Thursday, April 16, 2015

Ruling of the Week 2015.13: Origin, NAFTA and Circular Reasoning

The NAFTA Marking rules are a giant mystery to many people.

Let's assume you are importing evaporator cores from Mexico. The cores are initially produced in South Korea and shipped to the U.S. From here, they are exported to a facility in Mexico that adds fittings and connections before shipping them back to the U.S. Once back here, they are used in the assembly of automotive air conditioners. When returned to the U.S., the cores are not NAFTA originating. You can assume that set of fact because it is what happened in CBP Ruling N014917 (Aug. 2, 2007).

So, how do you analyze the origin of the cores?

The U.S. has various rules used to determine country of origin. Most products that are not wholly the growth or product of a single country are deemed to originate in the last country in which it was subject to a substantial transformation, i.e., a change in name, character, or use. See 19 CFR 134.1(b). That section goes on to say "however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin." Those rules are in Part 102 of the Customs Regulations.

The NAFTA Marking Rules are not based on substantial transformation; they are an exception to it. The NAFTA Marking Rules are a hierarchy of successive tests, one of which might determine the country of origin. In the case of these evaporator cores, the first applicable test was whether the foreign materials, in this case the Korean parts, made a qualifying change in tariff classification as a result of the processing in Mexico. They did not.

The next applicable test stipulates that the country of origin will be the country or countries of origin of the single material that imparts the essential character to the good. In this case, that was the Korean-origin core. Bingo! Korea is the country of origin. So says Customs, read it for yourself.

I have two thoughts on this.

First, there is an interpretive note stating that the only materials that merit consideration as imparting the essential character are those materials that are classified in tariff provisions from which a change in tariff classification is not allowed. This seems like an odd rule and it is pretty obscure, but it makes sense. The changes in tariff classification appear to be designed to require a lot of processing and added value. Often, for example, a change from a parts subheading to a finished goods subheading in the same heading will not be a qualifying change. That is because the operation is probably relatively simple assembly without much value added. But, a change from a raw material of one heading to a finished good of another heading is indicative of a lot of added value. So, the materials excluded from a qualifying tariff classification are closer to the finished article and are, therefore, more likely to represent the essential character. Makes sense to me.

Second, is CBP's conclusion correct? I am on the record about this issue elsewhere in this blog. The NAFTA Marking Rules are only used to determine the country of origin of "goods of a NAFTA country." A "good of a NAFTA country" is something determined under the NAFTA Marking rules to have the country of origin of Canada, Mexico, or the United States. South Korea is not a NAFTA Country.  That means the application of the NAFTA Marking Rules spit this evaporator core out of Part 102 and back into Part 134. Right?

To my way of thinking, that means the question is whether the operation in Mexico resulted in a substantial transformation. That is an arguable point. But, this ruling did not go that extra step and the importer apparently did not make that argument.

By the way, since this and other rulings don't seem to track my thinking keep in mind my general disclaimer: this is not legal advice. It's just me talking.

Monday, April 06, 2015

Late Ruling of the Week 2015.12: Quiver

If you read this blog regularly, you know I have a certain affinity for nerd culture and, in particular, comic book superheroes. For example, I very much like the CW incarnation of Oliver Queen's Green Arrow. I will admit that the Green Arrow books did not do much for me the last time I regularly read them. When I last checked in. Oliver/Green Arrow was fighting a mutant polar bear, or something.

If you follow Arrow on the CW, you might also like the podcast Quiver, which is both an episode recap and general discussion of the Arrow TV show. Amanda and Mike do a good job of commenting on the specific show and on the larger Arrow-related universe. Sometimes, they go a little off the deep end of fandom and "shipping" various romantic angles, but their podcast is informative and entertaining.

And, it is called "Quiver," which brings me to this post. As you likely know, a quiver is the device archers use to hold arrows. A company called Kinsey's Archery imports quivers and asked U.S. Customs and Border Protection how to classify them. The resulting ruling is NY N262341 (Mar. 25, 2015).



According to Customs, the quiver in question is a plastic container designed to provide storage, protection, organization, and portability to arrows. According to CBP, this item is classifiable in HTSUS item 4202.99.9000 as "containers or cases, other." That has a duty rate of 20% ad valorem, which is enough to hurt.

Oh the other hand, 9906.99.05 is the duty free provision for other archery articles and equipment. What gives?

