Customs Overviews

By John Pellegrini, USFIA Customs Counsel, McGuireWoods LLP

In This Memo:

  • Penalty Decision
  • User Fee Adjustments
  • Emphasis on Collections
  • CPSC Developments

PENALTY DECISION.

There was much discussion about individual liability in civil penalty actions when the Trek Leather decision came down in 2014. The decision made it clear that an individual need not actually "file” an entry to face individual liability under Section 592. Despite the attention given to Trek Leather, it did not really change the law in any material respect.

A recent case, United States v. Sterling Footwear, Slip Op. 17-141 (October 12, 2017), addresses a somewhat different issue in that it refers to misclassification rather than undervaluation, the issue in Trek Leather. In Sterling, the CIT held that an individual who misclassifies merchandise, or causes merchandise to be reclassified, in a document prepared for the purpose of entering goods, which that person causes to be shipped to and unloaded falls within the ambit of the term “introduce.” In both Sterling and Trek Leather, the individual was the sole shareholder and principal manager of the importer.

It comes as no surprise that actively engaging in what appears to have been obvious misclassification can subject an individual to liability under Section 592. The importer entered almost all of its wide variety of footwear in HTS subheading 6402.91.40 (6%), regardless of upper material or the presence of a foxing or foxing-like band, factors that require classification in subheadings that bear substantially higher rates of duty.

USER FEE ADJUSTMENTS.

U.S. Customs and Border Protection has announced annual adjustments in user fees minimums and maximums. 82 Federal Register 50659 (November 1, 2017). There is no change in the minimum ($25) or maximum ($485) merchandise processing fee.

EMPHASIS ON COLLECTIONS.

USFIA has learned of recent changes in CBPs financial management processes and objectives relating to unpaid increase duty bills.

Of particular interest, CBP will issue dunning letters at 61days as opposed to the current 181 days. At the same time, CBP has indicated that it will place more focus on diverting refunds to unpaid bills. This will be a problem.

An importer who protests an increased duty bill is not obligated to pay the bill until the protest is denied. An importer has 180 days to file a protest. It is easy to see that CBP could divert refunds prior to the time that the protest period has expired. In a sense, this change reduces the protest period to 60 days. Given the less than stellar accuracy of CBP's financial management systems, importers will have to pay close attention to what happened to refunds due them.

There is also the danger that failure to respond promptly to a dunning letter could result in an importer being placed on the sanction list, meaning that duties must be paid before cargo is released - essentially all entries become live entries. Again, filing a protest will keep an importer off the sanction list.

CPSC DEVELOPMENTS.

There were two recalls of apparel items in November. The recalls covered: 1) children’s nightgowns and pajama sets – the garments fail to meet flammability standards for sleepwear, posing a risk of burn injuries to children; and, 2) toddler sweater fleece pullovers - the snaps on the fleece pullovers can detach, posing a choking hazard.

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:

  • Returns and Drawback
  • De Minimis
  • FTC
  • WPM Violations
  • Hurricane Relief
  • CPSC Developments

RETURNS and DRAWBACK.

An importer who exports returned merchandise may claim same condition drawback. However, the importer must be able to establish that the merchandise was not used. This issue is addressed in HQ H263493 (July 25, 2017).

The importer is a domestic retailer of footwear and handbags. The importer accepts returns with “no questions asked.” The importer claimed same condition drawback on merchandise that it determined displayed “no evidence of use” and could be sold as brand new.

CBP rejected the drawback claim. The decision is based primarily on the concept that once footwear is worn or a handbag used to hold items it is used for the purpose for which it was manufactured and intended. CBP refused to accept the importer's argument that the absence of wear is sufficient to demonstrate non-use. According to CBP, a shoe or handbag could have been used “regardless of whether it appeared to be unused.”

In addition, the importer’s records were deemed insufficient to allow CBP to separate returned merchandise from that which had not been sold at retail.

The ruling points out a separate drawback provision that allows drawback for all returned retail merchandise regardless of use. The importer was not able to take advantage of that provision because it could not meet the filing deadline.

DE MINIMIS.

