Saturday, January 24, 2015

No License, No Brokerage

United States v. Freight Forwarder International, Inc. is another recent decision I can dispose of quickly.

Here's the deal. A freight forwarder that employs a licensed customs broker but does not hold a corporate license cannot legally engage in customs business. 19 USC 1641(b)(5) and 19 CFR 111.4. In this case, the defendant paid customs duties to Customs and Border Protection on behalf of importers and invoiced the importer. That is transacting customs business. CBP sought a penalty of $10,000 and the defendant failed to respond.

What follows in the reported decision is the Court of International Trade essentially ticking off the boxes showing that the United States has taken the necessary administrative and litigation steps necessary to collect a default judgment. Not surprisingly, the United States Department of Justice did just that and the Court entered a default judgment of $10,000 against the defendant.

Welcome to 2015

In case I have not already said it, Happy New Year. April of this year will mark the 10th year that I have written every word that appears on this blog. I am glad to have done it and hope it continues to be of value to all of you. At this point, I see no reason to stop or slow down and only good reasons to continue the effort. In fact, I would love some ideas from readers on what might make the blog more useful and more valuable, while keeping in mind that this is a side project and not an actual job. What I would really like is to see the blog readership numbers increase and much more interaction in the comments. I am certain not everyone agrees with what I say, what CBP does, or what the courts do. Let me know and we can have some discussion about it. I'd also like to see the blog make it into the "Niche" category of the ABA Journal's Blawg 100. I should get there just for longevity if not for my scintillating content.

In the meantime, let's learn a lesson from American Power Pull Corp. v. United States. This is the kind of case I might skip in the ordinary course. But given that it is the first Court of International Trade decision of 2015, I figure it deserves a note.

The quick summary of the case is as follows. The law requires that an importer who seeks judicial review of a denied protest to pay all the liquidated duties, taxes, and fees before filing a summons in the Court of International Trade. The job of the CIT is to order refunds of duties that should not have been collected; it is not (in the ordinary case) designed to tell CBP that it should not collect duties. Yes, there are exceptions that and the CIT can grant injunctions just like any district courts. But, here, we are talking about denied protest review under 28 USC 1581(a).

Also, a summons must be filed within 180 days of the date CBP denies the protest.

This case is about the intersection of those two requirements.

It seems that the plaintiff filed a timely summons before it paid the duties owed. Plaintiff then voluntarily dismissed the action without prejudice against a refiling. It then paid the duties owed and refiled the case. The problem is that plaintiff refiled the case after the 180 day statute of limitation had run. Plaintiff argued that the filing of the first case was sufficient to meet the statutory deadline and that the second summons should relate back in time to the original filing date.

The Court of International Trade disagreed. According to the Court, the voluntary dismissal of the first case makes it a nullity. It is as if that first case had never been filed. The second summons was out of time and could not be saved by the earlier filing date. That resulted in the second case being dismissed for lack of subject matter jurisdiction.

This requirement that duties be paid before filing the summons sometimes results in harsh realities. I don't know how much was at issue here. Apparently not so much that plaintiff could not pay the duties. But, in other cases, it can be a significant bar. The ongoing dispute about the classification of "white sauce" is a good example. If an alleged error in classification results in out of quota duties of maybe 300% or a dispute over the scope of an antidumping duty order produces a liability of 200%, it is possible that a small company might be incapable of paying the duties owed as a prerequisite to getting into Court. Unfortunately, that is the way law is written and has been applied.

What to do? One strategy, if you are confident in your argument, is to wait to be sued by Customs. As a defendant, the importer can assert its arguments about the correct classification or scope. But, no one wants to be a defendant. This seems like something that Congress should look at. Customs already has a surety bond protecting it. Maybe an additional litigation bond would provide the necessary security.

Friday, January 23, 2015

Ruling of the Week 2015.3: NAFTA CO by Power of Attorney

First, let me acknowledge what might be very obvious to you: the Court of International Trade has been pushing out customs opinions at an impressive rate this year. I am behind on cases, which prevents me from being behind on work. I will catch up.

