Holiday Rituals

WWRD U.S. v. United States is exactly the kind of case that makes me love what I do. Much like our recent foray into sunflowers seeds, this case seems to have a simple answer that gets derailed by the law. It has to do with some potentially festive articles, which is also one of my favorite legal topics.

The question here is the classification of several examples of tableware that are decorated with Christmas or Thanksgiving motifs. The items have names like "Old Britain Castles - Pink Christmas" and "12 Days of Christmas crystal flutes." Customs and Border Protection classified the merchandise in various headings based on their composition. The plaintiff protested and asserted that the merchandise is specifically designed and intended for use in conjunction with Christmas or Thanksgiving dinners. According to plaintiff, that makes the correct classification HTSUS item 9817.95.01, which reads:

Articles classifiable in subheadings 3924.10, 3926.90, 6307.90, 6911.10, 6912.00, 7013.22, 7013.28, 7013.41, 7013.49, 9405.20, 9405.40 or 9405.50, the foregoing meeting the descriptions set forth below: 

Utilitarian articles of a kind used in the home in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions, such as Seder plates, blessing cups, menorahs or kinaras . . . .

The history of this provision is interesting. After a lot of litigation, in 2007 the HTSUS was amended to clarify when utilitarian articles are "festive articles" related to holiday celebrations. The amendment added Note 1(v) to Chapter 95, which excludes from Chapter 95 "Tableware, kitchenware, toilet articles, carpets and other textile floor coverings, apparel, bed linen, table linen, toilet linen, kitchen linen and similar articles having a utilitarian function (classified according to their constituent material)."

This change caused a related problem. Changes to the HTSUS are supposed to be revenue neutral. Removing these items from the duty-free provisions of Chapter 95 resulted in an increased rate of duty. To fix that, the ITC added 9817.95.01, which is also duty free and avoids the messy issues of classification as festive articles.

What all that means is that because of Note 1(v), these products cannot be classified in Chapter 95. If they are not classifiable in 9817.95.10, then CBP correctly classified them according to their constituent materials. So, what about 9817.95.10?

A lot of the legal analysis is about breaking down text to find its correct meaning. Doing that to 9817.95.01, we find that merchandise classifiable there must be:

1. Classifiable in 3924.10, 3926.90, 6307.90, 6911.10, 6912.00, 7013.22, 7013.28, 7013.41, 7013.49, 9405.20, 9405.40 or 9405.50
2. Utilitarian
3. Of a kind used in the home
4. In the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions

There was no controversy surrounding the first three elements. The sole question before the Court was, therefore, whether these items are used in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions.

Ask yourself whether Thanksgiving dinner is a specific cultural ritual celebration? It is a specific cultural celebration. That seems to be clear. After all, we all know what that looks like, right?

Normal Rockwell's Freedom from Want
via a Quinta Arts Foundation

But, is the imported tableware part of a "ritual celebration?"

We all have family rituals for Thanksgiving dinner.  Do you have to hide the alcohol before Uncle Abe arrives and starts mixing overly sweet Old Fashioneds? Does Grandpa insist on carving the turkey his special circa 1975 electric carving knife? Does little Jenny come back from Berkeley to lecture everyone on the evils of industrial turkey farming while being the sole person willing to eat her tempeh loaf and non-gmo cranberries? How about when the entire assembled family simultaneously leans back from the table just enough to loosen their belts and newly-tight pants and then moves in for pie? 

I am less comfortable opining on Christmas rituals. I can, however, say with certainty that my personal Hanukkah ritual involves using a curved carrot peeler as an implement to clear candle stubs from the menorah each of the eight nights. Another widespread ritual is the discussion among knowledgeable Jews of exactly the best means of accomplishing that task.  Add to that the ritual second degree burns inflicted on the poor bubbe tasked with frying the latkes or, in fancy households, the sufiganyot. The latter should look familiar to Rustbelt residents who enjoyed paczki this week.

The legal problem is that while those may be rituals in a colloquial sense, they are not rituals in a tariff sense. According to the Court of International Trade, a ritual is "a customarily repeated often formal act or series of acts." That means it is something done the same way, using the same steps, every time. A ritual is essentially scripted and can be reduced to the instructions necessary to accomplish it. That is distinct from the raucous and chaotic family gathering around the Thanksgiving or Christmas table.

That understanding of "ritual" is consistent with exemplars in the tariff item. Seder plates, for example, are part of the ritual Passover Seder. "Seder" means "order" and the important ritual of every Seder is telling the story of the redemption from salvery in Egypt. The event is so ritualized that there is a manual given each participant. 

