Customs Overviews

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

In This Issue:

  • Hangers
  • Defective Merchandise
  • Gender Litigation
  • CPSC Developments 

 

HANGERS                                                                                                   

Many garments are imported on hangers.  When it is possible to classify hangers as separate articles of commerce, the duty rate is 3% under HTS subheading 3923.90.00.  Alternatively, Customs and Border Protection (“CBP”) has ruled that the hangers can qualify as instruments of international traffic (“IIT”) and for that reason free of duty.  Rulings which hold that hangers are eligible for treatment as IITinclude HQ H042107 (November 24, 2008), HQ H050604 (March 18, 2009), and HQ H117917 (October 13, 2010).             

In either case, in order to obtain the more favorable duty treatment, the hangers must satisfy two criteria.  First, they must be “relatively substantial.”  Frequently, CBP has taken the position that only hangers with a metal hook satisfy this criterion.  However, it is clear that that is not an absolute requirement as many of the IIT rulings involve molded hangers that do not have metal hooks.             

The second criterion is that the hangers must belong to a class of hanger that is reused.  This is an area where some importers may have difficulty.  Importers who are not also the retailer have found it difficult to establish reuse to the satisfaction of CBP.  Keep in mind that actual reuse is not necessary.  Rather, it is sufficient that the hangers be of a type that is reused.             

This is not a new development.  It is addressed here because we understand that the Regulatory Audit Division is looking at the question of whether hangers are being classified incorrectly separate from the garments with which they are imported.             

Importers who routinely claim hangers as separate articles of commerce whether in Chapter 39 or as IIT, should review the practice to ensure they have a solid basis for making the claims and that they can support the claim if required by CBP.                                                                                                                       

DEFECTIVE MERCHANDISE                                                                  

It is black letter law that merchandise imported in a defective condition is eligible for a reduced appraisement.  However, it is not always easy to persuade CBP that the merchandise is defective and the specific amount of the reduction in appraised value.             

HQ H121497 (May 16, 2012) provides a good example of what CBP require to agree to a reduced appraisement.             

The ruling involved an importer who had sold bottoms to a national retailer.  An inspection performed on behalf of the retailer revealed that certain of the garments did not meet specification.  Specifically, the inseam, the back rise and in some cases the front rise and hip measurements were out of tolerance.  Based upon these defects, the retailer required that the importer to refund approximately fifty percent of the purchase price.  The importer then went to the supplier who agreed to absorb a portion of the loss.             

The importer then filed a protest asserting that the appraised value should be reduced by the amount that the vendor had refunded.             

Generally, in order to establish a claim for defective merchandise an importer must establish that the imported merchandise was not the merchandise it ordered (it did not meet specifications); the importer must link the defective merchandise to specific entries and the importer must prove the amount of the allowance for each entry.             

The importer in this case was able to do so.  It established that the merchandise was defective by providing information about the specifications required by the retailer customer and contrasted it to the specific information in the inspection reports showing that there were various deficiencies in the dimensions of the garments in their condition as imported.  The importer also provided correspondence between it and the national retailer which outlined the nature of the defects.             

In terms of value, the importer was able to provide correspondence in which the retailer demanded a refund.  The importer provided proof that the refund was paid to the retailer.  It also provided correspondence between it and the vendor in which the vendor agreed to a rebate and the importer established that it actually received a rebate.             

The importer was able to tie the merchandise to specific entry and entry lines.  Finally, the ruling notes that the defect is not the type of defect that would occur after importation but only at the time of production.             

To summarize, it is possible to persuade CBP that imported merchandise is defective and that the importer is entitled to a reduced appraisement.  However, an importer who seeks a reduced appraisement must be able to provide specific probative information that the merchandise was defective and did not satisfy the importer’s specifications, that any defect occurred prior to importation, and that there is a reasonable basis on which to derive a new value.

GENDER LITIGATION                                                                             

Plaintiffs have appealed the most recent decision of the Court of International Trade holding that duty rates based in part on gender or age are not discriminatory.  The appeal was lodged with the Court of Appeals for the Federal Circuit.  Initial briefs are due in August.  A decision is not expected before early 2013.

CPSC DEVELOPMENTS                                                                                        

There were three recalls involving apparel during June.  The first involved boys’ and girls’ lounge pants and boxers recalled because of failure to meet flammability standards for children’s sleepwear.  There were two additional flammability recalls both involving pajamas.

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

In This Issue:           

  • Pile Ruling

  • Protest Decisions – CAFTA

  • Transfer Pricing

  • Colombia FTA

  • CPSC Developments

PILE RULING          

Customs and Border Protection (“CBP) proposed to revoke NY N084077 (April 12, 2010).  The New York ruling held that a man’s vest constructed of a bonded fabric consisting 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 NY 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 proposed to reclassify the vest as a woven garment in subheading 6211.33.00 (16%).  The proposed ruling was based on the essential character principle, 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. 

USA-ITA filed comments seeking clarification, in particular whether it would represent a change in the interpretation of Note 1(c).

CBP has published a final ruling, HQ H136897, 46:21 Cust. Bull & Decs. 164 (May 16, 2012).  The published ruling is clear that the inner layer of the bonded fabric was not a knit pile.  Accordingly, the ruling does not represent a change in the interpretation of Note 1(c).

PROTEST DECSIONS – CAFTA                          

CBP’s Headquarters Office recently issued three rulings which review decisions by the Port of Miami to deny protests challenging rejections of duty-free treatment under CAFTA.  The denials were based on perceived deficiencies in the supporting documentation and did not reflect a determination that the apparel failed to qualify for CAFTA treatment.

