Saturday, April 20, 2013

INCOTERMS and Customs Valuation

Cutter & Buck, Inc. v. United States is one of those increasingly rare cases in which the Court of International Trade had to determine the value of imported merchandise. In this case, the question was whether Customs and Border Protection should have deducted international freight charges from the transaction value of imported merchandise.

The normal process for this importer was to have the goods shipped FOB, which means that the buyer takes delivery when the goods are delivered on the ship (the old phrase was across the rail). Under FOB shipping terms, the purchaser is responsible for the cost of international freight. As a result, the invoice price does not include international transportation.

The shipments at issue were not shipped in the ordinary course. Instead, they were late shipments under which the seller agreed to cover the cost of international freight. The relevant INCOTERM was CFR. Under this term, the seller is responsible for contracting for the freight necessary to bring the goods to the named point of destination. In this case, the named destination was in the U.S.

Apparently, when these transactions were shipped, the plaintiff paid the normal FOB price and subsequently sought a deduction for the cost of freight. Although it may not be obvious, this makes sense. Even if the invoice price for the merchandise was unchanged, the CFR shipments included the cost of transportation, which should not be included in transaction value. See 19 USC 1401a(b)(4).

Looking to the statute, the Court started from the premise that for a freight cost to be deducted from transaction value, it must be directly or indirectly paid by the buyer. The applicable INCOTERM is important evidence of whether transportation is included in the transfer price. Ordinarily, Customs will treat an FOB shipment as not including freight while it will ordinarily treat a CFR shipment as including freight. But, the applicable INCOTERM is not the sole consideration. Customs and Border Protection will always look to the actual circumstances of the transactions.

Here, the terms and conditions in the purchase order had two important clauses. First, if the shipment was 15-21 days late, "vendor pays air charge ground freight." This apparently means that the importer would only pay the ocean portion of the full cost of shipment. The second clause is that if the goods are 22-28 days late, "Vendor pays 100% [of] all freight via air using a freight company/forwarder of buyer's choice." After that, the seller was also required to reduce the price of the goods.

Looking at these clauses and the "totality of the facts," the Court noted a few additional points. First, many of the invoices associated with the relevant entries show FOB or FCA as shipping terms. These purchases would not include freight expenses. Although some of the relevant documents contained a hand written CFR notation, the Court of International Trade did not see that as dispositive. Moreover, the importer did not prove how the cost for freight was actually handled irrespective of the shipping terms shown on the documents. The importer failed to "present corroborating facts supporting its assertions, especially since C&B paid the same price it would have paid had the goods been timely shipped on an FOB (freight-exclusive) basis."

Thus, the Court found that the exclusive penalty for the late shipments was to relieve C&B, i.e., the importer, of the freight expenses it normally would have incurred for timely shipments. Based on this, the Court found that the evidence did not establish a basis for a freight deduction.

This, frankly, I do not understand, which is not to say it is not a correct result. I just do not follow that last bit of logic. If the importer was relived of the obligation to pay freight and yet the goods arrived, then someone paid that expense. The only party who could have done so is the seller. If the seller paid the freight and the out-of-pocket payment from the buyer to the seller remained the same, that means that the amount of money paid to the seller for the goods was reduced by the amount of the freight expense. That, at least, is how the seller will see it.

Another way to look at it is to ignore the INCOTERMs entirely and just follow the money. Assume I want to buy a fancy new sports car from Italy. It is $200,000 and I am on my own to get it from Italy to Chicago. The cost to me is $200,000 and the profit to the vendor is that less its cost of production and local shipment to the vessel where I take delivery. The transaction value reported to Customs will be $200,000. If I pay the same amount to the vendor but the vendor has to get the car to me, the cost to me is still $200,000. But, the profit to the seller is less than in the first transaction because it has the additional expense of shipping the car to me. As a matter of economics, it is rational to assume that the shipping expense is coming out of the $200,000 payments and is, therefore, included in the invoice price. After all, the seller is not running a charity shipping service. I think an economist or accountant would say the fact that the selling price remains fixed at $200,000 is a red herring. The price of the goods has been reduced by the cost of shipping, which is not subject to duty.

On the other hand--and there is always an other hand--the issue in a transaction value case is the determining the price paid or payable by the buyer. It is not to determine the cost to the seller. Sellers are free to make bad deals that require them lose money. Assuming the seller is unrelated to the buyer, that does not change the valuation.

