There’s only about two months of shopping days before Christmas, but it’s enough time to survey some of the most interesting tariff classification cases with holiday themes. Not just Christmas, but here we also look at Halloween and Thanksgiving. I am nothing if not ecumenical when it comes to tariff classification. What I find strange, beyond the items described in these cases, is the undeniable conclusion that Americans can’t celebrate the holidays without imported merchandise.
Park B. Smith v. US (US Court of Appeals, Federal Circuit 2003) - Importing a festive article that is useful can get an importer into trouble. If your imported merchandise is too useful, if it is utilitarian, you risk losing your special low-duty “festive article” status. You also have to prove that your imported merchandise is specifically associated with a particular holiday (this is where “aberrant” comes in). Here the court easily determined that sweaters with clearly Christmas (angels and “Silent Night”) motifs and Halloween (witch, devil, jack-o-lantern, candy corn, and spider web) motifs qualified as festive articles, but struggled over whether sweaters with a bat, spider, ghost, and black cat designs equally qualified because people might wear these sweaters outside of Halloween. How it reached that distinction and why it didn’t consider sweaters to be utilitarian (you would think that only certain frost bite could force anyone to don a candy cane sweater), the court doesn’t say, but it eventually decided that all of the sweaters were festive articles.
Russ Berrie & Company vs. US - The Court of Appeals for the Federal Circuit is about as high as classification cases go (the next level up is the US Supreme Court). In this opinion, the Federal Circuit Court of Appeals reversed the Court of International Trade and sided with CBP. The controversy revolved around Halloween and Christmas earrings with the following motifs: a Santa Claus; a snowman decorated with holly, wearing a top hat and holding a snowball; a teddy bear dressed in red and white Santa outfit and holding a present; red, green, gold bells with/or without red or green bows; a ghost; a jack-o-lantern; a Frankenstein monster; and a witch. The Court decided that these trinkets were imitation jewelry and not festive articles, a decision that I must question because reading the list of items got me in a festive mood.
Rubie's Costume Company v. US - While deciding the classification of Halloween merchandise, this case laid down an important rule with a much broader affect. The Court of Appeals for the Federal Circuit again slapped down the Court of International Trade and sided with CBP. The importer claimed that courts should give no deference to tariff classifications from CBP. Not so fast, said the Federal Circuit Court of Appeals. CBP may not be the final word on classification, but courts must pay attention and be guided to a degree by the agency's expertise -- sometimes. The level of deference courts give to CBP's classification decisions depends on how well CBP did its job, i.e., "The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give power to persuade, if lacking power to control." In this case, the Court of Appeals for the Federal Circuit found that it should defer substantially to CBP's classification ruling. Thus, court concluded that children's costumes of "Witch of the Webs", "Abdul Sheik of Arabia," "Pirate Boy," "Witch," and "Cute and Cuddly Clown" are properly classified as "festive articles" and not "wearing apparel," an obvious outcome if you are parent.
Whealon v. US (US Customs Court, 3d Division, 1961) - Does a lecture hall within a Catholic seminary qualify as a house of worship, i.e., a place of thanksgiving? That was the question confronting this court. Items for houses of worship came in duty free and the seminary was importing stained glass windows from France. Some praying was done in the lecture hall, but that was not its main purpose. Employing a surprisingly liberal reasoning, the court concluded that, yes, the lecture hall was a house of worship.
Wilton Industries v. US (Court of International Trade, 2007). This is just one of many tariff classification cases on festive articles. The irony with “festive articles” litigation is that they tend to be acrimonious. Acrimony seems out of place when classifying cute cookie-cutters that are in lovely holiday shapes. Classification litigation is all about convincing the government that your imported product should be classified under a low or no duty classification. The government, of course, prefers higher duty classifications because it’s in the business of collecting revenue. The resulting legal analyses from the courts read more like Monty Python than Oliver Wendell Holmes. For example, this court reasoned:
Patterns used to make Christmas stockings are fundamentally different from festive-themed pans used to make Christmas baked goods, in several respects. Perhaps most significantly, sewing patterns can be used to make Christmas stockings year-round. While it would be aberrant to hang Christmas stockings on the mantle other than at Christmas time, it would not be aberrant to sew such stockings at other times of the year, in anticipation of (and in preparation for) the Christmas season. Thus, it would not be aberrant to use patterns for Christmas stocking year-round.