The problem for Kinsey is General Rule of Interpretation 1, which requires that importers and CBP apply the relevant legal notes. Note 1(d) to Chapter 95 excludes from that chapter sports bags and other articles of Heading 4202. Thus, the question is whether anything excludes the quivers from 4202.

It turns out that Note 2(l) to Chapter 42 excludes sports equipment of Chapter 95. This creates a conundrum. Can the quiver be excluded from both headings by operation of conflicting notes? I don't think so. Rather, the way to address this is to start at the 4202. There, Note 2(l) tells us that this piece of archery equipment of Heading 9506 is excluded from Heading 4202. Since it cannot be in 4202, Note 1(d) of Chapter 95 does not preclude classification in Heading 9506. Thus, 9506 prevails.

Customs disagrees, which is why you should never treat anything you read here as legal advice. In a prior ruling, CBP directly faced this question, but only indirectly answered it. In NY N069455, Customs held that a quiver is  a case for holding arrows. From there, CBP applied Chapter 95, Note 1(d) to exclude the quiver and place it in Heading 4202.

Is CBP right? I suspect the argument goes that 9506 does not specify quivers. Thus, it is not clear that the heading was intended to cover containers of a sort specified in Heading 4202. That makes some sense. But, it strikes me as moving beyond GRI 1, which should resolve this. It is similar to a relative specify argument comparing the scope of headings. By reading the HTSUS from start to back, we stay in GRI 1 and first exclude the quiver from 4202, which means that it is not excluded from Chapter 95. End of story.

But, then why does Chapter 95 include the note excluding sports bags of Heading 4202? We can't interpret 4202 in a way that makes that exclusion meaningless. I suspect that Note is intended to exclude general purpose sports bags (think gym and yoga bags) as opposed to specialized pieces of sports equipment like quivers. That seems to be a reasonable argument to pursue.

Saturday, March 28, 2015

Ruling of the Week 2015.11: German Pizza, Chicago Pride

This one is pretty straight forward. The only reason I am covering it is that the notion of importing completely prepared pizza from Germany is oddly funny to me. Kind of like getting tacos from Australia.

In N261593 (Mar. 11, 2015), U.S. Customs and Border Protection answered a ruling request from Freiberger U.S.A., Inc. asking for the tariff classification of a completely prepared and frozen pizza to be imported from Germany. Four varieties were involved including: flatbread with cream sauce and eleven-inch square.

The correct tariff classification is in Heading 1905 which is the heading for:

Bread, pastry, cakes, biscuits and other bakers' wares, whether or not containing cocoa; communion wafers, empty capsules of a kind suitable for pharmaceutical use, sealing wafers, rice paper and similar products . . . .

I come from Chicago where we like our pizza thick, the way God intended it. Consequently, it makes sense to me that pizza would be treated as a bread product. Specifically, Customs classified the pizza in 1905.90.90. This is the "other, other" provision in the heading. The statistical suffix at 1905.90.9060 specifically calls out "Pizza and quiche" (not that the statistical suffix means much legally). The applicable rate of duty is 4.5%

From The Pizza Fan (thepizzafan.com)

This should not be (but probably is) true for the wood-fired, crispy-crust, hipster pizza you might find, say, in Brooklyn. It seems to me that would be, at best, a "crispbread" of 1905.10.0000. Just sayin', Brooklyn. I note there are no breakouts under crispbreads. I have, therefore, just legally proven that hipster pizza is, from a legal perspective, not pizza at all. You're welcome, Chicago.

Of course, the practical economic problem is that crispbreads are duty-free. We here in Chicago do not want Brooklyn to have an economic advantage in the imported pizza market. I think we need to petition the President (who is an adopted Chicagoan) to reduce the duty on imported pizza to Free to give Chicago parity with Brooklyn.

Here's another thing I am worried about: do they make a good pizza in Germany? Is this a product we really want in the U.S.? I realize that the tariff item covers more than just pizza. It also covers quiche, corn chips, and other savory snacks. But, for the entire category, Germany was the number seven source of these products. It fell just behind South Korea and just ahead of Israel, neither of which is a pizza dynamo. The number one source of pizza and similar products imported to the U.S. in 2014 was Mexico with the number two slot going to Canada. See, NAFTA works.

Italy, by the way, was number three.