CBP has issued a second ruling on the de minimis provision. HQ H275530 (July 19, 2017). This ruling involves shipments to retailers in the United States. Each of the shipments are valued at less than $800. CBP agreed that as long as the shipment to each individual retailer is less than the maximum amount, the statute applies.

The ruling clarifies that eligible shipments are not limited to shipments to individuals. Commercial shipments are eligible as long as they are less than the maximum amount to a single buyer on a given day. The buyer may be a retailer who resells the merchandise. This ruling would not apply if the retailer has already re-sold merchandise.

The ruling involves shipments from Canada and its practical implications are limited.

The ruling requests related to the use of foreign trade zones to repackage bulk shipments as packages addressed to individual consumers remain pending.

FTC.

The Federal Trade Commission has amended its regulations to provide that all requests for RN numbers be filed electronically. 82 Federal Register 43690 (September 19, 2017). The Commission is not changing the requirements for RN numbers, only specifying the method by which requests are to be submitted.

The change applies to the Textile Fiber Products Identification Act, the Wool Products labeling Act and the Fur Products Labeling Act. The amended rules go into effect October 19, 2017.

WPM VIOLATIONS.

Beginning in 2005, imported wood packaging material (WPM) must have been treated at an approved facility to kill harmful timber pests that might be present. The WPM must display a visible, legible, and permanent marks signifying treatment.

Effective November 1, 2017, responsible parties with a documented WPM violation may be subject to a penalty. This is a change from the previous published threshold of five violations. In addition, there will be no yearly reset for calculating repeat violations as each WPM violation may incur a penalty. CSMS #17-000609 (September 25, 2017).

HURRICANE RELIEF.

U.S. law allows for the duty-free entry of materials intended for disaster relief under certain circumstances. One of the pre-conditions is that there be a national emergency.

National emergencies have been declared for each of the recent hurricanes, Henry, Irma, and Maria. Instructions for duty-free entry and the remission of duties previously paid are found in the following CBP publications: CSMS #17-000531 (September 1, 2017) (Henry); CSMS #17-000601 (September 21, 2017) (Irma); and, CSMS #17-000611 (September 26, 2017).

CPSC DEVELOPMENTS.

There were three recalls of apparel items in October. The recalls covered: 1) children’s’ nightgowns and pajama setsthe garments fail to meet flammability standards for sleepwear, posing a risk of burn injuries to children; and, 2) infant bib and bootie sets - rattles sewn into the booties can detach, posing a choking hazard; 3) toddler sweater fleece pullovers - the snaps on the fleece pullovers can detach, posing a choking hazard.

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:

CLASSIFICATION DECISIONS.

The following is a brief description of recent Customs and Border Protection (CBP) Headquarters Office classification decisions. The first two appear in the Customs Bulletin for July 19, 2017.

The classification of polyester flower leis is the subject of HQ H251022 (May 26, 2017). NY N48019 (January 7, 2009) ruled that the products are classified in subheading 7117.90.90 (11%) as imitation jewelry. The Headquarters Office disagreed.

The NY ruling overlooks a note to Chapter 71, which provides that the chapter does not cover textiles and textile articles. CBP determined that the correct classification lies in subheading 6702.90.35 (9%), which, inter alia, covers articles of artificial flowers.

In HQ H285546 (Proposed), Headquarters addressed the classification of an unfinished quilted cotton pillow shell. As imported, the article consists of two quilted panels joined by a gusset. The panels are backed with a non-woven fabric and filled with polyester batting. The three layers are quilted together. After importation, the unfilled main chamber will be stuffed, sewn closed and finished.

NY classified the article in HTS subheading 9404.90 .10 (5.3%), as articles of bedding such as cushions and pillows, stuffed or entirely filled with any material.

Inasmuch as the imported pillows was not stuffed, the Headquarters Office concluded that it was not classified as bedding in Chapter 94. It found that the proper classification to be subheading 6307.90.89 (7%), as other made-up articles.

The classification of a knit bonded fabric intended for use in performance outerwear is addressed in HQ H273313 (May8, 2017). The fabric consists of a layer of wool fabric knit in Australia and sent to China. In China, a polyester interlock fabric is added and then laminated to the wool fabric by means of an adhesive. The wool fabric costs more and weighs more than the polyester fabric

CBP looked at the fabric as a composite good whose essential character was imparted by the wool fabric that is both more expensive and heavier. CBP classified the fabric in subheading 6006.10.00 (10%).