Outside of tariff classification cases, no one ever wonders whether Christmas stockings are “aberrant” (they wouldn’t be any fun if they were not), but bizarre rules are common in tariff classification. Tariff classification isn’t for the faint of heart or the ignorant of the esoteric classification rules. The decision in the Wilton Industries case can’t be summarized in a few words because the court classified a variety of cute kitchenware from a spectrum of holidays, including a pumpkin pie pan, a jack-o'-lantern nesting cookie cutter pan, a pumpkin cookie stamp, snowman pan, a poinsettia pan, and a cherub place card holders.
Thanhauser v US (US Customs Court 1908) - This case is so old that Mark Twain was still alive when it was written. After reviewing even earlier cases, the Honorable Jasper Yeates Brinton (you won’t find a judge with a name like that nowadays) had to decide whether the imported goods were toys or christmas tree ornaments. The stakes were high. If toys, the duty rate would be 35%. If tree ornaments, the duty rate would be 60%.
Judge Brinton was palpably annoyed that Christmas tree ornament cases had a long history even in 1908. “As the briefs of the parties show distinctly, there has been more or less uncertainty for a good many years concerning the proper classification of articles that may be described in a general way as Christmas tree ornaments.” The controversy had raged for so long and vexed him to such a degree that he found it necessary to wrestle with the profound issue of what constitutes a Christmas tree ornament. With Solomonic certainty, he pronounced,
In my opinion, the evidence shows that the fragile, flimsy articles in question, mainly composed of tinsel in different shapes- stars and rings and nondescript devices - are not intended, and are not suitable to be played with.
You know you're in trouble when the judge calls your goods "fragile and flimsy.” As for the argument that a child’s willingness to play with a thing rendered it a toy, Judge Brinton would have none of it.
They amuse or entertain because they are adapted to decorate, and no doubt they entertain children when they are hung on a Christmas tree; but on such an occasion they entertain adults also in the same way, although the entertainment differs in degree. Moreover, it clearly appears that the articles in question are often used by confectioners, stationers, and other merchants to make their wares or their shops more attractive, and this use has little reference to the amusement of children.
And thus the courts have for well over one hundred years tried to figure out what makes a Christmas tree ornament, and there have been revealing milestones.
For example, in Import & Export Service Co. v. US, this court in 1942 was busy determining the proper customs duty of Christmas tree ornaments from Nazi Germany! The case raises a mountain of unanswered questions, including, why were the Nazis sending us Christmas tree ornaments? Why were we allowing it? Did we retaliate by exporting to Germany FDR masks and July 4 flags?
Fortunately, most of the holiday classification cases have a far less sinister context, but they all seem to be trying to determine what may be undeterminable -- quantifying the ineffable qualities of holiday cheer.
Harry Houdini died on Halloween. You know him as the greatest magician ever, but did you also know that he was an immigrant? Born Ehrich Weiss in 1874 in Budapest, Hungary (not Appleton, Wisconsin as he claimed), he and his family moved to the US when he was four and he later became a US citizen.
Did you also know that he was an inventor? His acumen with technology was widely regarded during his lifetime. He borrowed some of his famous escape tricks from others, but, as it is the mother of invention, necessity required him to design the technology for his elaborate illusions.
Companies today routinely bring in foreign technical experts and engineers to supplement their US workforce. Relying on immigrants can be tricky, however. Not only is there a bureaucratic morass with visas and naturalization, but US export laws may also be implicated. Apparently in disregard to the magician's credo, Houdini revealed technical secrets of some of his tricks. Sharing technology with a foreign national today may have hidden risks. Depending of the technology that is involved and the nationality of person to whom the technology is being shown, the Deemed Export Rule may require a company to first apply for and receive an export license from the US Government.
Halloween is as American as pumpkin pie. If you are anything like this writer, and given the explosion of all things Halloween, your house will soon be decorated with ghosts, witches, and monsters. You may even be seen wearing clothing with a Halloween theme. Some people are so overwhelmed by the spirit of the season that they put themselves at risk.
Though an American tradition, most of our Halloween gear is manufactured overseas and then imported for domestic consumption.
