Tuesday, February 03, 2015

What is a Unit of an ADP System?

Digidesign Inc. v. US involves a perennial classification question of the digital world. At what point does a digital device that manipulates data and connects to a central processing unit become a unit of an automatic data processing system? This is important as we move toward the era of the "internet of things." To the extent the connected devices perform a specific function that is not strictly data processing, this case provides an answer. Spoiler: your internet connected refrigerator, toaster, or car is not an ADP machine.

In this case, the merchandise was two music editing systems. The decision provides a detailed description of both devices and how they work. For our purposes, just understand that they are physical consoles that translate the sound engineer's manipulation of switches, sliders, and knobs into digital effects. One unit accomplished that task by sending signals to a separate computer where the digital music file is housed. The other unit can do it internally.

The court had to deal with one housekeeping matter before deciding the classification. For one of the entries, the corresponding commercial invoice listed four products, none of which were subject to the protest or the complaint. The importer argued that the invoice contains an error that can be seen by looking at the corresponding value, which matches the value of the items at issue. The government argues that the invoice does not identify the product subject to the protest and complaint and, therefore, is not properly before the Court. The court agreed that it lacks subject-matter jurisdiction over the goods on that entry.

This raises a question or two. First, could the plaintiff have avoided this problem by including in the complaint the factual allegation that the invoice covered the subject merchandise but mis-described it? I think the answer to that is, yes. That would have created a factual issue to be resolved by documents or testimony. Second, should the court have given the plaintiff an opportunity to cure the defect by amending the complaint? I'm not sure about that. It is likely that the statute of limitations had passed to file the claim and the amendment may not relate back to the original filing date. The court has an obligation to dismiss any case not properly before it, so the burden is on the plaintiff to prove up jurisdiction. This seems like a harsh result in a circumstance where the entry documentation probably asserted the correct classification and CBP likely knows that the entry covered the merchandise in question.

The competing headings here are 8471, units of automatic data processing machines, and 8543, electrical machines having individual functions not elsewhere specified or included. Units of ADP machines in Heading 8471 are duty free. The relevant provision in Heading 8543 has a duty rate of 2.6% ad valorem.

The definition of an ADP machine is set out in Chapter 84, Note 5(B), which states:

Automatic data processing machines may be in the form of systems consisting of a variable number of separate units. Subject to paragraph (E) below, a unit is to be regarded as being a part of a complete system if it meets all of the following conditions:
(a) It is a kind solely or principally used in an automatic data processing system;
(b) It is connectable to the central processing unit either directly or through one or more other units; and
(c) It is able to accept or deliver data in a form (codes or signals) which can be used by the system.

The difficulty here is that Note 5(B) references Note 5(E), which says:

Machines performing a specific function other than data processing and incorporating or working in conjunction with an automatic data processing machine are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings.

Looking to Note (E), the court first found that the merchandise at issue performed a function other than data processing. Both models include microphone pre-amp and room monitor functions, neither of which are ADP functions.

The question is whether the machines work in conjunction with an ADP machine. The tariff does not define what it means to "work in conjunction with." Turning to dictionaries, the court held that "working" means acting, doing, or functioning. "In conjunction," according to the court means "joined together for a common purpose." From that, the court concluded that these machines perform specific functions in conjunction with ADP machines. As such, they are precluded from classification in Heading 8471 by Chapter 84, Note 5(E). There being no other more specific Heading, the machines were properly classified in the residual Heading of Chapter 85. 

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