Sunday, March 22, 2015

Ruling of the Week 2015.10: Getting an iHandle on iLuggage

[UPDATE: It turns out that there is a reason for the ambiguity in the ruling discussed below. The ruling was not written for publication. It was inadvertently posted to CROSS. The "ruling" has now been removed. Hence, you should treat what follows as an interesting hypothetical discussion and nothing more.]

Heading 4202 of the Harmonized Tariff Schedule of the United States sees lots of legal action for two reasons. First, the duty rates are very high; some as high as 20%. Second, U.S. Customs and Border Protection seems to find that many items go in these high-duty provisions.

For context, Heading 4202 covers:

Trunks, suitcases, vanity cases, attache cases, briefcases, school satchels, spectacle cases, binocular cases, camera cases, musical instrument cases, gun cases, holsters and similar containers; traveling bags, insulated food or beverage bags, toiletry bags, knapsacks and backpacks, handbags, shopping bags, wallets, purses, map cases, cigarette cases, tobacco pouches, tool bags, sports bags, bottle cases, jewelry boxes, powder cases, cutlery cases and similar containers, of leather or of composition leather, of sheeting of plastics, of textile materials, of vulcanized fiber or of paperboard, or wholly or mainly covered with such materials or with paper . . . .

There are two distinct parts to this heading. The first part, before the semicolon, does not depend on material. The second part only includes items that are of leather, plastic sheeting, textiles, etc. Both sections list many examples of containers and end with the expression "and similar containers." That is where things get interesting and problematic.

I am talking about this because it is endlessly fascinating, because I have litigated this issue, and because of HQ H163995 (May 19, 2014), which involves the classification of iPod covers or possibly neoprene covers for laptop computers. There is, at least to my mind, some ambiguity as to the merchandise. I am going to assume it is iPod covers.

Customs classified them in Heading 4202 and Target, the importer, protested. According to Customs, the proper classification is as articles of plastic in Chapter 39. The problem for Target is that Note 2(m) to Chapter 39 states that "This chapter does not cover . . . trunks, suitcases, handbags or similar containers of heading 4202." If the laptop covers are similar to trunks, suitcases, and handbags of Heading 4202, they cannot be classified in Chapter 39.

Because the laptop covers at issue are not leather, plastic sheeting, textiles, vulcanized fiber, or paperboard, if they belong in 4202, it will be in the first section as containers "similar to" trunks, suitcases, vanity cases, etc.
Ticking off the necessary elements, Customs first made the unsurprising but necessary conclusion that the iPod covers are containers. This was based on dictionary definitions stating that a container is something that can hold together, hold, or contain an article.

The bigger issue was whether the iPod covers are "similar to" the containers listed in the first part of Heading 4202. To do this, Customs properly invoked the cannon of statutory construction "ejusdem generis," which is Latin for "same kind." Under this rule, the general phrase "and similar containers" is interpreted as limited to containers that share the same  essential characteristics or purposes with the listed articles. The courts have previously held that the essential characteristics and purposes of the items listed in Heading 4202 are that they "store, organize, protect, and carry" the items contained therein.

The meaning of "store" and "organize" were worked out in a case called Firstrax. That case is worth reviewing if only because it is one of mine. It involved fabric pet crates. The Court of International Trade found that a single item, including a living pet, cannot be organized. Organizing is the act of putting multiple items in some kind of useful order.  A pet is also not stored, because storage is the act of putting something away for later use.

In this case, the iPod covers hold one device. Consequently, they do not provide organization. Furthermore, the covers include opening to allow the user to operate the controls on the iPods. Since the iPod is not being put away for later use, the covers do not "store" the iPods. Two down.

Target acknowledged that the covers protect the iPods from scratches and from impact in the event they are dropped. Target also seems to have acknowledged that the grippy material facilitates securely carrying the iPods. That means that the covers serve to protect and facilitate carrying.

That was enough for Customs and Border Protection to find that the iPod covers are properly classifiable in Heading 4202 and, therefore, excluded from Chapter 39.

