Customs Overviews

By John Pellegrini, USFIA Customs Counsel, McGuireWoods LLP

In This Issue:

  • Guayabera Shirts
  • 301 Tariffs
  • Enforcement
  • Classification Decision
  • CPSC Developments

GUAYABERA SHIRTS. 

HQ H257144 (proposed) would have revoked NY N52750 (May 23, 2014), which classified a woman’s guayabera-style shirt-blouse in HTS heading 6211. The importer sought reconsideration seeking classification in HTS heading 6206. 

The garments have pockets at or below the waist. The Explanatory Notes to heading 6206 indicate that it does not cover garments with pockets below the waist. The subject garments are not described by heading 6206. U.S. Customs & Border Protection (CBP) rationalized the proposed revocation by referring to the Explanatory Note describing heading 6205, which states that it does not cover garments having the character of windbreakers, which generally have pockets below the waist. CBP argued that since both EN’s describe shirts, the clear prohibition against pockets below the waist in heading 6206 read in conjunction with the less definitive statement in heading 6205 means that the presence of pockets below the waist in a women’s garment does not preclude classification in heading 6206.

The United States Fashion Industry Association (USFIA) filed comments opposing the reclassification. No other comments were filed. The comments pointed out that the premise for favoring the general over the explicit is based upon the erroneous assertion that headings 6205 and 6206 cover the same type of garment. USFIA argued it is obvious that they do not because men’s and boys’ shirts are an entirely different article of commerce than women’s and girls’ shirts and blouses, and that entire industries are based on the difference.

In the 52 Customs Bulletin 39 (September 26, 2018), CBP withdrew the proposed revocation, stating: “[R]eading the ENs 62.05 and 62.06 to mirror one another is erroneous because men’s and boys’ shirts are an entirely different article of commerce than women’s and girls’ shirts and blouses, and entire industries are based on the difference.”

301 TARIFFS. 

Until recently, the assessment of Section 301 tariffs on products originating in China had little direct impact on members. This changed with the third tranche of 301 tariffs, which includes handbags, hats, and other consumer products. Further, if a fourth tranche is imposed, it is inevitable that at least some apparel will be included.

It is time to consider the available steps that may minimize some of the impact. Consider the following: 

1. Look at the tariff classification assigned to each imported product. Could a different classification, not subject to the additional duties, be more appropriate? 

2. Are entered values higher than necessary? For example, if the seller is a middleman, can you use the First Sale principle to use the middleman’s purchase price as the entered value? Similarly, does the price include elements that, if contracted for and stated separately, may be excluded from entered value?

3. Can final production steps be moved from China to a second country, to change the country of origin? The effectiveness of this strategy will depend on whether CBP will recognize the processing in the second country as satisfying the requirements of Section 102.21 of the Customs Regulations in the case of textiles and apparel, or constituting a “substantial transformation” in the case of other articles.

4. Will the seller agree to share the duty through discounts? Do the terms of sale allow you to recover the cost of the additional tariff? Is it possible to renegotiate the terms of sale or terminate disadvantageous long-term agreements?

5. Explore the use of foreign trade zones and comparable tariff-deferment programs to mitigate or soften the immediate impact of the increased tariffs.

6. Evaluate the potential for exempting a product from the additional tariffs.

ENFORCEMENT. 

The imposition of additional duties on China-originating goods creates a strong incentive to play fast and loose with origin declarations. CBP’s website quotes blatant claims of methods to evade antidumping duties. An example follows:

Please do not worry about the dumping duties. This order will be operated through the intermediary trade. We will send the goods to a third country; the forwarder will repack our goods for export with other company title from that third country. It is a legit business.

It also continues to pay close attention to preference claims involving apparel. The 301 duties will elicit an equally vigilant response.

There is a high likelihood that you will be approached by vendors who offer to deliver China-made products at prices too good to be true. Keep in mind that even though you are not the importer, CBP may attempt to hold you responsible. It has successfully done so in similar matters. 

