Monday, September 29, 2014

Ruling of the (Last) Week 10: Botox Pas a Deux

For those of you who might not know it, botulism is bad for you. According to Wikipedia, it is a rare and potentially fatal condition caused by toxins produced by certain bacteria. A common cause of the rare condition is improper food preservation.

But, there is an upside to botulism, particularly for the Hollywood red carpet set and others worried about the perception that they may be aging. Where that perception is caused by fine lines on the forehead and face, the botulism toxin, when properly administered, might be just what the dermatologist ordered.

As it turns out, that means that some of this stuff is imported for cosmetic use. And therein lies the rub. We have botulism toxin imported for cosmetic use. How should that be classified? We get the answer from the current Customs Bulletin, in which CBP proposes to revoke its prior decision in Ruling N209720. The new ruling will be HQ 227295.

The two products here are FDA approved Botox and Botox Cosmetic. [Note from Larry: Botox is a registered trademarks of Allergan. CBP seemed very intent on making that known, so I will do the same.] The former is approved for various medical uses including the treatment of spasms, which makes sense since this stuff can paralyze you. The latter is injected into facial muscles to improve the look of lines. Botox has been classified in 3002.90.51 as a toxin. Botox Cosmetic has been classified in 3304.99.50 as a beauty preparation or preparation for the care of the skin (other than medicaments).

The two products are identical, but marketed differently. What to do? As in all such cases, start with the legal text.

Note 1 to Chapter 30 excludes from classification in that Chapter preparations of, among other things, Heading 3304. So, if Botox Cosmetic is properly in 3304, it cannot be classified in 3002.

The first question is whether Botox Cosmetic is a "preparation." While the term is not defined in the tariff itself, Customs and the Courts have previously held that a preparation is something that has been "prepared or made up for its appropriate use." Another definition is "something made, equipped, or compounded for a specific purpose." Botox Cosmetic has been created for the purpose of treating skin lines. So it qualifies as a preparation.

That leads to the next question of whether Botox Cosmetic is "for beauty and make-up" or "the care of the skin." This is where things get more interesting. The way Botox Cosmetic works is that when injected into the muscle under the skin, the muscle relaxes. That relaxation is what causes lines in the skin to appear less pronounced. That is wholly different than topical cosmetics and skin treatments. Because Botox Cosmetic does not beautify or treat the skin in a manner similar to make-up and topically applied products, it is not a "beauty or make-up preparation, or a preparation for the care of the skin."

That means that it is not included in Heading 3304 and leaves toxins of Heading 3002 as the correct classification.

One final note. You do not often see CBP make a joke (or even a quip) in a ruling. In this case, an unstated underlying assumption of the analysis is that removing facial lines is a beautifying treatment. In that context, all CBP said was "Without getting into whether wrinkles are beautiful in the eye of the beholder . . . ." That was enough to make me smile when I read it. Of course, I can move all my facial muscles, so that helped too.

Wednesday, September 24, 2014

More on Trek

Sometimes even I hate lawyers.

Part of the job is to watch for developments in the law and advise clients on how those developments might impact them. Because lawyers are careful by nature, we have a tendency to see the worst possible outcome and tell our clients to be prepared for it. If I needed a literary analogy to insert here, I could do no better than Henny Penny. On the other hand, what happens if we fail to point out the worst possible outcome? Well, let's just say we might not be doing that part of our job that requires lawyers to keep their clients informed.

What does this have to do with Trek Leather? Many of my colleagues in the customs bar read the decision as greatly expanding the potential for customs penalty cases to be brought against individual corporate officers and compliance professions. Unfortunately, they are not wrong on that score. But, I think they may be overwrought.

Just to recap, the Federal Circuit decided in Trek Leather that the president and sole shareholder of an importing corporation could be held liable for customs penalties despite not being the importer of record. This is inconsistent with the general legal notion that an individual employee or officer is not liable for corporate debts unless that person engaged in criminal behavior, fraud, or was the legal alter-ego of the company. In fact, entrepreneurs start corporations for exactly this reason. In many cases, their lawyers have advised them to incorporate to avoid having personal liability for corporate actions. Generally, that is good advice.