Classifying merchandise, almost by its definition, is a dry, painfully esoteric exercise, which explains why some people have a hard time passing the customs broker exam. But classification is the lynchpin of all import laws. Wars have been fought because of tariffs, or at least in large part because of tariffs. Tariffs emerge when diplomacy fails. Tariffs (how much in taxes you pay to the Government) are determined by the classification of your imported products. You classify products under the Harmonized Tariff Schedule of the United States. In printed form, the HTSUS makes the Yellow Pages (remember those?) look like a comic book. Its heft is explained by the thousands of pages that list the tens of thousands of items. It is a "harmonized" schedule because our country coordinates with other countries on a model tariff schedule, thereby giving much predictability to both exports and imports regardless of which country you are doing business in. Predictability while classifying merchandise, that is. While tariffs have fallen a great deal worldwide in recent decades and tariff rates are increasingly determined by treaty, tariff rates can still vary wildly. Countries often use tariffs to protect domestic companies and even in this era of free trade are loath to open domestic markets to the vicissitudes of laissez faire.
Rules of interpretation, both unique to the country to which the merchandise is being imported, and more general rules that cut across jurisdictions, parse the whole mess out.
When you have tens of thousands of classifications and several ways, or rules of thumb, to determine the most accurate classification, there are bound to be disagreements. Which opens the system to an inevitable struggle between importers, who argue for classifications with the lower tariff rate, and Government, who argues the exact opposite because it feels its coffers threatened. That is why the court cases have the federal government on one side and the importer on the other side: US vs. Importer.
The courts have decided several Halloween classification cases.
What adds color and makes these cases almost tolerable and even fun to read is how the courts try to sound austere and formal while discussing the finer legal points of ghost bracelets, Frankenstein costumes, and jack-o-lanterns.
Here are a couple of the more notable Halloween classification cases:
Russ Berrie & Company vs. US - The Court of Appeals for the Federal Circuit is about as high as classification cases go (the next level up is the US Supreme Court). In this opinion, the Federal Circuit Court of Appeals reversed the Court of International Trade and sided with US Customs and Border Protection. The controversy revolved around Halloween and Christmas earrings with the following motiffs: a Santa Claus; a snowman decorated with holly, wearing a top hat and holding a snowball; a teddy bear dressed in red and white Santa outfit and holding a present; red, green, gold bells with/or without red or green bows; a ghost; a jack-o-lantern; a Frankenstein monster; and a witch. The proper classification of these trinkets, according to the Court of Appeals for the Federal Circuit, is "imitation jewelry" under heading 7117 of the HTSUS, not "[f]estive ··· articles" under heading 9505.
Rubie's Costume Company v. US - While deciding the classification of Halloween merchandise, this case laid down an important rule with a much broader affect. The Court of Appeals for the Federal Circuit again slapped down the Court of International Trade and the Importer in favor of US Customs and Border Protection. The importer claimed that courts should give no deference to tariff classifications from CBP. Not so fast, said the Federal Circuit Court of Appeals. CBP may not be the final word on classification, but courts must pay attention and be guided to some degree by the agency's expertise -- sometimes. The level of deference courts give to CBP's classification decisions depends on how well CBP did its job, i.e., "The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give power to persuade, if lacking power to control." In this case, the Court of Appeals for the Federal Circuit found that it should defer substantially to CBP's classification ruling. Thus, court concluded that children's costumes of "Witch of the Webs", "Abdul Sheik of Arabia," "Pirate Boy," "Witch," and "Cute and Cuddly Clown" are properly classified as "festive articles" and not "wearing apparel," an obvious outcome if you are parent.
You're Wrong If You Think You Don't Have To Worry About Assists Just Because You Didn't "Enter" the Imported Merchandise
Importers must report assists on their imported merchandise. It's not only that importers may have to eventually pay back duties owed to U.S. Customs and Border Protection (CBP) on their undervalued merchandise, but the real hassle comes from the fines and penalties and the added scrutiny from CBP.
The alarming thing is that you can be tagged with liability even if you do not strictly enter the merchandise, but merely introduce. Let me explain.
