Customs Overviews

By John Pellegrini, USA-ITA Customs Counsel, McGuireWoods LLP

In This Issue:

  • Colombia FTA
  • Penalty Decision
  • Trademark Regulation
  • Korea FTA
  • CPSC Developments

COLOMBIA FTA                                                                            

The Free Trade Agreement with Colombia goes into effect May 15, 2012 and applies to all qualifying goods entered on and after that date.  United States and Border Protection (“CBP”) has yet to issue any implementation requirements and the ITC has not amended the HTS.  Neither can make any changes until the President issues a proclamation.  CBP has released entry requirements but has not completed all necessary system changes.     

The following provides a brief outline of the principal textile and apparel provisions of the Agreement.     

All Chapter 61 and 62 subheadings are free of duty as of the effective date.  There is no staging.             

The basic qualifying rule of origin is yarn forward, meaning that the yarn must originate in the region (United States and Colombia).  The rule applies to the component that determines classification.  There are a few broad exceptions to the basic rule.  They are brassieres and nylon filament yarn.

The Agreement allows ten percent by weight of non-qualifying fibers or yarns, but elastomeric yarns must be originating.  The term “elastomeric yarns” is defined to exclude latex. 

Visible linings are required to be originating for specified outerwear and tailored apparel.  It is also necessary that pocketing, thread and narrow elastic fabric rules be originating.

In the case of sets, each of the set components must be originating, or alternatively, the aggregate value of non-originating materials must be less than 10 percent of the “adjusted value” of the set.  “Adjusted value” is the appraised or customs value less any included international freight, insurance, etc. 

We expect that a claim for the benefits under the Colombia FTA will require that the importer have in its possession an appropriate certification.  We do not expect a specific certification form.  However, it is reasonable to assume that any certification must include the following elements.

  • Name & Address (Tel. and E-mail) of importer, exporter (if different from producer) and producer
  • Description of the Merchandise
  • HTSUS Subheading
  • Preference criterion (GN 33(d) )
  • Single shipment (Invoice No.) or Blanket Period
  • Authorized signatories (Company, Title, Tel., Fax and E-mail)
  • Certification

The certification must be in the following form:

I certify that:

The information on this document is true and accurate and I assume the responsibility for proving such representations.  I understand that I am liable for any false statements or material omissions made on or in connection with this document;

I agree to maintain, and present upon request, documentation necessary to support these representations;

The goods comply with all requirements for preferential treatment specified for those goods in the United States-Colombia Free Trade Agreement; and

This document consists of _____ pages, including all attachments.

              Signature:

              Title:

              Phone Number:

              E-Mail Address:

              Date:

We anticipate the CBP and the ITC will make the necessary changes in the relatively near future.

PENALTY DECISION                                                                                

The United States Court of International Trade (“CIT”) has dismissed a penalty claim because the government failed to complete the administrative process prior to filing suit.  United States v. Nitek Electronics, Inc. (Slip Op.12-50) (April 13, 2012). 

The government brought an action in the CIT alleging that the importer had committed a negligent violation.  The suit sought lost duties, lost antidumping duties and penalties.  The litigation was based upon a penalty action which began in 2005.  The pre-penalty notice alleged that the importer had attempted to enter merchandise by means of material false statements and documents, essentially a false classification claim.  The pre-penalty notice asserted that the error was the result of gross negligence.  The importer challenged the pre-penalty notice.  Customs then issued a penalty notice with no real changes, including a continuation of the claim that the error was the result of gross negligence.  The importer responded by asserting that it had exercised reasonable care in classifying the imported merchandise and, in an effort to resolve the claim, offered to pay all duties claimed.  The government rejected this offer and filed suit.

The government’s complaint alleged that the errors were the result of negligence not gross negligence.

According to the Court, the penalty law requires that the government complete an administrative process before initiating litigation.  The importer argued that the government had failed to conduct a complete administrative proceeding, specifically because the complaint raised a claim (negligence as opposed to gross negligence) different from that alleged at the administrative level.  The Court agreed and held that the penalty law mandates that the government perfect the penalty claim prior to seeking recovery in court.  The Court pointed out that the level of culpability is an essential element of any such claim.  Since the government did not seek to impose a negligence-based penalty at the administrative level, it could not raise that issue for the first time in litigation.  Accordingly, the Court dismissed the government’s penalty claim.

