but still in port

• Remove rear seat

• Remove rear safety restraints and

seatbelts

• Cover rear footwell

• Add cargo mat

• Add scuff plates to second-row door sills

• Optional: remove side door windows

Discussion

What do you think?

Artifice or disguise?

Ford Preliminary Decision

• CIT Slip Op. 16-92 (Oct. 5, 2016)

• “The dutiable classification of articles imported must be ascertained by an examination of the imported article itself, in the condition in which it is imported.”

• Articles cannot escape a prescribed rate of duty “by resort to disguise or artifice.”

• Does the article, as imported, fall within the description of a passenger vehicle?

Ford Preliminary Decision

• Test for car or truck is Marubeni Am. Corp. v. U.S.

• Look to how the vehicle is designed for evidence of “principally designed” use

• Court says it has numerous detailed and undisputed facts about the Transit

• But, the court does not have facts on the cost of the reduced rear seats

• Parties are to submit additional information.

Summary

• Goods are classified in their condition as

imported

• Importers may configure goods to achieve

a lower rate of duty

• Importers may not engage in artifice or

disguise

Avoiding Artifice or Disguise

• Truthful and complete descriptions to CBP

• The product should have a commercial

identity or use as imported

• Avoid temporary products

• Production should be for a commercial

purpose other than duty avoidance

Questions

Larry Friedman

lfriedman@barnesrichardson.com

www.barnesrichardson.com

www.customslawblog.com

Tariff Engineering: How to do it Properly

Jennifer R. Diaz, Esq.

Diaz Trade Law

Customs & International Trade

Board Certified in International Law

Jen@diaztradelaw.com

Office: (305) 456-3830

Disclaimer • This presentation is for informational purposes only and does not purport to

provide legal advice as all cases and facts are different.

• The information in this presentation is provided “as is” and no representations are made whatsoever.

• You should not rely on the information included in this presentation as an alternative to legal advice from your attorney.

• For questions related to a specific matter, you should consult your attorney.

• To the extent permitted by law, this presentation is Copyright © 2017 by Diaz Trade Law, P.A.

Agenda

• What About After

Importation?

• Case Studies

– CBP Rulings

– $$ Refunds! 1520d

– FTZ

QUIZ TIME!

You can only

review HTS’s prior

to importation?

True or False

HTSUS REVIEW

– Confirm you’re using the correct

HTSUS necessary for proper

assessment of duties.

QUIZ TIME!

The HTS is universal

throughout the world

up until the __ digit?

A. 2nd

B. 4th

C. 6th

D. 8th

GENERAL RULES OF INTERPRETATION

(GRI’S)

• The classification of merchandise under the HTSUS is governed by the principles set forth in the HTSUS.

• The GRI’s are intended to be consulted and applied each time merchandise is classified under the HTSUS.

• There are a total of six (6) GRI’s dealing with relatively sophisticated concepts such as interpretation by heading levels, and concepts such as unfinished goods, unassembled goods, and goods composed of mixtures or combinations of materials or substances.

• In addition, Section Notes and Chapter Notes should always be reviewed.

QUIZ TIME!

It is a brokers

responsibility to use

“reasonable care” in

ascertaining the

correct HTS?

True or False

MERCHANDISE DESCRIPTION AND TARIFF

CLASSIFICATION

• Have you obtained a Customs ruling regarding the description of the merchandise of its tariff classification?

• Have you consulted a Customs “expert” (lawyer, customs broker, or customs consultant) for advice?

• If you are claiming a conditionally free or special tariff classification such as NAFTA, how have you verified that the merchandise properly qualifies for such status?

Case Study

• Frozen

preserved

Crabmeat

(King Crab)

HTS QUIZ TIME!

What’s the main

difference between

the HTS’s?

Case Study

– 1605.10.05 – 10% Duty!

• Prepared meals

– 1605.10.40.. – 5% Duty!

• Crabmeat (not in airtight

containers)

– 1605.10.20.. - DUTY

FREE

• Crabmeat (in airtight

containers)

CBP Ruling

QUIZ TIME!

CBP has published

over _ Binding

Rulings?

A. 50,000

B. 75,000

C. 100,000

D. 170,000

CBP Binding Ruling Process (19 CFR Part 177)

• Request Binding Rulings for: – Classification

– Valuation

– Country of Origin

– Free Trade Agreement Verification

• Total Rulings: OVER 171,152!

http://www.cbp.gov/

BINDING ADMINISTRATIVE RULINGS (19 CFR PART 177).

• The Ruling will be binding at all ports of entry, unless modified or revoked by CBP’s Office of Regulations and Rulings.

• The information that should be included with a Binding Ruling Request includes:

A complete and detailed

description of the merchandise.

Cost breakdowns of component materials or parts and their respective quantities shown in percentages.

A description of the principal use of the goods.