This week's ruling (HQ H256731) answers a question that comes up all the time. The question is whether employees of an American parent company can issue NAFTA certificates of origin on behalf of a wholly-owned Canadian subsidiary. Presumably, the same answer would apply to a Mexican subsidiary.

The facts here are simple and familiar. The company involved is S.C. Johnson & Sons. SCJ has a wholly-owned subsidiary in Canada that manufactures goods for export to the U.S. SCJ Canada, through its officers, acting pursuant to authority granted by the Board of Directors, has granted two employees of the Wisconsin-based parent company Powers of Attorney authorizing them to execute NAFTA Certificates of Origin on behalf of the Canadian sub. The resulting CO would show SCJ Canada as the producer and exporter. The signature block would show the title of the person signing the CO as "SCJ Global Trade Compliance as Agent for SCJ Canada," which seems like a lawyerly mouthful.

After a brief review of corporations law, Customs' ruling notes that there is no specific requirement that an agent authorized to sign a NAFTA CO to hold a formal power of attorney. In cases where the party signing the CO is an employee or officer of the exporter, his or her status as an agent of the exporter is clear. An exporter is also permitted to establish an agency relationship with someone who is not an employee or officer but who is to complete NAFTA CO's. The primary requirement is that the person executing the CO have knowledge of the relevant facts. The way to formalize and memorialize that agency relationship is with a Power of Attorney.

Consequently, SCJ employees who hold a Power of Attorney from SCJ Canada are agents for SCJ Canada and can complete NAFTA CO's on its behalf provided they have knowledge of the facts.

That's your best practice. If you are in a similar situation, make sure there is a POA in place.

But, there is still a lingering question. What if there were no POA? Would the CO be invalid? Personally, I don't think so. I think any evidence of authorization would be sufficient to show an agency relationship. In fact, there is the legal concept of "apparent authority," under which someone can be held to be an agent simply because they appeared to be acting as an agent. If someone from SCJ in Wisconsin who holds the Title "Global Trade Compliance Lead" signs a NAFTA CO on behalf of a wholly-owned SCJ sub, that sure looks a lot like an agency relationship.

I am certainly not advising that companies skip the formal POA. It is the right way to go. But, I wonder whether it truly is necessary.

Monday, January 19, 2015

Ruling of the Week 2015.2: Sharks, Jets, & Switchblade Knives

You may not be aware of the scope of laws Customs and Border Protection is charged with enforcing. One special category of activity for CBP is the interdiction of restricted or inadmissible merchandise. One such item is the switchblade knife.

Under 15 USC 1242 (the Switchblade Knife Act), it is illegal to introduce into interstate commerce any switchblade knife. If you were to do so, you would be subject to a $2,000 fine and up to five years in prison. The knives themselves are subject to forfeiture. There are certain exceptions for the carrier and for knives for the Armed Forces. It is also legal for a person with one arm to carry on his or her person a switchblade with a blade three inches or less in length. Finally, there is a complicated exception for spring action knives that have a mechanical bias toward being closed and require exertion of the hand, wrist, or arm to overcome that bias (sort of a reverse switchblade).

Customs' regulations define a switchblade as:

Any imported knife, or components thereof, or any class of imported knife, including "switchblade," "Balidong," "butterfly," "gravity" or "ballistic" knives, which has one or more of the following characteristics or identities:
(1) A blade which opens automatically by hand pressure applied to a button or device in the handles of the knife, or any knife with a blade that opens automatically by operation of inertia, gravity, or both . . . .

Occasionally, a prospective knife importer is smart enough to know about this law. Even more occasionally, that importer will ask Customs for a ruling on whether a particular knife is a banned switchblade. Such is the case in HQ H229916 (Nov. 12, 2012).

The knife at issue in the ruling is described as an "Out the Front" knife. It is 8" overall, with its 3" blade extended. As you might gather from the name, the blade slides straight out of the handle. Here is a picture Customs included in the ruling:

To extend the blade, the user depresses the base of the handle. When depressed, the blade slides forward until it is fully exposed.

Not surprisingly, CBP determined that this knife falls within the definition of switchblade in its regulations. Consequently, it is inadmissible. So, whether you are a Shark or a Jet, if Customs Officer Krupke sees your container of Out the Front knives, you are going to lose them.