The government also sought to recover duties under a different section of the penalty law.  The Court held that this portion of the penalty law does not require that the government exhaust the administrative process and allowed that claim to stand.

This does not mean that the government will automatically win its claim for lost duties.  It must establish that the importer failed to exercise reasonable care in classifying the subject merchandise at any entry.

TRADEMARK REGULATION                                                     

CBP has published an interim rule amending 19 CFR Part 133 pertaining to the treatment of merchandise suspected of bearing counterfeit trademarks or trade names.  77 Federal Register 24375 (April 24, 2012).  The interim rule was effective on the date of publication.

Comments on the interim rule are due by June 25, 2012.

The interim rule provides CBP expanded authority to disclose to intellectual property rights (“IPR”) holders information appearing on merchandise or its packaging for the purpose of assisting CBP in determining whether the merchandise bears a counterfeit mark. The interim rule authorizes CBP, prior to seizure, to release to the IPR holder photographs or a sample of the goods, serial numbers, dates of manufacture, lot codes, batch numbers, universal product codes, and/or other identifying marks appearing on the merchandise or its retail packaging. 

The interim rule also creates the following procedure for detention and seizure of goods bearing potentially counterfeit marks.

  1. CBP issues a detention notice within five days of determining to detain.
  2. The importer is given seven days, excluding weekends and holidays, from the date of the detention notice to demonstrate that the marks are not counterfeit.
  3. CBP may contact the IPR holder at any time to obtain assistance and may provide images or a sample of the imported article, but will not provide indentifying information, such as serial numbers, dates of manufacture, etc.  A sample will not be provided until the IPR holder furnishes a bond.
  4. If the importer fails to demonstrate that that the goods are genuine, within the seven days, CBP will release all information, including indentifying information, to the IPR holder. 
  5. Customs has 30 days from the date on which the merchandise is presented for examination (and any extension requested by the importer for good cause) to make a determination with respect to admissibility.  If after the 30-day detention period and any authorized extension the article is not released, it will be excluded and is subject to seizure and forfeiture.
  6. The IPR holder may, within 30 days of the notice of seizure, provide written consent allowing release of the article.  Otherwise the article will be seized and forfeited, subject to the importer’s right to petition for relief. 

The interim rule does not limit the time CBP may take to decide to detain and it is not clear whether the admonition that a decision to detain must be made within five working days after merchandise is presented as found in 19 U.S.C. § 1499(c)(1) applies.

KOREA FTA                                                                                                

CBP has published interim regulations governing the implementation of the United States – Korea Free Trade Agreement.  77 Federal Register 15943 (March 19, 2012).  Comments on the interim regulations are due by May 18, 2012.

CPSC DEVELOPMENTS                                                                                        

There were two recalls involving apparel during April.  In both, jackets were recalled because drawstrings at the waist created an entanglement hazard.

By John Pellegrini, USA-ITA Customs Counsel, McGuireWoods LLP

In This Issue:

PREFERENCE DOCUMENTATION                                                                 

 

Customs and Border Protection (“CBP”) has issued supplemental instructions relating to document review when verifying preference claims for textiles or wearing apparel.  TBT-12-003 (March 22, 2012).  USA-ITA has circulated a copy of the document.         

Generally, the supplemental instructions appear to be intended to make it clear that they as well as the earlier publications, TBT-07-019 (October 10, 2007) and TBT-11-004 (March 31, 2011), are intended as guidelines; they are not intended to be exhaustive nor are they intended to be rigidly interpreted.  The basic message seems to be that port officials should use common sense in reviewing supporting documentation.  CBP also states that importers should exercise reasonable care in the preparation of claims and responses to request for information and should provide port officials all documents that support claims for preferential treatment even if the request for information does not specify the particular document.             

A major point in the supplemental instructions is that importers should take care to ensure that the documents presented are understandable.  In many cases explanations will be necessary.  For example, providing a list of the documents explaining what each is intended to convey and tying them together in some reasonable fashion will facilitate a review by port officials.  If invoices or other documents cover more materials than were necessary for the production of the specific goods under review, the importer’s submission should identify the specific material relevant to the shipment under review.  In our view, this does not mean dealing with quantities as such but rather taking care to identify the fabric type or color included in an invoice or affidavit that covers multiple fabric types and colors as the particular fabric used to make the apparel covered by the shipment under review.             

