Customs Overviews

CLASSIFICATION DECISION

U.S. Customs & Border Protection (CBP) recently published HQ H300680 (Proposed). It appears in the Customs Bulletin for November 14, 2018 and reviews a 2004 pre-classification ruling. The ruling classified a backpack that contained plastic play food as a unit under the provision for toys, subheading 9503.00.00 (Free). That classification was based upon the conclusion that the backpack and play food constituted a tariff set.

The Headquarters Office first looks at the question of whether the combination is a set. It decided that it is not, for the reason that the set components are not intended to meet a particular need or to carry out a specific activity. The backpack has a separate use and is not necessarily used when a child is playing with the toy food.

The next question is whether the backpack could be classified with the toys as ordinary packaging. Again, the Headquarters Office felt otherwise. First, the Chapter 95 Notes effectively preclude classification of heading 42 bags in the chapter. 

Finally, the ruling examines whether backpack could be treated as packaging. Since the backpack is suitable for long-term use and is not specially fitted to contain the play food it was not classified as packaging. 

Accordingly, the proposal is that the toy food be classified in subheading 9305.00.00 and the backpack in subheading 4202.92.45 (20%).

ADAPTIVE CLOTHING. 

The Customs Bulletin for November 14, 2018, publishes proposed revocations of two New York rulings holding that garments with magnetic buttons were classifiable as articles for the physically challenged in subheading 9817.00.17.

The first proposed ruling, HQ H300625, would revoke NY N278872 (September 29, 2016) which dealt with a man's dress shirt. The second ruling HQ H00600 addresses the classification of a man's suit with magnetic buttons. The relevant New York ruling is N382688 (January 27, 2017). The basic reasoning in both proposed rulings is that garments incorporating magnetic closures, according to CBP, have become “mainstream in their use.”

The two proposed rulings along with HQ H292346 (June 29, 2018) and HQ H292642 (June 29, 2018), appear to make it virtually impossible to attain subheading 9817.00.17 treatment for apparel. Basically, apparel not obviously intended for the physically challenged does not qualify for classification in that provision. The likely consequence of these rulings is that stylish clothing designed for the physically challenged will become more expensive and in many cases beyond the means of the very individuals whose needs the garments are designed to address. CBP’s narrow interpretation makes it more difficult for the fashion industry to develop stylish apparel that creates a sense of inclusiveness while addressing the physical challenges of the community it is attempting to serve. 

Comments on the proposed rulings are due December 14, 2018. USFIA will file comments if there is sufficient member interest in the issue, so please let us know your thoughts by Monday, December 10, 2018.

NAFTA RULING. 

The Headquarters Office addressed the validity of a post-entry North American Free Trade Agreement (NAFTA) claim in HQ H300353 (September 14, 2018).

The importer filed the claim electronically through the Document Image System rather than through Automated Commercial Environment (ACE). The claim was timely. The port denied the claim arguing that the only means of filing the claim electronically was through ACE. The importer protested the denial.

The ruling points out that the instructions on electronic filing of post-NAFTA claims were not clear. The only message that was clear on whether electronically filing must be through ACE referred to protests. A post-entry NAFTA claim is not a protest; it’s a 520(d) claim. Given the circumstances, in particular that the claim was timely, the Headquarters Office ruled that the protest should be approved; common sense prevailed.

BOND ISSUES. 

The Trump tariffs have prompted CBP to issue a notice reminding importers that its Revenue Division conducts continuous bond sufficiency reviews on a monthly basis. CSMS #18-000664 (November 8, 2018). The basic requirement is that the continuous bond amount equals 10 percent of annual estimated duties. In the event that the Revenue Division determines that the bond amount is insufficient, it could restrict release. In addition, it could deactivate the bond, requiring that the importer use single entry bonds, which are substantially more expensive than continuous bonds. We have seen no reports of the Revenue Division taking either action.

CBP – TECHNOLOGY. 

CBP is said to be running multiple emerging-technology pilots to see whether new technology can better address agency needs. In the latest project, CBP is using Microsoft HoloLens augmented-reality headsets to inspect goods for intellectual property rights violations. Instead of referring to paper guides to verify the authenticity of an imported product, CBP uses a HoloLens-enabled mobile app to instantly access product details and compare the reference images to the physical object under examination. CBP is also considering an app that would allow it to test items such as pharmaceuticals to ascertain if they are legitimate.

CBP also recently concluded a “live fire testing” of a proof of concept that uses block chain technology to verify NAFTA and CAFTA certificates of origin. The goal is to reduce CBP’s interference in the process without sacrificing enforcement priorities. 

CPSC DEVELOPMENTS. 

There was one recall of a textile or apparel item in November. Girls’ clothing sets with a pendant necklace were recalled because the metal pendant on the necklace contains levels of lead that exceed the federal lead content ban. 

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:

  • 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. 

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 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.