Friday, September 29, 2006
U.S. law requires that all articles of foreign origin imported into the United States be marked with their country of origin. The marking must be permanent and conspicuous. For certain specific articles, Customs has specific marking requirements. This applies, for example, to watches and jewelry in the style of Native American wares. Also, Customs likes to see die cast or etched markings on pipes and the like. Bottom line is that it has to be permanent enough to reach the end user.
Deciding on the correct country of origin is tricky. We already discussed NAFTA marking, which is wholly different, so that is not what I am talking about here. The country of origin of goods is generally the country in which the goods originate or last underwent a substantial transformation. So a coconut grown and harvested in Thailand is of Thai origin. No problem. Coconut milk canned in Malaysia from Thai coconuts is a different issue. Here, the question is whether the coconuts from Thailand undergo a substantial transformation in Malaysia A substantial transformation is a change in name, character, or use. Given that the name of the product has changed from coconut to coconut milk, that it is no longer a raw agricultural product but has become a canned commodity, and that it can't be used to to make a bikini top, I conclude it is a product of Malaysia and should be so marked.
The coconut milk will need to be marked in a conspicuous place. It could be printed on the label so long as it is easily visible and permanent. If lots of cans of coconut milk are packaged together in crates for shipping, the outermost container must also be labeled with "Malaysia."
There are lots of exceptions and refinements to the marking requirements. For example, if the importer is the last person in the U.S. to get the product in its imported form, the goods may be exempt from marking. Another example is that replacement parts made in the same country as the machine they go in need not be marked. One rule that trips people up is that if there is a U.S. address (or other conflicting marking), then the origin label must be close to that address, in type that is at least as large, and include the phrase "Product of . . ." or "Made in . . ." on the origin marking.
Some products just don't need to be marked. These are on the so-called J-list. A lot of these things are just too small or there is some other reason why marking does not make sense.
Lastly, none of this relates to the use of the phrase "Made in U.S.A." For obvious reasons, that is not generally a Customs issue. It belongs to the Federal Trade Commission. Bottom line on that: if all or substantially all of your labor and materials is not from the U.S., you don't qualify. Think about that the next time you wander through a department or hardware store. How much faith do you have in most of those "Made in U.S.A." claims?
Wednesday, September 27, 2006
But this was different.
My new roommate was big.
Really big. I looked into its eight eyes and I saw no fear.
To get this into perspective, we are not talking Clint Eastwood's Tarantula. But, we could easily be talking about an extra from William Shatner's Kingdom of the Spiders. This spider claimed Peter Parker as a dependent on its last tax return.
The spider sat in a plastic bin full of toys, mostly of the Play-Doh genre. I could not reach in with a shoe, newspaper, or other suitable blunt instrument as the spider was in a crevice between some containers.
So, I did exactly what a third world dictator would do. I gassed the S.O.B. More specifically, I sprayed it with a product cleverly called Spider Kill (note to producer: you must have the worst corporate web site in history). I have used this stuff, which quite literally smells like a used diaper, on my boat to control spiders. If left unchecked, tend to grow fat and ugly all over the place.
On the boat, I have grown quite accustomed to picking the critters up and tossing them overboard. Often, they are immediately gulped down by a bluegill or carp. But, I was not going near this thing. First, I am fairly certain it could bite. Second, I am also certain that it could jump up to my face, insert some sort of tube down my throat, and lay an egg that would eventually hatch into something that would burst from my chest, most likely while in court. While I would like to be like Lance, that means Armstrong not Hendriksen.
Having stunned the beast with chemical weapons, I took the entire bin outside and dumped it out. This allowed me to get a good look at it. Of course, the thing, like any good Alien, would not die. Rather, it started to scamper away. At which point, it was impacted by the sole of my shoe. May it rest in peace. I have since decontaminated the toys and the bin.
After extensive Google research, I have decided that the spider was a dotted wolf (Hogna punctulata) which "hunts by night and hides by day." Nice to know.