I have some concerns about this decision. First, how exactly do the exemplars in the first part of Heading 4202 facilitate carrying the items in the container? With the exception of spectacle cases, they all have a handle. I think this is important in that it helps define how we should interpret what it means to facilitate carrying something. All of these cases take something that is unwieldy (clothing and personal effects) or delicate (a musical instrument or binoculars) and make carrying the item or items practical by the addition of a handle to something that does not otherwise have a handle. That is not the case with respect to an iPod case, which makes the iPod no easier to carry. The grippiness of the case is, at best, incidental, since the user still has to carry the iPod in much the same way it would be carried without the case.

The inclusion of spectacle cases does not change that analysis. Glasses are hard to carry safely without a case. They bend and scratch easily. The case makes it easier to carry glasses in a meaningful way (even without a handle).

So, it seems to me that the "carry" part of the "store, organize, protect and carry" test must mean that the item would not be easily carried but for the case. The iPod cases doe not seem to satisfy that requirement.

Is it enough if all the cover does is protect the contents? Personally, I think not. This is the second question. Customs, following some court cases, says that any one of the four criteria is sufficient to classify something in Heading 4202. I don't agree. Trunks, suitcases, vanity cases, etc. do all four of those things. I think what we have here is a semantic argument that has lost sight of the original ejusdem generis analysis. Nothing in the first part of Heading 4202 is exclusively protective without also helping to transport the articles inside. It seems to me that you need at least those two items together to be ejusdem generis with trunks, suitcases, spectacle cases, etc.

Lastly, I wonder whether it is correct to say that an iPod cover contains the iPod when it has opening to allow access to the controls. The cover certainly envelopes the iPod, but the iPod is exposed to the elements in a way that is not true for musical instrument cases, for example. When I was in high school carrying a bass clarinet from home to school, I could not play the instrument while it was in the case. That strikes me as very significant.

This issue will surely be before the Court of International Trade at some point. It looks to me to create the opportunity to further clarify what "carry" and "protect" mean in the context of Heading 4202. More important, it looks like a good opportunity to reverse course and recognize that protection alone is not enough to be ejusdem generis with the exemplars of Heading 4202.

Saturday, March 14, 2015

Ruling of the Week 2015.9: Do Court Decisions Matter?

We sometimes take it for granted that when the Court of International Trade or Court of Appeals for the Federal Circuit makes a determination on the tariff classification of some item, the decision matters beyond the specifics of the case. That, however, is not an obvious proposition or necessarily true. It is rare that the Court of International Trade will have two or more opportunities to decide the classification of exactly the same product, though it does happen. So, the direct impact of court decisions can be limited.

Also, the Court of International is unique among federal courts in that the principal of res judicata does not apply in tariff classification litigation. As a result, an importer can lose a classification claim on its first entry and try again on its second, third, and fourth entries. Although the Court does apply the principal of stare decisis, under which it seeks uniformity in its decisions, one judge of the CIT cannot bind the decision of another judge.

At the administrative level, things are a little different. When Customs and Border Protection issues rulings, it often cites decisions from the Court of International Trade and from the Federal Circuit in support of its conclusion. This is often true with respect to the major guiding principles of customs law but is also sometimes true on specific questions of law.

That is the case with HQ H178917 (Sept. 15, 2014), in which Customs ruled on the classification of certain lighting fixtures designed specifically for use in dental applications. Customs had initially ruled that the merchandise was classified as lamps and lighting fittings of Heading 9405. In this ruling, following the court decision in Trumpf Medical Systems, Inc. v. United States, Customs has decided to revoke the earlier ruling and classify the merchandise in Heading 9018 as instruments and appliances used in medical, surgical, dental or veterinary sciences . . . ."

In the original ruling, Customs noted that dental chairs are classifiable as furniture of Heading 9402. Complete dental consoles, which include chairs and lighting, are classifiable in Heading 9018 as dental instruments and appliances. Customs concluded that lamps, which are not explicitly included as either furniture nor as dental equipment, should be classified in Heading 9405 because it is a specific provision for them.

Following the decision in Trumpf, Customs reconsidered this approach. Trumpf involved overhead lights for surgical theaters. The court looked at the characteristics of the lights and found them to mee the broad definition of the term "instrument or appliance" in the context of Heading 9018. The specific characteristics the court considered included:

  • High illumination/brightness
  • Color rendition of tissue
  • Light field diameter
  • Shadow reduction
  • Limited heat/Irradiance
  • Depth of Illumination

Applying this analysis to the dental lamps, CBP found the same characteristics present. Further, there is evidence that the lamps are only used in dental applications. Consequently, CBP revoked the earlier ruling, followed the analysis in Trumpf, and changed the classification of the lamps.