Finally, where can I get one of those sweet CBP rulers?

Sunday, January 11, 2015

Ruling of the Week 2015.1: Boo Boo Packs

This is the first “Ruling of the Week” for 2015. I’m going to do my best to get 52 of these to you this year. “My best,” of course is not a guaranty. I am already a week behind. So sue me.

Today’s ruling is HQ H253885, which is technically still a proposed ruling. It is in the Customs Bulletin and Decisions, Volume 49, dated January 1, 2015.
The merchandise involved is the “Boo Boo Pack,” which is a plush fabric animal (e.g., a teddy bear or adorable hippo) that is designed to accommodate a gel pack that can be either heated or frozen. The hot or cold animal is used to treat minor injuries in children (and probably to preserve the nerves of their parents). The animals are imported with the gel packs. This proposed ruling impacts a number of rulings on similar products with different styles of inserts. One insert was a mixture of rice and lavender and must have been intended for someone other than me. Others were combinations of water and propylene glycol.
In the previous rulings, Customs and Border Protection found that the proper classification was in HTSUS item 9503.49.00 as toys representing non-human creatures. Customs is having second thoughts about that.
The problem for Customs is that several court cases have held that “toys” are designed and used for amusement and play rather than for some practical purpose. A product is only a toy when amusement is not incidental to the utilitarian purpose.
The Boo Boo Pack and its kin have a utilitarian purpose of providing pain relief. According to Customs, that is enough to preclude classification in Heading 9503. Treating “toys” as a classification controlled by use, Customs also applied the so-called Carborundum Factors to the imported items. Customs noted that the presence of the opening for the gel pack indicates a use separate from the plush toy. Furthermore, the Boo Boo Packs are often sold as cold packs along with health and person care items, not alongside toys. Interestingly, Customs again noted that consumer reviews on indicate real world use as hot and cold packs. Consequently, Customs held that the Boo Boo Packs are not toys.
That, of course, leaves open the question of how to classify them. We still have two disparate items: the plush animal and the gel insert. Assuming the plush animal is not a toy, it would be independently classifiable as an “other made up article” in Heading 6307. The gel insert for the Boo Boo Pack is classifiable in Heading 3824 as a chemical product not provided for elsewhere. Neither of those headings fully describe the product, so Customs tried to apply the composite goods rule of GRI 3(b) to classify the item based on the component that imparts the essential character.
What do you think that would be?
It turns out that CBP believes both the plush animal and the insert are equally as important to the nature of the product. This was because the pleasing shape and feel of the plush animal facilitates soothing the child and might encourage prolonged application of the heat or cold. The gel insert, on the other hand, provides that heat or cold. Thus, the components are equally as essential.
That conclusion means that the classification is determined by GRI 3(c) and is the last in numerical order. That would be 6307.90.98 (7%) as an other made up article. Coming from the duty free provision for toys, that is a kick in teeth for which a cold pack shaped like a hippo might help.

Wednesday, January 07, 2015

Infantino in a Flash

Infantino, LLC v. United States

Parents of a certain socio-economic status want to protect their small children from real and perceived dangers including the horrible wire and plastic seats on grocery store shopping carts. You have, no doubt, seen chubby baby legs kicking their way through the square wire openings while parents meet in the produce section to commiserate over the price of soccer cleats and debate which local orthodontist has the best espresso machine in the parents' lounge. Happily, there is a solution in the form of the Funny Farmer Shop & Play 2-in-1 play mat from Infantino.

This product is a play mat printed with a farm theme and having detachable toys. It also includes features that make it suitable for use in a shopping cart. Those features include a waist belt, leg flaps, pea pod shaped pillow bolster, and hook and loop closures to secure it to the otherwise offensive shopping cart seat. According to the related advertising, the Funny Farmer is perfect for "tummy time" and turns a shopping cart "into a clean, comfy activity center."

Infantino imported the Funny Farmer and classified it in 9404.90.20 as articles of bedding and similar furnishings. After importation, Infantino had a flash of insight and protested the liquidation. Infantino asserted that the correct classification is in 9503.00.00 as a toy. Customs and Border Protection denied the protest, which was consistent with an earlier ruling issued to Infantino. In the culmination of an elongated process, the Court of International Trade has now decided the classification.

