Monday, June 27, 2016

Ruling of the Week 2016.15: Customs Business

One of my least favorite areas of customs regulation has to do with the ability of related companies to provide compliance expertise through shared services. The problem arises because while a company can rely on its employees to conduct customs business on its own behalf, no one but a licensed customs broker can engage in customs business on behalf of a third party. That means that if you are an employee of Subsidiary Alpha of Acme Holdings Corp. you can't fully assist your sister company Subsidiary Beta with its customs compliance. That is true even though you may be the most qualified person in the entirely to the Acme Holdings extended family. While there is a space called "corporate compliance" in which the shared services model works just fine, managing the line of acceptable advice is difficult.

The reason for this is 19 USC § 641(b)(1), which requires a valid customs broker's license to undertake customs business on behalf of a third party. Customs business is defined as:

those activities involving transactions with CBP concerning the entry and admissibility of merchandise, its classification and valuation, the payment of duties, taxes, or other charges assessed or collected by CBP on merchandise by reason of its importation, and the refund, rebate, or drawback of those duties, taxes, or other charges. “Customs business” also includes the preparation, and activities relating to the preparation, of documents intended to be filed with CBP in furtherance of any other customs business activity, whether or not signed or field by the preparer. . .

19 CFR § 111.1.

This is relevant at the moment because of HQ H261011 (Jun. 3, 2016) in which the question presented to Customs was whether the use of a single bank account to pay duties on behalf of two related but separately incorporated subsidiaries constitutes customs business. Each entity would have a separate ACH account to sweep payments to Customs, but the funds would come from a consolidated account. Clearly, the banking arrangement involves transactions concerning the payment of duties, taxes, or other charges assessed by CBP. That makes this a non-frivolous question, even though it should be entirely obvious that the account from which the funds are drawn is not indicative of the practice of "customs business."

In prior rulings, CBP has held that a company cannot make payments to CBP on behalf of a sibling company without running afoul of the broker licensing requirement. According to Customs, the arrangement proposed in this case is different because each entity is continuing to pay its own funds on its own behalf. The proposal is internal to the company and not visible to Customs. Further, the subsequent accounting reconciliation between the companies is not a transaction with Customs and does not constitute customs business.

That is a good result and a valuable step. Customs should go further. I realize this may be contrary to the interests of some brokers out there, but keep in mind that it is also contrary to the interests of outside legal counsel. In-house corporate compliance is a reality. Customs' primary interest should be in ensuring that importers have access to the best available compliance resources. Companies may choose to increase those resources if they can be shared among related entities. Today, sharing customs business resources involves fairly complicated steps including employee sharing agreements, employee time management to avoid overlapping times of responsibility, creating licensed brokerage entities, and other schemes.

The problem is that Customs can't do anything about this on its own. The statute is there and Customs must apply it. It is easy enough to say something like "call your congressperson" as a means of encouraging a fix. But, politics being what it is these days, you may as well stand in your cul-de-sac and shout into a storm. Nevertheless, when the political storm clears, this is something that requires congressional attention in a way that continues to support the brokerage community.

Friday, June 17, 2016

Ruling of the Week 2016.14: Something Fishy

Did you ever see a marlin or other game fish proudly displayed as a mounted trophy and wonder exactly how one goes from landing the fish to hanging it over the mantel? I have always assumed that some portion of that trophy is the actual fish that was murdered caught through the skill and patience of the angler. I pictured a taxidermy shop where meat and entrails were scooped out and skin carefully laid over some sort of interior structure. This was, in my mind at least, a gruesome art form.

It turns out that in at least one case, modern anglers do not rely on the real fish at all for their mounted trophies. Apparently, a mounted fish trophy can now be made based entirely on the recollection of the one that got away (or was released). Don't get me wrong, in an era of over fishing and increasing sensitivity to the needless destruction of animal life, this makes perfect sense. Why kill the fish when you can have a replica made and mounted?

For our purposes, the question is whether the plastic "fish blank" that is painted to become the "release mount" is classifiable as an article of plastic in Heading 3926 or in Heading 9705 as a collector's piece of zoological interest. This was tackled (see that?) in HQ H188945 (May 9, 2016).

Any guesses?

The importer claimed that the plastic fish mounts are used "in the taxidermy industry" to make replicas of game fish and are akin to taxidermied fish mounts in construction, purpose, and channels of trade.

Customs had previously classified fish mounts in 9705. See HQ 952687 (Apr. 30, 1993). In that case, the mount was used as a base to which actual fish parts were attached. Specifically, the skin, teeth, fins, and tail of a once live fish were attached to the plastic mount. Here, the process completely dispenses with the organic fish parts.

