Ruling of the Week: Note Cards

Frankly, I am not the most thoughtful person in the world. I know that. I try my best to make up for it. Rarely does that effort include a greeting card. When forced by circumstances, I stand at the local Walgreen's card racks staring into an abyss of cards that are never quite right. Finding something in the sweet spot between excessively sappy and an infantile effort at humor is incredibly frustrating. Often, I end up with a call, email or the dreaded Facebook message. So, it surprises me to learn that people still buy boxes of pre-printed cards as ready-at-hand supplies should the need for a card materialize. Apparently, this happens.

This all comes to mind in the context of HQ H305186 (May 8, 2020) in which Customs and Border Protection classified a set of 60 note cards for Michaels Stores. The image below is not the cards in question, but are cards available from Michaels, so I figure they will not mind me using the image.

The actual cards in the set fell into distinct categories, which will be important for classification purposes. Three styles of cards were printed with an exterior design. Three styles had text on the outside conveying the message "Thank You," "Cheers to You," or "Yay." All of the cards were blank on the inside.

There are two relevant tariff headings:

4909

Printed or illustrated postcards; printed cards bearing personal greetings, messages or announcements, whether or not illustrated, with or without envelopes or trimmings:

4911

Other printed matter, including printed pictures and photographs:

The difference between merchandise covered by these headings is pretty clear. If the cards bear a personal greeting, message, or announcement, they are classified in 4909. If not, they go in 4911.

The problem is that the set of cards is a mixture of cards with text and those that only have graphical elements. What to do?

As always, the answer lies in the General Rules of Interpretation. In this case, GRI 1 does not resolve the question because the two heading are equally applicable to the merchandise. That means we look to GRI 3(b) to classify the set on the basis of essential character. According to the Explanatory Notes, essential character is determined on the basis of the nature of the components including bulk, weight, value, and the role of the component in relation to the use of the good. Explanatory Notes, GRI 3(b) VII.

Here, the note cards are in equal quantities of textual and graphical. The values are also comparable. Thus, CBP determined that there is no component that imparts the essential character.

Consequently, CBP applied GRI 3(c) to classify the set in the HTSUS item that occurs last in numerical order (among those that merit equal consideration). Here, that is 4911 and the correct classification is 4911.91.40. 

Typically, both possible classifications are duty free. But, in today's world, there is a difference in the 301 duties. That probably explains the ruling request. This might create an opportunity for the company to manage its supply chain to engineer around the higher 301 duties by shipping the cards printed with text separately and packing the sets in the U.S. Or, it might be sufficient to change the number or value of each style of cards to establish the desired essential character. That, of course, depends on whether the savings justify the added costs. Still, it is something to consider.

Bottle Toppers, Assemble!

Under any circumstances, if the Court of International Trade mentions Iron Man and Thor in a decision, it has my attention. Even more so as I sit here today, working from home, wearing a Captain America t-shirt and a quarantine beard. For those who care, the Court also mentioned Care Bears, Ariel, and Sponge Bob. Pick your own fandom.

The cause for all this pop culture excitement is the decision in In Zone Brands, Inc. and Good2Grow, Inc. v. United States, which involves the classification of plastic bottle toppers molded into the forms of licensed characters and sold connected to a bottle of juice. In life, the products look like this:

The plaintiffs claimed that the toppers, imported separate from the bottles of juice, should be classified as toys in Heading 9503. Customs & Border Protection classified the merchandise in Heading 3923 as stoppers, lids and other closures of plastic.

Those of you who have been around for a while might think this question was resolved in 2000 in a case called Minnetonka Brands, Inc. v. U.S. I discussed that case and a related ruling here. Times change, statutes change, and (as you will see) results change.

The legal text, as always matters. Plaintiffs point to Chapter 39, Note 2(y), which excludes from that chapter "articles of chapter 95 (for example, toys . . . .)." So, if the bottle toppers are toys, they cannot be classified in Chapter 39. On the other hand, Chapter 95 includes Note 1(v) which excludes from Chapter 95:

Tableware, kitchenware, toilet articles, carpets and other textile floor coverings, apparel, bed linen, table linen, toilet linen, kitchen linen and similar articles having a utilitarian function (classified according to their constituent material).

Thus, if the toppers are kitchenware or a similar item with a utilitarian function, they cannot be classified in Chapter 95 and they drop back into Chapter 39.

