Tuesday, May 03, 2011

Extra Batteries Are Not Sets

The Federal Circuit has decided Dell Products v. United States, a case we previously discussed here.

Not much changed in the analysis between the Court of International Trade and the Federal Circuit's decision affirming the CIT.

The facts are simple. Dell imported a laptop computer kit (via a foreign trade zone) that contained an extra battery. The battery was added to the order by the customer and not by Dell. The bottom line is this: According to both courts, when General Rule of Interpretation 3(b) talks about articles "put up in sets for retail sale," they are referring to collections of goods selected by the seller rather than collections of goods selected by the buyer. In the former case, the goods have been "put up" for retail sale. In the latter case, they have simply been selected.

This is a perfectly reasonable reading of the law, which will likely stand as the final word on this question. Divorced from the business of actually processing entries, it makes a lot of sense. But, as I said previously, I don't think this is a good decision in a practical enforcement context.

The long-standing principal of customs law is that goods are classified in their condition as imported. Dell argued that, as imported, the goods constitute a set and should be treated as such. But, the Federal Circuit looked to an 1897 Supreme Court decision to find that the manner of sale or intended use of goods may be relevant in determining whether several goods imported together are to be classified separately or as a single entity. Further, the Federal Circuit found the language 3(b) to require an inquiry into how the pieces came to be packaged together. According to the decision, the inquiry is not the what is contained in the shipment, but what was offered for sale. Thus, because the extra battery was not offered for sale as part of the larger set, it is classified and subject to duty as a separate item.

So, how will industry react to this? Retailers might want to identify common combinations of items and offer them as sets to ensure that they receive unified tariff treatment (assuming the rate is beneficial). It might also be possible to segregate some products from the advertising for high-duty-rate sets to ensure that they receive the lower rate of duty applicable to the individual part. Also, how much advertising is necessary to show that something was offered as a set? Can Dell create a dynamic web page that shows, even momentarily, various configurations of computers and accessories to evidence that the products have been put up in sets for retail sale? It is possible that Customs will focus on individual transactions and ask for proof that the set was created by the seller at the time of the sale.

This is potentially quite complicated. So much so that it seems strange for Customs to have adopted this position. As the agency charged with interpreting the law, Customs might just as easily have adopted the position that 3(b) is to be applied to the box as it crosses the border. This would have facilitated legitimate trade and allowed for a useful allocation of enforcement resources. Instead, the position pressed by Customs creates new opportunities for well-meaning importers to get caught up in technical compliance errors.

Maybe this is worthy of congressional attention.


Anonymous said...

Larry -

Even though you're an attorney, please don't "complificate" this matter. The facts are simple: The CUSTOMER ordered 2 items of commerce, the computer AND the extra battery.

Carrying your reasoning in this case to its ultimate conclusion would have a US customer of, say, Harrod's in London, England, place an order for several diverse types of goods to give as holiday gifts. If Harrod's packaged them all together, invoicing the goods separately, as I am sure was done here, the importer could then claim that the whole magilla was "put up in a set" for Customs purposes. This simply flies in the face of reason.

The courts got this one right.

your faithful Customs retiree.

Anonymous said...

As I have understood it anything that is "extra" should be classified separately. For example if you have a set of 3 nightlights that require 1 light bulb each and this set comes with 6 light bulbs - 3 to power up the nightlights and 3 "extra" bulbs - you must declare the 3 "extra" bulbs as a separate line item. Essentially if there are components, such as lightbulbs or batteries, that are in excess of actually powering up or being able to be used by the set at one time - they are classified separate. This seems to fall in line with the logic of the courts.

Larry said...

To my faithful retiree . . . I understand your position up to a point. If Harrod's packaged a book, a pair of driving gloves, and a box of shortbread cookies, there would be no retail set. But, in my view, it is not because the customer selected the items. Rather, it is because the items are not put together for a single purpose. If, on the other hand, the customer selected and Harrod's shipped loose tea, a tea infuser, a tea pot, and a tea cup, I believe the collection should be classified as a retail set under GRI 3(b).

Anonymous, I completely agree that your analysis falls in line with the court's reasoning. But, I would not call a single additional battery for use with a laptop "extra." It strikes me as entirely normal for people to use both batteries (serially) on a long plane trip or in other circumstances where power is not available. I think your analysis is stronger if the "extra" item is not related to the main purpose of the set or is clearly in excess of what is needed. In Dell, had the customer ordered one stapler or six batteries, I would agree with you.

bifjamod said...

Well, let us leave Congress out of this - they can only make matters worse. Your point of being at a distance from actual entry filing is important, because it applies to both you and Customs. Presumably, this case refers to a retail order packed and shipped from China, as opposed to a US distribution point (as was my iPad, for example.) That being the case, a low level, unskilled entry writer on the Fedex assembly line in Anchorage or Memphis sees a PC and battery, considers it a set - reasonably so - and files accordingly. On a $30 battery, revenue loss under this scenario is around a buck. I understand that on an aggregate basis, there could be a lot of money at issue. But that really only makes sense from an enforcement standpoint if the shipments are imported in a consolidated fashion - say, 500 sets at a time. But even then, $500 is not a wise use of limited resources. As a Customs broker, I tell clients interested in drawback that anything under $500 is not worth pursuing (for example.) it is not worth my time, nor the enormous amount of resources required, to process such a transacion. Which brings me to my point: there is, and must be, a point at which intelligent decisions are made as to how to best utilize resources. Are import specialists being used to ferret out a few dollars in compliance at the expense of millions of dollars in non-compliance? I neither agree nor disagree with the outcome, only the method of achieving it: precedent is set either way, but one has less tangible, but more costly effects. Penny wise, pound foolish.