Trek Leather was not a fraud case. The company admitted to negligence in the improper valuation of wearing apparel. And, at no point did Customs or the Department of Justice argue that it could "pierce the corporate veil" to treat the individual as the alter-ego of the company. Doing so usually requires proof that the company was not managed as a separate entity (e.g., commingling of funds, a lack of corporate formalities, under-capitalization, etc.). So, why is Mr. Shadadpuri, the officer involved, liable for customs penalties?

The reason is Congress and the Supreme Court. Both entities have a tendency to mess up a perfectly good legal argument.

Congress is responsible for the text of the penalty statute, 19 U.S.C. § 1592. That statute creates liability for any person the enters or introduces merchandise into the United States by means of fraud, negligence or gross negligence. Mr. Shadapuri is clearly a person. But, he did not enter the merchandise; Trek Leather did that. According to the full Court of Appeals, that means the only real question is whether Mr. Shadadpuri "introduced" merchandise by means of his own negligence or gross negligence.

This is where the Supreme Court comes into play. Back in 1909, the Supreme Court held that the penalty statute was broad enough to cover actions and people who do not make entry. That's U.S. v. Mescall. Furthermore, in a 1913 in rem case with the awesome name United States v. 25 Packages of Panama Hats, the Supreme Court (via Mr. Justice Lamar) determined that the  word "introduced" was added to the penalty law to ensure that it covers situations where the merchandise did not actually get entered. In the Panama Hats case, for example, the goods arrived at the port and no one ever claimed them or made entry. According to the Court, "Instead of punishing only for entering or attempting to enter on a fraudulent invoice, it punished an attempt by such means 'to introduce any imported merchandise into the commerce of the United States,'"

Based on this precedent, the Federal Circuit had this to say (sorry for the big quote):

Panama Hats confirms that, whatever the full scope of "enter" may be, "introduce" in section 1592(a)(1)(A) means that the statute is broad enough to reach acts beyond the act of filing with customs officials papers that "enter" goods into United States commerce. Panama Hats establishes that "introduce" is a flexible and broad term added to ensure that the statute was not restricted to the "technical" process of "entering" goods. It is broad enough to cover, among other things, actions completed before any formal entry filings made to effectuate release of imported goods. We need not attempt to define the reach of the term. Under the rationale of Panama Hats, the term covers actions that bring goods to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices indicating value) for use in the filing of papers for a contemplated release into United States commerce even if no release ever occurs.

What Mr. Shadadpuri did comes within the commonsense, flexible understanding of the "introduce" language of section 1592(a)(1)(A). He "imported men's suits through one or more of his companies." Gov't Facts at 1. While suits invoiced to one company were in transit, he "caused the shipments of the imported merchandise to be transferred" to Trek by "direct[ing]" the customs broker to make the transfer. Id. at 1-2, 4. Himself and through his aides, he sent manufacturers' invoices to the customs broker for the broker's use in completing the entry filings to secure release of the merchandise from CBP custody into United States commerce. Supra pp. 7-8. By this activity, he did everything short of the final step of preparing the CBP Form 7501s and submitting them and other required papers to make formal entry. He thereby "introduced" the suits into United States commerce.

Applying the statute to Mr. Shadadpuri does not require any piercing of the corporate veil. Rather, we hold that Mr. Shadadpuri's own acts come within the language of subparagraph (A). It is longstanding agency law that an agent who actually commits a tort is generally liable for the tort along with the principal, even though the agent was acting for the principal. Restatement (Second) of Agency § 343 (1958); Restatement (Third) of Agency § 7.01 (2006). That rule applies, in particular, when a corporate officer is acting for the corporation. 3A Fletcher Cyc. Corp. § 1135 (2014). We see no basis for reading section 1592(a)(1)(A) to depart from the core principle, reflected in that background law, that a person who personally commits a wrongful act is not relieved of liability because the person was acting for another. See United States v. Matthews, 533 F. Supp. 2d 1307, 1314 (Ct. Int'l Trade 2007), aff'd, 329 F. App'x 282 (Fed. Cir. 2009); United States v. Appendagez, Inc., 560 F. Supp. 50, 54-55 (Ct. Int'l Trade 1983). That is as far as we go or need to go in this case. We do not hold Mr. Shadadpuri liable because of his prominent officer or owner status in a corporation that committed a subparagraph (A) violation. We hold him liable because he personally committed a violation of subparagraph (A).