The rulings are HQ H192596 (February 14, 2012), HQ H197897 (February 21, 2012), and HQ H198036 (February 27, 2102).

In general, the Headquarters Office reviewed the specific objections to the documents and, for the most part, concluded that the objections were not well-founded and did not justify the protest denials.

The following are examples of the comments of the Headquarters Office:

  • The Port objected to the failure of the importer to provide documentation showing that the fabric was shipped to the manufacturer and a failure to provide purchase orders.  The Headquarters Office responded by indicating that there was nothing in the record to show that the Port requested either the shipping documentation or the purchase orders. 
  • Documents were rejected because they did not recite the correct Harmonized Tariff Schedule of the United States (“HTS”) subheading.  The subheading was correct only through the eight-digit level.  The errors were at the statistical level.  Conceding that this was an error, the Headquarters Office indicated that it could have been a mere typographical error and, further, the error was one that did not affect the validity of the classification information because it was correct through the legal or eight-digit level.  The HTS subheading is important only to determine whether there was the appropriate change in tariff classification, a change which occurs at the eight-digit level.  According to the Headquarters Office this was an inconsequential error and not a valid basis for denying preferential treatment. 
  • The Headquarters Office also made the point that minor inconsistencies in an affidavit from a fabric source are not a sufficient basis for denying preferential treatment at least in those cases where the documents provide the name and address of the fabric producer and when the accompanying documentation was sufficient to clear up any inconsistencies.
  • The Headquarters Office accepted an affidavit that was not signed.  It agreed with the Port that all documents should be signed, but went on go reason that when viewed in totality with the other documents, failure to sign a single document is not a sufficient basis to deny preferential treatment especially in the light of CBP’s ability to verify the authenticity of the document by contacting the named individual.
  • In another situation, the Port objected to references to both yarn and sewing thread in an affidavit.  The Headquarters Office pointed out that sewing thread is a yarn and depending upon the stage of production process at times may be more properly referred to as a yarn.  Accordingly, the Headquarters Office indicated that it had no concerns with the use of both terms on the document. 
  • In another instance the Port cited ambiguous language such as “sold (or to be sold)” which appear on blanket certificates of origin.  The Port rejected these documents because the certificates did not clearly state that the product has been sold.  The Headquarters Office conceded that the language was ambiguous and that it is necessary to establish that the materials were actually sold.  Headquarters accepted the certificates because the importer had provided purchase orders and invoices to support the sales. 
  • Finally, another affidavit was rejected because of a stamp which stated “this affidavit must have the original notary seal, any photocopies will void this affidavit.”  The Headquarters Office accepted the affidavit pointing out that Headquarters Office guidance in this area is clear that documentation other than affidavits is acceptable.  The Headquarters Office concluded that the Port should not have rejected the copy of the affidavit with the notary stamp simply because it was a copy.  The copy was deemed sufficient for the purpose of the conveying the information necessary to support the preference claim.

We hope that the HQ decisions will educate the port officials that documentation supporting preference claims need not be rejected for what are irrelevant errors or trivial inconsistencies.  The documentation should be examined as a whole and accepted in the absence of substantive errors, omissions, or inconsistencies.  This does not mean that importers should not check the documents before submitting them to CBP.  HQ H192596 admonishes importers to pay attention; errors should be corrected and inconsistencies explained.  As the ruling states, “An importer cannot rely on CBP to constantly ask for clarifications or corrections on documents that are shoddily prepared and contain inconsistencies.”

TRANSFER PRICING                                                                                 

CBP has published a notice indicating that it has revoked HQ 547654 (November 2, 2001).  HQ W548314 (May 16, 2012), 46:23 Cust. Bull & Decs. 1 (May 30, 2012).  The revoked ruling held that a transfer price that is adjusted retroactively following importation is not acceptable as a basis for transaction value.

Under HQ W548314, a transfer pricing policy is acceptable when it satisfies the following criteria;

1.  Awritten policy is in place prior to importation and the policy is prepared taking IRS Code Section 482 into account. (There is no requirement that the IRS has agreed to the policy.)

2.  The importer/buyer is the U.S. taxpayer, and uses the transfer pricing policy in filing corporate income tax returns and any adjustments are used in filing tax returns.

3.  The transfer pricing policy specifies how the transfer price and any adjustments are to be determined with respect to all products for which the customs value is to be adjusted.

4.  The importer maintains and provides accounting details from its books and records and/or financial statements to support the claimed adjustments in the United States.

5.  There are no circumstances that indicate that the compensating adjustments result in a price that is not at arm’s length.

The ruling is clear that reporting the transfer price adjustments does not require use of the reconciliation process, however, it “strongly encourages” use of reconciliation.

COLOMBIA FTA                                                                            

Presidential Proclamation 8818 (May 14, 2012), 77 Federal Register 29514 (May 18, 2012), authorized implementation of the Free Trade Agreement with Colombia which went into effect May 15, 2012. 

The ITC has amended the HTS.  General Note 34 provides the rules applicable to agreement and the program designation is “CO”.  CBP has published a memorandum on implementation of the agreement dated May 15, 2012.  The memorandum is available here.

CPSC DEVELOPMENTS                                                                                        

There were seven recalls involving apparel during May.  Five of the recalls involved hooded garments with drawstrings at the neck and one involved drawstrings at the waist.  The seventh recall was a child’s jacket with snaps that could come loose 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

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 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 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.