Products imported after having been exported for repair or alteration are eligible for reduced-duty treatment under subheading 9802.00.50. However, that treatment does not extend to products that are "finished" abroad. HQ H287693 (July5, 2017) illustrates the difference.

The important article was yarn that had been dyed in Taiwan. The yarn was originally produced in Egypt and imported into the United States duty free as a QIZ-eligible product. The importer argued that the dying was a mere alteration. CBP disagreed.

According to the ruling, dyeing yarn in the greige state is a finishing operation and is more than a mere alteration. 

“MADE IN USA”.

The recent White House showcase of products considered domestic in origin (including four apparel items including NASA space suits, cowboy hats, and military outerwear) has resulted in news coverage and articles on the issue. Many of them are superficial and incorrectly describe rules that govern use of the "Made in USA” label.

The major shortcoming is that the failure to recognize that in the case of textiles and apparel there is specific legislation that governs use of the statement.

The Textile Products Identification Act requires that all covered products, even those that are domestically made, be marked with the country of origin. In the case of products made in the United States with imported components, such as fabric, the fact that imported fabric is used must be indicated.

In FTC rule requires that "virtually all" of the materials be domestic in origin, and allows an unqualified "Assembled in USA” label, even if the product consists of important materials. That label is not available to textiles and apparel, but is available to footwear.

In addition, state law, particularly California, comes into play here. California law prohibits a claim of domestic origin when the foreign content exceeds approximately 10% of an article's cost.

Litigation in which New Balance is alleged to violate California law because it labels some shoes as “Made in USA” while acknowledging that this means at least 70 percent domestic content, likely will result in an important decision on the California law and its interaction with federal law. Unlike other cases brought under the California statute, the New Balance plaintiffs are represented by a national law firm, which a cynic could read as suggesting that the individual consumer plaintiffs are not the real parties of interest.

CPSC DEVELOPMENTS.

There was one recall of apparel items in July. A women’s silk scarf with metal tassels was recalled because it does not meet the federal flammability standard for clothing textiles, posing a risk of burn injuries to consumers.

By John Pellegrini, USFIA Customs Counsel, McGuireWoods LLP

In This Issue:

CLASSIFICATION DECISIONS

The following is a brief description of recent Customs and Border Protection (“CBP”) Headquarters Office classification decisions.

The initial ruling appears in the Customs Bulletin for August 2, 2017.  HQ H243928 (June 22, 2017) addresses the classification of a cotton woven sleep sack. The article is 33×86 inches and sewn together on three sides. One end of the sack has a 1.5 inch pocket which is formed by a folded length of material sewn on three sides and which can be used to accommodate a pillow. The top near the pillow insert is not sewn down which allows a person to easily slip into and out of the sleep sack.  The importer explains that the sleep sack has a variety of uses, as a sleeping bag liner and a standalone product in warm climates. 

A number of rulings, some of them quite old (1992), classified the sleep sack as bed linens in heading 6302. 

CBP ruled that the sleep sacks are not properly considered linens for the reason that they are not primarily used in beds. For that reason, CBP finds classification in subheading 6307.98.90 (7%).

HQ H 283476 (July 20, 2017) appears in the Customs Bulletin for August 16, 2017.  The ruling revokes a number of New York rulings, which classified nursing pads in HTS subheading 6307.90.98 (7%). The subject merchandise is designed to absorb and prevent leakage of breastmilk onto the bra or clothing. The pads are faced with woven cotton, the absorbent inner lining is a non-woven poly/rayon blend and the pads are backed with woven propylene.

CBP concluded that the pads properly are classified as similar to sanitary pads and diapers.  CBP's rationale is that as articles that include an inner layer designed to wick milk breastmilk from a woman's skin preventing chafing as well as leakage onto clothing, the pads perform the same function as sanitary pads or diapers. 

CBP next looked at which of the component materials imparted essential character. Noting that the purpose of the pads is to absorb breastmilk, it identified the man-made fiber inner lining as that component.