No matter what crazy things happen at any particular Seder, there is a defined ritual for telling the Passover story. It involves four cups of wine, four questions, and a plate full of symbolic foods. Often, the evening ends with a debate over whether Charlton Heston was better in The 10 Commandments or in The Omega Man, but that is not in the haggadah. 

Plaintiffs in this case lost because the Court of International Trade found that a family dinner is not a "ritual," even when it falls on Thanksgiving or Christmas. In other words, every celebration is not a ritual celebration. With no ritual involved, the dinnerware could not be classified in 9817. 

Note to the tableware industry, you might want to take a lesson from Maxwell House Coffee and start printing instruction books for Thanksgiving and Christmas dinner.

Ruling of the Week: 2017.7: Our Lady of Guadalupe in Wood

Customs law is an interesting practice because we get to see all of the interesting things that come into the country. Granted, a lot of it is pieces of machinery, chemicals, and goods for resale. Now and again, something strange or unexpected shows up. Couple that with my belief that the Harmonized Tariff Schedule of the United States provides the legal means of determining important philosophical questions such as whether something is art or is holy. These questions are, sort of, the issue in HQ H136955 (Aug. 6, 2014), which for some reason was only recently published.

The merchandise at issue is the 3/4 round depiction of Our Lady of Guadalupe with surrounding rays of light. The issue is whether this is a statuette or ornament of wood of HTSUS heading 4420, an original sculpture of Heading 9703, or an article for use by a religious institution of HTSUS item 9810.00.25.

The starting place for this analysis is that Note 1(r) to Chapter 44 excludes works of art of Chapter 97. That means the first philosophical question to be addressed is whether the above depiction of Mary is a work of "art" as opposed to a commercial craft. While artists, collectors, curators, and academics might argue that the definition of art is profoundly subjective, Customs does not work that way.

To be classifiable in Heading 9703, the item must be an "original" sculpture, ancient or modern. That excludes decorative items of conventional craftsmanship of a commercial nature. That means the random coconut carved into the head of a monkey is not likely to be "art" by this definition because the workmanship is conventional and commercial. Court cases have held that a statue is original if the artist exercised his or her own aesthetic imagination and artistic conception when creating the work.

It turns out that this image is basically a three-dimensional copy of images dating back to 1531. Stick with me here as I am way out of my comfort zone. In 1531 Mary appeared to Juan Diego. After the event, his cloak was miraculously imprinted with a version of the image depicted in the statue and also "countless" similar depictions. See, for example, this image of Juan Diego from Catholic.org:

And here is the "original:"

You can see that the imported statue does not show a lot of aesthetic imagination or artistic conception. Consequently, CBP declared it to not be "art." Also, there was no evidence presented establishing the identity of an artist who might have exercised some artistic imagination. That prevents classification in 9703.

What about 9810.00.25? This is an interesting question. The tariff item covers:

Articles imported for the use of an institution established solely for religious purposes:

Articles imported for the use of an institution organized and operated for religious purposes, including cemeteries, schools, hospitals, orphanages and similar nonprofit activities staffed and controlled by such institution:

Altars, pulpits, communion tables, baptismal fonts, shrines, mosaics, iconostases, or parts, appurtenances or adjuncts of any of the foregoing, whether to be physically joined thereto or not, and statuary (except granite or marble cemetery headstones, granite or marble grave markers and granite or marble feature memorials, and except casts of plaster of Paris, or of compositions of paper or papier-mâché)  

According to CBP, articles classifiable in this tariff item must be subject to a pre-importation sale to a religious institution. Here, it appears the item may have been sold to a church, but there is a failure of adequate proof. There is an inconsistency between the commercial invoice, which describes a 3/4 round statue, and the purchase order, which describes a fully round statue. Other documents do not list the church as party to the transaction. In addition, the entity listed as the importer is a re-seller of this type of merchandise and maintains an inventory of similar statues. IMports for re-sale would not fall within this tariff item.

As a result, Customs was not convinced that this particular statue was destined for use by a religious institution. Customs, therefore, rejected the possible classification in Heading 9810.

The statue of Our Lady of Guadalupe was, therefore, classified in tariff item 4420.10.00 with a 3.2% rate of duty.

Ruling of the Week 2017.6: Printers vs. Printing Machines

This one will be quick, for lots of reasons. Mostly, I don’t have much to add to the ruling other than a question. The ruling at issue is HQ H128416 (Feb. 9, 2017). It involves the tariff classification of digital wide-format ink-jet printer used to print and cut vinyl graphics for outdoor advertising and similar applications.