Friday, September 22, 2006
We had lots of good questions. Rather than find a search engine phrase for my Friday question, I'll just give you some from the meeting this morning.
Why do I have to worry about privilege for an internal review?
Because you may not want to turn the results over to Customs when they come knocking. That's it.
Customs often starts an audit by asking about prior reviews and to see the results. If you do a review as part of normal management activity (which you should), the results are non-privileged. If the review is done under the direction of counsel for the purposes of securing legal advice, the results can be privileged. Note that the underlying business information is not privileged. What is protected is the direction from counsel on what to look at, the final report that conveys the results to the lawyer, and the lawyer's advice on what to do about it. If you think there is a problem, it pays to make an appointment with your in-house legal staff and see if they think they want to initiate the review. The prospects of getting some of it protected by privilege may be appealing.
Can I still do a disclosure after an audit starts?
Yes. You can make a disclosure up to the time Customs records that it has received information indicating that a violation has occurred. That is the official initiation of an investigation. You can make a disclosure after that, provided you can prove you had no notice of the investigation. It is often hard to prove a negative, but it can be done. To make matters worse, certain things create a presumption that you knew about an investigation. Those things include: inquiries from a Special Agent, a pre-penalty notice, or a seizure of merchandise.
An audit, including a Focused Assessment, is not an investigation and does not give you reason to believe an investigation has been commenced. So, if you happen to be sitting with an auditor going over some data and watch the auditor get all excited about some terrible error, go ahead and get that disclosure in. You still have the right to do it.
Can a disclosure ever make things worse?
Yes, in at least two ways. First, if your disclosure is incomplete or in some way invalid, it will not protect you. Instead, it will serve as a tip to Customs that something is wrong and they should start an investigation. Word to the wise: don't make a disclosure casually. It needs to be done right.
Also, if you make a disclosure of error X covering the past five years and then continue making error X for the next five years, you are looking at least at a gross negligence penalty. In the worst case, it could be fraud because once you made the disclosure, you knew it was wrong and continued to knowingly provide false information. That is bad.
On that happy note, Happy New Year to those of you on that calendar.
Tuesday, September 19, 2006
A guy who deserted from the Marine Corp. 40 years ago was arrested driving in from Mexico through the port of San Ysidro. There has been a warrant for his arrest since 1966. Here is the story. If CBP has good enough records to catch this guy, how come they are constantly requesting that importers "reconstruct" entry documents for them?
This one is better. It has to be, because it includes the sentence "I've got monkeys in my pants." Here is that story. Apparently, a guy and his buddy were coming into the U.S. through LAX with a trove of banned wildlife and plants. "Buddy" was being searched by Customs when a tropical bird flew out of his backpack. It was at that point that he made the above-referenced confession to monkey smuggling. Seeing this, the other guy bolted from the line along with his own concealed cargo of Asian leopard cubs.
From there, the story gets murky. It is clear that the guy made it out of the customs area and apparently out of the airport. We know that because these events all happened in 2002 and the guy was just arrested. But, I can't say whether he took the leopards with him, or dumped them in the terminal. Also, there is no explanation as to why it took four years to arrest the guy, especially when his accomplice was in custody. And, how exactly does someone on the run get past Customs and out of the very controlled environment of an international airport? Keep in mind that this is still relatively shortly after 9/11. It boggles the mind. But, that is less inexplicable than stuffing multiple monkeys in your pants.
Which brings me to something I noticed this morning. I may be the last customs professional to have noticed this. Generally, when I visit www.cbp.gov, I go to two locations. Most often, I click on "Legal" to get to something . . . well, legal. Other times, I go right to CROSS and look for rulings. This morning, my Newsgator aggregator told me there was something new on the CBP site. When I clicked, I was in the Customs Answers service. This is a nice knowledge base search tool similar to what technology companies use to provide online help. I have not reviewed much of the information here, but it seems like good general information particularly for the non-commercial importer and travelers.
