Wednesday, March 30, 2016

CITBA Annual Meeting and CLE, April 21

Join CITBA for a CLE event on April 21 to be held at the Court of International Trade in New York. Details and registration is available here. Registration is a little funky for now. You'll need to click select Event in the box on the left side of the Meetings, then click Buy Now. After that, fill in the registration amount ($60 for general members, $30 for government employees) and your payment method. Please RSVP to info@thegateam.com. We're going to work on improving that process.

Krill Oil, Cryptozoology, and Tariff Classification

Podcasts are a terrible thing if you expect to do work or read books while otherwise leading a productive life. Among the many I listen to somewhat regularly is Tetrapod Zoology, from which I learn all kinds of thing about both real and fanciful zoology. It's worth a listen, though it may be a bit of an acquired taste. I came to it through the side door. Co-host Darren Naish is an actual, credentialed scientist who is willing to talk about allegedly unidentified megafauna (e.g., the Loch Ness Monster, Yeti, and Bigfoot), not because they exist but because the notion that they might is entertaining. He and his co-host John Conway are fully comfortable trying to imagine how something as absurd as the Mongolian Death Worm might exist in the real world (because it does not).

Why I am on about this? Because I have been wracking by brain trying to think of puns involving krill and the baleen whales that eat them.

It turns out that people eat krill oil as a dietary supplement, which makes us share at least one thing with baleen whales. In Jedwards International, Inc. v. United States, the question presented to the U.S. Court of International Trade was the proper tariff classification of krill oil. The importer classified the merchandise in 1603.00.90 as "extract and juices of meat, fish or crustaceans . . . ." other than clam juice. This seems like a perfectly good description of the product, which, by the time it gets imported, contains nothing but natural components of the krill and a residual amount of ethanol from the production process. U.S. Customs and Border Protection disagreed and classified the merchandise in 3824.90.40 as a product of the chemical or allied industries, including several miscellaneous chemical products and preparation. To complicate matters, in Court, the plaintiff argued that the correct classification is as an animal fat or oil of Heading 1506 or 1517.

The Court easily eliminated Heading 3824, which is a basket provision for chemical products not elsewhere specified. Since the krill oil is described by at least one other heading, 3824 cannot apply.

To be classified in Chapter 15, the krill oil must be an "animal oil." This is where my limited knowledge of zoology might come in handy. I know, via Wikipedia, that krill are subject to the following taxonomical breakdown:

Kingdom:
Animalia
Phylum:
Arthropoda
Subphylum:
Crustacea
Class:
Malacostraca
Superorder:
Eucarida
Order:
Euphausiacea

From Wikipedia

I also know that creatures in the kingdom Animalia are, by definition, animals. So, this should not be an issue as far as science and the English language is concerned.

But, this is tariff classification we are discussing. In the tariff, an animal oil is defined as "esters of glycerol with fatty acids (such as palmitic, stearic and oleic acids)." This definition is apparently fairly consistent in the literature. The kind of fatty acid found in animal fats is chiefly of triglycerides and small amount of other stuff including free fatty acids.

It turns out that the krill oil is low in triglycerides (23%) and is mostly phospholipids (53%). Since the triglycerides do not predominate, krill oil is not animal oil, at least not according to the Court of International Trade. Despite the product being known commercially as an "oil." Advertising and marketing is evidence to be considered, but does not determine tariff classification.

Having excluded Heading 3824 and Chapter 15, the Court classified the merchandise in 1603.00.90 as an extract of crustaceans. Yummy.

This is one of those cases I tend to find frustrating. The Court relies heavily on the Explanatory Notes for a definition of "animal oils" as esters of glycerol, etc. But the term "animal oil" is not defined in the actual Harmonized Tariff Schedule. That means the Court has added a limitation to the scope of the term "animal oil" by relying, in part, on the Explanatory Notes. In this case, the Court noted that this limitation is consistent with scientific and other lexicographical sources. Consequently, I don't think there is a real problem here.