The US Court of the Appeals for the Federal Circuit just decided US vs. Trek Leather. The US Government had sued and won a judgment in the US Court of International Trade against the importer of men's suits for $45,245.39 in unpaid duties and $534,420.32 in penalties and interest. Most small importers would find it hard enough to come up with the $45K, but half a million dollars? Not even bankruptcy, which frowns upon debtors who owe customs duties and penalties, may be much of a haven.
The importer provided fabric to the manufacturer of the suits free of charge or at a reduced costs. These were the assists. Importers often find it hard to grasp why assists are important or even what they are. The US Court of the Appeals for the Federal Circuit clarifies what was at stake:
By providing the manufacturer free or subsidized components, like the "fabric assists" here, an importer reduces the manufacturer's costs, and the manufacturer may then reduce the price it charges for the merchandise once manufactured. A suit maker, if it obtains its fabric for free, might shave $100 off the price it charges for a suit. In this case, "[t]he material assists . . . were not part of the price actually paid or payable to the foreign manufacturers of the imported apparel." In such circumstances, the manufacturer's invoice price understates the actual value of the merchandise, and if the artificially low invoice price is used as the merchandise's value when calculating customs duties based on value, disregarding assists results in understating the duties owed. To address such an artificial reduction of customs duties, the statute and regulations expressly require that the value of an "assist" be incorporated in specified circumstances into the calculated value of imported merchandise used for determining the duties owed.
In affirming the judgment against the importer, the US Court of the Appeals for the Federal Circuit reminded the trade community that liability for accurately reporting assists applies not just to the individuals and companies who enter the merchandise, but equally to those who introduce it. What's the difference? Here again is the court:
Panama Hats confirms that, whatever the full scope of "enter" may be, "introduce" in section 1592(a)(1)(A) means that the statute is broad enough to reach acts beyond the act of filing with customs officials papers that "enter" goods into United States commerce. Panama Hats establishes that "introduce" is a flexible and broad term added to ensure that the statute was not restricted to the "technical" process of "entering" goods. It is broad enough to cover, among other things, actions completed before any formal entry filings made to effectuate release of imported goods. We need not attempt to define the reach of the term. Under the rationale of Panama Hats, the term covers actions that bring goods to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices indicating value) for use in the filing of papers for a contemplated release into United States commerce even if no release ever occurs.
What Mr. Shadadpuri did comes within the common sense, flexible understanding of the "introduce" language of section 1592(a)(1)(A). He "imported men's suits through one or more of his companies." Gov't Facts at 1. While suits invoiced to one company were in transit, he "caused the shipments of the imported merchandise to be transferred" to Trek by "direct[ing]" the customs broker to make the transfer. Himself and through his aides, he sent manufacturers' invoices to the customs broker for the broker's use in completing the entry filings to secure release of the merchandise from CBP custody into United States commerce. By this activity, he did everything short of the final step of pre- paring the CBP Form 7501s and submitting them and other required papers to make formal entry. He thereby "introduced" the suits into United States commerce.
Assists tend to be overlooked by importers, but the federal courts are clearly expanding liability for improper reporting of assists. It's time to sit up and pay attention.
Need more information on CUSTOMS ASSISTS? Attend our webinar on Customs Assists, November 10, 2014.
US Customs and Border Protection just amended its policies regarding Focused Assessments, those intensive, prolonged, invasive audits of large importers. Employing the ascetic, some might suggest sadistic, philosophy of one who prefers to remove a bandaid slowly to maximize the duration of the discomfort, CBP decided that this is just the first big step of a greater overhaul that the agency plans to gradually roll out in the coming months and years. CBP claims without any sense of the irony that it is seeking to make focused assessments more nimble and malleable.
If you are one of the lucky and increasingly rare large importers that hasn't been subjected to a focused assessments, CBP auditors have been clinical in their application of a series of highly technical standards that all importers are expected to comply with. If this sounds like the agony that schools inflict on our kids through standardized tests under Leave No Child Standing, you are getting the gist. CBP uses questionnaires, personnel interviews, document reviews, facility walk-through, and statistical sampling to gauge compliance and improvement and upon finding an indication that either is missing will elevate the risk level and therefore the audit to more punitive levels of intrusion and cost. If you are really naughty, the CBP auditors may even set up shop on a semi-permanent basis within your place of business. It's like having cops move in to your home just to make sure you tow the line.
But CBP realizes that one size doesn't fit all and perhaps a more nuanced approach is needed.
