Friday, March 23, 2007

Off BLog

I'll be off blog for a bit. I'll be back. Give me a week or two.

Tuesday, March 20, 2007

Design Failure or Tech Triumph?

Where are the internet police when you need them? Where do we go to report an idea gone horribly wrong?

Search engines are the critical tool to make the internet useful. Otherwise, you'd have what is essentially a global library, an infinite jukebox, and the contents of Netflix without any way of finding that article on Mongolian Throat Singing you desperately need. Google, Yahoo, MSN, and the other search engines give you the tools to find value in the content.

So, explain this to me (click the link).

Maybe I need to fine tune my senses of irony and humor. Maybe Ms. Dewey (as in Dewey Decimal?) is just for fun. Maybe, it is a really impressive implementation of an interactive flash movie. Hmmm. As entertainment with a search engine tossed in, this site might be great.

In a customs law context, I'd say this site is a composite good classifiable by essential character. I wouldn't necessarily visit Ms. Dewey for serious research. Let's classify it as entertainment.

Monday, March 19, 2007

Comment Responses

I asked for thoughts on things to address here in the blog and I received three very thoughtful responses. I'll address them here.

First, Roly P wants the low down on the first sale rule. For those of you who might be unaware, this is the legal principal that lets importers in multi-tiered transactions report the value of merchandise based on the first bona fide sale of the merchandise to the United States. If there is a middleman in your transaction, the middleman is getting some profit and, therefore, increasing the total landed cost. Under the first sale rule, you don't need to pay duty on the middleman's sale to you. Rather, you can report value based on the transaction from the vendor to the middleman.

Seems easy, but its not. If the parties are related, Customs will make it extraordinarily difficult to prove that the first sale price is a legitimate sale to the United States. That's your rock. If the parties are unrelated, it is very unlikely that the middleman will want to disclose the factory price and, therefore, its profit. That's your hard place.

It can be done. I discussed this is a prior post. The benefit is reduced duty liability. But Roly also wants to know if there are risks associated with using first sale. Sure there are. First, you are going to complicate any Focused Assessment or audit. Your paper trail for each first sale transaction is going to have to be much more detailed than just the invoice and proof of payment. You'll need some way of getting the manufacturer to vendor price verified. In a lot of these cases, it is hard enough verifying whether there is or is not a relationship between the parties. This is particularly true in the textile trades where there are many small companies involved and lots of complicated familial and business relationships that are not always documented or obvious.

Second, your risk of an audit is increased. This is particularly true if you just decide to switch to first sale valuation without informing Customs & Border Protection. There will be a change in your valuation and that might be enough to trigger a CF-28 Request for Information or even a Quick Response Audit. There are a few ways to avoid this. First, you could seek a prospective ruling asking permission to value the goods based on the first sale. Essentially, this means gathering up a model document package and arguing to CBP that is shows a bona fide sale to the U.S. An alternative, is to make entry as usual and file a protest with a full model document set. This might be slower, but it lets you avoid the "prospective only" issue with rulings.

It used to be that everyone trying to use first sale valuation tried to get a ruling for every vendor. You can thank the accounting firms for that practice. It's not necessary. All that is necessary is that you exercise reasonable care in reporting your value. A ruling (or approved protest) is a good way to show reasonable care, but it is not always required. Talk to your lawyer about your circumstances.

The third danger is that your cash flow might get messed up. If you report the middleman value and CBP ultimately rejects it, you might be stuck paying a big bill at one time. You might even be hit with a penalty if it looks like you arrived at your reported value without exercising reasonable care. So, look at your potential savings. If there are big dollars involved, you are more likely to want to get a ruling.

Next, the mysterious Lady X asked a very practical question: Why does it take CBP forever to finalize regulations? Truthfully, I have no earthly idea. I'd be thrilled if someone from OR&R (or is it OT?) would chime in.

Finally, Celia Dávila left a well-reasoned and finely crafted comment consisting of a list of phrases related to the smoking of cannabis. I'd like to thank her for that.