But, on principle, the Explanatory Notes, in my view, should not be elevated to nearly statutory authority unless there is some ambiguity and the available sources of common and commercial meaning have been exhausted. I HATE the fact that the Explanatory Notes are not available for free to the trade community. If the United States Government expects importers to always consult the Explanatory Notes, they should be available to importers just like the regulations, the tariff, and CBP rulings: free. I know that is not the majority view of the Explanatory Notes. Nevertheless, I think we should consult to the Explanatory Notes less often and with less deference, at least until they are made freely available.



Tuesday, March 29, 2016

Reminder: DiCarlo Lecture and CLE Program April 14, 2016

Don't forget to register for the upcoming DiCarlo lecture and the CLE event at the John Marshall Law School in Chicago. It's April 14, 2016. Speakers will include Chief Judge Timothy Stanceu of the U.S. Court of International Trade. Registration information is here.

Wednesday, March 16, 2016

Ruling of the Week 2016.10: Share-A-Dram and NAFTA Marking

I've been at this a long time. Nevertheless, I am still sometimes surprised. That happened when I read N272495 (Mar. 1, 2016).

There are two "travel kits" at issue in this ruling. These are travel kits of the kind used by Victorian gentlemen tromping around the Amazon or Africa trailing a line of porters carrying their necessities. In this case, the necessities include six glass bottles with caps, two pipets, a funnel, coasters, a whisky taking journal, some other stuff, and a leather case for all of it. There is also a Share-A-Dram kit consisting of 12 glass bottles, a funnel, paper neck tags, and sample tasting ledger.

Customs and Border Protection decided that these kits are to be classified as retail sets based on the single item that imparts their essential character. For the travel kits and the Share-A-Dram, that is the glassware, specifically the drinking glasses, which are the most expensive glass items.

Here's the more interesting point. The drinking glasses are made in Germany and etched in the UK. There are pipettes in the kits, which are products of the United States. Everything else appears to be from China. The leather case includes a Japanese zipper. So, how should the importer determine the country of origin of the set and how should it be marked?

Interestingly, and without discussion, Customs used the NAFTA marking rules of 19 CFR Part 102 to determine whether the glass etching produced a tariff shift in the UK (it did not). Similarly, Customs used the NAFTA rules to determine that the zipper form Japan made a sufficient tariff shift to make the leather case a product of China. Chinese pencils embossed in the US do not change tariff classification and remain products of China.

Why is Customs doing this? It gives me a headache and this kind of analysis has given me a headache for years.  The only clue I can find is that the party requesting the ruling is in British Columbia, which is in Canada, which is a NAFTA country. The NAFTA marking rules are applicable to goods of a NAFTA country, so maybe that's the connection.

Let's assume that the goods are actually shipped from Canada, is this analysis correct? 19 CFR 134.1(b) says this:

Country of origin. “Country of origin” means the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin” within the meaning of this part; however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin. 

So let's say, hypothetically, I import a German glass, etched in the UK from Canada. How do I determine the country of origin? Well, it comes from Canada, so for laughs we can check the NAFTA rules. We do that, and we determine that the glass is from Germany. It is not a good of a NAFTA country. Are we done? I don't think so. We next have to ask whether the etching is a substantial transformation. It's not, so we end up at the same place, but this is not a trivial matter.

The reason we have NAFTA tariff shift rules is to replace the substantial transformation test. That means the two test might produce different results. The NAFTA rules apply to goods of a NAFTA country. That means the NAFTA rules do not apply to goods for which the NAFTA marking rules indicate that the country of origin is other than Canada, Mexico, or the United States.

When a product is not the good of a NAFTA country, Customs needs to revert to substantial transformation. Or, am I wrong? Someone talk me out of this.








Congrats ICPA

Congratulations to ICPA on another successful (and sold out) conference. I heard lots of good talks and had fun fake-litigating the classification of chopped olives. Sadly, I lost. I also got to do a last-minute recycling of my talk on tariff engineering, which was both fun and efficient (since the work was already done).

Thanks to all the blog readers who introduced themselves. See you next year.

Friday, March 11, 2016

Ruling of the Week 2016.9: Contact

Having already invoked Star Trek: First Contact today, I will now reference Contact.

Arecibo, Puerto Rico is probably most famous for being the location of the Arecibo radio telescope observatory. It was there that the fictional astronomer from Carl Sagan's book, played by Jodie Foster in the movie, successfully decoded a message from intelligent aliens. The book is better than the movie, but both are worthwhile.