Rather than be zoological specimens, according to Customs, these are mass produced from molds made of fish that have been caught, molded, and released. Further, these are decorative items, not likely to be used in, say, museums for scientific or educational reasons. Consequently, Customs classified the plastic fish release mounts in 3926.40.00 as "Other articles of plastic . . . statuettes and other ornamental articles."

Of course, this also dispenses with potentially troublesome compliance issues such as the Convention on Traffic in Endangered Species and APHIS clearance. It also means I can get a mounting of a purely fictional fish like the shark from Jaws or Dory.

Tuesday, June 14, 2016

Ruling of the Week 2016.13: Kimera Koffee

If you have been around here long enough, you know I am a skeptical guy. I believe the consensus of medical science is in a better position than the guy at the supplement store to give medical advice. I also believe that eating or drinking something with the intention of modifying the way your body works is a medical decision whether you are taking a prescription drug or a "natural" supplement. I suspect the prescription drug has a better chance of actually working as advertised than does the supplement, but both are drugs.

With that in mind, I read HQ H268556 (Dec. 15, 2015), which considers the tariff classification of Kimera Koffee. This particular product is about 95% coffee, but it has been "boosted" with taurine, alpha GPC 50%, L-theanine, and DMAE (Deanol). As  result, the coffee is advertised as enhancing cognitive performance, boosting energy levels, improving focus and concentration, and enhancing athletic performance.

The additives are a class of products known a nootropics, also called "smart drugs." Here is a good overview of the science of nootropics from Yale neurologist Dr. Steven Novella. The article does not address the specific additives in Kimera Koffee, but the conclusion is interesting. Stimulants provide a subjective experience of enhanced performance. That makes me think that the caffeine in the coffee might be the nootropic we all already know and love. Personally, I like my nootropic in the form of a cappuccino from Intelligentsia in Chicago.

I'm not saying that the additives in this product don't work. I don't know that, and I suspect they do provide an additional jolt. But, there are a couple legal issues raised.

First, what about the tariff classification? In the ruling, Customs had to decide whether this is coffee of HTSUS Heading 0901 or preparations of coffee in Heading 2101. According to prior rulings, a preparation of coffee includes coffee with sugar, milk, etc. regardless of changes in the finished products' physical characteristics. But, coffee mixed with natural or artificial flavors has been classified as coffee, rather than as a preparation.

Although the added supplements are not flavorings, Customs believes the analysis is similar. This did not get a lot of analysis, and I think it is legally dubious. But, there it is. Customs classified this product as coffee in subheading 0901.21. As a side note, coffee of 0901.21 is exempt from country of origin marking.

The second question I have is whether this should be regulated as a drug. Assuming it falls into the category of supplements rather than drugs, it should be labeled to say that the statements about performance enhancement have not been evaluated by the FDA and that this coffee is not intended to diagnose, treat, cure, or prevent disease. That is the magic get-out-of-FDA-jail-free card for supplement sellers. Section 201(g) of the Food, Drug & Cosmetics Act defines a drug as, in part, "articles (other than food) intended to affect the structure or any function of the body of man or other animals." By its own advertising, this coffee is designed to affect the function of the human brain. By my reading, that is a drug. Of course, I can also get a cup of coffee with my apple pie, making it food. That is enough to take it out of the scope of the Act. Is that the right analysis though? It seems that by adding those ingredients to coffee for the purpose of affecting brain function, the coffee is being used as a delivery system rather than food. If I put insulin in chocolate pudding, is it no longer regulated as a drug?

Lucky for me, this is the Customs Law Blog and I don't need to know the answer to these questions. If you, on the other hand, are a F&D lawyer, please let me know how this plays out for Kimera Koffee and similar "boosted" products.

Thursday, May 26, 2016

My Point Exactly

For the past couple years, I have been on the record at numerous events and in numerous publications with various ideas for how to make tariff classification litigation more efficient and, therefore, more useful for importers. There are several good ideas floating around about this. Not the least of which is the Court of International Trade's recently announced pilot program for a "small claims" process. Others have done the lion's share of the work on that.

My big idea has been to promote early efforts to resolve the legal questions about how to interpret the Harmonized Tariff Schedule. My thought is that if everyone is reading the tariff the same way, the parties will know what facts matter and whether there is a real dispute. With the fact disputes eliminated or narrowed down, discovery can be focused and the parties can get to the controlling issues quickly. It's even possible that, once the parties know the meaning of the tariff terms, cases will be stipulated or settled.

I got here by analogizing tariff classification disputes to patent infringement cases. In a patent case, the judge interprets the patent claims following what's known as a Markman hearing. You can read all about that here, in the Brooklyn Journal of International Law.

Along comes Chemtall, Inc. v. United States, from the Court of International Trade to help me make my case. Chemtall is a complicated case involving more chemistry than I have seen since high school. The opinion is full of helpful diagrams of chemical structures. The product at issue is acrylamide tertiary butyl sulfonic acid or ATBS, for short. The classification question is whether that product is an amide. Since the structure of the produce is well understood, the only question is the definition of an amide.