As long as we are talking about online tools, I recently saw that the faculty at California Western School of Law is producing short legal analysis podcasts. They are called "Law in 10" and promise to be 10 minutes or less. There are not many posted yet, but it seems like a good idea for a law school.
Friday, September 15, 2006
The first thing to understand is that the regular NAFTA rules of origin are designed only to tell you whether something is originating in North America. They do not tell you what country in North America. Normally, that would not be a big deal. Once you know it is originating, you could just apply the normal substantial transformation rules to figure out how to mark it. But, this is not normally. First, because Canada had a head start on duty reduction under the U.S. Canada Free Trade Agreement, the rates for Canada and Mexico were not always the same. Now, they are in all but a few sensitive products from Mexico. Second, there is a general understanding that Mexico and Canada did not like the substantial transformation rule because it is somewhat subjective. They wanted a more objective and, therefore, predictable test. And that is how we ended up with the NAFTA marking rules in 19 CFR Part 102 and, in particular, the NAFTA preference override in 19 CFR 102.19.
The NAFTA marking rules are applicable to all "goods of a NAFTA country." You know if something is a good of a NAFTA country by applying the same rules. Very circular. It is safe to assume that cuckoo clocks from Switzerland are not goods of a NAFTA country but if there is any content from or production in Mexico or Canada, you should run through the NAFTA marking rules to be sure.
Sometimes, stange things happen. You can run through the NAFTA rules and end up with more than one country as the country of origin. When that happens, and if the goods are NAFTA originating, then the country of origin is the single NAFTA country in which the goods last underwent more than minor processing. This is just a tie breaker provision.
The second thing that happens is that you might end up with the U.S. as the country of origin. That causes problems, although it should not. You might think that if you are importing U.S. goods from Canada that you could make a NAFTA claim. The problem is that you can't. There is no NAFTA rate for U.S. goods. You need to treat it as U.S. goods returned or make entry at the MFN rate. That is, of course, silly. There should be a "US" NAFTA code just like there is a CA and MX NAFTA code. That would allow for some flexibility at the border and permit uniform documentation for companies that move stuff back and forth a lot.
But, the way it works is this: if the country of origin turns out to be U.S., then the second part of the NAFTA preference override applies. Under that rule, the goods are treated as if they originate in the last NAFTA country in which they were advanced in value or improved in condition. But, this treatment is limited to figuring out duty. So, if you paint some U.S. origin rocking chairs in Canada, they keep their U.S. origin for marking purposes. For duty purposes, they are treated as if they come from Canada. This lets you make a NAFTA claim.
Make sense? No, it doesn't. Again, there should be a "US" NAFTA rate, but I don't write the rules.
There is a more lawyerly discussion of this on my firm's web site here.
Today, I was unlocking the door to the office while listening to music. OK, it happen to be Neil Diamond singing Cracklin' Rosie. Leave me alone. My eclectic (or is it eccentric) taste in music is not the point. I could not hear anything outside my head. At one point, the background singers chime in. I swear the audio was so good that I was startled and jumped a bit because I thought three women had crept up behind me to sing harmony.
Thursday, September 14, 2006
Just to drive the point home a bit, here is a press release from Customs crowing about its enforcement of textile-related enforcement. This is a big deal area for CBP because it represents a significant portion of the total duties owed and U.S. textile producers are a significant and vocal presence on Capitol Hill (as are the retailers and apparel importers with diametrically opposed interests).
And, to further prove the point, Customs is announcing the creation of an Office of Trade to consolidate trade-related operations in a single office. The new office, to come into being October 15, will include functions currently held by Field Operations, Strategic Trade, and Regulations and Rulings.
Maybe Customs is thinking of tightening a noose of its own.
