Another Update: SGS Sports

Sometimes I am forced to explain to non-customs and trade lawyers the basics of tariff classification and why it is an interesting area of law. I often use the metaphor of doing a complicated puzzle. There are rules to be followed (i.e., the General Rules of Interpretation, Section Notes, and Chapter Notes). Solving the puzzle requires properly applying the rules to the available facts. When you are lucky enough to have an issue that includes some ambiguity, you can use the rules and facts to advocate for the desired outcome. But, like all legal questions involving the interpretation of a statute, it is important that you focus on all the words. That is the main take away from SGS Sports, Inc. v. United States. 

In a nutshell, this case is about whether swimwear imported from Canada could enter the U.S. duty free under HTSUS item 9801.00.20. That provision allows for duty-free entry for:

 Articles, previously imported, with respect to which the duty was paid upon such previous importation . . . , if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States.

U.S. Customs and Border Protection denied the claim and the importer challenged that decision in the Court of International Trade. Both sides moved for summary judgment. There are some complicated facts involving a warehousing agreement between Canadian entities that have office space in the same location and the same sole officer.

What matters most is that 9801.00.20 has a number of specific requirements that an importer must prove to establish the validity of its claim. Specifically, the merchandise must have been:

  1. Previously imported and subject to duty;
  2. Exported from the U.S. under a lease or similar use agreement; 
  3. Not advanced in value or improved in condition by any process or manufacture or other means while abroad; and
  4. Reimported by or for the account of the person who imported it into and exported it from the U.S.
An importer that fails to provide admissible evidence of any one of those conditions does not satisfy the legal requirement for duty-free entry under this HTSUS provision.

In this decision, the Court walked through each of these requirements and found the plaintiff's evidence to be lacking. For example, with respect to the first and last requirements, the plaintiff provided inventory records to establish the date and time of the original entry and the description of the entered merchandise. But, according to the Court, the records failed to show that the subject merchandise is the same merchandise that was previously imported and on which duty was paid. Similarly, the Court found that plaintiff had failed to produce any evidence confirming that the merchandise had not been advanced in value or improved in condition while in Canada.

An interesting legal question is whether the warehousing agreement is a lease "or similar use agreement." This is where the nature of the Canadian companies becomes important. A lease generally requires two parties, the lessor and the lessee. If the two Canadian entities are actually one business, there would not be a separate lessor and lessee, and no "agreement." I also wonder whether warehousing is a lease of the merchandise or a similar "use agreement." In this case, the swimwear was just held in a Canadian warehouse. When I think about a lease, I generally think about an agreement that allows the person to use the leased property. That might be an apartment, a rental car, or a pair of bowling shoes. But, because the Court had already found evidence of other factors lacking, it was not necessary to resolve the factual questions about the alleged use agreement.

Instead, the Court granted the government's motion for summary judgment and dismissed the case.

In addition to focusing on every element of the tariff provision at issue, importers also need to remember that they have the burden of proof. Customs is presumed to have made the correct decision. It is possible (and I don't know this to be true), that all of the discussion with CBP was about whether there was a lease or similar use agreement. That history of dealing with the agency does not mean that the Department of Justice will accept the remaining facts as having been proven. Importers may "know" the facts. The question before the Court is what has the importer "proven." Those are two different things. The art of lawyering is figuring out what constitutes sufficient "proof" and convincing the Customs (and then the Court) of the sufficiency of that proof.



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