The supplemental instructions also make it clear that blanket affidavits are acceptable.  However, caution is advised when using blanket affidavits that indicate “will be sold” or “to be sold”.  These statements are ambiguous in the sense that the affidavit is intended to apply to a specific shipment and therefore, according to CBP, at the time of entry, the word “sold” rather than “to be sold” is appropriate.  CBP clearly prefers affidavits that are a specific to a particular shipment or invoice and indicate the date when the materials were sold.  However, if a blanket affidavit is used, CBP expects that the affidavit will be accompanied by records demonstrating when the sale of the relevant materials took place. This could be an invoice for example.              

The supplemental instructions cover a number of major points but hardly all of the areas of contention between importers and port officials. Nonetheless, it is a helpful sign that the ports are admonished to use a common sense rather that a rigid approach.             

Members who continue to experience problems in this area should bring them to the attention of USA-ITA.  USA-ITA can take some credit for persuading CBP to issue the supplemental instructions.

KOREA FTA                                                                                                

CBP and the International Trade Commission (“ITC”) have completed the changes necessary to implement the free trade agreement with Korea.              

As of March 21, 2012, CBP has accepted electronic Korea FTA claims.             

CBP has issued a memorandum dated March 12, 2012 to provide implementation information.             

As you will have anticipated, a claim for the benefits of the FTA requires that the importer have in its possession an appropriate certification.  There is no certification form per se.  Certification must include the following elements.

  • Name & Address (Tel. and E-mail) of importer, exporter (if different from producer) and producer
  • Description of the Merchandise
  • HTSUS Subheading
  • Preference criterion (GN 33(d) )
  • Single shipment (Invoice No.) or Blanket Period
  • Authorized signatories (Company, Title, Tel., Fax and E-mail)
  • Certification

The certification must be in the following form:

I certify that:

The information on this document is true and accurate and I assume the responsibility for proving such representations.  I understand that I am liable for any false statements or material omissions made on or in connection with this document;

I agree to maintain, and present upon request, documentation necessary to support these representations;

The goods comply with all requirements for preferential treatment specified for those goods in the United States-Korea Free Trade Agreement; and

This document consists of _____ pages, including all attachments.

              Signature:

              Title:

              Phone Number:

              E-Mail Address:

              Date:

It is important to keep in mind that the tariff change rules and the staging schedules are expressed in terms of the 2002 Harmonized Tariff Schedule of the United States (HTS).  There have been a number of changes in the HTS since that date.  For example there are new subheadings for hosiery, hats, as well as women’s coats.  CBP suggests that in filling out the certification you include both the 2002 subheading and the paralleled subheading in the current 2012 HTS.

The ITC has issued a new HTS with all of the changes required by the FTA.  General Note 33 covers the Korea FTA.  The preference identifier is KR.             

CBP indicates that it will be sometime before there are even proposed regulations.  In the meantime the details provided the March 12, 2012 memorandum will govern.

PROPOSED IN-BOND CHANGES                                                         

CBP has published a notice of proposed rule making relating to changes in the in-bond process.  77Federal Register 10622 (February 22, 2012).             

The proposed rulemaking covers various changes to the in-bond regulations.  The stated purpose of the changes is to enhance CBP’s ability to regulate and track in-bond merchandise and to ensure that in-bond merchandise is entered correctly and duties and fees paid.             

The proposed changes would eliminate the paper in-bond application (CBP form 7512) and would require carriers or their agents to file an in-bond application electronically.  In addition the application would require new information including a six-digit HTS number if available and information relevant to the security of the in-bond merchandise.  The proposal would establish a maximum period of 30 days to transport in-bond merchandise between ports. 

It would also require carriers to submit electronic requests to CBP before diverting in-bond merchandise from its intended destination port to another port.  Finally, carriers would be required to report the arrival and location of the in-bond merchandise within 24 hours of arrival at the port of destination.             

Comments on the proposed regulations are due on or before April 23, 2012.

CPSC DEVELOPMENTS                                                                                        

There was a single recall involving apparel during March.  A boy’s jacket was recalled because drawstrings at the waist created an entrapment 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 USA-ITA members and other interested parties.  Matters reported on or summarized herein should not be construed as legal advice on specific situations.