We have also seen an increased number of whistleblower claims involving importers and importers’ customers, including retailers. These cases, which are brought by private citizens on behalf of the government, have attracted plaintiffs’ lawyers because of the potentially large recoveries. Most involve the evasion of antidumping duties on China-origin goods. At some point, the alleged evasion of 301 duties will be the subject of a whistleblower proceeding.

CLASSIFICATION DECISIONS. 

HQ H265483 (June 19, 2018) addresses the classification of motorcycle jackets and pants. The jackets are 100% woven polyester. They have a full front zippered opening, protective pads in the sleeves extending from above the elbow almost to the wrist, at the shoulders, and in the back. The lining of the jacket contains a pocket with a removable protective pad. The jacket has the zipper at the back that can be used to attach the inside back of the jacket with the outside back of the companion pants. The pants are constructed in a similar manner with padding and removable protective pads in the knee and thigh areas. The garments are marketed as the “Integrated Armor System.”

The importer sought classification as water resistant jackets and pants. The Headquarters Office disagreed, finding classification in subheading 6211 as other garments.

CBP’s position is that headings for jackets and trousers cover conventional apparel and do not include apparel design for a specific, narrow purpose, as evidenced by the construction of the government. In CBP’s view, the garments are specialized articles designed to be worn only when motorcycling. The ruling points to features such as padding at the sleeves, shoulders, and knees, and zippers to connect the jacket and pants, among others as indicative of a specialized, narrow use. The ruling also points to advertising in which the garments are marketed as motorcycle apparel. The ruling concludes that it is unlikely that the garments will be worn for any purpose other than motorcycling.

Classification was found to fall in subheading 6211.33.00 (16%).

The following decision appears in the Customs Bulletin referred to above.

HQ H273867 (July 24, 2018) addresses the classification of non-woven polypropylene bottle bags. The bags have two handles and open tops. The insides of the bags are divided into six equally sized compartments. The bags are sold or distributed free of charge. In HQ H235569 (May 17, 2013) CBP classified the bags in subheading 4202.92.91 (17.6%), the basket provision for other bags. The ruling classifies the bags as shopping bags in subheading 4202.92.39 (17.6%). CBP considers the bags classifiable as shopping bags because they have carrying handles, are of durable construction, are suitable for repetitive use and designed to provide storage, protection, portability and organization for bottles.

Both subheadings are subject to Section 301 duties under subheading 9903.88.03 (10%).

CPSC DEVELOPMENTS. 

There was a single recall of a textile or apparel item in September. The recall covered children’s coveralls - the applique on the coveralls can detach, posing a choking hazard to young children.

The Customs Overview is a newsletter of Customs legal, administrative and other developments affecting importers of textiles and wearing apparel prepared as a service for United States Fashion Industry Association members and other interested parties. Matters reported on or summarized herein may not be construed as legal advice on specific situations. 

By John Pellegrini, USFIA Customs Counsel, McGuireWoods LLP

In This Memo:

  • Classification Decisions
  • Assist Decision
  • Made in the USA
  • Drawback
  • Late Payment Consequences
  • CPSC Developments

CLASSIFICATION DECISIONS.  

In HQ H288209 (August 8, 2018), the Headquarters Office affirmed NY N275048 (May 25, 2016), which classified certain undergarments in subheading 6109.90.10 (32 %).  The importer sought reconsideration arguing for classification as body supporting garments in heading 6212, presumably subheading 6212.90.00 (6.6%). 

The garments are upper body knit underwear garments containing 38% elastane.  The importer argued that it marketed the subject merchandise as compression garments and that the compression technology of the knitting process and methods of differentiates these garments from other undergarments. CBP did not agree.

The ruling points out that the importer’s advertising and marketing describe the garments as body-shaping.  The ruling refers to the Textile Guidelines, which noting that they state that garments containing elastic-type yarn, the primary purpose of which is to cause the garment to fit snugly under other garments are not classified as body supporting garments.  Based on this, the Headquarters Office affirmed the New York ruling.

In HQ H297341 (Proposed), 52:33 Cust. Bull. 328 (August 15, 2018), CBP would revoke NY A89600 (December 9, 1996).  The New York ruling covered five styles of garments described as medical stretch briefs. The garments were constructed of knit did mesh of 90/10 polyester/spandex.  The ruling found parallel classification in 9817.00.96 (Free) as garments articles specially designed for use by the handicapped.  The Headquarters Office would modify the ruling by revoking that classification.

