One of the best ways for an importer to save money is to reduce the duties it pays on imported merchandise to US Customs and Border Protection (CBP). A company can save thousands or even millions of dollars by classifying its merchandise under a heading with a lowest duty rate possible under the Harmonized Tariff Schedule of the US (HTSUS).
Importers commonly request that CBP classify items using the binding ruling request process. CBP publishes its rulings online (CBP’s Customs Rulings Online Search System or CROSS), an extraordinarily convenient and helpful service to the trade community, especially given the size of CBP’s electronic database (which consists of tens of thousands rulings). However, often CBP’s classification rulings can read like perfunctory edicts with little or no rationale. Sometimes rulings contradict each other, and it is not at all clear which ruling wins (although interested parties are allowed to report and challenge inconsistent rulings). Importers are often left to guess at CBP’s logic, to seek a pattern, to argue the merits of a preferred tariff classification, and to hope for the best.
There is also an unstated but obvious clash of interests between importers and CBP. Importers seek to classify their imported merchandise under HTSUS headings that impose the lowest duty rate possible. CBP is generally motivated in the opposite direction and, as a result, it can produce rulings that do not always correspond to the clear intent of the HTSUS or court precedent.
What happens if you don’t like CBP’s classification ruling? You can ask that CBP reconsider the ruling, but once you run out of administrative remedies, the question becomes: should you sue, as is your right, in the Court of International Trade?
Bringing a lawsuit made a lot more sense after the US Supreme Court rendered in 2002 its decision in Mead Corporation vs. U.S. The case is remarkable on many levels, including that the U.S. Supreme Court chose to hear an import/customs case, a true rarity. Writing for the majority, Justice Souter said that the courts should not use the Chevron standard (which requires an appellate court to generally defer to the administrative agency) when deciding a tariff classification appeal. Courts should instead use the watered-down standard of Skidmore vs. Swift.
Justice Souter wrote:
Under Skidmore, a classification ruling receives a measure of deference proportional to its "power to persuade." That power to persuade depends on the thoroughness evident in the classification ruling, the validity of its reasoning, its consistency with earlier and later pronouncements, the formality attendant the particular ruling, and all those factors that give it power to persuade. In addition, Customs' relative expertise in administering the tariff statute often lends further persuasiveness to a classification ruling, entitling the ruling to a greater measure of deference. While this court therefore recognizes its responsibility to accord a classification ruling the degree of deference commensurate with its power to persuade, this court also recognizes its independent responsibility to decide the legal issue regarding the proper meaning and scope of the HTSUS terms. This court construes a tariff term according to its common and commercial meanings, which it presumes are the same. To discern the common meaning of a tariff term, this court consults dictionaries, scientific authorities, and other reliable information sources.
The Skidmore standard provides importers with an enhanced opportunity to challenge CBP’s tariff classifications. The federal courts give CBP’s tariff classifications only the “power of persuade” deference, reviewing the arguments and evidence nearly as if presented for the first time. The importer, in essence, almost gets a mulligan or a do-over. As a result, there is now a healthy compilation of written opinions on tariff classification from the federal courts applying the General Rules of Interpretation and other canons of construction. These judicial edicts force greater transparency, logic, and predictability upon CBP’s tariff classification rulings. Importers can hold CBP accountable for incorrect tariff classifications.
It is surprising how few importers actually challenge CBP’s tariff classifications in light of the potential savings. There is, of course, no guarantee that filing a lawsuit will produce the desired tariff classification, and the merits and prospects for success of each case vary widely, but clearly challenging CBP should clearly be a possibility that importers may want to explore.
Here’s a spooky question about 9802 HTSUS: When do improvements create a completely new imported item?
Halloween (which is just around the corner, judging by all the pumpkins at the grocery stores) may be just the right holiday to consider a ghoulish question that confounds importers in regards to section 9802 of the HTSUS. As you may know, 9802 allows an importer to avoid paying duties on merchandise that was exported, as long as the merchandise was enhanced (advanced in value or improved in condition) overseas. If the merchandise qualifies, the importer pays duties solely on the value of the enhancements.
Halloween at the gut level deals with transformation, typically from good to bad or, if not bad, at least to outcast or mischievous. People wear costumes to make the change temporary and superficial, but the fun stories touch a darker reality. People transform into zombies, werewolves, vampires, and even monsters created by evil geniuses or possessed by demons. Think Doctor Jekyll and Mister Hyde, The Fly, and The Exorcist. The stories would not work and would not stir something in us, however, if the hope for redemption was absent. Will the monster ever turn back into a human? Or has he/she turned irretrievably into something completely inhuman, something so different that it no longer deserves all the protections and benefits that we guarantee solely to our fellow humans?
Back to 9802. To qualify for duty savings under this provision, you must export an item to get it improved or enhanced in the foreign country. However, while improvements or enhancements are required, you must keep a tight leash on them. You cannot bring back a completely new item.
I call this the Six Million Dollar Man paradox. Turn the way-back machine to the 1970s. Steve Austin, aka the Six Million Dollar Man, aka the Bionic Man, is injured in a terrible accident. A secret, government-funded medical team saves his life by replacing his broken body parts with robotic or bionic parts. They improve him. They make him better.
They replace one eye and one ear drum with an infrared scanner and an electronic earpiece. He is still Steve Austin, human. They give him nuclear powered legs and arms. He is still Steve Austin. If memory serves (I have not watched the show in over three decades and barely even then), the upgrades stopped there. But what if they continued to replace body parts? What if they replaced his torso with a gigantic iPad and on and on you, removing slices of his anatomy and replacing them with shining steel and electronic circuitry. At some point, he will no longer be Steve Austin, but instead will be something else irretrievably.
What is that point?
Questions like that are normally the province for philosophers and science fiction fans, but US Customs and Border Protection daily decides similar, albeit more prosaic, questions regarding 9802 items. We attorneys often fight to convince CBP that the items have not transmogrified while in a foreign land into something more sinister.
Who knew import law could be so spooky?
Principal and a founding member of GRVR Attorneys.