Recently, Arecibo became home to a 360-foot monument to the European discovery of the New World. Note that 300 feet is roughly the size of the Statute of Liberty.

The customs issue in NY N272432 (Feb. 26, 2016) does not have to do with the statute. Instead, it has to do with tchotchkes sold as souvenirs in the gift shop near the monument. In particular coffee mugs that have the words "Puerto Rico" or "Arecibo, Puerto Rico" printed on them.

The question presented to Customs and Border Protection was how to properly mark these mugs with their country of origin. The mugs are made in China. As such, they are articles of foreign origin that must be marked with their country of origin in a manner that is conspicuous, permanent, and legible. 19 USC § 1304.

Typically, the origin label on a coffee mug could be placed on the bottom. That is reasonably conspicuous and easy enough for the consumer to find. But, there is a regulation (19 CFR § 134.46) that says that if there is a geographic indication on the item that is not the country or locality of origin, then the true origin label must be in close proximity and in comparable size. You can image that a large "Made in China" label near the "Puerto Rico" marking would be less than aesthetically ideal.

Recently, we discussed an exception to this rule that applies where the locality is part of the trademark for the item. It turns out that another exception applies.

Under § 134.47, the "close proximity" requirement does not apply if the locality is stated as part of a "souvenir marking." That is the case here. "Puerto Rico" is on the mug to make the mug a tourist's keepsake from the visit. Consequently, according to Customs and Border Protection, placing the origin marking "Made in China" on the bottom of the mug via an adhesive label is perfectly acceptable.


Ruling of the Week 2016.8: Silence of the Borg

By my calculation, this is week 10 of 2016 and this is ROTW 8, I am getting close.

Today's ruling might make the squeamish among you go "Eww," but it shouldn't. The product in question is a three-dimensional reconstructed human epidermis. When I read that, I pictured a fully human-shaped skin ready for taxidermy or some more nefarious use. The reality is far more mundane and much more scientifically cool.

The ruling is NY N270364 (February 19, 2016). The product turns out to be an "in vitro " epidermis grown from human skin and other cells cultured on a polycarbonate substrate. Here is the technical lowdown on it. The commercial purpose of this is not to build Buffalo Bill-style human skin suits or to give Mr. Data goosebumps. The idea is to have an in vitro model for testing drugs, cosmetics, etc.

Star Trek: First Contact
According to Customs, this item is classified as "Human blood . . . vaccines, toxins, cultures of micro-organisms (excluding yeasts) and similar products" in HTSUS item 3002.90.5150, which is duty free.

Customs and Border Protection noted that this product may be subject to regulations of the Centers for Disease Control and Prevention, which should make us all happy.

Tuesday, March 08, 2016

Ruling of the Week 2016.7: Microsoft Band

First things first, I admit that I am in the tank for Microsoft products. I have multiple Windows 10 computers and a Windows 10 tablet. I am also on my third Windows Phone. I stared with a Samsung Windows 7 device, moved to a Nokia Lumia 920, and now carry a Lumia 950, which I keep slightly ahead of the curve through the Insiders program. I recently got my hands briefly on a Surface Book, on which I have a serious crush. I also have most of my personal data in the Microsoft cloud via OneDrive and Office 365. I am, as you can see, all in on Windows. Nevertheless, I do not have a Microsoft Band fitness tracker.



Before we discuss why I have so far skipped the Microsoft Band, we should talk about its tariff classification. I raise this because Customs recently ruled on the question. According to HQ H265035 (Jan. 19, 2016), the Microsoft Band is classified in subheading 8517.62.00, HTSUS, as an apparatus for the transmission or reception of voice, images, or data . . . ." This is a good result for Microsoft because the duty rate is free. I have no intention of trying to muck that up here. Also, the analysis is entirely consistent with Customs' prior decision on a Samsung smart watch, which we analyzed here.

In a nutshell, Customs stated that the Band is a device comprised of multiple electronic components including a display, sensors for heartrate and acceleration, a GPS receiver, a Bluetooth transceiver, and a wrist watch. Given that no one HTSUS heading describes the product, Customs determined the proper classification under General Rule of Interpretation 3(b) based on the one component that imparts the essential character. Customs then found that the Bluetooth connectivity to a paired mobile phone enables many of the Band's functions. Unpaired, the Band has limited utility. Consequently, the Bluetooth transceiver imparts the essential character.