The proposed ruling asserts the subject garments have no apparent design features that dedicate them for use by the handicapped. Features such as the elastic yarns and Bands are insufficient to demonstrate that the garments are dedicated for a particular use. The ruling asserts that use of elastic yarns in the production of underwear is quite common.  

The proposed ruling also points to advertisements for articles substantially similar if not identical to the merchandise at issue. The advertisements refer to multiple uses as well as uses for transient - not chronic - conditions.

Based on the above, the ruling would modify A89600 to limit classification to subheading 6108.22.90 (15.6%).

ASSIST DECISION. 

HQ H299185 (August 24, 2018) provides a useful review of the treatment of assists.  The importer provides both design and equipment assists to sellers.  Some of the production is exported to third countries.

Many of the design assist relate to multiple products or modifications to existing products. The importer proposed that to allocate the design assist by calculating the ratio of US import purchases to global purchases for the same year. Although not stated, the assumption is that the ratio is based on value rather than quantity.

The importer will report the assist during the year. At the conclusion of the fiscal year it will recalculate the assist. Since in some cases, the calculation may be too low, the assist reported at entry will include an uplift to cover the potential miscalculation. In any given year, the previous calculation will be used at entry until the new calculation is complete.

The equipment assist is calculated in roughly the same manner. However, there was a complication in that many of the imported products are duty-free. Where the equipment makes duty-free merchandise, the total assist is reported on the first entry of that merchandise. In the case of merchandise that is subject to duty, the importer calculated the average today and loaded the assist on the first entry of merchandise subject to duty, using the average duty rate.

CBP approved the importer's approach.  This ruling illustrates that CBP’s general approach to assist declaration and apportionment is reasonable and not overly technical.

MADE IN USA.  

Wellco Enterprises Inc. sold boots falsely claimed as “Made in the U.S.”  The boot uppers and insoles were manufactured in China.  After importation, the boots we assembled with soles and "Made in China" labels removed.  Although the details of the assembly process were not revealed, the implication is that the imported uppers were closed and applicable rules of origin, final assembly in the United States did not eliminate China origin.

Wellco does not appear to have contested the charges.  The company’s CEO was sentenced to a prison term of 41 months. Two executives were sentenced to six months in prison; others were put on probation.  

Although this case involved violations of the Berry Amendment (the boots were sold to the military), not Customs or FTC requirements, the potential adverse consequences of false origin declarations are obvious.

DRAWBACK.  

CBP published a proposed rule implementing changes in the drawback regulations enacted in the Trade Facilitation and Trade Enforcement Act of 2015 (the “ACT”).  83 Federal Register 37886 (August 2, 2018).

The proposed regulation establishes revised drawback procedures that are said to liberalize the merchandise substitution standard, simplify recordkeeping requirements, extend and standardize timelines for filing drawback claims, and require the electronic filing of drawback claims.

The Act provides a transition period during which drawback claimants may file claims under existing procedures or under the revise procedures.  The notice covers the following points among others:
1. Explains the filing procedures in place during the transition period (2/24/2018 - 2/23/2019);
2. Discusses the interim procedures for filing claims prior to the proposed regulations becoming final;
3. Requires that all drawback claims be submitted in ACE;
4. Tariff classification to become the basis of substitution drawback in the majority of cases;
5. Creates a uniform five-year drawback period; and,
6. Notes that the importer is now jointly and severally liable with the drawback claimant.

LATE PAYMENT CONSEQUENCES.  

The importance of paying additional duty and interest bills in a timely fashion is highlighted in the decision of the Court of International Trade in Dis Vintage, LLC v. United States, Slip-Op. 18-104 (August 21, 2018).  There, the importer challenged the classification of used clothing asserting classification in subheading 6309.00.00 (Free). The case was dismissed on jurisdictional grounds.

In order to file suit in the CIT, all duties and fees must be paid prior to the date of filing. Here, the importer paid the duties but failed to remit the entire interest due. The difference of $26.07 was not paid until after the case was commenced, leaving the court had no choice but to dismiss the case. 