So, it strikes me that there is a real question here as to whether the seller included the CFR shipping costs in its selling price. If so, a deduction is appropriate. Maybe this case still has an underlying unanswered question of fact.

Friday, April 19, 2013

Burma and Laos in Line as Possible GSP Beneficiaries

The Office of the United States Trade Representative announced that it is initiating a review of Laos and Burma for possible designation as Beneficiary Developing Countries under the Generalized System of Preferences. The notice is here. Comments are due May 17 and there is a hearing scheduled for June 4. If successful, both countries would be designated as least developed countries and would be entitled to duty-free access to the U.S. market for designated products.

If you are looking strategically at your supply chain and wondering about increasing costs associated with production in China, this may be welcome news.

Tuesday, April 16, 2013

Expanding the Centers of Excellence and Expertise

There is an interesting piece by Tim Warren in yesterday's International Trade Today (subscription required). The article talks about Customs and Border Protection's plans to expand the Centers of Excellence and Expertise concept beyond trusted traders. Currently, trusted traders are importers participating in C-TPAT and ISA. The CEE's are envisioned as covering entire industries regardless of whether individual companies in the industry are trusted traders. To me, that makes a lot of sense and is consistent with calling these Centers of Excellence and Expertise. The issue for CBP will be finding incentives to get importers to participate in ISA and, to a lesser degree, C-TPAT.

8 Years and Still Running . . . Slowly

This blog is now eight years old. That is surprising even to me. As always, I feel guilty that things do not get here as quickly as they should. That is life with a job and a family. I'll do my best to keep up. I just printed three CIT cases to review.

My thanks for your continued readership. Watch this space for developments.


Sunday, April 07, 2013

Welcome Back Cotterman. You are Under Arrest.

The scope of Customs and Border Protection's authority to search and seize digital devices including laptops and phones has been a matter of controversy for several years. The most recent detailed discussion of this from a federal court is in United States v. Howard Cotterman.

As with many of these cases, the facts are unpleasant. Mr. Cotterman drove from Mexico into the United States via the Lukeville, Arizona port of entry (formerly known as Gringo Pass). Lukeville has a population of 35.

Cotterman is a registered sex offender who was previously convicted of several child-sex related offenses. Because of that history, Cotterman's name was in Customs and Border Protection's database as someone who may be carrying child pornography into the country. A secondary inspection located two laptop computers and three digital cameras. The laptop contained many password protected files. After approximately six hours, Immigration and Customs Enforcement Agents took the laptops and one camera for further forensic investigation. After making a copy of the memory card and finding nothing incriminating on it, the digital camera was returned to Cotterman the next day. Another day later, forensic examination of one of the laptops disclosed 75 images of child pornography. These images were in unallocated space, meaning that they had been deleted or were temporary files previously viewed on websites. When Customs tried to arrange to have Cotterman come in, ostensibly to provide passwords, it was determined that he had boarded a flight to Mexico with his final destination being Australia. Shortly thereafter, ICE was able to access hundreds of images and videos depicting child pornography. Many of these images showed Cotterman engaging in sexual activity with the same girl over a two- to three-year period commencing when the victim was about seven. He was arrested in Australia and extradited to the U.S.

At his trial, Cotterman moved to suppress the electronic evidence on the grounds that it had been seized in violation of the Fourth Amendment. The district court agreed on the grounds that the search occurred 170 miles away from the border at the ICE office and that it was concluded at least 48 hours after the border crossing.

This is where we need to start talking about the law, rather than the sordid facts. The Fourth Amendment protects individuals from unreasonable search and seizure of their property. A search is usually considered to be unreasonable if the law enforcement officer does not have a warrant or a reasonable particularized suspicion of criminal activity. But, the law has long been that when someone presents themselves or their property at the border, a thorough (but not unconscionable) search of the person and the property is reasonable by virtue of the search taking place at the border. This is sort of the price of admission into the United States and is consistent with a sovereign nation's right to control its borders. Thus, the question put to the en banc Ninth Circuit Court of Appeals was whether the fact that this search was away from the border crossing both in distance and in time mean that the border search doctrine dis not apply.

A majority of the Ninth Circuit sitting en banc found that a "border search" need not be confined to be border either in time or space. Rather, the question is whether the individual would have a reasonable expectation that he or she or the property would be subject to a higher or lower level of privacy. In this case, the detention and seizure of the property began at the border at the time of the attempted entry when Cotterman should have known he was subject to a lesser degree of Fourth Amendment protection. More specifically, Cotterman and most of his property were never cleared for entry. Legally, he was still at the border although he was physically in the country. [Note, that last sentence is mine, not the Court's.]

