Friday, July 22, 2016

The Revenge of GRK Screws

Abraham Lincoln is reported to have asked, "How many legs does a dog have if you call his tail a leg?" He answered his own question. "Four. Saying that a tail is a leg doesn't make it a leg." This is an important legal principle in customs law. How you describe a product at the time of entry does not control the classification. You can't import pickles, call them baseballs and expect Customs to agree. My own corollary to Lincoln's question is this: "What do you call a bowling trophy if you use it as a hammer?" The answer is, a broken bowling trophy.

This all matters because the correct name, (as opposed to a fraudulent name) of an item is often a potent indicator of its tariff classification. Many tariff provisions in the Harmonized Tariff Schedule of the United States are so-called eo nomine provisions. Eo nomine is legal Latin for "Under that name; by that appellation." It comes from the expression "Perinde ac si eo nomine tibi tradita fuisset,"meaning "just as if it had been delivered to you by that name." At least that is what my trusty Black's Law Dictionary says. If the item is properly described by the name provided in the tariff, then it is classified there, unless some part of the legal text excludes it.

Other tariff items depend on the use of the item for classification. For example, HTSUS Heading 8704 covers "motor vehicles for the transport of goods." That means that vehicles will only be classified there if they are used to transport goods, as opposed to people. Note that this is not an eo nomine headings; 8704 does not say "Trucks." Instead, it covers any motor vehicle for the transport of goods whether it is a truck, van, lorry, dumper, or tanker. As long as the item is both a motor vehicle and for the transport of goods, it goes in 8704.

The Harmonized Tariff Schedule of the United States recognizes this distinction between eo nomine and use provisions. According to Additional U.S. Rule of Interpretation 1(a),
In the absence of special language or context which otherwise requires--
(a) a tariff classification controlled by use (other than actual use) is to be determined in accordance with the use in the United States at, or immediately prior to, the date of importation, of goods of that class or kind to which the imported goods belong, and the controlling use is the principal use;
When a tariff classification is controlled by use, we look to evidence of principal use. When it is not, we apply the legal text and notes to classify the item according to its description (modified as necessary by the legal notes to the tariff).

The question is, can we, when classifying something in an eo nomine provision, treat the use of the item as evidence of it being properly described? In other words, if we are classifying knives, should Customs and Border Protection and the Court of International Trade consider evidence that the item is used for cutting? That may seem like a ridiculous question. The non-trade nerds of the world would say, "Of course. If no one ever uses a cucumber to cut, it should not be treated as if it were a knife." But, the trade nerds have long believed the answer to be different. We believed that classifying an item in an eo nomine term like "knife" depended only on the physical characteristics of the thing and not on its use, principal or otherwise. We would ask: Can it be held in the hand? Is there a blade? Is the blade sharp? If so, it is a knife, even if it is is such a poor example of a knife that it might only ever be used as a doorstop.

The Federal Circuit decision in GRK Canada changed that. You can read about the prior litigation in my three previous posts on this issue. Start here. Now, the law is that when the eo nomine description of an item suggests a particular use, the Court of International Trade, and presumably Customs, may consider how an item is used to help define the meaning of a tariff term (a question of statutory interpretation). They may also consider evidence of use when classifying the the article (a question of fact). The CIT had initially refused to take use into consideration when classifying items described as "wood screws." The Federal Circuit reversed and remanded. The CIT has issued its revised decision.

The CIT decision begins with a detailed analysis of what the Federal Circuit seems to require in the post-GRK environment. There are open questions. The one I previously raised, which is raised again, is whether an eo nomine classification that suggests a specific use is, in fact, "controlled by" use such that Additional U.S. Rule of Interpretation 1(a) is applicable. If that is the case, then many nominally eo nomine headings have just been converted to use provisions. Nothing in the Federal Circuit decision answered that question.

Next, the Court spent considerable time defining "wood screws" and "self-tapping screws" based on the tariff language, Explanatory Notes, and normally lexicographical sources. According to the Court, neither term is "controlled by use," meaning that AUSRI 1(a) is not implicated and the question is not the principal use of these screws. Use is, however, "implicated."