The history of Note 1(v), which is now Note 1(w), is relevant.  It was added to the HTSUS to deal with the fallout of the litigation surrounding the classification of festive items. When that tariff was amended to confirm that utilitarian items with festive motifs were nevertheless classified based on their material, the result would have been that products that had been duty free under Chapter 95 would become dutiable in other chapters. That violates the rule of rate neutrality. To fix that, two items were added to Chapter 98 to maintain duty-free status for these goods while still having them classified in their proper headings. Those items are 9817.95.01 and 9817.95.05 and both make reference to use in connection with religious or cultural holidays and celebrations. According to the plaintiffs, that indicates that Chapter 95, Note 1(v) only excludes festive articles. The Court did not agree. Rather, it found the language of the Note includes no such limitation. Instead, it simply clarifies the understanding that primarily utilitarian merchandise is not classifiable in Chapter 95. Because the Note applies, the question becomes whether the bottle toppers have a utilitarian function. If the function is principally "amusement, diversion, or play," then the toppers remain in Chapter 95.

To sort that out, the Court undertook a thorough application of the "Carborundum factors" to determine the principal use of the merchandise. I am not going to go through all of that here. I will, however, point to a few facts that seem to be most salient.

• There is evidence that children collect and play with the bottle toppers
• The bottle toppers are generally sold at retail with the juice-filled bottles and usually along side other juices
• The toppers have a unique thread and valve system designed specifically to match the bottles
• The toppers meet ASTM choking risk standards for toys
• The toppers meet FDA standards for beverage packaging
• The molded character design adds costs not related to the utilitarian function
• The circumstances of the sale indicate the topper is designed to appeal to children to encourage the purchase of juice by adults

Looking at these factors, the Court found that the toppers are not primarily for for amusement and, therefore, are not classifiable in Chapter 95.

But, there is the issue of Minnetonka in which the the opposite result was reached. Several points distinguish that case. First, Note 1(v) had not been added to Chapter 95. That means the applicable law has changed. Also, the facts were different, In Minnetonka, the bottles themselves were formed like the character represented by the topper. This added amusement value to the entire item. Also, the Minnetonka toppers were simple caps that sat on top of a traditional screw cap for a bottle. In contrast, the juice bottle toppers include a valve and straw. The Court, therefore, was not persuaded to follow Minnetonka.

Having eliminated Chapter 95 as a possible classification, the Court held that the bottle topper are properly classified in 3923.50.00.

Ruling of the Week: Rice Krispies Treats

I had a long run of covering at least one CBP ruling every week. I enjoyed doing that as it allowed me to find an odd ruling and use it as a tool to illustrate some point. That fell by the wayside, mainly because of the time commitment it takes to do actual work and also write other content for the blog. On the other hand, I kind of miss it. Others have tried to fill that space. I am looking at you, Crowell & Moring. 

Today, I am inspired to jump back in. That inspiration came in the form of the printed New York Times. In today's Science Times, there was an interesting and entertaining discussion of whether a reasonably functional traffic barrier could be made of Rice Krispies Treats. In the course of that discussion, the author quotes Customs & Border Protection for what seems to be an "official" description of a Rice Krispies Treat. According to the Article: "[T]he Tariff Classification and Marking Branch, a part of U.S. Customs and Border Protection, describes them as 'moist, gooey, sticky, easily malleable, and very sweet like a marshmallow . . . .'"

That surprise appearance by CBP at my breakfast table caused me to look up the source of the quote. It comes from HQ H200575 (Apr. 16, 2012). In the ruling, CBP grappled with three questions. First, what is the classification of a brick made of cereal and marshmallow? Second, is said brick entitled to NAFTA treatment when made in and imported from Mexico? Third, how should said brick be labeled to show its country of origin?

On the classification, the competing headings were 1704 covering sugar confectionery and 1904 covering prepared foods obtained by swelling or roasting cereal products not elsewhere specified or included.

After apparently eating one (or more) Rice Krispies Treat, CBP determined that it is sweet. It also determined that more than 50% of each bar is sugar. Customs noted that the bars are sold ready to eat and not as ingredients on other products. More on that later. Finally, the bars are sold with snack bars and sometimes alongside candy, Consequently, CBP held that the treats are classified as confections in Heading 1704. 

On the NAFTA front, the the non-originating materials used in the production (is it baking?) of these treats underwent the required change in tariff classification. So, the treats are NAFTA originating. Similarly, each foreign ingredient underwent the change in tariff classification required by the NAFTA marking rules. Consequently, they could be marked as products of Mexico.