My minor complaints about the analysis remain minor and are well explained in the smart watch post. I will leave it at that.

That brings me back to why I do not yet own a Microsoft Band. The reason is that I currently own a relatively old but perfectly functional Polar C300 cycling watch. The watch uses a chest strap heart rate sensor and on-bike speed and cadence sensors to capture data. The Band would add GPS ride data, which would be great, but I can get that with a phone app and would lose cadence. Also, I have read that the Band's heart rate sensor records data less frequently than does the Polar HRM.

Here is what I want. Microsoft, if you could do me this favor, I would run out and buy a Band. Please add on-bike sensors to capture cadence and possibly a chest-strap for better heart rate data. The Band has Bluetooth, so wireless sensors should be possible. Then, I would gain GPS tracking, all the great connectivity features of the Band and not lose any cycling data. The alternative of a new Polar V800 seems a little excessive given that my current watch is working perfectly. Still, my birthday is coming up, so keep that in mind.



Thursday, March 03, 2016

JBLU: A Trademark is a Trademark

Remember JBLU, Inc. v. United States? It was an interesting Court of International Trade decision involving whether the use of a geographic terms in a trademark required a country of origin marking in close proximity when the trademark was not registered with the U.S. Patent and Trademark Office.

What is at issue here is 19 CFR §§ 134.46 and 134.47. Under § 134.46, when a geographic location is indicated on an imported article or its container, and that indication may mislead the ultimate purchaser as to the actual country of origin, then the article must also be marked with it correct country of origin in close proximity. Section 134.47 provides a more lenient rule where the geographical indication is part of a trademark or trade name.

According to the Court of International Trade, without a registration or a pending application, the use of the geographic indicator triggers the more strict requirement for a close-by country of origin marking. The Court of Appeals for the Federal Circuit has weighed in and basically said, "You've got to be kidding me."

The Federal Circuit's analysis is nicely reductionist. There is, in this case, no need for fancy arguments. The only question is whether the label on the imported blue jeans which included the terms "USA" and "Los Angeles," were "trademarks" within the meaning of the regulation.

The Federal Circuit opened a dictionary, discovered that the dictionary definition of "trademark" does not depend on whether the mark has been registered or an application for registration is pending. Consequently, without some similar limitation in the regulation, the word "trademark" has to be given its broader meaning. Even definitions from the Lanham Act, which is the U.S. federal trademark law, do not require that the marks be registered to be trademarks. According to the Court of Appeals, the word "trademark," in this context, "unambiguously incudes trademarks without a pending application."

Consequently, the Court of International Trade decision was reversed and the case was remanded.

That is a pretty detailed point of law. But, there is a bigger moral to the story. This reaffirms the uncontroversial proposition that Customs, like all federal agencies, must interpret its regulation consistent with their plain meaning. In the absence of ambiguity, Customs is not entitled to apply the regulation in a way that is inconsistent with the clear meaning. Given the Federal Circuit's perception that this regulation is clear, Customs had no basis on which to read a limitation into it.

Good job to counsel for the plaintiff.


Come see me April 14

If you area a compliance person in the Chicago area, please come to the DiCarlo Lecture and CLE event at the John Marshall Law School on April 14. The event will end with a talk by Chief Judge Stanceu of the U.S. Court of International Trade. There will be a two hour CLE event leading up to his talk. The first panel will focus on international corporate compliance and ethics. The second panel, which I will moderate, will focus on Customs and Border Protection penalty cases. Judge Stanceu is expected to talk about the international harmonization of tariff law and its impact on U.S. court cases. The CLE event requires a registration fee. The DiCarlo Lecture, which is Chief Judge Stanceu's talk, is free, but registration is required. Click the link above to register.


Tuesday, March 01, 2016

Ruling of the Week 2016.6: His (K)nobs

Here is a classic classification ruling I use for teaching. It is a good example of how applying General Rule of Interpretation 1 almost always gets to the result, even if that result seems counterintuitive. The ruling is NY J82174 (Mar. 31, 2003).  Just to be clear, I know the ruling was subsequently modified, but not in a way that is meaningful for this analysis. I'll deal with that at the end.

