The background is pretty well known at this point; here is the short version. Since the 1960's there has been a 25% duty assessed on motor vehicles for the transport of goods (i.e., trucks). This is the result of U.S. retaliation in a trade spat over European duties on U.S. chicken. As a result, the 25% duty on trucks is known as the "chicken tax." The rate generally applicable to motor vehicles for the transport of people (i.e., cars, passenger vans, and SUVs) is 2.5%. That difference creates an opportunity, which Ford has tried (so far successfully) to exploit. What if you were to import a passenger van, pay 2.5% duty, and then convert it to a cargo vehicle prior to delivery to the dealer or customer? Would that be legal?
That is the question addressed and decided by the Court of International Trade.
The vehicles at issue are Ford Transit Connects. You no doubt have seen these driving around as urban delivery vehicles (think florists, bakeries, plumbers, and similar businesses). You also see them, though less often, as taxis, hotel shuttles, and family wagons. As imported, all the Transit Connects have swing out front doors, second row sliding doors with windows, and swing out rear doors. As imported, they also have a second row seat with seat belts; child locks in the rear doors; lights in the front, middle and rear of the vehicle; a full-length cloth headliner; and coat hooks in the second row.
Importantly, the second row of seats, as imported, does not have certain features. Specifically, the seats do not have headrests, a tumble forward lock mechanism, or accompanying labels. Over time, Ford found ways to reduce the cost of the rear seat. Later versions lacked certain structural wires that make it more comfortable for passengers and were wrapped in a "cost reduced" fabric. There are many other relevant facts stated in the opinion, which is worth reading. But, this is enough for our purposes.
The reason the Transit Connect may not be just a passenger van with a lousy rear seat is what happens after importation. After CBP clearance, but still within the confines of the Port, a Ford contractor unbolts and removes the rear seats and safety equipment. The rear footwells (dips in the floor where passengers would put their feet) are filled to create a flat cargo floor. Sometimes, Ford also removed the rear windows and replaced them with solid metal panels. The result is a cargo van with no rear seats. There is no dispute that had the cargo van been imported, it would have been subject to the 25% chicken tax.
There is another variation of the Transit Connect that has better rear seats and other passenger-related features. These vehicles, identified as the Transit Connect 9, are sold as imported and remain passenger vehicles. These were not re-classified and are not subject to this litigation. But, they illustrate the difference between passenger vehicles intended for the market and those Ford knows at he time of importation will be converted to cargo vans.
The question raised in this case is whether Ford's process of importing passenger vehicles knowing that they will be converted to cargo vehicles is permissible tariff engineering.
The starting point for this analysis is the legal principle that goods are classified in their condition as imported. This goes back at least as far as a 1881 when the Supreme Court held that it was permissible for an importer to darken refined sugar to avoid the higher duty applied to lighter sugar. In that case, the Supreme Court said "So long as no deception is practised, so long as the goods are truly invoiced and freely and honestly exposed to the officers of customs for their examination, no fraud is committed, no penalty is incurred." In a case called United States v. Citroen, 223 U.S. 497 (1912), the importer purchased a string of pearls in France. Prior to importation, the importer unstrung the pearls and imported them with the lower rate of duty applicable to pearls "in their natural state." The Supreme Court found no fraud and upheld the application of the lower rate of duty despite it being clear that the pearls were to be restrung into a necklace after importation.
Those cases and the ones that followed establish that an importer is free to structure its products to achieve the lowest legally available rate of duty. But, there is a caveat. Importers cannot escape an applicable duty by resort to "artifice or disguise." That means that an importer cannot hide the true nature of the imported article. For example, an importer got into trouble when it hid high quality (and high duty) tobacco in a bale of low quality (and low duty) tobacco. Assuming the importer did not properly declare both grades of tobacco, that is fraud; it might actually be smuggling.
Is Ford's process an unacceptable artifice or disguise? According to CBP, the as-imported passenger vehicles with low-cost rear seats were never intended to be sold. That makes them fictional, temporary products that have no real purpose other than avoiding the chicken tax. Customs contended that is a disguise or artifice.