By John B. Pellegrini, USA-ITA Customs Counsel, McGUIREWOODS, LLP

Table of Contents:

CAFTA LITIGATION                                                                                

There may be light at the end of the tunnel for those importers who are frustrated with the manner in which Customs and Border Protection (“CBP”) reviews documents submitted in support of CAFTA claims.  Recently, two importers initiated litigation in the Court of International Trade challenging the refusal of the Port of Miami to grant the CAFTA preference.  Our understanding is that in both cases, the issue is not whether the garments qualify for the CAFTA preference but whether the documentation provided by the supplier and the importer was sufficient for the Port.

Importers who file CAFTA claims at Miami experience frequent problems with documentation.  The problems usually are of the “nit-picking” variety rather than a significant deficiency in the documentation.

We are not suggesting that importers start litigation every time the Port of Miami denies a CAFTA claim but depending on the result of these new litigations, that may prove to be an option.  Hopefully, the litigations will shine some light on what is happening in Miami and require that the Headquarters Office take a closer look at what the ports are doing when they determine that the CAFTA preference, or any other preference, is not supported by appropriate documentation.      

FESTIVE ARTICLES                                                                                   

CBP proposes to revoke New York Ruling N097116 (April 9, 2010) which addresses the classification of a children’s dress-up vest.

The subject vests are composed of non-woven polypropropylene fabric and are designed to be worn over other clothing.  The garments are pulled over the head, feature a rounded neckline, oversized arm holes with open sides, a hook/loop velcro closure and hemmed edges.  The vests come in different styles that indentify the wearer as a police officer, fireman, soldier, or construction worker.  The differentiation is created by color and by screen printing of designs and words that identify the wearer’s occupation.  The vests have a retail price of $1.00.

The New York ruling held that the garments were classified as clothing HTS subheading 9217.10.95 (14.2%).  The importer sought reconsideration. The Headquarters Office proposes to issue HQ H105997 revoking the ruling and classifying the subject merchandise in subheading 9505.90.60 (Free).

The proposed ruling points out that in analyzing whether a textile costume is of flimsy and non-durable construction and therefore, classified as a festive article, CBP looks at styling, construction, finishing touches, and embellishments.

In reaching the conclusion that the vests are classified as festive articles, CBP pointed to the following factors: 1) the absence of zippers, buttons and overall tailoring elements; 2) basic straight stitching, visible overlock stitching with loops loose enough so that they can be pulled and easily loosened; 3) folded hems that are loose and not tightly secured; 4) the absence of closures that reflect a well-made garment; 5) the use of small velcro tabs as closures; and 6) screen printed stripes rather than sewn-on stripes.  Given these considerations, CBP held that the garments were classified as festive articles.

VALUE DECISION                                                                                     

CBP has issued a value ruling that may be of interest to members.  The ruling, HQ H179142 (November 21, 2011), concerns the treatment of certain charges for services provided by a logistics provider, specifically whether the charges should be included in the transaction value of imported merchandise.

The services provided by the logistics provider include; 10 + 2 management fee; booking services, carrier fee for issuing the bill of lading; CFS receiving and packing fee, foreign customs clearance fee, CY monitoring, documentation fee for issuing the freight cargo receipt or house bill of lading, port construction fee, port security charge fee, etc.

In all cases, the fees were paid by the seller to the logistics provider.  Accordingly, the fees are included in the price payable by the importer to the seller.

Under these circumstances, CBP held that the fees could be deducted from the price in calculating statutory transaction value.

Please note, that this approach is available only when the fees are paid by the seller and are included in the price.  Further, in order to adjust the fees the importer would have to establish the actual cost of these fees by providing documentation, such as an invoice, issued by the carrier, freight forwarder port – the actual provider of the services.  It is insufficient to simply provide a list of the charges on the seller’s invoice.

CBP ruled that all of these services could be deducted from the price.  To reiterate, this requires that the service fees be included in the seller’s price and as important, the importer is able to provide documentation from the actual provider of the services establishing the actual price paid.

CVD                                                                                                              

In GPX International Tire Corporation v. United States (December 19, 2011), the Court of Appeals for the Federal Circuit determined that the Department of Commerce lacked statutory authority to apply the countervailing duty law to non-market economies, including China.  Under the countervailing duty law, the United States may impose additional duties to offset, or countervail, certain government subsidies.

The Court noted that when it amended and reenacted CVD the countervailing duty law, Congress was aware of and ratified the position held at that time by Commerce that government payments may not be characterized as “subsidies” in a non-market economy context and that the countervailing duty law did not apply to non-market economy countries.