And there you have a new Ruling of the Week (although it is an old ruling).

I do want to have a discussion about the notion that Rice Krispies Treats are not ingredients in other prepared foods. I watch a lot of competitive baking. Everything from the always informative The Great British Baking Show to the almost painful Nailed It. I watch enough of this genre of television to know that Duff was robbed and that Adriano Zumbo is a magician. I also know that "crisped rice treats" are the go-to material to fill gaps and create structures in what for some reason people continue to call "cake." Crisped rice, as they are generically called when allowed on these programs, is the drywall of the baking industry. So, while this has not bearing whatsoever on the CBP ruling, it think it is fair to say that bricks of puffed rice and marshmallow are actually building materials of Heading 6808. In this case, the rice is the vegetable fiber and the marshmallow is the binder.

Kellogg's call me if you want to try that, but not on a contingent fee basis.

Worn Clothing and Commingled Products

One thing you learn as a customs and trade professional is that there is international trade in just about any commodity you can imagine. Today, we are dealing with the inbound trade in used clothing. I was aware that there is a lot of exporting of this product from the U.S. both for resale and also for recycling. The NPR podcast Planet Money did a great episode on the afterlife of U.S. clothing in Africa and then tracked down the original owner of a bat mitzvah t-shirt that ended up in Africa. Here is a report on that story from Haaretz and here is the original podcast. But, Dis Vintage LLC v. United States is a case about the classification of used clothing coming into the United States.

The plaintiff imported bales of used clothing and classified the merchandise in HTSUS item 6309.00.00 as "worn clothing," which is a duty free. CBP sampled the merchandise and found that the clothing did not show "appreciable wear." CBP has long used "appreciable wear" as the test for whether clothing is classifiable as "worn." In CBP's view, the bales consisted of commingled clothing some showing appreciable wear and some not. As a result, CBP classified it in the HTSUS item with the higher rate of duty, which is 6204.63.35 with a duty rate of 28.6%. That, obviously, is a big difference and worthy of a fight.

The plaintiff's position is simple enough. This is second hand clothing. It has been worn. It should be classified as worn clothing.

The harder part is Custom's position. Customs has long held that worn clothing shows visible damage, impairment or change in physical condition that results from continued use. Under this standard, some of the clothing in the bales would be classifiable as worn clothing if entered individually. But, HTSUS General Note 3, which is the Note that specifies the rate of duty applicable to goods in a given classification, states at 3(f):

(i) Whenever goods subject to different rates of duty are so packed together or mingled that the quantity or value of each class of goods cannot be readily ascertained by customs officers (without physical segregation of the shipment or the contents of any entire package thereof), by one or more of the following means:

    (A) sampling,

    (B) verification of packing lists or other documents filed at the time of entry, or

    (C) evidence showing performance of commercial settlement tests generally accepted in the trade and filed in such time and manner as may be prescribed by regulations of the Secretary of the Treasury,

the commingled goods shall be subject to the highest rate of duty applicable to any part thereof unless the consignee or his agent segregates the goods pursuant to subdivision (f)(ii) hereof.

However, General Note 3(v) provides that GN 3(f) does not apply where the HTSUS grants commingled goods a particular tariff treatment. Keep an eye on that, it will come into play.

That is the basis for the assessment at the highest applicable rate of duty.

The starting point for the Court was to define "worn clothing." The HTSUS provides, at Chapter 63, Note 3 that to be classified in Heading 6309, the goods must show signs of appreciable wear and that must be entered in bulk or in bales, sales or similar packaging. After looking at the parties' competing dictionary definitions, the Court found the common "thread," [see what he did there?] that the wear be readily or clearly noticeable. 

Next, the Court turned to what constitutes "wear." First, the Court held that in this context, "worn" is an adjective describing the state of the clothing and not a past-tense verb indicated that the clothing had been on an actual human being. "Wear" is a noun describing elements of the condition of the clothing. Wear, according to the Court, is a condition of physical deterioration that arises through use. Customs argued that the standard should require the damage to arise from "continued use," but the Court rejected that standard as not supported by the HTSUS. 

There was no debate about whether the goods were imported in bales. They were. 