The Court of International Trade disagreed. First, Customs' approach is inconsistent with the general premise that importers are permitted to fashion their merchandise to achieve lower rates of duty. Second, the Court held that asking (or permitting) CBP to inquire as to the subsequent processing of merchandise and the genuineness of the imported product would impair the timely and sound administration of the entry process. Most important, the cases that have found disguise or artifice do so where the appearance, rather than physical characteristics, are changed. Merritt, the sugar case, involved adding molasses to darken light sugar. But, the tariff applicable in 1881 classified sugar based on its color (i.e., its appearance) rather than physical characteristics. That means changing the color of the sugar was changing the physical parameter that controlled classification.
This would seem to decide the issue. The Transit Connects were presumably properly invoiced and reported to Customs. Customs had the opportunity to inspect them and make a determination as to the correct classification. Furthermore, the vehicles as imported had actual rear seats and other passenger-related components.
But, there was more to this. The question remained whether the as imported vehicle has features that satisfy the requirements for classification as a vehicle for the transportation of persons rather than cargo. In other words, did Ford build a real passenger vehicle with what appears to have been an epically lousy rear seat? Or, do the physical characteristics of the as-imported vehicle indicate that it is really a cargo van? According to the Court of International Trade, "That Ford ultimately removes that seat after importation is immaterial." For our purposes, that is the decisive utterance of this case.
Having established that the as-imported condition is what matters for classification, the Court next turned to the classification question. The relevant case for that analysis is Marubeni America Corp. v. United States. In that case, the Court identified a number of structural features that differentiate passenger from cargo vehicles. Many of these are features that interfere with loading cargo or that add comfort for passengers. Looking at the Transit Connect, the Court found numerous similarities to the Transit Connect 9, which remains a passenger vehicles after importation. The only question was whether the cost-reduced rear seat was sufficiently inadequate for passengers to prevent the classification of the vehicle as for the transport of people.
It turns out it is not this rear seat is not so lousy that it does not qualify as a passenger seat. The seats fold forward, but do not lock. The inability of the seats to lock makes transporting cargo more difficult than it would be if the seats locked away. The lack of support wires in the seats did not make them unsuitable for human passengers and they remained compliant with safety requirements. In other words, the cheap seat is still a seat. That means the vehicle, as entered, has features that indicate it is designed for the transport of people.
There was one last issue. Does the post-importation use of the vehicles as cargo vans affect their classification? If the two competing headings are eo nomine classification, use would be largely irrelevant. The Federal Circuit decision in Marubeni did not treat Heading 8703 (covering vehicles principally designed for the transport of person) as a use provision.
But, recent Federal Circuit decisions have indicated that some eo nomine provisions suggest that evidence of use consistent with the eo nomine designation may be relevant and useful for classification. On this front, the CIT held no such inquiry was required. First, the distinction between passenger cars and trucks is not that challenging in light of the established Marubeni factors. Second, Heading 8703 does not suggest a use. Instead, the Heading indicates that design is the primary consideration.
Having walked through that analysis, the Court made a very important ruling that does not substantially change the law. The relevant time for classification remains the time of importation. Importers continue to have the right to fashion products in a manner to achieve the lowest legally applicable rate of duty. At the same time, importers must properly describe their products to Customs. A false statement about what is being imported or an effort to make merchandise appear to be something other than what it actually is at the time of importation will be an impermissible "artifice or disguise." And, finally, the way to distinguish between passenger vehicles and cargo vehicles is to look at whether the vehicle has design characteristics and features that, taken together, show it to be principally designed for the transport of persons (or cargo).
This is a huge win for Ford. More important, it is a huge win to the trade community as a whole. This decision continues the established law and maintains existing compliance obligations. It allows companies to continue to make changes to their products to manage their duty liability, even if those changes are temporary. There is a real question as to how the Court of Appeals will decide the inevitable appeal of this case. Given the dollar amounts that are likely to be at stake and the importance of the legal principal (remember, CBP thinks this is an unfair trade practice), this case might even see an effort to secure Supreme Court review. So, keep your eyes on this case.
Now, whenever you are driving around with someone, if you see a Transit Connect, you will have an interesting work-related story to tell. For all of you who, like me, have friends and family who have no idea what customs law is about, tell them this story. It may be the best example to come along since the debate over whether the X-Men are humans.