The court noted that since the interest was paid within 180 days of the denial of the protest, the importer could have filed a second summons that would have been timely.

CPSC DEVELOPMENTS.  

There were no recalls of textile or apparel items in August.

The Customs Overview is a newsletter of Customs legal, administrative and other developments affecting importers of textiles and wearing apparel prepared as a service for United States Fashion Industry Association members and other interested parties. Matters reported on or summarized herein may not be construed as legal advice on specific situations. 

By John Pellegrini, USFIA Customs Counsel, McGuireWoods LLP

In This Memo:

  • Classification Decisions
  • First Sale
  • Air Cargo
  • CPSC Developments

CLASSIFICATION DECISIONS.

The following is a summary description of classification decisions recently made public by U.S. Customs.

The first two decisions appear at 52 Customs Bulletin 23 (June 6, 2018).

HQ H273867 (Proposed) addresses the classification of non-woven polypropylene bottle bags. The bags have two handles and open tops. The insides of the bags are divided into six equally sized compartments. The bags are sold or distributed free of charge. HQ H235569 (May 17, 2013) classified the bags in subheading 4202.92.91 (17.6%), the basket provision for other bags. The proposed ruling would classify the bags as shopping bags in subheading 4202.92.39 (17.6%). CBP considers the bags classifiable as shopping bags because they have carrying handles, are of durable construction, are suitable for repetitive use and designed to provide storage, protection, portability, and organization for bottles.

The second of the two Rulings, HQ H285295 (May 8, 2018) classifies a girls' cotton sports bra from Peru in HTS subheading 6212.10.90 (16.9%) as a brassiere. The ruling also concludes that the garment is eligible for duty-treatment under the Peru FTA. The ruling revokes NY N279310 (October 13, 2016), which had classified the garment in subheading 6109.10.00 (16.5%) and denied duty-free treatment.

The change in classification is based upon CBP’s recognition that the onset of breast development may be as young as 8.8 years. CBP concluded that the garment is used for body support purposes justifying classification in subheading 6212.10.90.

The change in classification also meant that the garment qualified for duty-free treatment. As a T-shirt or similar garment, the applicable origin rule required that fabric classified in heading 5806 be originating. However, the requirement for garments classified in the heading 6212 is that the fabric undergo a change in classification. Since that did occur, the garment qualified for duty-free treatment.

FIRST SALE.

It is no secret that CBP is no fan of first sale. Recent rulings have focused on transactions where the importer and export are related and where there is flash title. CBP typically denies first sale in these circumstances.

A recent ruling grants first sale where the importer and exporter are related and illustrates the importance of avoiding flash title. The ruling, HQ H295538 (May 31, 2018), involves an importer of footwear and a related exporter. The exporter purchased the merchandise on ex-factory terms and resold on FOB terms. CBP granted first sale in a very brief ruling that does not include a slavishly detailed review of the transaction documents.

The message is clear - avoid flash title.

AIR CARGO.

CBP has announced an amendment to its regulations pertaining to the submission of advanced air cargo data. 83 Federal Register 27380 (June 12, 2018). The changes apply to inbound aircraft that has commercial cargo aboard. The new rules go in to effect on an interim basis July 12, 2018). Comments on the interim rule are due by August 13, 2018.

Previously, the requirement was that advanced data must be transmitted to CBP four hours prior to arrival of the aircraft in the United States. On certain short flights, the data was required not later than the time of departure of the aircraft. Under the interim rule, the data must be transmitted as early as practicable, but no later than prior to lading the cargo on to the aircraft. CBP explains that under the new timeframe, it will have sufficient time before the aircraft departs to analyze the data, determine whether is suggests the presence of a threat and to eliminate the threat.

CPSC DEVELOPMENTS.

There was a single recall of textile or apparel items in June. The recall covers women’s scarves that fail to meet federal flammability standards for clothing textiles, posing a risk of burn injuries to consumers.

The Customs Overview is a newsletter of Customs legal, administrative and other developments affecting importers of textiles and wearing apparel prepared as a service for United States Fashion Industry Association members and other interested parties. Matters reported on or summarized herein may not be construed as legal advice on specific situations.