So there you have it. Mr. Shadadpuri is liable for his own bad acts. At a minimum, he personally made false representations to Customs as a result of his own negligence. The fact that he was an officer of the importing entity is not the basis for his liability. Rather, it is his own personal bad acts.

That brings me back to customs lawyers and Henny Penny, AKA Chicken Little. We were all very happy for our clients when the initial three-judge Federal Circuit panel held that only the importer of record could be liable for negligence under the customs penalty statute. Many of us, myself included, believed that to be the correct result for the reasons stated by the first panel. In brief, that panel held that negligence in the customs context is an absence of reasonable care. Reasonable care, in turn, is a statutory creation that specifically applies only to importers of record. Thus, it follows quite nicely that only the importer can fail to exercise reasonable care and be liable for customs penalties. Those two statutes are now decoupled from one another.

When the full Court of Appeals agreed to rehear the appeal, the Cassandras of the customs bar were cursed with a vision of the future in which anyone who submits materially false or incomplete information to customs can end up a defendant in a penalty case. And, like Cassandra of ancient Troy, we were right. The decision of the Federal Circuit, as written leads to that possibility. In my view, that's a bad thing.

But, is it the end of the world? Probably not. We need to keep some perspective. This may be a good example of the lawyers' adage that "Bad facts make for bad law." Mr. Shadapuri was, in Customs' view a bad guy. He was warned about assists previously and provided information to the broker that omitted references to assists. He was not a diligent compliance professional who was doing the best he could with the information available to him. Nor was he a diligent corporate office who delegated authority to a trained compliance professional and supervised as needed. He was the individual responsible for the information provided to Customs and he appears to have known or at least should have known it was wrong.

The bottom line from Trek Leather is this: there is no automatic immunity from penalties for everyone but the importer of record. But, there is also no automatic liability for corporate officers and compliance professionals. Rather, what we now know (barring an unlikely reversal by the Supreme Court) is that the statute exposes individuals to liability for their own false or incomplete representations to Customs and Border Protection.

That understanding does not change materially my advice to companies and compliance personnel. That advice remains, "Be sure you know that what you are saying is true and that, if asked, you can prove it." In my view, Trek does not mean that Customs compliance people need to personally and specifically prove up everything they ever say to Customs. Reliable corporate records are those records on which the corporation relies. The import manager at a commercial bakery need not find the tree from which its imported cinnamon was harvested. But, if the bakery says it came from Vietnam, that manager needs to have a reasonable basis on which to make that statement.

Of course, I know that "reasonable basis" is the giant gap in that statement. My "reasonable" may not be reasonable to the Office of Fines, Penalties, and Forfeitures and the Court of International Trade may have a different view on what is reasonable. What I do know is that "reasonable care" requires something less than absolute certainty. I cannot say and will not try to define it here in the absence of specific facts. Unfortunately, i am coming to the conclusion that reasonable care is much like pornography in the mind of Mr. Justice Stewart:

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.

Before Trek, I advised clients to be reasonably certain about what they say to Customs. After Trek, I give the same advice. The difference is that now I can add that by doing so they protect the importer and themselves.

Monday, September 22, 2014

Ruling of the Week 9: Doc Brown, Red Matter, and Chicken Wire Frames

U.S. Customs and Border Protection takes a lot of heat for not being terribly responsive when it comes to ruling requests. I know, because I have thrown some of that heat. It is very difficult to develop a business plan when the importer does not know the applicable rate of duty. As a general rule, Customs does a good job of getting rulings out. Often times, those are well within the administrative guidelines for timeliness. But, when making that determination is difficult enough to require input from Customs Headquarters, where there is an international dispute about the correct classification, or when another party already has the issue before Customs, things can quickly get bogged down. That causes a lot of frustration. Apparently, Customs is taking bold new steps to satisfy the needs of importers. I know this from ruling N246515.