Citation to supportive Rulings from CROSS

(Customs Rulings On-line Search

System) http://rulings.cbp.gov/

http://rulings.cbp.gov/

Case Study – Stuffed Mattress Cover

HTSUS’s Under Review

• 6304 Other furnishing articles,

excluding those of heading 9404:

• 9404 Mattress supports; articles of

bedding and similar furnishing (for

example, mattresses, quilts,

eiderdowns, cushions, pouffes and

pillows) fitted with springs or stuffed or

internally fitted with any material or of

cellular rubber or plastics, whether or

not covered:

Case Study –

Stuffed Mattress Cover

• 6304.91.0040

• 9404.90.2000

CBP Ruling Review • Headquarters Ruling Letter (HQ) H015427, dated January 5, 2010

• Heading 9404, HTSUS, is limited to “Articles of bedding and similar

furnishings which are…stuffed or internally fitted with any

material.”

• Articles of bedding properly classified in heading 9404, HTSUS, are

stuffed.

• Linens and other bedding furnishings classified in chapter 63 are

not.

https://rulings.cbp.gov/detail.asp?ru=h015427

Explanatory Notes Review

• EN 94.04 clarifies that goods

classified in 9404 may be

stuffed with cotton, wool,

horsehair, down or synthetic

fibers.

• Each of these “materials” are

basic, homogenous, stuffing

materials.

QUIZ TIME!

Non originating

components will

automatically

disqualify the use

of NAFTA?

True or False

NAFTA

NAFTA Review

• Component Parts

(non NAFTA

originating)

– 6006, 6004, 5801,

69

• Cut/Sewn in MX

• General Note 12(b)

– Tariff Shift?

NAFTA REVIEW

• General Note 12(t), Rule 7, which regards

the relevant subheadings of Chapter 94

states the following:

– A change to subheading 9404.90 from any

other chapter, except from headings 5007,

5111 through 5113, 5208 through 5212, 5309

through 5311, 5407 through 5408 or 5512

through 5516.

NAFTA REVIEW

• General Note 12(t), Rule 4, which regards the relevant

subheadings of Chapter 63 states the following:

– A change to headings 6304 through 6310 from any other

chapter, except from headings 5106 through 5113, 5204 through

5212, 5307 through 5308 or 5310 through 5311, chapters 54

through 55, or headings 5801 through 5802 or 6001 through

6006, provided that the good is both cut (or knit to shape) and

sewn or otherwise assembled in the territory of one or more of

the NAFTA parties.

QUIZ TIME!

You can file a PEA

or PSC to make a

post-importation

preference claim

on ALL Free Trade

Agreements?

True or False

CSMS #17-000110

19 USC 1520d (no Protest) • The 19 U.S.C. 1520(d), post

importation preference claim,

allows for a preference claim to

be made within one year of the

date of importation if a claim

was not made at entry summary.

• It is the ONLY mechanism to

make a post-importation

preference claim on CERTAIN

Free Trade Agreements

QUIZ TIME!

You can file a PSC

up until the date of

liquidation via

ACE?

True or False

PEA or PSC or Protest (19 USC 1514)

AGOA

Civil Aircraft Agreement

Jordan FTA

Australia FTA

GSP

Morocco FTA

Bahrain FTA

Insular Possessions

Pharmaceutical

CBERA

Israel FTA

Products Agreement

CBTPA

Uruguay Round Concession on

Intermediate

Chemicals for Dyes

Singapore FTA

• PSC = Allows corrections

to ACE

• May be filed 270

calendar days from

date of entry

• Cannot be filed within

20 calendar days of

the scheduled

liquidation date

• PEA = Method to request

correction to entry, prior to

liquidation

Case Study

• Potential 45%

China Tax?

– Solution

• Foreign Trade

Zone

QUIZ TIME!

If an importer imports

merchandise NOT

intended for U.S.

consumption, a great

way to avoid CBP duty is

to use a FTZ or bonded

warehouse?

True or False

Foreign Trade Zones

• Considered outside CBP territory

• Formal CBP entry procedures and

payments of duties are not required on

the foreign merchandise unless and until

it enters CBP territory for domestic

consumption

USEFUL LINKS • What is Trump’s 45% tariff on Chinese imports, and how can I avoid it?

• http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-

45-tariff-chinese-imports-avoid/

• Importing into the U.S.: A Guide for Commercial Importers

• https://www.cpsc.gov//PageFiles/113831/iius.pdf • CBP's Legal Decisions/Publications

• http://www.cbp.gov/trade/rulings • Customs Rulings Online –

• http://rulings.cbp.gov/

• Harmonized Tariff Schedule - Online Reference Tool –

• http://hts.usitc.gov/

• Protecting your intellectual property rights! –

• http://www.cbp.gov/trade/priority-issues/ipr

http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/http://www.tradeready.ca/2017/topics/supply-chain-management/trumps-45-tariff-chinese-imports-avoid/https://www.cpsc.gov//PageFiles/113831/iius.pdfhttp://www.cbp.gov/trade/rulingshttp://rulings.cbp.gov/http://hts.usitc.gov/http://www.cbp.gov/trade/priority-issues/iprhttp://www.cbp.gov/trade/priority-issues/iprhttp://www.cbp.gov/trade/priority-issues/ipr

BLOG customsandinternationaltradelaw.com

Now That We Have Our Paws Dirty… Any Questions?

Tariff Engineering: How to do it Properly

Jennifer R. Diaz, Esq.

Diaz Trade Law

Customs & International Trade

Board Certified in International Law

Jen@diaztradelaw.com

Office: (305) 456-3830