Thursday, April 30, 2015

Ruling of the Week: Missing Edition


I am a week and a half behind on my commitment to provide a post on a ruling each week. Sorry, that is the beauty and curse of litigation. Back soon and will catch up.

The good news is that there have been no new CIT and CAFC customs-related cases to report.

Thursday, April 16, 2015

Ruling of the Week 2015.13: Origin, NAFTA and Circular Reasoning

The NAFTA Marking rules are a giant mystery to many people.

Let's assume you are importing evaporator cores from Mexico. The cores are initially produced in South Korea and shipped to the U.S. From here, they are exported to a facility in Mexico that adds fittings and connections before shipping them back to the U.S. Once back here, they are used in the assembly of automotive air conditioners. When returned to the U.S., the cores are not NAFTA originating. You can assume that set of fact because it is what happened in CBP Ruling N014917 (Aug. 2, 2007).

So, how do you analyze the origin of the cores?

The U.S. has various rules used to determine country of origin. Most products that are not wholly the growth or product of a single country are deemed to originate in the last country in which it was subject to a substantial transformation, i.e., a change in name, character, or use. See 19 CFR 134.1(b). That section goes on to say "however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin." Those rules are in Part 102 of the Customs Regulations.

The NAFTA Marking Rules are not based on substantial transformation; they are an exception to it. The NAFTA Marking Rules are a hierarchy of successive tests, one of which might determine the country of origin. In the case of these evaporator cores, the first applicable test was whether the foreign materials, in this case the Korean parts, made a qualifying change in tariff classification as a result of the processing in Mexico. They did not.

The next applicable test stipulates that the country of origin will be the country or countries of origin of the single material that imparts the essential character to the good. In this case, that was the Korean-origin core. Bingo! Korea is the country of origin. So says Customs, read it for yourself.

I have two thoughts on this.

First, there is an interpretive note stating that the only materials that merit consideration as imparting the essential character are those materials that are classified in tariff provisions from which a change in tariff classification is not allowed. This seems like an odd rule and it is pretty obscure, but it makes sense. The changes in tariff classification appear to be designed to require a lot of processing and added value. Often, for example, a change from a parts subheading to a finished goods subheading in the same heading will not be a qualifying change. That is because the operation is probably relatively simple assembly without much value added. But, a change from a raw material of one heading to a finished good of another heading is indicative of a lot of added value. So, the materials excluded from a qualifying tariff classification are closer to the finished article and are, therefore, more likely to represent the essential character. Makes sense to me.

Second, is CBP's conclusion correct? I am on the record about this issue elsewhere in this blog. The NAFTA Marking Rules are only used to determine the country of origin of "goods of a NAFTA country." A "good of a NAFTA country" is something determined under the NAFTA Marking rules to have the country of origin of Canada, Mexico, or the United States. South Korea is not a NAFTA Country.  That means the application of the NAFTA Marking Rules spit this evaporator core out of Part 102 and back into Part 134. Right?

To my way of thinking, that means the question is whether the operation in Mexico resulted in a substantial transformation. That is an arguable point. But, this ruling did not go that extra step and the importer apparently did not make that argument.

By the way, since this and other rulings don't seem to track my thinking keep in mind my general disclaimer: this is not legal advice. It's just me talking.

Monday, April 06, 2015

Late Ruling of the Week 2015.12: Quiver

If you read this blog regularly, you know I have a certain affinity for nerd culture and, in particular, comic book superheroes. For example, I very much like the CW incarnation of Oliver Queen's Green Arrow. I will admit that the Green Arrow books did not do much for me the last time I regularly read them. When I last checked in. Oliver/Green Arrow was fighting a mutant polar bear, or something.

If you follow Arrow on the CW, you might also like the podcast Quiver, which is both an episode recap and general discussion of the Arrow TV show. Amanda and Mike do a good job of commenting on the specific show and on the larger Arrow-related universe. Sometimes, they go a little off the deep end of fandom and "shipping" various romantic angles, but their podcast is informative and entertaining.

And, it is called "Quiver," which brings me to this post. As you likely know, a quiver is the device archers use to hold arrows. A company called Kinsey's Archery imports quivers and asked U.S. Customs and Border Protection how to classify them. The resulting ruling is NY N262341 (Mar. 25, 2015).

According to Customs, the quiver in question is a plastic container designed to provide storage, protection, organization, and portability to arrows. According to CBP, this item is classifiable in HTSUS item 4202.99.9000 as "containers or cases, other." That has a duty rate of 20% ad valorem, which is enough to hurt.

Oh the other hand, 9906.99.05 is the duty free provision for other archery articles and equipment. What gives?

The problem for Kinsey is General Rule of Interpretation 1, which requires that importers and CBP apply the relevant legal notes. Note 1(d) to Chapter 95 excludes from that chapter sports bags and other articles of Heading 4202. Thus, the question is whether anything excludes the quivers from 4202.

It turns out that Note 2(l) to Chapter 42 excludes sports equipment of Chapter 95. This creates a conundrum. Can the quiver be excluded from both headings by operation of conflicting notes? I don't think so. Rather, the way to address this is to start at the 4202. There, Note 2(l) tells us that this piece of archery equipment of Heading 9506 is excluded from Heading 4202. Since it cannot be in 4202, Note 1(d) of Chapter 95 does not preclude classification in Heading 9506. Thus, 9506 prevails.

Customs disagrees, which is why you should never treat anything you read here as legal advice. In a prior ruling, CBP directly faced this question, but only indirectly answered it. In NY N069455, Customs held that a quiver is  a case for holding arrows. From there, CBP applied Chapter 95, Note 1(d) to exclude the quiver and place it in Heading 4202.

Is CBP right? I suspect the argument goes that 9506 does not specify quivers. Thus, it is not clear that the heading was intended to cover containers of a sort specified in Heading 4202. That makes some sense. But, it strikes me as moving beyond GRI 1, which should resolve this. It is similar to a relative specify argument comparing the scope of headings. By reading the HTSUS from start to back, we stay in GRI 1 and first exclude the quiver from 4202, which means that it is not excluded from Chapter 95. End of story.

But, then why does Chapter 95 include the note excluding sports bags of Heading 4202? We can't interpret 4202 in a way that makes that exclusion meaningless. I suspect that Note is intended to exclude general purpose sports bags (think gym and yoga bags) as opposed to specialized pieces of sports equipment like quivers. That seems to be a reasonable argument to pursue.