I found this ruling while looking for rulings with a fairly current date. I saw that N246515 references the importer's letter of September 18, 2014. As I write this post, it is September 22, 2014. A four day turnaround over a weekend is amazing customer service from CBP. But, it turns out to be better than that. I then noticed that CBP issued ruling on October 17, 2013about 11 months before the date of letter.

Several things might be happening here. I know from watching a lot of History Channel's hard science reporting (including Ancient Aliens and UFO Hunters), that normal causation can be interrupted by inter-dimensional quantum entanglement and magnetic vortices that form along geophysical ley lines connecting high-qi sites such as the pyramid complex at Giza, Machu Picchu, and Stonehenge. My guess is that the ley line between Stonehenge and the Nazca lines runs through New York. Specifically, it probably runs through the Office of the National Import Specialist Division. That is a plausible explanation for how Customs answered an inquiry before it was sent.

Another possibility is that Customs seized a Delorian, not knowing it has a flux capacitor and 1.21 gigawatt plutonium generator installed. When a CBP officer got it up to 88 MPH, it jumped into the past, where the officer responded to this letter before jumping back to the future. Perhaps a despondent Romulan with access to red matter is involved.

A less likely possibility is that someone typed the wrong date in the letter and I happened upon it as a result. William of Ockham was a parsimonious kill joy.

On to the substance.

Crafty people can do all sorts of useful, or at least decorative, things with what the rest of us might consider to be junk. In this case, the imported product was chicken wire affixed to a wooden frame. Apparently, this item is used as the base on which crafty types affix decorative items to make wall hangings and whatnot.

CBP was aware of similar items being imported for use as jewelry racks. On that basis alone, CBP decided to classify these items "accordingly," meaning as jewelry racks. I have already spent too many words on this ruling, so I will keep this short and simply say, "Huh?" I'm not sure how supportable that analysis is.

The next problem was that CBP needed to determine whether the racks are of metal (i.e., chicken wire) or wood (i.e., the frames). Here, CBP found that neither component prevailed to provide essential character. As a result, it applied General Rule of Interpretation 3(c) and used the last occurring applicable tariff heading. In this case, that was 8302.50.00 as base metal mountings, fittings, and similar articles . . . brackets and similar fixtures . . . ."

That is a duty-free provision, so I assume everyone was happy regardless of the consequences to time and space.

Wednesday, September 17, 2014

Customs Trolls and the False Claims Act

Want to see the tip of the spear of a new aspect of the practice of customs law? Take a look at United States of America ex rel. Customs Fraud Investigations, LLC v. Victaulic Company. This is a decision of the United States District Court for the Eastern District of Pennsylvania.

What we have here is a False Claims Act case brought by a private company calling itself Customs Fraud Investigations, LLC. CFI scoured through ships manifest data to find products it believed might be lacking correct country of origin markings. It then compared the import data to pictures of the products it found on eBay to confirm its suspicions. Armed with that data and the possibility of a financial windfall, CFI filed a case against Victaulic in the federal district under the False Claims Act. I hereby dub this the birth of the customs troll. Compare that to the patent troll and you will see why.

In the end, CFI lost (at least so far), but how we got to that point is interesting.

The False Claims Act is designed to permit the government to levy civil penalties against companies and individuals who make false claims for governmental benefits. Common examples of this kind of fraud are health care providers who submit claims to Medicare for reimbursement related to services that never happened or were unwarranted. As you can imagine, there are a lot of other programs that pay money to claimants that can be abused. For each of those, there are False Claims Act defendants.

An interesting thing about the FCA is that it deputizes regular folks to also bring the case to by filing a claim in a federal district court. The claim is filed under seal to protect the identity of the "whistleblower." The Justice Department then reviews the case and decides whether it want to take over and pursue the defendant. If the Justice Deparatment decides not to intervene, then the original whistleblower, who is known as the "relator," can proceed on his or her own, technically on behalf of the United States.

Why would someone do this? There is money to be had. The relator gets a portion of the recovery, and a larger portion if the Department of Justice does not intervene. This incentivises medical clerk, government contract administrators, and others who might see shenanigans to report them. It also gives an incentive to lawyers to find and pursue these cases, which can include a recovery of attorneys fees, which is always nice.