Wednesday, September 13, 2006
Yesterday and today (registration required), The New York Times ran articles that imply through attributed and unattributed sources that EPO doping was a fact of life in the 1999 U.S. Postal Service cycling team that brought Lance Armstrong to the first of his Tour de France wins. The clear implication of these articles is that doping was and likely is part of the culture of professional cycling. That means the scandal is circling Lance Armstrong where, we must keep in mind, it may never land. Meanwhile, the Floyd Landis defense continues with new attacks on the reliability of the testing procedures.
This comes right after I had the pleasure of hearing a talk by a Sports Illustrated reporter on steroid use in baseball. The initial reaction to all this is that doping of any kind is cheating. But, a case can be made that steroid use is not too different from good equipment and nutrition, both of which provide a competitive edge. So does coaching; and really good coaches are only available to elite athletes. Maybe that is not fair to everyone else. Maybe the medically supervised use of performance enhancing drugs should be treated just like better equipment and training--just another way of pushing to athletic extremes. The counter argument is that performance enhancing drugs send a particularly bad message to kids who might feel the desire or pressure to use them. Kid, who are unlikely to have quality professional medical supervision, might do lots of damage to themselves. This is a fairly compelling argument.
But, and maybe this is because I am a lawyer, isn't the best argument simply that the rules are designed to promote fair competition. If big league baseball said all players must wear ankle weights, then anyone not using ankle weights would be a cheater. By not following the rules, the doped athletes are cheating. Cheaters who win lose their titles. End of story.
Lastly, and completely unrelated, why did people feel compelled to out the professionals behind the LonelyGirl15 phenomenon? You only needed to watch a few episodes to know that Bree was not making these well-produced videos without professional help.
Sunday, September 10, 2006
I promised I would comment on them. I lied. I am only going to comment on one issue from 05-1584. It has to do with declaring post-entry price adjustments. Customs tried to hit Ford with a penalty for failing to declare at the time of entry that its values reflected "provisional pricing." That is, at the time of entry, Ford allegedly knew that the price was not final and failed to alert Customs to that fact.
The Court of International Trade had previously ruled in 1997 that 19 USC § 1484 requires importers to disclose contract terms that might impact the correct duty calculation. But, the Court went on, no penalty could be assessed because Customs had not provided consistent guidance on this issue and, as a result, importers had no notice of the requirement to report. This comes from United States v. Hitachi Am. Ltd., 964 F. Supp. 344, 387 (CIT 1997).
Taking up the issue--the CAFC says for the first time--the Federal Circuit held that § 1484 does impose on importers the obligation to disclose variable pricing agreements to Customs as part of "such other information as is necessary to enable [CBP] to properly assess duties . . . ." But, the Court noted the lack of any regulations instructing importers exactly how to report this information. Customs apparently presented no evidence that it has required this type of information to be reported. Thus, due process under the Fifth Amendment precludes imposing a panalty on Ford for violating this "requirement." It is not clear what portion of the $17 million penalty relates to this part of the case, but it is a nice win for Ford (OK, and its lawyers too). It is also not clear how an importer excercises reasonable care knowing there is a statutory requirement to report something and possibly no means of doing so.
There are now lots of ways this issue can be handled, for example, ACS Reconciliation lets importers flag entries when the value is not finally known at the time of entry and complete the entry process 21 months later. For unliquidated entries, a Supplemental Information Letter might do the trick.
The real question for importers is whether the price change is reportable. Transaction value is the the total price paid or payable for the merchandise when sold for export to the United States. So, if at the time of the sale, the importer knows the price is not fixed, there is an argument that the importer should report that fact. But, what if the deal looks like it is firm and the price changes only after the sale because of some unforeseen? Well, there seems to be a solid argument that the price at the time of sale for export reflected a legitimate value for the goods and, therefore, no change is required to the value for duty. Who says? Well Customs does. See HQ 54462 (Mar. 11, 1992).
I have written about this for the Chicago Bar magazine, The Record. I am not embarrassed by it.
But, apparently, there are people who both love it more and are more talented than me. One of them set his emotions to music. Enjoy it here. Or, not. You may find it somewhat disturbing.