The printer is a combination of a printing machine and a cutting machine. As such, the competing tariff provisions are in Heading 8443 (Printing machinery) and 8477 (Machinery for working rubber or plastic). That is the sole question addressed in the ruling.

To resolve the classification, Customs and Border Protection applied Note 3 to Section XVI of the HTSUS, which states in relevant part:

Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function.

According to the importer, the principal function is printing, making the machine an article of 8433. Customs agreed, finding that the machine would not be used solely for cutting but that it might be used for printing without cutting. Customs examined the factors set out in United States v. Carborundum Co., 63 C.C.P.A 98, 536 F.2d 373 (1976), including physical characteristics, channels of trade, expectation of the ultimate purchaser, and recognition in the trade to ultimately agree that this machine is primarily a printer.

OK, so here’s my question: Why not consider this to be an 8471 unit of an automatic data processing machine? In other words, why is this ink-jet printer different than the ink-jet printer on my desk? The difference between 8471 printers and 8443 printing machines was discussed at length by the Court of International Trade in Xerox, which we reviewed here. The ruling states that these are “digital” printers. That means that they function in conjunction with a computer to translate digital data into signals to the printer. The only difference is that they print on large format plastic rather than on paper and they can cut the plastic. Once we determine that printing is the principal function, it seems to me that the cutting becomes irrelevant. What we know from Xerox is that large scale digital printing is still a data processing function. That would make these printers units of ADP machines of Heading 8471.

I am probably wrong for some factual reason not stated in the ruling. Heck, I may be wrong on the legal analysis. My analysis ends up with the potentially absurd result that all digital printers are ADP machines and 8443 printing machines would cover only Gutenberg-style presses and similar analog machines. It would be nice to know whether this was discussed and how it was decided that 8471 is not relevant.

Sunflower Seeds

I am falling behind on Rulings of the Week, but not for want of effort. I am keeping up with CIT decisions (more or less). The latest of which is Well Luck Co., Inc. v. United States. The case has to do with the classification of sunflower seeds that have been processed for human consumption. Some have been flavored with spices or other flavorings and dried. All are roasted and salted. The question is the tariff classification, which turns out to be trickier than you think.

The options are HTSUS item 1206.00.00, which covers "Sunflower seeds, whether or not broken." The applicable rate of duty is free and this is what the plaintiff claimed is correct. Customs and Border Protection liquidated the sunflower seeds in HTSUS item 2008.19.90 as "Fruits, nuts and other edible parts of plants, otherwise prepared or preserved . . . not elsewhere specified or included: Nuts, peanuts (ground-nuts) and other seeds . . . ." The applicable rate of duty is 17.9%, which is a significant deviation.

Think about everything you know about classification. In your heart, you already know the answer, don't you? Sunflower seeds are sunflower seeds. They are called out eo nomine in 1206.00.00 and that tariff item covers all forms of the sunflower seed. Easy. On top of that, as between the two, Heading 1206 is more specific in that is covers sunflower seeds. Heading 2008, on the other hand, covers other edible parts of plants not elsewhere specified or included, which is far less specific. Finally, since sunflower seeds are specified in 1206, they cannot be included in 2008.

All of that makes sense.

And yet, your conclusion (and mine) is wrong. Let's try to sort it out.

First off, do not jump to Relative Specificity under General Rule of Interpretation 3(a) until we fully explore the text as required by GRI 1.

Let's agree that if the processed sunflower seeds are classifiable in 1206, they are excluded from 2008. So that is the first question the Court of International Trade had to decide: are processed sunflower seeds "sunflower seeds" for purposes of Heading 1206? Getting the botany out of the way, there was no dispute that the imported product is the edible seed of Helianthus annuus, the common sunflower.

The problem for the plaintiff in this case is that the Explanatory Notes further define sunflower seeds of Heading 1206 as "minimally processed" and having general uses including for the extraction of oil and for sowing. These are not those seeds. They have been processed to add flavoring (even if just salt) and have been heated to an extent that they are no longer suitable for sowing. These are sunflower seeds with the specific use of being a food item. As a result, they are excluded from Heading 1206 and reamin classifiable in Heading 2008.

This conclusion is consistent with the Explanatory Notes. It is also consistent with the overall structure of the HTSUS, which moves from less processed to more highly processed materials. There is no doubt that the imported seeds are more highly processed than similar seeds for oil extraction or sowing. Thus, I don't have much of a problem with this result.

But, I think there is an analytical open question. A few Court of Appeals cases have held that the Explanatory Notes should not be used to impose a restriction on the language of the HTSUS that is not present in the text. See, e.g., Archer Daniels Midland v. U.S. Is that what happened here? Is there an answer to this issue that does not violate that principle?