To the best of my knowledge, Customs Fraud Investigations LLC is the first entity set up for the purpose of identifying cases of customs fraud for a profit. That is similar to a company that looks to acquire patents not for purposes of exploiting the technology but rather to sue potential infringers. Those folks are patent trolls or in the parlance of the trade "Non-Practicing Entities." So CFI is a 'Non-Importing Entity."

What CFI LLC did was an exercise in mining big data to find potential customs violations. To the best of my knowledge, CFI was not a business partner, employee, or competitor of Victaulic.

The substance of the case is interesting. CFI has a couple problems. The first has to do with the public disclosure exemption. Under this rule, a plaintiff may not successfully bring a FCA case if the information on which it is based has already been publicly disclosed in the news media or certain other outlets. In this case, much of the underlying data came from Zepol. According to the Court, Zepol is a news media outlet. But, that was not enough to bar the action. Although CFI LLC relied in part on Zepol data, it needed the eBay information to complete its analysis. EBay, according to the Court, is not a media outlet covered by the act. As a result, the public disclosure bar did not apply.

The second issue was whether CFI LLC had provided enough facts in its complaint to plausibly establish that Victaulic had imported improperly marked goods. On this point, the Court found that CFI LLC had shown a lot of imports and had shown that there are unmarked Victaulic in the secondary marketplace. CFI LLC had, however, not been able to make the link between the unmarked products for sale on eBay and the imports. CFI LLC needed to also show that the unmarked products were the imports rather than being products of the U.S. not subject to a marking requirement.

Because CFI LLC failed to plead facts making that connection, the Court dismissed the case.

One additional point is worth noting. The underlying alleged false claim here was not just that the goods were unmarked at the time of entry. It was that as a result, Victaulic was liable for marking duties of 10% of the value of the merchandise. By failing to mark the goods, Victaulic avoided marking duties and, therefore, made what is called a reverse false claim. That is, rather than receiving a payment as a result of the claim, Victaulic allegedly avoided having to make a payment.

There are problems with this theory. First of all, Customs need not impose marking duties in all cases of mismarked goods. It can, for example, seek redelivery and then pursue liquidated damages if the goods are not returned to Customs. There is also a question of whether the failure to mark is a "claim" if the entry documentation properly identifies the country of origin. Because of the pleading issues, the Court did not have to address these interesting questions.

Mark my words, the False Claims plaintiff's bar is going to start talking to compliance people looking for wrongdoing. In-house counsel and compliance managers should review how they respond to internal reports of potential violations and complaints. You need to address them quickly, fully, and with the utmost respect to the party raising the issue. The last thing you want is a disgruntled employee with CFI LLC on his or her speed dial.

Also, first thing tomorrow, make sure that your company has requested that U.S. Customs and Border Protection not publish you import data. You can do that under 19 CFR 103.31(d). Do it. It can prevent your data from being mined by a customs troll.

Tuesday, September 16, 2014

Breaking News: CAFC Finds Corporate President Liable in Trek Leather

In a closely watched decision, the Court of Appeals for the Federal Circuit has reversed itself and upheld the decision of the Court of International Trade in U.S. v. Trek Leather. The core issue here is whether an individual can be held liable for customs-related negligence when that individual is not the importer of record. According to 19 U.S.C § 1592 no "person" may "enter or introduce" merchandise into the United States by means of a material false statement or omission that is the result of fraud, gross negligence, or negligence. Here, the government claimed that the importer and its president were both separately negligent. The president argued that since he did not enter the merchandise, he could not be negligent.

Initially, the Federal Circuit agreed. It reasoned that negligence is an absence of reasonable care and that the law only puts the reasonable care obligation on the importer of record. The United States asked the full Court of Appeals to reconsider that decision, which it agreed to do.

In the decision issued today, the Court reversed course and affirmed the Court of International Trade. The Court found that the phrase "enter or introduce" expands the scope of "persons" to whom the law is applicable beyond the importer of record. Because the defendant was actively involved in directing the importation of this merchandise, and did so on the basis of false statements, he "introduced" the merchandise and can be held liable for negligence.