Wednesday, September 06, 2006
The first of the recent Ford cases does not come from the Court of International Trade. Rather it is from the U.S. District Court in Michigan. The case comes out of an action for declaratory judgment Ford filed ahead of Customs suing it in El Paso for recordkeeping violations relating to NAFTA entries. The plaintiff in a declaratory judgment case essentially asks the court to declare its rights relative to the defendant. When allowed, declaratory judgment often takes the wind out of a potential suit and result in settlement.
Ford assumes it is going to get sued for failing to produce backup documents supporting NAFTA certificates of origin for goods from a related party in Mexico. It assumes this based on the fact that it has received a mitigated recordkeeping penalty demand for $21,642,481, which it has not paid. Quite reasonably, Ford insists that it has no obligation to keep or produce documents that the supplier is required to produce in the course of a properly conducted NAFTA verification. Rather, according to Ford and everyone but the U.S. Bureau of Customs and Border Protection, importers are entitled to rely on a facially valid NAFTA C.O. and required to maintain it with its entry records for five years.
Not necessarily wanting to wait to become a defendant, it sued for a declaratory judgment in Michigan. Customs moved to dismiss the case on a number of grounds. A couple of the arguments are worth mention.
1. Does NAFTA Bare the Complaint?
The NAFTA has language in it designed to prevent anyone from going to any court claiming the U.S. is in violation of the text of the agreement. Here, the U.S. argued that the declaratory judgment act is a challenge to U.S. actions under the NAFTA and, therefore, barred. The court disagreed saying, basically, that the case is about the implementing regulations and the recordkeeping statute, not the NAFTA. So, the case is not barred.
2. Is Declaratory Judgment Proper?
Declaratory judgment is somewhat discretionary. The court does not have to entertain the case if the court thinks the action is best resolved in the pending action by Customs against Ford. On that front, the court looked at a number of factors.
A. Declaratory judgment will not lead to settlement. The court held that even if it declared that Customs could not assess a penalty as proposed, it could assess a penalty under the normal 1509 procedures. Frankly, I found this confusing and hope someone can explain it. It appeared that Customs was trying to apply the recordkeeping penalty process, so saying it could use that as an alternative left me scratching my head. Was the penalty issued under sec. 1592 for unsupported NAFTA claims?
B. Declaratory judgment will not clarify the law. If the court refuses to grant the declaratory judgment, what happens? Ford has to defend the penalty case. And, in the course of doing so, it gets to raise the same arguments as defenses to the penalty. So, declaratory judgment does not provide any additional clarity over waiting for the affirmative case to be decided. Plus, Ford faces no additional harm in waiting to defend the action in Texas.
C. Is this forum shopping? If the only reason the declaratory action was filed in Michigan is to gain "home court advantage," the court will not play along. Ford apparently did not have a particularly good explanation for why Michigan is the better location for the decision. The port of entry was El Paso and the investigation has been conducted there. Hence, the court found El Paso to be an appropriate forum and said this was an important factor in the final decision.
And that final decision was to dismiss the case in Michigan. That means the merits will be heard in El Paso and we are all going to have to wait for that decision. But, let's think ahead a bit.
Customs says Ford needs to produce backup records, including bills of material, for NAFTA imports from Mexico despite having produced NAFTA certificates. Let's ignore for the moment the fact that the NAFTA certificates were produced in response to an administrative summons and after the date of the claim. Let's also ignore the fact that we are talking about a related supplier, so Ford does have some say with respect to the records. Let's focus on the basic question: Who has to produce the backup documents?
Customs appears to be thinking that an importer exercising reasonable care would make an independent analysis of the C.O. to determine whether it is correct and valid. Failure to do so, would, therefore, violate sec. 1592 if the entry documents made based on the C.O. were materially false or had material omissions.
