Sunday, April 24, 2005

Compliance 101

Customs says there are five common errors that vex importers. In reality, it is Customs that is vexed, but that is a technicality.

These errors are:

  • Classification
  • Valuation
  • Quantity
  • Rate of duty
  • Payment of fees

Over the coming months, when the mood strikes me, I’ll occasionally visit each of these issues and give you my take on them. In between, I’ll blather on about whatever I want.

Today, we start with classification.

Tariff classification is fundamental to everything Customs does. It controls the most-favored-nation rate of duty for imports and also the availability of duty reduction programs such as the Generalized System of Preferences, African Growth and Opportunities Act, NAFTA qualification, etc. Classification is also involved in how Customs targets imports for intensive examinations, antidumping compliance, and compliance with other agency requirements. In other words, if you get the classification wrong, you are likely applying the wrong rules on a bunch of other fronts. So getting it right is critical.

One approach many importers take is to hire a licensed customs broker to handle the classification. That is a decent start but can provide a false sense of security. Under the 1994 Customs Modernization Act, consulting with a broker is evidence that the importer has exercised reasonable care in entering merchandise. It is, however, not a magic bullet.

First, the importer always (say that again, always) has the ultimate responsibility for the accuracy of the entry. When Customs comes knocking with a penalty notice, you won’t get too far pointing at the broker and saying, “He did it.” This also applies to those importers who require their foreign suppliers to give them the classification.

Second, one common complaint brokers have is that the importer does not provide enough information for a correct classification. It is not enough to say that what is being imported is a “motor.” The classifier has to look at the tariff schedule and ascertain that she needs to know whether the motor is AC or DC, single or multi-phase, brush or brushless, and the power output in watts. An invoice description that says “vacuum cleaner motors,” simply won’t do. So, the brokers are sometimes left to guess. Whether that is an appropriate strategy is a whole different issue.

So what is the right way to do it?

First, get yourself a current copy of the Harmonized Tariff Schedule of the United States. You can download it for free or order it from the Government Printing Office. Personally, I like to have it on paper so I can flip back and forth.

Next, read the General Rules of Interpretation at the beginning and then read them again. Repeat as necessary until you fully absorb those rules. The GRI are the rules of the classification game. To a customs lawyer, they are the constitution of what we do.

The next step is to know as much as possible about the product you are classifying. If you don’t know the specs, you are going to have to talk to someone who does. That might mean the seller, the buyer, an engineer, or anybody who really knows the product.

Now, open the Tariff Schedule and find as many possible classifications as possible based on name and description. So, for example, that vacuum cleaner motor might be described as a motor or a vacuum cleaner part. Don’t worry about getting too many possibilities. The more you have, the safer you are. If you want to toss in articles of iron and steel or other machines not described elsewhere, that is fine.

Now, you go back to the GRI to sort out the single right answer from all the wrong possibilities. Apply the GRI in order. That means you first have to look at the language of the headings in the tariff schedule and the relevant section and chapter notes. Don’t over look this. The section and chapter notes will often specifically list things that are not included in that part of the HTS. That will generally reduce your list of possibilities.

Work your way through the other GRI in order until you get to the solution. Think of it as a puzzle, because in a lot of ways, it is.

Often, the next relevant question is whether one or the other possibility more specifically describes the product. The one that covers fewer articles will almost always be the more specific. For example, “parts of vacuum cleaners” covers a range of parts from wheels to electrical cord. “Motors,” on the other hand, covers motors and nothing else. Thus, “motors” is more specific. There are exceptions, so you need to be careful. For example, a provision based on the use of the product is considered to be more specific than one giving its specific name. Go figure.

The GRI will also tell you what to do when you have mixtures of materials or components, unassembled goods, incomplete goods, and two classifications that appear to be equally specific. You need to understand and apply the rules.

Of course, sometimes things are not clear even when you apply the rules. And sometimes, you just don’t like the result. When that happens (or just to verify your work), there are places to turn. First, there are the very helpful Explanatory Notes to the Harmonized System. This is basically a commentary on the HTS from the World Customs Organization. It provides examples and some additional analysis. In addition, CBP has a searchable database of its advice to importers. This will often tell you how Customs classifies the merchandise.

Of course, there are plenty of competent lawyers with experience in these matters available to help as well. In many cases, there are relevant decisions of the U.S. Court of International Trade or the U.S. Court of Appeals for the Federal Circuit. These decisions are generally binding on CBP (although CBP does have some flexibility on that front). More important, they tell the importer and CBP how the courts would analyze a question if brought before it.

Classification is important. Don’t take it for granted and don’t assume all your goods are classified in a certain provision. Most machine parts are not classified as parts of something but under headings specific to their nature. This applies to all sorts of things like gaskets, pumps, valves, bearings, transmission shafts, switches, and just about any other piece of hardware that has a name.

Take my advice (which is not legal advice in this context because I don’t know who you are or what you are doing): Be careful with your classifications.

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