Compliance professionals, small business owners, and entrepreneurs who import should think about that.

I'll post a more detailed analysis as soon as possible.

Thursday, September 11, 2014

Ruling of the Week 8: Those Annoying Rubber Bracelet Things

In every profession, there are senior statesmen and women who have been around a long time and share their wisdom with the young whippersnappers. When I was a young whippersnapper customs lawyer, there were several at Barnes, Richardson & Colburn where I worked and continue to work. In particular, Bob Burke and Jim O'Kelly were and remain in that category. Outside of my firm, one of the guys who held that position was Bill Outman of Baker & McKenzie. Bill was recently the recipient of a CBP ruling that merits a brief discussion. Bill, this one is for you.

HQ H236523 (July, 2, 2014), is a request to Customs and Border Protection to reconsider the classification of various styles of silicone bands. These are similar to, but not in all cases the same as, those charity and awareness bracelets people wear. Some were sized to be worn as rings, rather than around the wrist. Importantly, some were not intended to be worn at all but were intended to be used as bindings for printed material or for sets of shirts and caps. Most were printed with some text or design.

The reason this ruling is interesting is that it follows directly from the GRK decision we recently discussed here. In that case, the U.S. Court of Appeals for the Federal Circuit reiterated an old notion that the use of a product can be used as evidence of proper classification in an eo nomine tariff provision. That notion is inconsistent with the conventional wisdom that the use of imported goods is only relevant when the tariff makes it relevant, which would be in a so-called "use provision." An eo nomine provision, on the other hand, describes the product by name, which is usually independent of use. Salt, for example, is salt whether used in cooking or on a frozen driveway. [Note: don't send me email about the tariff classification of salt. That is an example of English, not legal advice on how to classify salt.]

The silicone bands in Bill's ruling clearly have two different uses. Some are imitation jewelry and some are for binding things together like regular office supply rubber bands, only nicer.

The classification issue is that if the silicone bands are classifiable as imitation jewelry (Heading 7117), they are precluded from classification as articles of rubber in Chapter 39 by Chapter Note 2. The problem is that while the products are very similar in construction, the printed or embossed designs or lack thereof indicate that some of them are decidedly not jewelry. How to make a consistent classification analysis?

Like the court in GRK, Customs and Border Protection looked back to an old case call United States v. Quon Quon, 46 CCPA 70 (1959), in which the old Court of Customs and Patent Appeals said that use is :of paramount importance" in determining the identify of a manufactured article. [Editor's Note: Is Quon Quon a character in the Star Wars universe?]

When you look at it that way, it becomes obvious which of these silicone bands are jewelry and which are not. Or does it? Frankly, it is a little hard to tell without pictures. There seems to have been a lot of weight given to how the importer described the goods and their intended uses. Customs and Border Protection, which had samples of the goods, made the call based on design, lettering, and stated intended purpose.

I'm still not 100% comfortable with this approach under the Harmonized System, as opposed to the old TSUS, which was in place when Quon Quon was decided. I don't like it because it adds an element of subjectivity to tariff classification and makes superficial differences like printing determinative of classification.

What was the alternative? That's the hard question. Some of these are clearly jewelry, in that they are intended to be worn as decoration. That takes me back to my GRK analysis. Maybe, the right thing to do is to treat "Jewelry" not as an eo nomine description at all but as a description that necessarily includes as an intended use personal adornment. That's what I said about wood screw, which implies use in wood. If jewelry is, under my unorthodox and possibly crazy analysis, actually a use provision, then this whole issue goes away. Under that approach, the HTSUS mandates a consideration of use and the classifications for these silicone bands would vary accordingly.

Monday, September 08, 2014

Ruling of the Week 7: Rum by Any Other Name

Alcohol Victoria is a 99 proof (49.5% alcohol by volume) neutral spirit beverage made of distilled sugarcane. This seems like something I would like to know more about. It does not seem to be rum, which is made from sugarcane byproducts such as molasses and cane juice. My understanding is that rum production was historically a means of using up material from the production of sugar. Alcohol Victoria must be different in that it is made directly from cane.