Given that the Funny Farmer is a padded mat, the court had no difficulty finding that it is prima facie classifiable in Heading 9404. The question requiring more detective work was whether the product is also a toy.

A toy, for classification purposes, is something which is primarily designed and used for pleasurable diversion rather than a practical or utilitarian purpose. Apparently, the evidence showed that Infantino trademarked and tested the item as a toy. Infantino included the Funny Farmer in its "Toys and Activity Play" catalog and the description emphasized the accompanying "plush pals." Finally, the packaging acknowledges the use as a shopping cart cover but emphasizes the play aspects of the mat. There are obvious utilitarian features to the product including the leg holes and waste strap. Nevertheless, the court found it to also be designed for amusement. Accordingly, the court found the Funny Farmer to also be prima facie classifiable as a toy in Heading 9505.

The Court of International Trade found, however, that both headings each refer only to part of the materials in the product. Under General Rule of Interpretation 3(b), the good is to be classified as if it were the single material or component that gives the item its essential character. Essential character can be determined by examining the nature of the material including its bulk, weight, quantity and value as well as its role in the use of the good.

The Court noted that the detachable toys are, well, toys. The mat, were it not fitted to cover a shopping cart, would also be a toy. The packaging and pricing are also consistent with the item being a toy. Consequently, the Court held it to be classifiable in 9503.00.00.

A note on the links. When I saw the title of the case, my nerd heart skipped a beat. Carmine Infantino is a legend among comic artists who did great work at both DC and Marvel in the silver age of superhero comics. He is credited with reviving Flash, de-cluttering Batman (including the reviled Bat-Mite), creating the Barbara Gordon version of Batgirl and co-creating Detective Chimp and Elongated Man. I hoped this case would be similar to Toy Biz, which involved the classification of action figures from the Marvel universe. No such luck. Nevertheless, the links are a minor tribute to Mr. Infantino's work.

Available at Amazon.

Tuesday, December 23, 2014

Motoring Along

Unless something big happens, this will be my last post for the year. Happy holiday of choice to all of you. Here's to a happy, healthy, and productive 2015.

The U.S. Court of Appeals for the Federal Circuit has affirmed the Court of International Trade's decision in Belimo Automation v. United States.

The issue in the case is the tariff classification of specialized actuators used to move dampers in HVAC systems. The actuators include an electronic circuit that senses the damper angle and adjusts it to maintain proper alignment. The importer argued that these items should be classified in HTSUS item 9032.89.60 as an "automatic regulating and controlling instruments and apparatus; parts thereof." The Federal Circuit disagreed and affirmed the Court of International Trade, which is a win for Customs and Border Protection.

Chapter 90, Note 7(a) provides that Heading 9032 only applies to

Instruments and apparatus for automatically controlling the flow, level, pressure or other variables of liquids or gases, or for automatically controlling temperature, whether or not their operation depends on an electrical phenomenon which varies according to the factor to be automatically controlled, which are designed to bring this factor to, and maintain it at, a desired value, stabilized against disturbances, by constantly or periodically measuring its actual value . . . .
Parsing this Note, the Federal Circuit found that goods of Heading 9032 have three characteristics:

  1.  They automatically control the flow, level pressure or other variables of liquids or gasses , or are for automatically controlling temperature;
  2. They're operation may but need not depend on an electrical phenomenon that varies according to the factor to be automatically controlled; and
  3. they are designed to bring that factor to, and maintain it at, a desired value, stabilized against disturbances, by constantly or periodically measuring its actual value.
The Federal Circuit noted that the actuators do not measure the state of a liquid or gas. Rather, they measure the angle of the damper, which indirectly relates to airflow or temperature. The Court rejected the notion that the actuator need only be sensitive to changes in a measured variable such as temperature. In a somewhat snarky turn of phrase, the Court said "A block of ice may be sensitive to temperature, but it does not 'measure' temperature in any meaningful way." Because Belimo's actuators are not designed to control a factor on the basis of the factor's actual value, it does not satisfy the requirements of Note 7 and, therefore, is not classifiable in 9032.