Accordingly, classification was held to fall in HTS subheading 9619.00.74 (16%).

The same edition of the Customs Bulletin includes HQ H257144 (proposed).  The proposed ruling would revoke NY N52750 (May 23, 2014). That ruling had classified a woman's guayabera style shirt-blouse in HTS heading 6211. The ruling also addressed the eligibility of the garment under terms of the Panama Trade Promotion Agreement. The New York Ruling denied duty-free treatment.  The importer sought reconsideration seeking classification in HTS heading 6206. Classification in that heading could have made the garment eligible for duty-free treatment.

CBP agreed on the classification. However, it denied duty-free treatment because the shirts did not meet all of the physical characteristics of the specific duty-free provision.

Some USFIA members have expressed interest in challenging CBP's decision on the classification portion of the ruling.

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. This seems clear that the subject garments are not described by heading 6206.  CBP rationalizes its decision in part 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 argues that since both EN’s describe shirts, the apparently 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 logic of this approach escapes me.

USFIA intends to comment on the proposed ruling arguing that it is incorrect. Comments are due on or before September 15, 2017.  Draft comments will be available for review not later than COB September 13, 2017

DE MINIMIS

CBP has issued what we believe is the first ruling on the entry of shipments for personal use valued at less than $800.  The ruling, HQ H263272 (July 26, 2017), reiterates the requirements that had been in place before the law was amended to increase the maximum value.

The ruling involves consolidated shipments and holds that individual packages consolidated for international shipment, each of which is assigned a unique house airway bill (“HWAB”) qualify as shipments for personal use.  The manifest for the consolidated shipment identifies the individual HWABs in the shipment. 

The ruling contrasts this approach with one in which the consolidated shipment is addressed to a sales agent, with the end-user unknown.  The agent is deemed the importer, not the individual purchasers, with the result that the value is that of the entire shipment, not the individual packages.

To our knowledge, CBP has not responded to the pending ruling requests related to the use of foreign trade zones to repackage bulk shipments as packages addressed to individual consumers.

CPSC DEVELOPMENTS

There were five recalls of apparel items in September.  The recalls covered: 1) Infant rompers whose shoulder straps can detach, posing a choking hazard to children; 2) Girl’s dresses - flower petals can detach, posing a choking hazard to children; 3) Children’s swimsuits - snaps on the swimsuit can detach, posing a choking hazard to the child; 4) Children’s robes – the robes fail to meet federal flammability standards for children’s sleepwear, posing a risk of burn injuries to children; and 5) Children’s two-piece woven pajama sets  - the  pajamas fail to meet the federal flammability standards for children’s sleepwear, posing a risk of burn injuries to 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:

FIRST SALE RULINGS.

 Two recent Headquarters Office rulings on First Sale suggest U.S. Customs & Border Protection (CBP) may be taking a somewhat less liberal view on the consequences of “flash title.” The existence of flash title can lead to the conclusion that there was only a single sale for export—from the middleman to the importer.

In the first ruling, HQ H273886 (April 5, 2017), the transaction involved related parties manufacturer, middleman, and importer. The terms of sale, if indicated on the POs and invoices, were either FOB Origin or FOB Port of Export, i.e., flash title.

The documentation of the transaction between the importer and the middleman were less than optimal. Further, the ruling looked at a transaction involving a third-party manufacturer. As you might expect, the documentation in the third-party transaction was much more extensive. CBP granted first sale as to third-party transactions but denied it in the related party transactions.

The take away here is that related party transactions must be documented to the same degree as third-party transactions. This is particularly the case where title passes from the manufacture to the middleman and from the middleman to the importer at the same time.

CBP granted first sale treatment in HQ H278748 (March 17, 2017). Here, as in the previous ruling, title passed from the source of the goods to the middleman and from the middleman to the importer under the same terms. Nevertheless, CBP held that there was a bona fide sale between the middleman and the source of the goods and granted first sale treatment.

The difference between the two rulings is the level of detail in the transaction documents. In the second ruling, the documentation was extensive. As described in the ruling, the documentation submitted illustrates the flow of the order process from one party to the next and the flow of the payment process. CBP described each as following a “reasonable and expected pattern.”