The Court concluded that a "wood screw" is a screw intended to be used and able to produce its own thread in wood. A "self-tapping screw" is a screw made of hardened material, intended to be used and able to cut its own thread through non-fibrous material." Neither definition is "controlled by use." Further, nothing in the Explanatory Notes indicates that classification turns on the manner of use. On the contrary, the texts indicate that the classification of screws is controlled by their physical characteristics such as the nature of the point, thread, and whether they are made of hardened materials. There is, however, a suggestion that wood screws will be used in wood. Similarly, "self-tapping" screws will likely be used "for tapping." There is no authority for the proposition that self-tapping screws will only be used in non-fibrous materials.

Having taken all of that into consideration, the Court differentiated between wood screws and self-tapping screws on the basis of whether they are made of hardened steel meeting the minimum torsional strength requirements sufficient to cut their own mating threads in non-fibrous materials. It is apparently undisputed that this describes the screws at issue. It is also undisputed that the screws are intended for fastening non-fibrous materials to other materials. That the screws can be used in wood does not preclude their classification as self-tapping screws. Consequently, the screws remain classified in 7318.14.10 as self-tapping screws, in exactly the same place the plaintiff first asserted in 2009.

So what does this mean for compliance pros? Good question.

At a minimum, it means that when classifying items in an eo nomine classification that suggests a use, we now need to ask whether the description is "controlled by use." If so, you are dealing with a use provision and must apply AUSRI 1(a) to classify the article based on principal use. It is not clear how this determination will be made, though the CIT opinion in this case provides a thorough example to follow.

If the classification is not controlled by use but the eo nomine description suggests a use, compliance professionals should confirm that there is evidence of real and intended use consistent with that name. For example, if you are classifying "locks," be sure that the marketing and design history indicates an intention to use the item to secure an area or object (i.e., as a lock). Next, ask whether there is evidence of contrary use. It will be an unusual case in which the evidence of use is inconsistent with the intended use. But, evidence of use consistent with the intended use supports your classification. All of that might go into a protest.

This is complicated, but it might be more theoretical than practical. The result in this case did not change as a result of the analysis of use. It may be that the original reversal and remand back to the CIT was more about process than about substance. Unfortunately, we won't know the overall impact until more cases make their way through the CIT and Federal Circuit.

Thursday, July 21, 2016

No Refund of Excessive CVD

I have previously pointed out the few cases that I see as ending in an injustice, even where the result is legally correct. These cases always lead me to ask whether anyone in a position of power in the United States Government asked whether the ultimately successful litigation position was actually the right thing to do. Sometimes, it is not. Capella Sales & Services Ltd. v. United States, is one of those cases.

The background you need to understand this case is that there has been a long-running dispute over the proper calculation of the countervailing duty deposit rate imposed on aluminum extrusions from China. In May of 2011, Commerce initially calculated the all-others rate applicable to companies in China that were not assigned their own or a separate rate as 374.15%. Following some litigation, Commerce reduced the deposit rate to 137.65%. Finally, after additional litigation, the deposit rate was reduced to 7.37% in October of 2015.

At the time of entry, importers of aluminum extrusions subject to the order are required to deposit estimated countervailing duties based on the prevailing rate stated in Commerce Department instructions to Customs and Border Protection. Importers who are unsatisfied with the applicable rate are permitted to request administrative review of the order and can have the liquidation of their entries suspended pending a final determination of the proper rate of the CVD.

Capella, the plaintiff in this case, did not do that. While all that trade litigation was happening, Capella made four entries of merchandise. At the time of entry, Capella was not aware that the merchandise it was imported was subject to the CVD order. As a result, it did not deposit any countervailing duties. It also did not participate in the case, despite being notified by Customs that its merchandise was subject to the order. As a result, Customs liquidated the entries with 374.15% CVD, which was the then-current rate in the Commerce Department instructions. After the rate was determined to be 137.65%, Capella filed a case in the Court of International Trade seeking to recover the CVD it deposited in excess of the amount ultimately found to be correct.

Let's recap. Capella made some mistakes. It failed to recognize that it was importing merchandise covered by a countervailing duty order. It also failed to participate in the investigation or take any steps to prevent the liquidation of its entries. But, the United States Government also made some mistakes. Whatever it did wrong, it collected roughly 367% of excess CVD from Capella and other companies.

The question in this case is whether Capella has a means of recovering the excess CVD it paid. Sadly, the answer is no.