In This Issue:

  • Preference Rulings
  • Forced Labor – Uzbekistan
  • User Fees
  • CPSC Developments 

PREFERENCE RULINGS.

The following is a summary description of preference rulings recently made public by U.S. Customs & Border Protection (CBP).

The first ruling, HQ H291701 (May 22, 2018), addresses whether certain disposable shoe covers are eligible for North American Free Trade Agreement (NAFTA) benefits.

CBP denied NAFTA treatment at liquidation and the importer protested. The crux of the issue was whether the covers satisfied the applicable RVC requirement. The decision at liquidation appears to have been based on the fact that the importer submitted a second set of documents that differed in part from the original set. In support of the protest, the importer explained that the second set of documents included different labor costs than provided originally because the first set was based upon estimated production runs and did not include all labor and packaging costs. The importer provided more detailed information as part of the protest, information based on actual production run data that was supported by evidence. In addition, the importer provided NAFTA certificates for all of the originating materials used in production of the shoe covers.

The Headquarters Office approved the protest based upon this additional information.

This ruling highlights the importance of providing complete documentation and, where necessary, explanation. In particular, importers claiming a preference should ensure that a claim originating good status be supported by an appropriate certificate of origin.

HQ H296285 (July 10, 2018) discusses the origin of sewing thread under CAFTA. The CAFTA origin rule applicable to some apparel mandates sewing thread formed and finished in the region, a term CBP equates with “wholly formed.” The thread at issue was staple yarn or spun yarn made of cotton, polyester, or aramid fibers, and core spun yard consisting of polyester fiber spun around a polyester filament core.

In order to be “wholly formed,” the filament of a core yarn must be originating. However, there is no impediment to using non-originating fibers.  

The importer indicated that it planned to import some fibers but would continue to source the filament from regional sources. The ruling holds that as long as processing is performed in the region both forms of yarn may use non-originating fibers and remain in originating status.

FORCED LABOR – UZBEKISTAN.

The Department of Labor has filed notice of its initial determination to drop Uzbekistan cotton from the list of products made with indentured or forced child labor. 83 Federal Register 36969 (July 31, 2018).

It is important to note that the finding is limited to child labor. The notice is careful to note that the International Labor Organization and independent monitors found that at least 300,000 adults were forced to work in the 2017 cotton harvest.

USER FEES.

CBP published notice of various changes to user fees effective October 1, 2018.  83 Federal Register 37509 (August 1, 2018). The Merchandise Processing Fee (MPF) ad valorem rate of 0.3464% remains the same; the MPF minimum and maximum for formal entries will change. The minimum will increase to $26.22 from $25.67 and the maximum to $508.70 from $497.99.

A list of all fee changes may be found in the notice.

CPSC DEVELOPMENTS.

There were two recalls of textile or apparel items in July. The recalls cover: 1) children’s sleepwear that fail to meet federal flammability standards for clothing textiles, posing a risk of burn injuries to consumers; and, 2) shorts with patches that can detach, posing a choking hazard to young children.

The Customs Overview is a newsletter of Customs legal, administrative and other developments affecting importers of textiles and wearing apparel prepared as a service for United States Fashion Industry Association members and other interested parties. Matters reported on or summarized herein may not be construed as legal advice on specific situations.

By John Pellegrini, USFIA Customs Counsel, McGuireWoods LLP

In This Issue:

  • Classification Decisions
  • Turkmenistan WRO
  • Bond Limits
  • De Minimis
  • CPSC Developments

CLASSIFICATION DECISIONS

The following is a summary description of classification decisions recently made public by U.S. Customs & Border Protection (CBP).

In HQ H257531 (January 22, 2018), The Headquarters Office addressed the classification of a textile money belt. The ruling revokes a 1991 New York ruling, 868779 (November 25, 1991). That ruling found that a MMF/cotton money belt was classified as “flatgoods” in HTS subheading 4202.32.93 (17.6%). The Headquarters Office ruled that the money belt is properly a classified as “travel sports and similar bags” in HTS subheading 4202.92.31 (17.6%). The subheadings and duty rates are those currently in force.