Does that make it similar to Cachaca? This Brazilian product is the chief ingredient of the caipirinha, one of my favorite summer cocktails. It is distilled from sugarcane juice. Alcohol Victoria might also be similar to CSR, a potent spirit made in St. Kitts.

The caipirinha.

The question in HQ H197914 (Jun. 25, 2014) is how to classify Alcohol Victoria. There was no disagreement on the correct heading, which is 2208. That heading covers "spirits, liqueurs and other spirituous beverages." It might be classified in 2208.40 as "Rum and other spirits obtained by distilling fermented sugar-cane products." That seems easy enough.

But, Alcohol Victoria is "neutral," which means that it has no secondary characteristics associated with the sugar cane from which it was produced.  It turns out that the Explanatory Notes define vodka as something "obtained by distilling fermented mash of agricultural origin (e.g., cereal, potatoes) . . . ." The Alcohol and Tobacco Tax and Trade Bureau defines vodka as a neutral spirit without distinctive character, aroma, taste, or color. Thus, the Alcohol Victoria could also be classified in 2208.60.

Along the way to resolving this conundrum, Customs noted that this product is not a liqueur or cordial because it does not have any added flavoring.

That leaves us with two subheadings that apply to the merchandise. So, what to do? Keep in mind that because we know the correct heading and are focused only on finding the correct subheading, General Rule of Interpretation 6 applies. That means we apply the Section and Chapter Notes to the subheadings as applicable and then apply the GRI in order to the subheadings. That takes us to GRI 3(a), which tells us that when two or more subheadings apply to the same product, the subheading with the more specific description of the product will prevail. The subheading that includes characteristics or requirements that are more difficult to satisfy is the more specific subheading.

In this case, the subheading for rum identifies the specific raw material from which the product is to be made, i.e., fermented sugarcane products. Vodka, it turns out, can be made from any agricultural material. Based on that, Alcohol Victoria is rum of 2208.40 after all.

We can now return to our end of summer cocktails secure in that knowledge.

[Note: Updated as per the comment below.]

Tuesday, September 02, 2014

Ruling of the Week 6: Instruments of International Traffic

I'm enjoying the Ruling of the Week feature. One important benefit of this task is that I get to blog about some aspect of customs law that might not otherwise make it into the Court of International Trade or a Federal Register Notice. This week (really last week, but who's complaining?), the topic is Instruments of International Traffic, which is the subject of  HQ H255763 (Aug. 15, 2014). You should look at the Ruling because Customs and Border Protection included pictures, which are usually helpful.

The law allows importers to designate reusable containers, racks, skids, and similar fixtures as Instruments of International Traffic. The relevant regulation is 19 C.F.R. § 10.41a. The value of making this designation is that IIT's are not subject to duty and exempt from other aspects of the normal entry process. That can be a valuable cost-savings mechanism for frequent and repeated imports. Think about a car company in Detroit that gets the same parts from Windsor, Ontario multiple times a day using the same pallets, racks, and bins. The importer can avoid the cost and compliance effort of entering the pallets, racks, and bins if they are recognized as instruments of international transport and treated accordingly.

The way CBP looks at this, an IIT is something that is "a substantial container or holder." The article must also be capable of repeated use and used in significant numbers in international traffic. This rolls up into HTSUS item 9803.50.00, which provides for duty-free entry for products "of a class specified by the Secretary of the Treasury as instruments of international traffic." IIT's may be imported empty or containing the articles they are intended to transport.

In this ruling, CBP found that the containers were substantial (with a five to seven year service life)and reusable (about 1,500 times per year). Given those facts, the subject containers were found to be IIT's.

The ruling does not go into the details, which are always important. First of all, to do this, the importer has to have a corresponding bond to ensure that customs duties will be paid if the IIT's turn out to be dutiable for some reason. One reason that happens is that the container gets diverted from international traffic to domestic ("point-to-point") use or stays in the U.S. for a year or more. When that happens, the former IIT is subject to entry and duty if applicable. That means a compliant importer will have a process for tracking IIT's and reporting those that go astray. Also, there are specific rules regarding the serializing of containers and exceptions for traffic between the U.S. and Canada and Mexico. So, check the regs.