This, according to the plaintiff, is sufficient to trigger General Note 3(v) and avoid the application of the GN 3(f) highest-rate-of-duty rule. The idea is that clothing in bulk or bales is a particular tariff treatment dictated by the packaging of the clothing. No other tariff item for clothing includes this requirement and, therefore, plaintiff argued that the bales are excluded from being treated as commingled goods. For its part, the U.S. pointed out that the first requirement of Chapter Note 3 is that every article show signs of appreciable wear. The problem with plaintiff's argument, according to the U.S., is that it would allow for the duty-free entry of any clothing packed in bales. This probably overshoots the mark as there would need to be at least one item showing wear, but that is beside the point because the Court agreed with the U.S. As a result, it dismissed the idea that "in bales" created a particular tariff treatment. That conclusion allows for the possibility that the commingled products rule will apply.

Let's take a brief aside here. So far, nothing in this case has turned on a dispute about the merchandise. The definition of the terms "worn" and "appreciable" are questions of law to be determined by the judge without regard to the particular facts of the case. I do not know whether there was any time spent on discovery in this case. I imagine that someone was deposed to give his or her opinion on whether particular items of clothing showed signs of wear. There might also have been CBP laboratory work in which white-coated technicians measured and recorded abrasions, tears, and discolorations. But, from reading the opinion, it appears that none of that has mattered. We should keep that in mind when managing classification litigation. Would this case have been resolved more quickly and efficiently had the Court been asked to or taken the opportunity to define these terms earlier in the dispute? I think the answer to that is yes. But, I was not involved and do not know for certain.

With all those bricks in place, the Court could move on to classifying the merchandise.

The Court started by dismantling CBP's administrative position that "appreciable wear" is present when the fabric succumbs as a result of continuous use.  CBP has also characterized appreciable wear as fabric that is "greatly stressed" or "reflecting physical deterioration." But, the Court pointed out, Chapter 63, Note 3 is not that specific. It does not require that the wear be to the fabric. Nor does the note require that the wear be from "continued use." Thus, there is no requirement that the wear result from "continued use."

The last question to be resolved is whether the merchandise is actually commingled. There are three requirements for goods to be treated as commingled:

1. The goods are subject to different rates of duty;
2. The goods are packed together or mingled; and
3. The quality or value of each class of merchandise cannot be readily ascertains by (A) sampling, (B) packing lists, etc.

The Court held that clothing in 100-pound and 1000-pound bales are not segregable. Second, the volume of different items and conditions in the bales makes it impossible to readily ascertain the breakdown of the merchandise. If any of the clothing is not "worn" as defined by the Court, then there would be different rates of duty applicable to merchandise present in the bales. 

The problem for the Court and the parties is that CBP misapplied the definition of "worn" by adding the requirement that that the wear be to the fabric and result from continuous use rather than just use. This creates a genuine question of fact that cannot be resolved on the record presently before the Court. Under the proper tests, it is possible that all of the clothing is worn and, therefore, not subject to different rates of duty. In that event, the commingled goods rule does not apply.

Given the lack of evidence presented, the Court remanded the matter to CBP to re-review the merchandise and make a determination as to whether any of it is subject to a different rate of duty (because some portion of it does not show noticeable damage resulting from use).

Given that this is Judge Reif, the opinion ends with a reference to literature. In this case, the Walt Disney version of Mary Poppins (1964) in which the Banks' and Ms. Poppins discuss the state of her new quarters and of her large and magical carpet bag. The point of which is that we are reminded to "Never judge things by their appearance." Customs, however, will have to do exactly what we have been warned against; it must judge the subject merchandise on the basis of its appearance determine whether it is worn. Regardless of how this particular case comes out, the Court has provided valuable guidance on how CBP is to conduct that analysis. Any further litigation in this case will, therefore, turn on the actual facts. That may or may not be good for the plaintiff. But, going into that phase, the parties now know the rules. 

New Challenge to 232 Duties Focuses on Exclusions

On April 21, 2020, Barnes, Richardson & Colburn LLP opened a new line in the challenges to certain Section 232 imposed duties on steel and aluminum products. In this case, brought on behalf of a Michigan-based metals importer, the challenge is directed at the exclusion process implemented by the Commerce Department. Specifically, because Section 232 exclusions are not applicable to all importers of the same product and are not implemented by changes to the Harmonized Tariff Schedule, the exclusions result in the HTS items being non-uniform in their application to importers of merchandise classified under the same tariff item. This system is contrary to the constitutional requirement that “all Duties, Imposts and Excises shall be uniform throughout the United States . . . .”