We expect that the government will appeal the decision to the U.S. Supreme Court.  It is also likely that Commerce will pursue legislation to expressly grant it authority to apply the countervailing duty law to non-market economies.

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 USA-ITA members and other interested parties. Matters reported on or summarized herein should not be construed as legal advice on specific situations.

By John B. Pellegrini, McGUIREWOODS, LLP, USA-ITA Customs Counsel

Table of Contents:

KOREA FTA                                                                                                            

The Free Trade Agreement with Korea goes into effect March 15, 2012 and applies to all qualifying goods entered on and after that date.  CBP has yet to issue any on implementation and/or entry requirements.  The following provides a brief outline of the principal textile and apparel provisions of the Agreement.

The vast majority of tariffs become Free on the effective date.  This includes; MMF sweaters, most outerwear, headwear, gloves and sleepwear.  The exceptions include:

  • Cotton Knit Shirts/Blouses – 10 years
  • MMF Knit Shirts/Blouses – 5 years
  • Cotton & MMF T-Shirts – 10 years
  • Cotton Sweaters – 10 years
  • MMF Tops – 10 years
  • Cotton Woven Trousers – 10 years
  • MMF Woven Trousers – 5 years
  • Cotton Shirts – 5 years
  • Silk Blends, Linen – 5 years

The basic qualifying rule of origin is yarn forward, meaning that the yarn must originate in the region (United States and Korea).  The rule applies to the component that determines classification.  There are a few broad exceptions to the basic rule.  Rayon filament yarn, silk and linen fabrics, cotton velveteen, some corduroy, Harris Tweed, certain lightweight wool/MMF blends and polyester satin need not originate in the region.  There are other specific exceptions.  These include; men’s and boys’ shirts made using specified cotton and MMF woven fabric; women’s & girls’ MMF knit jackets; circular knit cotton pajamas, nightwear, women’s & girls’ panties and briefs of cotton yarns having a Metric Number over 100.

There is no short supply list in the Agreement.  A list specific to the US will be developed after the effective date pursuant to a procedure laid out in the Agreement.  Under the Agreement short supply goods are limited to 100 SME.  The short supply provision expires in five years unless extended.  There is no requirement that elastomeric yarns be originating.

The Agreement allows seven percent by weight of non-qualifying fibers or yarns, but elastomeric yarns must be originating.  Visible linings are required to be originating for specified outerwear and tailored apparel.  There is no requirement that pocketing, thread or narrow elastic fabric rules be originating.

In the case of sets, each of the set components must be originating, or alternatively, the aggregate value of non-originating materials must be less than 10 percent of the customs value of the set.

GENDER LITIGATION                                                                                         

The Court of International Trade has again dismissed importers’ complaints that tariffs based on gender or age are unlawfully discriminatory.   In Rack Room Shoes, et al., v. United States, Slip Op. 12-18 (February 15, 2012) the court dismissed plaintiff’s complaints.  The court’s decision is based upon the conclusion that the complaints did not plausibly show invidious government intent to discriminate.  The court asserts that based upon the decision of the Court of Appeals for the Federal Circuit, plaintiff’s are required to plead additional facts to make plausible the claim that Congress intended to discriminate between male and female users – or between older and younger users – in the tariff.  Plaintiffs conceded that in order for the provisions to be held unlawful, Congress must be shown to be have been motivated by discriminatory intent, rather than by other lawful actions.  Importers alleged that Congress intended to discriminate by basing classification on gender when it could have used other non-gender factors.  The importers also pointed to the Tariff Classification Study of 1960 for the proposition that age and gender discriminations within the tariff are of questionable justification.

The court did not buy either of these arguments and concluded that there simply is nothing in the complaints that can connect the tariff provisions and Congressional actions in a way to suggest the existence of a government intent to discriminate.         

We now have three decisions in this case and it seems clear that the prospects for ultimate success are limited.             

We expect that the importers will appeal.

DDP VALUE DECISION                                                                           

CBP has had DDP transactions in its sights for a good period of time.  In HQ H105275 (December 21, 2011), CBP addressed the proper appraised value of merchandise entered in accordance with a DDP transaction.             

The merchandise was purchased by a US customer from a Hong Kong based seller.  The Hong Kong based seller in turn purchased the merchandise from a seller in China who in turn subcontracted production of the apparel to a second entity in China.  The merchandise was sold by the China seller to the Hong Kong seller on FOB Hong Kong terms and resold by the Hong Kong seller to the US customer on DDP terms.  The merchandise was imported by an entity described as the alter ego of the Hong Kong seller.  However, there was no documentation which established the relationship between the importer of record (“IOR”) and the Hong Kong seller.              

