Thursday, July 14, 2005

How Much Care is Reasonable?

The main thing Customs says about avoiding liability as an importer is to "exercise reasonable care." What the heck does that mean?

Customs has put out a lot of information about reasonable care (including this). Generally, reasonable care is equal to the amount of care a reasonably prudent importer in a similar situation would exercise. That, of course, is a bit circular as Joe importer generally can't tell what a reasonable Jane importer would do. To help, Customs has provided a bunch of examples of what constitutes evidence of reasonable care. These examples (usually in the form of questions) include:

  1. Using an expert (including lawyers like me) to assist in compliance activities.
  2. Having a competent individual in the organization to review compliance procedures.
  3. Providing your expert with complete information about the importation before the merchandise applies.

So far, so good. But, sometimes this breaks down. For example, how does an importer exercise reasonable care when making a GSP entry? This is what Customs says:

If you are claiming a conditionally free or special tariff classification/provision for your merchandise (e.g., GSP, HTS Item 9802, NAFTA, etc.), How have you verified that the merchandise qualifies for such status? Have you obtained or developed reliable procedures to obtain any required or necessary documentation to support the claim?

For GSP, there isn't much in the way of required documentation. The "Form A" that used to be required is now extinct. All you need is to make the claim. That counts as a promise that you can prove it if asked. The vast majority of times, the entry will get through Customs just fine. But, what happens in an audit? The auditor will ask what have you done to "verify" the claim. Usually, the answer is that you asked the supplier. But, to Customs, that is not enough.

Let's imagine that scenario.

You: Look, we need to confirm that your product qualifies for GSP.

Supplier: It does.

You: How do you know?

Supplier: Trust me.

You: Not good enough. I need to know that 35% of the value comes from [fill in your favorite beneficiary developing country].

Supplier: I can't tell you my cost of production. You will know my profit.

You: Customs says I need this info.

Supplier: Here is a spreadsheet. Please go away.

You: Can you show me proof of payment at the prices shown on the spreadsheet?

Supplier: We can show you proof of payment at any price you like.

And so it goes in a standoff. You want to make entry and you want to do it right, but there might be no way to be sure enough to satisfy reasonable care. Trusting your supplier without more probably is not enough. So, what do you do?

Well, one approach, is to go visit the supplier (or have an agent do it). Make sure the product is made where it is supposed to come from. Are the right number of machines there with sufficient employees? Ok, so they can make it. Now, ask about the supplier's suppliers. Can you see receiving records? Then ask whether you can see proof of payment for just enough materials to satisfy the 35% requirement. That might be enough.

This is not a magic formula. It is really nothing more than a possible approach. There are plenty of other ways to do it. You need to be creative and you need to work with the supplier. Sitting back and relying on the supplier's word alone, though, is definitely not a good strategy.

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