We believe that companies that continue to pay 232 duties for merchandise classified in an HTSUS item for which another entity has received an exclusion are at a competitive disadvantage and may be entitled to have the same tariff treatment applied to their imports. If your company is paying 232 duties on merchandise classified in a tariff item for which a competitor or other entity has secured an exclusion, contact a BRC attorney to discuss whether you might be eligible for a refund.

A Victory for the Vaquita that is Hopefully Not Too Late

The Court of International Trade has issued an order lifting an injunction aimed at protecting the vaquita from illegal fishing by banning the importation of certain fisheries products from Mexico. The vaquita is a critically endangered porpoise that is endemic to the Gulf of California.

The order is the result of a favorable settlement between the government and several environmental organizations. That is a good thing. For background on this case, read this post.

The Court approved the settlement stating that

the Government has changed course, announcing an embargo that embraces the one sought by Plaintiffs in their complaint and preliminarily issued by the court; indeed, it expands its reach. In short, Plaintiffs have achieved the outcome they sought before the court in the suit they filed. Presented for the court’s review is the settlement of the instant litigation as set forth in the Stipulation and Proposed Order of Voluntary Dismissal Under CIT Rule 41(a)(2), Apr. 10, 2020, ECF No. 112 (“Stipulation and Proposed Order”), filed by the parties.

There is not a lot to say, but I will provide this passage from CIT Judge Katzmann:

The road to this day has been a tortuous one. The vaquita remains an endangered species; every death brings it perilously close to disappearing from the planet forever. The illegal trade in the totoaba, caught in gillnets which catch and strangle the vaquita, is a matter not before this court -- but the need for vigorous international enforcement against its continuing threat is a  compelling one. On this Earth Day, as we ponder the imperatives of biodiversity and the environment, we would do well to heed the sobering words of Rachel Carson: “So delicately enterwoven are the relationships that when we disturb one thread of the community fabric we alter it all -- perhaps almost imperceptibly, perhaps so drastically that destruction follows.” The panda of the sea, the little cow, cannot be replaced.

July 18 is (apparently) International Save the Vaquita Day. Make a contribution to a conservation organization. I am not vouching for any particular organization, but the Porpoise Conservation Society appears focused on saving the vaquita. Check them out. The plaintiff organizations in this case can also use your support. Visit the NRDC, Center for Biological Diversity, and Animal Welfare Institute to donate.

90-Day Duty Deferral Ordered for COVID-19

Customs & Border Protection has issued a CSMS notice alerting the trade to an emergency order from the White House to defer the collection of some duties for goods entered between March 1 and April 30, 2020.

The text of the summary of the corresponding Federal Register Notice is as follows:

SUMMARY: In light of the President’s Proclamation Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) (Presidential Proclamation 9994) under the National Emergencies Act on March 13, 2020, and the President’s Executive Order entitled “National Emergency Authority to Postpone The Time to Deposit Certain Estimated Duties, Taxes, and Fees” authorizing the Secretary of the Treasury to exercise the authority under section 318(a) of the Tariff Act of 1930, issued on April 18, 2020, the Secretary of the Treasury, in consultation with the designee of the Secretary of Homeland Security (U.S. Customs and Border Protection (CBP)), is amending the CBP regulations to temporarily postpone the deadline for importers of record with a significant financial hardship to deposit certain estimated duties, taxes, and fees that they would ordinarily be obligated to pay as of the date of entry, or withdrawal from warehouse, for consumption, for merchandise entered in March or April 2020, for a period of 90 days from the date that the deposit would otherwise have been due but for this emergency action. This temporary postponement does not permit return of any deposits of estimated duties, taxes, and/or fees that have been paid. This temporary postponement also does not apply to entries, or withdrawals from warehouse, subject to certain specified trade remedies, and any entry summary that includes merchandise subject to those trade remedies is not eligible under this rule. 

The CSMS notice is here. A follow up notice on payments is here.

There are important caveats to this, which may blunt the usefulness of this apparent effort to be helpful. First, the notice is clear that the duties that are likely the most worrisome to importers are not covered by this deferral. Specifically, the notice excludes antidumping duties, countervailing duties and tariffs imposed under Section 201, 232 and 301 (you know, the ones that hurt the most).

Moreover, if duties were already deposited, the government is not issuing refunds. That means this whole thing might be useful for the next 10 days and for companies on periodic monthly statements.

In other words, your mileage may vary and it seems may be less than anticipated.