According to the Explanatory Notes, an "amide" is a compound with an amide functional group and either hydrogen, alkyl radicals, or aryl radicals.

Plaintiff's position in this case is that "many" sources do not explicitly limit the definition of "amide" to those compounds with these functional groups and, therefore, it is possible to substitute a different structure. But, the Explanatory Notes provide a specific definition, which is going to be pretty persuasive. Further, the only source of support for this theory was the plaintiff's expert. Note that the expert is an expert in chemistry, not in interpreting the law. That is what judges are for.

The Court did not agree to expand the definition and applied the Explanatory Notes. That resulted in a win for Customs and Border Protection.

If the parties knew that definition early in the case, would it have taken three years to resolve the matter? Possibly, I was not involved and do not know what disputes might have been raised and resolved along the way.

Plaintiff had some other arguments about whether the product was derivative and the meaning of the 10-digit statistical suffix. And, I certainly do not pretend to understand the chemistry. The great thing about being a lawyer is that I am confident I could understand it if and when it became necessary. That is not today.

What I find fascinating about this case is that THERE WERE NO FACTS IN DISPUTE. The only issue was how to read the tariff language. Much of the 13-page opinion was a careful explanation of the process of tariff classification, the standard of judicial review, and the nature of the product. The value of the expert testimony was a minimal consideration.

When there are no material facts in dispute, cases get decided on motions for summary judgment. That is how the majority of classification cases are resolved. If that is the case, doesn't it make sense to identify the question of law up front, resolve it, and then decide whether it makes sense to continue to pursue the case? If the case goes forward, the relevant facts should be fairly well known, making discovery more focused and the whole process more efficient.

Something like that is supposed to happen in patent cases through Markman hearings and it makes sense to me to try something like that in the Court of International Trade. People in the trade have started talking about applying Markman in tariff cases, which is a good thing. On the other hand, Markman was a patent case and has not direct relevance here. Consequently, I hereby declare that if and when this process takes hold in customs litigation, it be called a "Friedman hearing."

Ruling of the Week 2016.12: Avalanche Aribag

One of the things I find interesting about my job as that I have the opportunity to learn about all sorts of products that I might not ever see in my real life. One such product is the avalanche airbag. It never occurred to me that such a thing existed, but as soon as I read the words "avalanche" and "airbag" together, the concept made perfect sense. This is the item in question:

It is designed to keep the wearer "afloat" in the event of an avalanche. More information about the product is available here. Basically, it is a backpack that incorporates a sturdy balloon and an electrically powered fan to inflate it. Once inflated, the balloon prevents the wearer from being buried in snow.

In NY N274983, Customs was asked to classify this airbag enhanced backpack. My first thought was, "Oh no, this is going in Heading 4202 as a backpack." To me, that seems to undervalue the safety features. Moreover, none of the exemplars in 4202 have safety features. But, that is a straw man I need not fight, because 4202 was not in play. Rather, the importer suggested classification in Heading 9506.99.60 as sports equipment. Customs disagreed with that and noted that the airbag backpack is neither "requisite" not "essential" to any sporting activity.

Instead, Customs classified it in Heading 6307 as an other made up article of textile.

The thing about this device is that it apparently could be worn by anyone in an avalanche-prone area, whether or not participating in a sport. For example, I can see this being worn by the folks who groom and patrol ski runs, by park rangers, and by scientists doing field work. That makes me wonder whether the manufacturer might be able to modify the design to make it clearly dedicated to a sporting event. Customs did admit that it includes exterior straps designed to carry skis, snowboards, and ice axes. Is that enough to make it a product of 9506? Maybe. A more interesting question might be whether there is a clever design tweak that would make it clear that this is a "sporting" product? I don't know what that might be, but I hope the engineers at Arc'teryx are working on it.

Tariff engineering: It's value-added classification.

Wednesday, May 18, 2016

Ruling of the Week 2016.11: Seriously?

Calling this post a "Ruling of the Week" is a little disingenuous. It has been many weeks since I was able to make a "weekly" post. Nevertheless, this is my effort to get back on that self-imposed horse.

Today, we look at HQ H264891(Apr. 5, 2016), primarily because before I read this ruling I had never heard of "tendu leaf cones." I bet most you had not.

A tendu turns out to be the East Indian Ebony tree, diospyros melanoxylon. Someone decided to import leaves of the tendu tree rolled into a tapered cone and secured with threads and a band. You might reasonably be wondering why anyone would need this product. It turns out that these cones are commonly used as wrappers for bidis, which are an alternative to cigars and can be packed with tobacco or "other smoking mixtures." This image should help illustrate what we are talking about.