The Court of International Trade first had to resolve the question of whether it had jurisdiction to review the case. Here, Capella was not challenging the substance of the deposit calculation. In fact, it was happy with the final calculation. Capella's complaint was that Commerce failed to modify its instructions to Customs to retroactively modify the deposit rate. A challenge to Commerce's instructions falls within the Court's grant of subject matter jurisdiction in 28 USC 1581(i). So, jurisdiction is not the problem.

However, the government also moved to dismiss the case under rule 12(b)(6) on the grounds that Capella failed to plead a cause of action. Capella's argument was that by keeping money to which it was not entitled, the government was acting in a manner that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. This makes sense. The Court already determined that the higher rate was not in accordance with law. What right should the government have to keep that money?

Unfortunately, there are procedural steps that need to be followed to preserve the right to recovery. As mentioned above, Capella did not participate in the investigation. It did not seek review of the deposit rate applicable to its products. Most important, it did not have the liquidation of its entries suspended or judicially enjoined. According to the statute, unless liquidation is suspended or enjoined, the entries will be liquidated in accordance with the Commerce Department instructions. If liquidation is enjoined pending litigation, the entries will liquidate in accordance with the final court decision.

Because Capella did not prevent the liquidation of its entries, Commerce acted properly when it liquidated the entries at the higher rate.

That, is a tough break for Capella, even if the result is not wrong. There is a principle of administrative law that requires parties to exhaust the administrative process to gain access to the Court. This is useful in most cases because it allows the agency to fully and completely review the matter and it creates a complete record for judicial review. There is also the rule that a statute means what it says. Both of these rules of law work against Capella.

But, most importers in this same situation and even those who made deposits at the time of entry did not envision such a dramatic change in the deposit rate. Participating the case is expensive and time consuming. Not enough importers will do it. The lesson of this case may be that importers should always participate in the reviews and always seek to have liquidations suspended as the only way to preserve the right to a refund should someone succeed in securing a lower deposit rate. That hardly seems efficient.

As it is, many importers have paid far too much and the domestic industry has received market protections far in excess of what the correct analysis would have mandated. No, the right, just, and efficient thing is for Commerce to amend its instructions to refund excess deposits paid. Since that will never happen, Congress should pass a bill refunding the excess duties paid by importers. Unfortunately, there may not be anyone in Congress who will stand up for the importers of aluminum extrusions.

Wednesday, July 06, 2016

Ruling of the Week 2016.16: July 4th Edition

I hope my readers in America, which is 90% of the readership, had a happy Independence Day Holiday. As is essentially mandatory, I watched fireworks and contemplated the range of pyrotechnical displays available. If we create a spectrum from the impressive aerial burst you might see at Disneyworld to tossing a lit match in the air, there are many options in between. Among the least entertaining versions of fire-related entertainment products is the so-called "black snake." I remember lighting these things off as a kid. They smoke a lot, create a messy and not particularly impressive ash trail, and leave enough residue on the sidewalk that an underage and unauthorized user is likely to get in trouble.

If you are not familiar with what I am on about, watch this:

As I am likely to do, I also wondered about the tariff classification and admissibility of these things.

In NY N114744 (July 23, 2010), Customs was asked for the classification of TNT CP1051 assorted color snakes of fireworks class 1.4G. The importer was asserting that the correct classification is as a festive article in HTSUS item 9505.90.20. I suggest you watch the video again. It is Exhibit 1 in proving that these are hardly "festive" even if intended as such, but that is my judgment, not a legal determination.

The alternative classification was 3604.10.90, which provides for other fireworks. Without much analysis, CBP jumped to General Rule of Interpretation 3(a) and held that Heading 3604 is the more specific of the two potentially applicable headings. The issue was whether the snakes were more properly treated as pyrotechnic toys or as fireworks in Class 1.4G. Inexplicably, to resolve this question about the 9th- and 10th-digit statistical suffix, Customs referenced the WCO Explanatory Notes. Apparently, a pyrotechnic toy is more likely to be handheld, while these items are lit on the ground and watched from a distance.

On top of that, the Consumer Products Safety Commission defines snakes as Class 1.4G as did the importer's documentation to the Department of Transportation.

As a result, the snakes were classified in 3604.10.9010 as other fireworks of Class 1.4G.

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.