Wednesday, March 14, 2007

Story on the NAU

Just a link to a blog called "The Stupid Shall Be Punished," which features a story on the courageous efforts of the Idaho state government to oppose the so-called NAFTA Super Highway as part of an end-run around the Constitution.

I can't (and don't) vouch for anything else on that blog, but this is a good post.

Thursday, March 08, 2007

Notes on Blogging

Lately, my posts have been pretty specific to customs law. I can tell from my reader stats that with the exception of my possibly obsessive-compulsive brother, most visitors to this site are interested in technical legal information. I will continue to provide that.

However, two things compel me to remind readers that I have covered things as diverse as my bike ride to work and the mystery that is Clifford the Big Red Dog. First, spring is almost here and I have recently dragged my sorry self onto my bike (in a trainer) to get ready for cycling to work and hopefully drop some winter weight. You are likely to hear about these things in the future. Second, I enjoy the blogging process but don't always have really relevant customs-related information to convey. So, be prepared and be patient. I'll flag as off topic these personal asides.

Also, as is always the case, if you have suggestions for topics to cover, please let me know either through comments or via e-mail.

Wednesday, March 07, 2007

Notes on Use and Classification

I did not read The Da Vinci Code. I may be the only literate American who can say that. I did read The Historian, which is an apparently similar tale of following literary and historical clues to unravel an ancient mystery. In the case of The Historian, the mystery is the whether Vlad Tepes (better known as Dracula) still lives. It's an entertaining and engaging book that covers a lot of ground from the Cold War to East-West tensions.

Why is this relevant to customs law? Because tariff classification is really a matter of following the literary trail of rules through the Tariff Schedule along with the gloss applied by the Explanatory Notes, CBP rulings, and court decisions. In many ways, it is not all that complicated. The trick is finding all the applicable rules and applying them properly.

One question that has come up recently is the meaning of "use" in a tariff term. Here, again, the answer comes from finding the right rule. Additional U.S. Rule of Interpretation 1(a) states:


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 . . . .

Obviously, that is a clue that requires us to determine exactly what the heck "principal use" means.

One place to get that answer is rulings. Customs has pretty consistently held that principal use is the single use that exceeds all others in the United States for articles of the same class or kind at or immediately prior to the time of exportation. Take a look, for example, at HQ 84710. That means that if there are 30 uses for something and the most common use is only done 4% of the time, that is the principal use. This differs from chief use under the old tariff schedule, but there is no reason to drag that out of its casket to drive a stake into its heart.

This, of course, leads to the question of what is the appropriate class or kind of the merchandise. For that, look to court decisions. For example, in BASF v. US (starting at page 29) the issue was the principal use of a chemical used in the production of gasoline additives. In that case, the court held that when determining the class or kind of merchandise, the court should look to goods that are "commercially fungible." The court also noted a number of factors to consider including:
  • general physical characteristics
  • expectations of the ultimate purchaser
  • channels of trade
  • use in the same manner as merchandise that defines the class
  • the economic practicality of so using the product
  • recognition in the trade

So the critical things for a classification-by-use analysis are determining the class or kind into which the imports fall and then the most common use in the U.S. of that class or kind. What this means in a practical sense is hard to tell. It certainly means that the actual use of any given shipment is of marginal relevance. Clearly, the use of a single shipment (or even every shipment by a single importer) is some evidence of the use of the merchandise in the U.S.; but, it can't be the end of the story.

Rather, if you face a principal use issue, you need to look to industry practice and standards. You should try to gather supporting evidence from trade publications, catalogs, and other reliable sources. All of that is part of the backup to your classification determination and goes toward establishing reasonable care in your classification.

One other interesting tidbit on use: When a product is described by two or more headings, the General Rules of Interpretation require that the more specific heading prevail. By dint of judicial opinion, use provisions are generally (but not always) deemed to be more specific than eo nomine provisions. Go figure.