The port appraised the merchandise on the basis of the transaction value of such or similar merchandise imported by the US buyer acting as IOR.  The importer filed a protest arguing that the correct appraised value was the price paid by the Hong Kong seller to the China seller and alternatively at the DDP price less expenses incurred subsequent to exportation.             

The Headquarters Office denied the protest and affirmed the port’s appraised value.

The first issue addressed in the ruling is whether the IOR had the authority to act in that capacity.  The Headquarters Office concluded that it did not.  The IOR made entry based upon an invoice addressed from the China seller to it.  The B/L named the IOR as the consignee.  Nevertheless, CBP held that the IOR did not have the authority to act in that capacity.  The ruling points out that the invoice from the China seller was a sham.  The IOR did not buy the merchandise and did not hold title to the merchandise.  Title to the merchandise was held by the Hong Kong seller until it delivered the merchandise to its US customer.  The ruling also points out that the IOR had no apparent financial interest in the transaction noting that it was not an agent of the Hong Kong seller.  Given these facts, CBP concluded that the IOR did not have the authority to act in that capacity.             

The ruling goes on to reject the transaction value basis of appraisement because of the “sham” invoice from the China seller to the IOR.  As noted, there was no sale from the China seller to the IOR.             

The importer also argued that the price between the China seller and the Hong Kong seller represented transaction value.  CBP rejected this argument largely on the ground that the documentation relating to the transaction, i.e., the invoices and proof of payment were inconclusive.  CBP pointed out two inconsistencies in the dates of the invoices and the ambiguity of what was presented as proof of payment.  Accordingly, CBP held that it could not verify the transaction between the China seller and the Hong Kong seller.             

Similar problems were encountered with respect to the DDP transaction.  Based on what it saw as inconsistencies, CBP ruled that it could not appraise the merchandise on the basis of the DDP price.             

Given the absence of any of a transaction which it viewed as legitimate or supported, CBP ruled that the next basis of appraisement i.e., transaction value of such or similar merchandise, was appropriate and denied the protest.             

The ruling is interesting on a number of levels.  First, the ruling does point out that an agent of a foreign seller can act as IOR assuming the agent has a financial interest in the transaction.  Previous rulings have indicated that the fact of the agent earns a commission in the transaction is a sufficient financial interest.  The problem with the foreign sales appeared to be a lack of adequate documentation.  Also, the fact that there was a sham invoice from the China seller to the IOR created a situation where CBP was reluctant to accept any of the documents at face value.  The obvious way to have handled this transaction was to use the invoice from the China seller to the Hong Kong seller.  Also, the B/L should have been consigned to the IOR, as agent for the HK seller.  These documents would have reflected the transaction accurately and would have made it more difficult for CBP to ignore the transaction documents.

SHORT SUPPLY DECISION                                                                                 

CITA has issued a new short supply decision relating to certain faux suede bonded to faux fur fabric.  77 Federal Register 8221 (February 14, 2012).             

The interesting innovation in this short supply decision includes a note that the yarn size designations describe a range of yarn specifications for yarn in greige condition before dyeing and finishing and before knitting, dyeing, and finishing the fabric.  The designations are intended as specifications to be followed by the mill.  The note goes on to indicate that changes in the dimensions of the yarn created by processing of the greige yarn and production of the fabric would not disqualify the fabric from the short supply provision             

This is an important development and hopefully will be carried over in future short supply decisions.

CPSC DEVELPOMENTS                                                                                        

There was a single recall involving apparel during February.  An infant’s body suit was recalled because snaps on the garment could fall off creating 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 USA-ITA members and other interested parties. Matters reported on or summarized herein should not be construed as legal advice on specific situations.       

By John Pellegrini, USA-ITA Customs Counsel, McGUIREWOODS, LLP

Table of Contents:

PENALTY CASE – ORIGIN                    

The U.S. Court of International Trade addressed the validity of a penalty assessed by U.S. Customs and Border Protection (“CBP”) against an importer who, according to CBP, misdeclared the country of origin of certain garments.  U.S. v. Inner Beauty, Int’l USA-Ltd, Slip Op. 11-148 (December 2, 2011).