That's all well and good, but how does that fit with the regulations? The regulations provide for verifications. Barring a failed verification, the NAFTA claim is presumed to be valid. Verifications are focused entirely on the supplier or exporter who provided the certificate. There are four methods for conducting a verification:
- A letter requesting information from the Mexican or Canadian producer or exporter.
- A written questionnaire to the exporter or producer in Canada or Mexico.
- Visits to the producer or exporter in Canada or Mexico.
- Any other method which results in information from a Canadian or Mexican exporter or producer, including a Canadian or Mexican producer of a material, that is relevant to the origin determination.
Notice a theme? The information comes from the producer or exporter that completed the C.O.; not from the importer. Want more proof? Read the darn C.O., which says, in Field 11:
THE INFORMATION ON THIS DOCUMENT IS TRUE AND ACCURATE AND I ASSUME THE RESPONSIBILITY FOR PROVING SUCH REPRESENTATIONS. I UNDERSTAND THAT I AM LIABLE FOR ANY FALSE STATEMENTS OR MATERIAL OMISSIONS MADE ON OR IN CONNECTION WITH THIS DOCUMENT.
I AGREE TO MAINTAIN AND PRESENT UPON REQUEST, DOCUMENTATION NECESSARY TO SUPPORT THIS CERTIFICATE, AND TO INFORM, IN WRITING, ALL PERSONS TO WHOM THE CERTIFICATE WAS GIVEN OF ANY CHANGES THAT COULD AFFECT THE ACCURACY OR VALIDITY OF THIS CERTIFICATE.
The "I" in those two sentences is the producer or exporter, not the importer. Have we all been lulled into trusting these documents? Maybe. The Court in Texas will tell us. It is possible to stretch option 4 to include strong arming the U.S. importer into getting documents from the supplier.
It is worth noting that the newer free trade agreements like Australia and Chile flip this around and center the verification process on the importer. But, that is because the language of the agreements and the regulations is different. That should tell the Texas court something about what the U.S. expected to happen in these cases. Also, rumor has it that the Canadian authorities disagree with CBP on this point.
The folks at Ford have the curse of living in interesting times.
The other Ford cases are from the Federal Circuit. I'll get to those next.
Friday, September 01, 2006
The importer had a decent argument that Commerce issued liquidation instructions too early. This was based on another case holding--apparently--that Commerce has to wait long enough to give the importer a chance to file a summons and complaint before issuing liquidation instructions. The problem for the importer in this cases was that it did not get around to requesting an injunction until after the date suggested in the previous case. So, even if that were the law (and it is not clear to me that it is), the importer requested the injunction too late.
Two interesting things about the case. First, Judge Gordon made what amounts to an affirmative policy suggestion to Commerce to avoid the problems in the future. That is unusual and it will be interesting to see whether Commerce changes its current policy of issuing instructions within 15 days of the final result.
Second, Judge Gordon agreed with my recent comment that Congress should fix this problem (see page 9). By itself, that is not interesting. What is interesting is the fact that he failed to cite my blog which is the clear and obvious antecedent to his decision. I am shocked.
A lot of the search terms are repetitive and won't make for good posts. I am going to skip the most common search which is "customs law." Also, I am going to skip searches related to things I have recently blogged. So, that means I will skip discussing liquidation, the customs broker exam and Stuart Romm's laptop. Also, I will skip anything related to an off-topic post. That eliminates an unexpected number of visitors who have been looking for information on Kris Kristoferson and Felt F3C bicycles.
All of which leaves me with . . . Festive Articles. A lot of people (at least by my standards) have been searching for information regarding the tariff classification of festive articles and, in particular, the U.S. Court of International Trade's recent decision in Michael Simons Designs v. United States. But, I just blogged that! So, either I am keeping up with the online customs law zeitgeist, or people are finding my blog because of the stuff that is already here. Given the way search engines work, the latter is more likely the case.
Hmmm. Maybe this is a bad idea. We'll see if there is anything better by next Friday. In the meantime, feel free to post questions as comments or reach me via e-mail.