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.