The case was decided on the basis of a default by the importer who did not appear in the case.  Generally, CBP alleged that garments made in China were entered as originating in Hong Kong.  This occurred during the period when quotas were in place.  The CBP Form 7501 did show Hong Kong as the country of origin.  However, documents submitted at entry, including origin declarations, were clear that the country of origin was China.  Nevertheless, CBP pursued a penalty action alleging that the importer was guilty of gross negligence and assessing a penalty equal to two times the entered value.

The court agreed that there was a violation but disagreed that CBP had made a case that the importer was guilty of gross negligence.  The court concluded that CBP did not allege facts and circumstances from which it could include that the importer willfully, wantonly or with reckless disregard in its role.  The court also pointed out evidence that the importer had changed its processes to ensure that the error did not recur.  Based on this information, the court concluded that the importer was guilty of negligence but imposed a penalty of 10 percent of the entered value rather than the maximum penalty of 20 percent of the entered value.

CLASSIFICATION ISSUES                                                                  

The proper classification of women’s garments that incorporates a shelf bra is now before the U.S. Court of International Trade.  The litigation challenges CBP’s position that the garments are classified as outerwear garments, with duty rates as high as 32% depending of fiber content, rather than body supporting garments (brassieres and similar articles), which are dutiable at 6.6% under subheading 6212.90.

Members who import this class of garments should consider filing a protest challenging the classification as outerwear garment and initiate litigation in the event the protests are denied.  This is the only way to take advantage of a court decision in favor of the importer-plaintiff.    

CBP proposes to revoke NY N084077 (April 12, 2010).  The New York ruling held that a man’s vest constructed of a bonded fabric consist of an outer layer of MMF woven fabric, a polyurethane membrane and an inner layer of MMF knit pile fabric was classified in subheading 6110.30.30 (32%).  The ruling is based on Note 1(c), Chapter 60, which states that laminated knit pile fabric is classified as knit, regardless of the construction of the outer layer.  The ruling is consistent with CBP’s longstanding interpretation of Note 1(c).            

CBP now proposes to reclassify the vest as a woven garment in subheading 6211.33.00 (16%).  The proposed ruling is based on the essential character principle.  It does not mention Note 1(c) and does not describe the interior layer as knit pile.  It may be that the inner layer is not pile, in which case Note 1(c) is not applicable.  If so, the ruling should so state.  If on the other hand, the intent is to alter the interpretation of Note 1(c), the ruling should be clear on that point.            

USA-ITA will file comments seeking clarification of the ruling and whether it represents a change in the interpretation of Note 1(c).

CPSC DEVELOPMENTS                                                             

There were three recalls of apparel items in December.  All of the recalls involved children’s sleepwear that did not meet federal flammability standards.  In a development that may be related to the recalls, the CPSC on December 23, 2011 announced that it had sent a letter to manufacturers, distributors, importers and retailers reminding them of the obligation associated with children’s sleepwear.

TRANSFER PRICES                                                                                   

CBP has published a notice indicating that it intends to revoke HQ 547654 (November 2, 2001), 46:1 Cust. Bull. & Decs. 15 (December 28, 2011).  The ruling addresses the use of transfer prices for valuation purposes.            

The ruling held that a transfer price that is adjusted retroactively following importation – a common occurrence in related party transactions usually driven by income tax issue – is not an acceptable transaction value which results in past-importation adjustments.  CBP proposes to accept a price derived from a transfer pricing formula as representing transaction value when the formula meets certain specified criteria.            

The criteria include: (1) a written policy, which sets out how the transfer price is to be determined prior to the importation; (2) the importer/buyer is the U.S. taxpayer, and uses the transfer pricing methodology in filing corporate income tax returns and in determining the transfer price for the products covered by the transfer pricing policy; (3) the transfer pricing policy specifically covers the products for which the value is to be adjusted; (4) the policy specifies what adjustments must be made to the transfer price, and how those adjustments are to be determined, and the importer provides detailed explanations and calculations of the adjustments incurred; and (5) there are no circumstances that indicate that the compensating adjustments result in a price that is not at arm’s length.            

The use of a transfer pricing formula does not mean that the price will be accepted as being at arm’s length, and the importer will have to establish that the relationship did not affect the price.             

Although not stated in the proposed ruling, we expect that reporting the transfer price adjustments will require use of the reconciliation process.

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 USA-ITA members and other interested parties.  Matters reported on or summarized herein should not be construed as legal advice on specific situations.