Warehousing May Be "Use"
Would you buy a "used" swimsuit? The answer to that question probably depends on exactly what "used" means. In at least one narrow application of the term, the Court of International Trade has determined that a swimsuit is "used" when it is stored in a warehouse, entered into inventory, picked off the shelf for packing, and shipped to a customer. This comes from SGS Sports Inc. v. United States, a recent decision from the CIT.
The issue came up in the context of swimwear that was imported into the United States and then sent to a warehouse in Canada to be held in inventory until sold. Upon its return to the U.S., the importer asserted that the goods were entitled to duty free entry under HTSUS item 9801.00.2000, which covers:
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
The Court held a trial to determine whether the warehousing agreement constituted a "lease or similar use agreement" for purposes of HTSUS item 9801.00.2000.
The facts and procedural history of this case are somewhat complicated. For our purposes, you need to know that the importer, SGS, is a Canadian corporation that is related to the corporation that operated the Canadian warehouse through the individual who was the sole owner of each entity. The importer, SGS, leased the property where the warehouse was located but the warehouse entity did not pay rent to SGS. The warehouse entity's role was to take delivery of the swimwear, store it, maintain inventory records, and to "pick and pack" merchandise in preparation for shipment to customers. Throughout this cycle, SGS maintained title to the merchandise. At no point in this process did anyone put on a swimsuit and take a swim or even a run through a sprinkler. In that sense, the goods were never "used."
The legal question is whether the swimwear was exported from the U.S. under "lease or a similar use agreement." According to the Court, a "lease" is a contract by which the rightful possessor of some property coveys the right to use that property to another for consideration. "Consideration," in this context generally means payment but can be any goods or services or other act that shows both parties treated the contract as an exchange of value.
Construing what it means to have a "right to use" the property, the Court determined that "use" means applying the goods in a way to accomplish a purpose. That means that a lease conveys the right to employ the swimwear to accomplish a purpose, not necessarily the obvious or intended purpose.
We are not talking about a lease because there is no payment or other consideration for the right to possess and use the swimwear. The Court determined, however, that an agreement similar to a use agreement would be one in which there is a mutual understanding by which the parties agree to employ the subject merchandise for the accomplishment of a purpose, similar to what would happen under a lease.
The question this raises is "whose use?" The Court reasonably looked at the two parties and their respective uses. Here, SGS was not someone seeking boardshorts for an upcoming cruise or weekend at the beach. SGS is in the business of buying and selling swimwear. That is its sole "purpose" for the merchandise. Without doubt, the arrangement with the warehouse in Canada facilitated that purpose and would, therefore, be "use."
The Government took the position that the "use" required under 9801.00.2000 is the intended use of the merchandise. First, I need to set aside the idea that SGS could have avoided this controversy by employing a team of people to put on the swimsuits and maybe even get wet. It seems like a retro-fit carwash would be ideal for this purpose. Picture a line of swimsuited employees walking through the sprayers, turning around, and doing it again in a new swimsuit, all day long. The Court explicitly rejected this argument saying, "[the warehouse] employees do not need to wear the bathing suits for swimming under the 'use' requirement . . . ."
There is some support for this in the legislative history. The old TSUS item 801 contains the predecessor provision. That tariff item originally required that the goods had been exported under a "lease to a foreign manufacturer." Item 801 was amended in 1984 to remove the reference to a manufacturer and insert "lease or similar use agreement." The stated purpose for this change was to facilitate duty-free returns to the United States of goods that had been leased to a government or service industry. The context for this was the example of plastic injection molds, which might be leased to a manufacturer for a time and then returned. A government or service provider that leased, for example, a computer, would not be a manufacturer and that arrangement would not allow for duty free return to the U.S.
It is not clear to me that this answers the Government's argument about the nature of the use required. The Court resolved that when it construed "use" broadly to mean accomplishing a purpose. Selling swimwear is a purpose. Transferring the swimwear to the warehouse in furtherance of storage for sale is also a purpose. That means the warehousing arrangement is a "use agreement" similar to a lease. That seems to resolve the first question.
There is, however, an open question of whether the subject entries qualify for duty-free treatment under 9801.00.2000 as the Court has construed it. That, it appears, will focus on whether the specific entries involved were actually subject to the warehousing arrangement described in the decision. Assuming the parties cannot agree on that fact, there will be a trial to resolve that and, likely, an appeal on the question of what use matters.