Is this a good result? I don't think so. Customs' initial ruling noted that Additional U.S. Rule of Interpretation 1(c) requires that a provision for parts and accessories does not prevail over a specific provision for the item. In this case, the lamp is arguably part of a dental chair. But, it is a lamp, provided for specifically in Heading 9405. Further, the Explanatory Notes to 9018 state that the heading excludes certain items of dental equipment when separately presented. Among the excluded items is "diffused lighting" and "shadowless lamp." If 9018 excludes these items, CBP was right the first time.

It seems that that Trumpf decision was very much influenced by the limited use for these lamps. That may not have been consistent with an application of the legal text and the General Rules of Interpretation.  This seems like a good example, along with the rulings following GRK Canada, of how the analysis in a CIT or CAFC decision trickles down to the people at Customs and Border Protection in a way that may not result in clarity.

Friday, March 06, 2015

Ladies and Gentlemen: Pitcairn Island Honey

Because I have some of the best and well-traveled readers (and their relatives) in the compliance business, I have received a picture of a Pitcairn Island country of origin label. An anonymous reader had this jar of honey in a cabinet.


So, compliance pros, what do you think of the marking? Does "Pitcairn Island, South Pacific Ocean" satisfy the U.S. Customs and Border Protection requirement for country of origin marking?

Let me know what you think in the comments.

Wednesday, March 04, 2015

Ruling of the Week 2015.8: Old Jersey and Pitcairn Island

For today's ROTW, I set out looking for a ruling dealing with some far off and preferably warm location. Turns out that, with the exception of coastwise transit issues, there are no Customs and Border Protection rulings involving Pitcairn Island or any of several Pacific Ocean microstates including Tuvalu, Niue, and Kiribati.

Pitcairn Island

What I did find is an interesting question about the country of origin marking for products of the Bailiwick of Jersey Island, Channel Islands. The ruling is HQ 561938 (Mar. 18, 2002). For those of you who may not know, Jersey is an island off the coast of Normandy, France. It is an independent international actor and not part of the U.K. although the U.K. is responsible for its defense and external relations. Also, the Queen is the Head of State in her capacity as "the Crown in Right of Jersey." It is, according to the U.S. Department of State, a "Crown Dependency" along with the Isle of Man and the Bailiwick of Guernsey.

So, what we know is that it is geographically and politically close to the U.K. It is politically distinct from the U.K.; but, it is not fully independent. That raises a question of how goods that originate in Jersey are to be marked when imported into the U.S.



Here, without additional comment, is the answer according to U.S. Customs and Border Protection:

For country of origin marking purposes, colonies, possessions, or protectorates outside the boundaries of the mother country are considered separate entities. Section 134.45(d), Customs Regulations (19 CFR 134.45(d)), states that the name of the colony, possession of protectorate shall usually be considered acceptable marking. However, when the name is not sufficiently well known to insure that the ultimate purchasers will be fully informed of the country of origin, or where the name appearing alone may cause confusion, deception, or mistake, clarifying words may be required. In such cases, the Commissioner of Customs shall specify the additional wording to be used in conjunction with the name of the colony, possession, or protectorate.
With regard to the Bailiwick of Jersey, Channel Islands, Customs has issued Treasury Decision (T.D.) 68-292(2), dated November 22, 1968, which states that, "[s]ince the States of Jersey, Channel Islands, attached to the Crown of England, are not a part of the United Kingdom or Great Britain, the marking "Made in Jersey, British Isles" constitutes acceptable country of origin marking." Similarly, T.D. 73-106, dated April 13, 1973, held that the marking, "Made in Guernsey, British Isles" was acceptable country of marking for goods produced on the island of Guernsey, Channel Islands. The phrases, "Manufactured in Jersey, British Isles," "Product of Jersey, British Isles," "Made in the British Isles" or "Made in the United Kingdom" would also be acceptable for purposes of 19 U.S.C. 1304.
I feel that the remaining descendants of the HMS Bounty should seek a CBP ruling on something, just for the heck of it. Apparently, they sell honey, soap, and honey soap. If you happen to see this, would represent you on a country of origin question just for the fun of it.

Next, on to Cueta and Mellila, little bits of Spain stuck in Morocco.