Keep in mind that as imported the cones were empty. They were, however, packaged with a plastic tool designed to facilitate filling and packing the cones with whatever smoking material the consumer chooses.

The potential HTSUS headings for this product are 1404, Vegetable products not elsewhere specified or included; 3926, Other articles of plastic; or 4813, Cigarette papers.

Because 1404 is a basket provision, it will only apply if one of the other two more specific headings does not apply. As between 3926 and 4813, it seems clear that cigarette paper is the more specific of the two headings. So, we should start there.

The obvious problem is that a leaf is not, in any ordinary sense of the word, "paper." According to the Explanatory Notes, "Paper consists essentially of the cellulosic fibres of the pulps of Chapter 47 felted together in sheet form." Because of this, Customs has previously ruled that tobacco wrappers made of tobacco leaves are not classified as cigarette papers. That would apply to the unprocessed tendu leaves, and exclude them from Heading 4813.

Customs then determined that the cones and plastic stick constitute a retail set to be classified on the basis of the single product that imparts the essential character. Here, Customs focused on the single item without which the set could not meet its particular need or carry out its specific activity. Customs concluded, reasonably enough, that the tendu leaves impart the essential character.

That, of course, leads to the question of where to classify the leaves. The only remaining option is Heading 1404 as other vegetable products and the applicable rate of duty is free.

So far so good. But, Customs is a law enforcement agency and is responsible for border enforcement for both the Food & Drug Administration and the Alcohol and Tobacco Tax Bureau. One has to wonder whether the importer contemplated that its classification ruling request may end up raising issues of admissibility. Customs specifically warned the importer that it did not rule on the admissibility of the merchandise. It may be subject to additional regulations under the Food, Drug, and Cosmetic Act as amended by the Family Smoking Prevention and Tobacco Control Act. Moreover, the tendu cones may be subject to federal excise taxes. Now that those issues have been raised, the prospective importer should be certain to confirm admissibility and tax status before investing much effort in trying to import these products.

Thursday, May 12, 2016

Final Exam 2016: Identity Crisis Edition

You may recall that last year my final exam for Trade Remedies was an elaborate, cinematic fact pattern involving the DC superhero universe. See here for that. Read the comments, which are really quite good.

This year, I was not able to string together quite as detailed a fact pattern for my Customs Law class. I did, however, ask this question. Tell me what you think is the correct answer. I will be flexible, but you should not need to stretch too much.

I'll be back soon. I promise.


Ralph Dibny is the CEO of Plastico, which imports plastic in various forms from suppliers all over the world into the United States. To find suppliers, Ralph relies on two representatives. Reed Richards is responsible for suppliers in South America. Patrick “Eel” O’Brian is responsible for suppliers in Asia. Neither representative is an employee of Plastico.

When Plastico wants to purchase materials from South America, Dibny contacts Richards who then finds suppliers that can provide the necessary material. Richards facilitates the transaction by locating and approving suppliers to Plastico’s standards, creating Plastico Purchase Orders, reviewing supplier invoices for Plastico, approving payment by Plastico, and arranging transportation. For these services, Richards earns a fee of 5% of the invoice price Plastico pays to the supplier. That amount is not shown on the commercial invoice for the imported product and has not been declared to Customs as part of the dutiable value of the merchandise.

Purchasing from Asia is a different process. Eel O’Brian has relationships with several plastic manufacturers throughout Asia. When a manufacturer in Asia has excess inventory, it contacts O’Brian and asks him to sell it to customers in the U.S. The supplier dictates the lowest acceptable price and usually refuses to take responsibility for the cost of shipping and transportation insurance, which must be paid by the customer, including Plastico. O’Brian will then contact Dibny and offer the merchandise to Plastico. If Plastico wants to purchase the merchandise on O’Brian’s terms, it agrees to purchase it from O’Brian. At that point, Plastico will create a Purchase Order naming O’Brian as the supplier. O’Brian places the order with the supplier, who ships the merchandise directly to Plastico in the United States according to the terms of Plastico’s P.O. with O’Brian. The supplier invoices O’Brian who then sends Plastico an invoice showing O’Brian as the seller and including a markup to add his profit. Plastico may not know the identity of the supplier until it receives the shipment, if even then. O’Brian has similar arrangements with several U.S. customers. He negotiates prices with the U.S. customer to maximize his income. The O’Brian’s markup is included in the commercial invoice used for entry and, therefore, has been declared to Customs as part of the dutiable value of the merchandise.

Plastico is always the importer of record and is not related to Richards, O’Brian, or to any foreign manufacturer of plastics. Transaction value is the applicable basis of appraisal.

Dibny has asked for your legal advice on whether the fee paid to Richards and O’Brian’s markup are legally part of the dutiable value of the merchandise. Dibny also wants to know whether there are adjustments Plastico can make to ensure that the amounts paid to Richards and O’Brian’s markup are not dutiable.