In addition to the age of the revoked ruling, HQ H257531 is interesting in that it reminds us that, outside of the textile chapters, classification of a mixed fiber article is based upon an essential character analysis. While, as here, the analysis is cursory, it is useful to keep that distinction in mind. Almost invariably, the essential character will be imparted by the fiber that dominates by weight.

The scope of subheading 9801.00.20 was the subject of HQ H276403 (December 12, 2017). The subheading provides duty-free treatment for merchandise exported from the United States pursuant to a lease or similar use agreement after importation and payment of duty. The merchandise at issue consisted of apparel and accessories.

Here, the imported merchandise was shipped to Canada for warehousing until needed by customers in the United States. The ultimate issue was whether the goods were entrusted to the custody of a second party.

CBP reviewed the relationship between the importer and the party responsible for warehousing and concluded that, although they have that may have separate legal existence, for all intents and purposes, they were the same party. Given that conclusion, CBP held that subheading 9801.00.20 did not apply and denied duty-free treatment.

CBP has frequently expressed skepticism that related parties located north and south of the border can enter into transactions that are recognized for purposes of the customs laws.

TURKMENISTAN WRO

As previously reported, CBP issued a withhold release order covering all Turkmenistan cotton and products produced in whole or in part with Turkmenistan cotton. The order is dated May18, 2018. The petition names two importers, Ikea (cotton bed linens) and Gamby Global, Inc. (fabric). It is not clear how far beyond the two named importers the detentions will extend.

To our knowledge, no shipments have been detained pursuant to the WRO and senior CBP officials have indicated that they do not expect a great deal of activity related to the WRO.

BOND LIMITS

CBP has broad discretion in setting bond amounts. However, that discretion is not unlimited. This is illustrated by a recent decision of the Court of International Trade.

The decision was in response to an importer’s request for a permanent injunction commenced to contest the imposition of an enhanced single entry bond requirement equal to three times the total shipment value. This created a single entry bond requirement of $9 million as opposed to the previous continuous bond amount of $200,000. The imposition of the requirement would, as a practical matter, put the importer out of business. CBP took this action because the importer had entered merchandise that violated certain trademark rights. The violative merchandise represented less than one percent of the importer's merchandise.

CBP’s directive on determining bond amounts indicates that the bond's purpose is to protect the revenue and to ensure compliance. The directive goes on to indicate that it is not CBP’s intention to require a bond amount that unnecessarily puts an excessive burden on importers or places them in an impossible situation.

The court looked at CBP's directive and the fact that the problematic merchandise represented only a very small part of the importer’s merchandise and concluded that bond amount was excessive and imposed a permanent injunction, preventing CBP from imposing the single entry bond requirement.

CBP has also refused to release the importer’s entries without a 100 percent inspection. The court ordered CBP to use its best efforts to process all of the backlogged shipments and to release them in a timely manner.

Although this matter is not settled as there has not been a decision on the merits, the likelihood is that the parties will reach an accommodation.

DE MINIMIS

During a National Association of Foreign Trade Zones conference held in May, a CBP official disclosed that the agency has ruled that distributors are not allowed to enter bulk goods into an FTZ, break them down into consumer shipments, and take advantage of the de minimis legislation. The ruling, which had not been made public as of 4:00 PM yesterday, was issued in response to an internal inquiry. We understand that the ruling does not address the retail sale prohibition but focuses on how goods are imported into the U.S.

There are efforts underway to amend the legislation to correct the failure to address the FTZ issues.

USFIA will circulate the ruling once it becomes public.

CPSC DEVELOPMENTS

There were two recalls of textile or apparel items in May. The recalls involved: 1) a three-piece cardigan set in which the cardigan’s toggle button can detach, posing a choking hazard to young children; and, 2) women’s silk scarves that fail to meet federal flammability standards for clothing textiles, posing a risk of burn injuries to consumers.

The Customs Overview is a newsletter of Customs legal, administrative and other developments affecting importers of textiles and wearing apparel prepared as a service for United States Fashion Industry Association members and other interested parties. Matters reported on or summarized herein may not be construed as legal advice on specific situations.