The products involved are rotary knobs for household appliances. They go on washing machines, dryers, electric stoves and gas stoves. They are all made of plastic with small amounts of metal at the insertion point for to attached to the post from the internal workings of the device. All of the knobs have an indicator mark used to line up to the control variable on the appliance. In other word, there is pointer on the knob that will show whether the stove is set to high, medium, low or what have you.

With one exception, all of the appliances are classified in Section XVI, Chapters 84 and 85. A gas stove is classifiable in Chapter 73. What to do about the classification of these essentially identical knobs?

Where might these go? Arguably, they can all be described as parts of their appliances. They might also be plastic knobs of Heading 3926.

Now, let's do the analysis following the General Rules of Interpretation, starting with GRI 1. Are there any section or chapter notes that control the outcome?

It turns out that Chapter 39, Note 2(s) excludes "Articles of section XVI (machines and mechanical or electrical appliances)." If the knobs are articles of Section XVI, they are not classifiable in Heading 3926.

So, are the knobs articles of Section XVI? There are no section notes that appear to exclude the knobs from Section XVI. Further, Note 2(b) indicates that parts that are suitable for use solely or principally with a machine of Chapter 84 or 85 should be classified with that machine unless there is a specific provision for the part. Washers and dryers are classified in Chapter 84. Electric stoves are classified in Chapter 85.

That means, according to this ruling (which gives far less of an explanation that I just gave you) the knobs should be classified as parts. Specifically, the washing machine knob goes in 8450.90.6000 as part of a washing machine. The dryer knob goes in 8451.90.30000* as part of a dryer. The electric stove knob goes in 8516.90.8000 as part of an electric stove.

Seems perfectly cromulent.

Following that logic, where do we classify the knob for a gas stove? As parts of gas stoves in Heading 7321?



Unfortunately, that logic does not work. Instead, we must follow our analysis to get to the legally correct result. There are no section notes that appear to exclude knobs from Section XV, where gas stoves are located. Similarly, there are no chapter notes excluding the knobs from Chapter 73. So far so good, but where do they go in Chapter 73?

The only place in Chapter 73 that seems to make sense is as a part in Heading 7321, which covers:

Stoves, ranges, grates, cookers (including those with subsidiary boilers for central heating), barbecues, braziers, gas rings, plate warmers and similar nonelectric domestic appliances, and parts thereof, of iron or steel

Notice anything? Look again. The "parts thereof" phrase is modified by "of iron or steel." As a result, plastic knobs are excluded from Heading 7321. The Chapter 84 and Chapter 85 headings had no similar exclusionary language.

That puts us back in Heading 3926, the only remaining possibility for these knobs. The correct classification being 3926.90.25 as plastic knobs and handles, not elsewhere specified or included. Only the knobs for gas stoves fail to be specified or included elsewhere, so they go here.

All of that was accomplished without moving beyond GRI 1.

*Now, let's deal with the modification.

In the modification, Customs realized it provided the wrong classification for the dryer knob at the eight-digit level. Originally, it had classified this knob in 8451.90.9010 as other parts of machines for washing, dry-cleaning, ironing, pressing or drying made-up textile articles or of other household or laundry type machines. On reflection, Customs realized that the correct classification was 8451.90.3000 as parts of machines of 8451.21 to 8451.29 incorporating drying chambers. That is the correct classification.

The modification of rulings, however, requires public notice and comment under 19 USC 1625(c). The notice produced one comment arguing that the knobs should be classified consistently, which makes some sense. In particular, think about gas and electric stove knobs you have seen. They are likely identical and interchangeable. Why should they be treated differently?

While this makes sense, it will require different facts. Here, the parts each had unique part numbers and were described as having different applications. From that, Customs and Border Protection reasonably concluded that the knobs were not interchangeable. Rather, consistent with the application of Section XVI, Note 2, they were used solely or principally with their designated appliance. Thus, they should be classified with those machines.

Finally, what's with the Jack of Diamonds? If you don't play cribbage, see here. If you play cribbage, you knew from the title what I was up to.