That does not take care of the issue. It is still possible for a border search to be unreasonable in the absence of reasonable suspicion. In cases where the search is both comprehensive and intrusive, the Fourth Amendment will require reasonable suspicion. In this case, the uniquely sensitive nature of data stored on electronic devices and retained electronically after the "perceived point of erasure," creates a significant expectation of privacy. Thus, this search was more intrusive than the search of other forms of property.

That is a very significant finding. It differentiates between digital media and all other forms of property for purposes of Fourth Amendment review. That is likely to make it far more difficult for Customs and Border Protection to make digital media search decisions "on the fly" as passengers and others enter the country. While a "quick look" will almost certainly be permissible, Customs will have to determine both whether there is reasonable suspicion for a "comprehensive and intrusive" search as well as whether the particular search to be undertaken is unreasonably comprehensive and intrusive.

Certainly, CBP Officers have precisely the same ability to do this analysis as does any other law enforcement official who encounters suspicious activity. But, the unique nature of passengers and vehicles lining up for the usually short interchange with Customs and Border Protection will add difficulty to the job. Of course, that is not meant as a defense of a potentially unconstitutional search. It is only an observation of a practical reality. It is also a point made by a dissenting judge.

Under these facts, the en banc Ninth Circuit found that the intrusive search was, in fact, justified. The alert in the Customs system showing prior child-sex related convictions, frequent foreign travel, and the collection of electronic equipment created reasonable suspicion to justify the search. It made this finding despite an apparent government concession that there was no reasonable basis for suspicion.

The Court noted that password protected files are commonly used by law-abiding citizens including business travelers to protect files. The presence of password protected files alone, therefore, would not be sufficient to create a reasonable suspicion of criminal activity. However, when combined with other evidence of possible criminal activity, the presence of password protected files may be considered by law enforcement in deciding whether to conduct an intrusive search.

The Ninth Circuit majority referred to this as a "watershed" case. It may well be. According to the dissent, it has created a split among the circuits. That means it may well be teed up for Supreme Court review.

The video of this oral argument is available on You Tube and embedded below. The audio is available here. It is a big deal case and worth a read.

Saturday, April 06, 2013

Kahrs Affirmed: It's Neither Parquet Nor Butter

The Court of Appeals for the Federal Circuit has affirmed the Court of International Trade's decision in Kahrs International, Inc. v. United States. This case involves the tariff classification of engineered wood flooring designed to be installed in to form a pattern of parallel planks. If you are interested in the legal process of tariff classification, this case is a textbook example of how to do it.

Customs classified the merchandise as plywood of Heading 4412. Kahrs sought classification as "builders' joinery" (including assembled parquet panels) of Heading 4418.

The Federal Circuit's first step was to define "plywood" based on reliable sources and also on prior decisions of the Court. In the end, the Court found that plywood has three important characteristic. First, it consists of at least three layers. Second, the layers are arranged with the grains at right angles. Third, the layers are bonded together.

There does not appear to have been much dispute that Kahrs' merchandise meets this definition of plywood. Kahrs, however, argued that the flooring had unique features distinguishing it from plywood and making it suitable for use as flooring. In response, the Court noted that "plywood" is an eo nomine tariff description and that it includes all forms of the merchandise, including improved forms. Further, the Court would not add a use limitation into an eo nomine tariff heading except where the tariff language suggests that limitation. [Side Note: See ADM v. US, and here for where the Court found that to be the case.] A final problem for Kahrs was that the Explanatory Notes to 4412 state that:

This heading also covers plywood panels or veneered panels, used as flooring panels, and sometimes referred to as "parquet flooring." These panels have a thin veneer of wood affixed to the surface, so as to simulate a flooring panel made up of parquet trips.
Based on all of this analysis, the Federal Circuit held that the merchandise was prima facie classifiable in 4412 as plywood.

Despite that conclusions, the Court needed to see whether the goods were also classifiable in 4418. According to both the Court of International Trade and the Federal Circuit, the sine qua non of parquet is that it consists of inlaid wood strips forming a geometric pattern. Apparently, the "geometric pattern" needs to be more complex than parallel flooring strips. Consequently, this was not parquet. Further, the Court found that "plywood" is a more specific description than is "builders' joinery." Consequently, even if the goods were described in both headings, then 4412 would still prevail.

As a result, the Court of International Trade's decision was affirmed.

Note: the picture is to make my father nostalgic for Boston Garden.