Based on these rulings, it appears to us that the existence of “flash title” does not necessarily eliminate first sale, but it does make it somewhat more difficult to persuade CBP that first sale is appropriate. This is particularly the case if there is any anomaly in any of the documentation and if the level of detail is lacking in the transaction between the source of the goods and the middleman.

BUY AMERICAN.

Given the increased focus on “Made in USA" and “Buy American,” a recent CBP origin decision warrants a quick review.

The decision, HQ H284685 (May 31, 2017), appears in the Federal Register for June 7, 2017 and in the Customs Bulletin for June 21, 2017. It involves the origin of surgical and isolation gowns produced in the Dominican Republic.

The gowns are produced using fabric originating from China, India, or Vietnam. The imported fabric is cut, ultra-sonically welded, or sewn to create a gown, and knit cuffs are sewn to the arms. Obviously, the country of origin is the Dominican Republic.

Under Federal Acquisition Regulations, products that originate in a trade agreement country may be eligible for treatment as “American” for some by “Buy American” purposes. This treatment is limited. The rule of origin is the basic rule of origin and not the free trade agreement rule of origin.

OREGON BAN.

A new Oregon law prohibits the sale in that state of products made with any “covered animal species.” None of the law’s exceptions apply to commercial apparel, accessories, or footwear. The law, which is the result of a ballot initiative, went into effect July 1, 2017.

The measure defines “covered animal species” as any species of elephant, rhinoceros, whale, tiger, lion, leopard, cheetah, jaguar, pangolin, sea turtle, ray and, with the exception of spiny dogfish, shark. 

PREFERENCE PROTESTS.

CBP has issued instructions on resubmitting protests for post-importation preference claims rejected as non-protestable. CSMS #17-000333 (June 8, 2017).

The resubmission must be filed within 180 days of the issuance of the February 15, 2017, memorandum, i.e., on or about August 14, 2017. If the original protest was rejected as non-protestable, importers may request re-liquidation of the entry through a new protest or in a letter. The protest or letter should include the following:

  • Statement that this is a resubmission of a previous preference claim that was rejected as non-protestable.
  • A copy of the original protest showing that it was rejected as non-protestable.
  • Certificate of origin (or data elements) for the tariff-shift model FTAs that are subject to section 514: Australia FTA and Singapore FTA
  • Affidavit in lieu of a certificate of origin for: Bahrain FTA, Israel FTA, Jordan FTA, and Morocco FTA.

Re-submission may be electronically through the ACE Protest Module via the ACE Portal or paper to the CBP Port of Entry.

This process does not apply to preference programs that by law have a post-importation provision: These include CAFTA, Chile, Columbia TPA, Korea TPA, NAFTA, Oman FTA, Panama FTA, and Peru TPA.

FTC REGULATIONS – PROPOSED CHANGES.

The Federal Trade Commission (FTC) has announced a change in the regulations promulgated under the Textile Products Identification Act. 82 Federal Register 29251 (June 28, 2017).

The proposed change deletes a requirement that the owner of a registered trademark that uses the mark in lieu of an RN, must furnish a copy of the registration to the FTC. In addition, the change deletes the requirement that only trademarks that are so-called house marks may be used for this purpose. It is not clear whether a company could use multiple trademarks.

The section showing the proposed changes follows:

303.19 Name or other identification required to appear on labels.

(a) The name required by the Act to be used on labels shall be the name under which the person is doing business. Where a person has a word trademark, registered in the United States Patent Office, such word trademark may be used on labels in lieu of the name otherwise required:. No trademark, trade names, or other names except those provided for above shall be used for required identification purposes.

CPSC DEVELOPMENTS.

There were five recalls of apparel items in June. The recalled items were: 1) children’s playwear because the buttons can detach from the garment, posing a choking hazard to young children; 2) two children’s robes that fail to meet flammability standards for children’s sleepwear and pose a risk of burn injuries to children; 3) a women’s silk scarf that does not meet the federal flammability standard for clothing textiles, posing a risk of burn injuries to consumers; 4) infant coveralls because the snap at the crotch can detach, posing a choking hazard to infants.

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.