That leaves the question of whether it is a motor of Heading 8501. To use old TSUS terminology, Belimo argued that the actuator is "more than" a motor by reason of the electronic components. This did not get a positive result from the Court, which noted that the actuators perform the function of converting electrical into mechanical energy. The addition of other functions complement the motor's operation, but the principal function remains to move the damper blades. Consequently, it is a motor.

Saturday, December 20, 2014

Ruling of the Week 18: Transfer Price

Customs valuation is subject to its own rules and requirements. Importers apply those rules and requirements when reporting the value of merchandise to Customs and Border Protection. As you likely know, when the buyer and the seller are related, the sales price between the parties is suspect and Customs can seek to determine whether the relationship affected the sales price. If so, the related party price might be rejected as a basis for transaction value, causing Customs to apply a different basis for valuation. That is a compliance hassle that no one wants.

Over on the income tax side of things, they have their own statutory rules and tests to determine whether transfer prices are an acceptable means of valuing products. The problem for customs compliance professionals is that the IRS tax compliance often drives transfer pricing and customs compliance must find a way to make due with the result. IRS compliance is sometimes the big dog that wags customs valuation as a small tail. When the customs compliance professionals press for changes to the transfer pricing system, the response is sometimes "We can't touch that, it is controlled by tax." That is not always the case and customs compliance people can make their lives a lot easier by educating tax professionals on customs issues.

Customs HQ Ruling H2043 (Aug. 18, 2014) illustrates some of that tension. In the ruling, the company involved was buying pharmaceutical products from its related party in Germany. The two companies were operating under a bilateral Advanced Pricing Agreement for tax purposes. This agreement required that the selling party maintain a certain level of profit to establish what the IRS and foreign tax authorities considered to be an arms-length level of profits. To accomplish this, the companies made accounting adjustments to transfer money back and forth over a period of years to get the seller to the level of profitability required by the APA.

Because the U.S. company was smart, it realized that these adjustments were made to the cost of goods sold to the U.S. company and might represent changes to the dutiable value of the imported goods. Consequently, the company filed a prior disclosure with Customs and Border Protection. The disclosure identified the adjustments and argued that they are not dutiable because the adjustments were for tax purposes and did not reflect the value of the merchandise.

In this case, Customs found that the way the APA worked, the adjustments were made to cost of goods sold with the intention that the adjustment affect the profitability of the seller. Based on this, Customs found that the adjustments had a direct impact on the price paid for the imported goods and, therefore, were part of the customs value of the merchandise.

That causes a potential problem for the importer. Between related parties, transaction value is only applicable where the relationship did not affect the price. If you think about the reason for these adjustments, you can see that the adjusted price was clearly impacted by the relationship between the parties. The parties were making the adjustments for the express purpose of managing the profitability of the seller, with the blessing of the IRS. That necessarily raises the question of whether transaction value is applicable.

Customs has established a five-part test to determine whether transaction value is applicable to related party transactions subject to a formal transfer pricing policy. Under that test, the transfer price is acceptable where:

(1) A written transfer pricing policy is in place prior to importation and the policy is prepared taking IRS code section 482 into account;
(2) The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return;
(3) The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted;
(4) The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and,
(5) No other conditions exist that may affect the acceptance of the transfer price by CBP

 The theory is that where these factors are present, the adjustment to sales represents the application of an objective formula, which has always been acceptable for transaction value.

In this case, the importer apparently did not provide information supporting the application of transaction value on the basis of the five-part test. As a result, Customs found that the importer could not claim the benefit of an objective formula, which would have allowed for refunds in the case of adjustments that lowered the purchase price.

Instead, counsel for the importer argued that the five-part test is inapplicable. Rather, counsel argued that the circumstances of the sale indicate that the relationship did not affect the price. This is also a legally viable way to preserve the application of transaction value. As Customs and Border Protection puts it: "[T]ransaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain 'test values.'” 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(l).

Unfortunately, the company did not submit sufficient information to prove that the circumstances of the sale indicate the relationship did not affect the sale price. As a result, increases in value need to be reported and, to the extent duties are applicable, duties paid.