Here are the major changes (thus far):
No More Advance Conferences: Before the audit even started, the importer and CBP audit team would meet in what could be seen as a test of wills. Armed with the answers to a lengthy questionnaire that the importer provided, CBP would interrogate the importer further to determine the scope the focused assessment, and the importer would gently but firmly deflect overreaching inquiries. Sadly, these preliminary scuffles are now gone (entrance conferences, however, will still be held) and CBP will rely more heavily on a review of the importer's policies and questionnaire answers. CBP has access to a wealth of the importer's data even before the importer is notified of the audit obviate the need for an interrogation. It is this data that allows the agency to decide which importers to audit. Much of the audit's scope, and certainly the contents of the questionnaire, are developed at this stage called the preliminary assessment of risk or PAR.
Tailored Questionnaires: The importer will still be asked to complete an extensive questionnaire, but now it's called a Pre-Assessment Survey Questionnaire or PASQ. While CBP provides a template for PASQs, CBP auditors are expected to tailor the PASQ to fit the importer based largely on the impressions generated during the PAR. In addition, "Auditors use their judgment to develop the format and content of the questionnaire". Most of the changes to the Focused Assessment are about giving CBP auditors more discretion. The scope of the Focused Assessment, how the auditors pick samples of entry documents and what they look at during walk-through will rely more heavily on the auditors' judgment. The problem with greater discretion is that the risk of overreaching is also greater. CBP auditors are not bound by yesterday's methodologies and will be able to dig more deeply into areas of concern.
Clearer Path to ISA: The Importer Self-Assessment (ISA) program is a gem that few importers take advantage of. A voluntary program from CBP, importers are allowed to audit and police themselves (CBP removes them from most audit pools) once they establish to CBP's satisfaction the soundness of their import policies. Because a Focused Assessment is more rigorous than ISA's qualifying procedures, companies that have successfully gone through a Focused Assessment are allowed a streamlined process to enroll in ISA.
Want to know more about the Focused Assessment amendments and how to prepare and survive a Focused Assessment, then sign up for our webinar on Monday, October 13.
This 19th Century author wrote his famous novel about finding a certain letter in the attic of a customs house in Salem, Massachusetts. Who is he and what is the name of the novel? SPOILER ALERT: The correct answer is at the end of this article.
The author wrote this novel, his first successful one, by building on his personal experiences in a customs house. His novel was America's first ever blockbuster novel with the public, generating desperately needed income for himself. He's related to one of the judges who tried the Salem witches two centuries earlier.
Need more clues? Here's an excerpt from the famed Customs House introduction:
But the object that most drew my attention, in the mysterious package, was a certain affair of fine red cloth, much worn and faded. There were traces about it of gold embroidery, which, however, was greatly frayed and defaced; so that none, or very little, of the glitter was left. It had been wrought, as was easy to perceive, with wonderful skill of needlework; and the stitch (as I am assured by ladies conversant with such mysteries) gives evidence of a now forgotten art, not to be recovered even by the process of picking out the threads. This rag of scarlet cloth,--for time, and wear, and a sacrilegious moth, had reduced it to little other than a rag,--on careful examination, assumed the shape of a letter. It was the capital letter A. By an accurate measurement, each limb proved to be precisely three inches and a quarter in length. It had been intended, there could be no doubt, as an ornamental article of dress; but how it was to be worn, or what rank, honor, and dignity, in by-past times, were signified by it, was a riddle which (so evanescent are the fashions of the world in these particulars) I saw little hope of solving. And yet it strangely interested me. My eyes fastened themselves upon the old scarlet letter, and would not be turned aside. Certainly, there was some deep meaning in it, most worthy of interpretation, and which, as it were, streamed forth from the mystic symbol, subtly communicating itself to my sensibilities, but evading the analysis of my mind.
If you're still lost, Demi Moore starred in the much-panned 1995 movie version of the novel, a novel about a young woman who has an adulterous affair with Salem's minister. With the minister serving as inquisitor, the town tries the woman, finds here guilty, and forces her to wear a red letter "A". The woman accepts the town's and her secret lover's punishment, even as the minister descends into his private hell of shame.
The Answer: Nathaniel Hawthorne, The Scarlet Letter.
Principal and a founding member of GRVR Attorneys.