There are no legal notes to Chapter 12 that exclude processed sunflower seeds. There are also no relevant Section Notes. Suddenly, this is a hard case.

The Court resolved this concern by noting that the meaning of the term "sunflower seed" is actually ambiguous. The lexicographical materials submitted to the Court indicate two distinct meanings. First, there are the raw and minimally processed seeds that remain suitable for oil extraction and for sowing. Those seeds may also be used for human consumption. Although not addressed by the Court, it is worth noting that Heading 1206 includes two statistical suffixes for sunflower seeds for "human use." The suffixes are not relevant to classification, but are indicative that some of the seeds of Heading 1206 are edible by humans.

The second meaning of sunflower seeds is in reference to the prepared snack food, which is no longer capable of general use. Having found two distinct meanings, the term is ambiguous and it makes sense and is legally correct to look to the Explanatory Notes to resolve the ambiguity.

That resulted in a substantial duty increase, which is why I suspect the Federal Circuit will let us know whether it agrees with this analysis. Given Archer Daniels Midland and the related cases, it is a close call on which reasonable judges might differ.

Snuggies Are Blankets

[UPDATED TO ADD LINK TO THE DECISION]

Remember Snuggies? A few years back, they were part of the zeitgeist. Here is a reminder of exactly what is a Snuggie.

According to the commercial, Snuggies are wearable blankets with sleeves-like tubes. That raises an interesting classification question. Is it a blanket of HTSUS item 6301.40.00 (8.5%) or is it a garment classifiable in 6114.30.30 (14.9%)? Or, if it is neither, is it an "other made up article?" The Court of International Trade had to decide that question in Allstar Marketing Group v. U.S.

These are important questions in my world. I get that there is a lot going on in the larger world. Lately, I have been inspired and a little shamed watching lawyers who practice in areas affecting the actual lives and liberty of people, particularly refugees and others trying to entry the country. It made me proud to be a lawyer to see my colleagues set up shop at airports to provide assistance. Yesterday, I was at a meeting sponsored by HIAS Chicago at which an immigration lawyer offered pro bono assistance to arriving refugees. Occasionally, we get to undertake projects for individuals and worthwhile organizations, but that is uncommon in my practice. Here is an example of which I am still proud. Happily, I am currently working on a project that I think will serve the larger public, but it is still in the early stages and will not have the direct, personal impact that we have seen from the good work of immigration lawyers.

Now, back to the wearable blanket.

The evidence presented to the Court of International Trade shows that the importer referred to Snuggies as blankets in communications with the producer-supplier. The marketing materials show people using Snuggies in a variety of settings both in the home and outside, including on an airplane and at a sports stadium. Snuggies have sleeve-like tubes attached to allow users (or are they wearers?) to use their arms freely while still in the comparative warmth of the Snuggie.

The Court found that it had all the information necessary to resolve the matter and that there were no material questions of fact in dispute. That means, the only question is whether Snuggies fit within the common and commercial meaning of the tariff terms "garments" or "blankets." Under Note 2(a) to Chapter 63, if Snuggies are classifiable as garments, they cannot be classified as blankets or other textile items.

Tariff item 6114.30.30 covers "Other garments, knitted or crocheted: Of man-made fibers: other . . . ." There is no dispute that Snuggies are knitted of man-made fibers. The question is, are they "garments?" Looking at the structure of Section XI, the Court found that the items specified in Headings 6101 through 6114 are "garments," which is interchangeable with "apparel." Prior court decisions indicate that apparel is articles that "are ordinarily worn--dress in general." These are "clothes and covering for the human body warn for decency or comfort" as well as adornment. The government argued that because Snuggies are worn for comfort, they are apparel. The Plaintiff argued that because they are not worn for decency and adornment, they are not apparel.

The Court focused on the fact that apparel is "ordinarily worn." Specialized items covered by the apparel provisions include aprons, smocks, clerical vestments, scholastic (and presumably judicial) robes, and certain sports apparel. According to the Court, all of these are more akin to apparel than are Snuggies.

The Court then considered the use of the product. For why, see here. Physically, Snuggies are one-size-fits-all items and are open in the back. These characteristics do not resemble the kind of apparel that is "ordinarily worn." Furthermore, Snuggies were "inspired" by prior existing products called "Slankets" and "Freedom Blankets," both of which were marketed as blankets. Finally, the sales and marketing literature refers to the Snuggie as a blanket. According to the Plaintiff, that makes Snuggies improved blankets.

Blanket is defined as a warm covering used especially on a bed or a similar article used as a body covering for warmth. The Snuggie was designed and marketed as a covering for warmth. Since "blanket" is an eo nomine tariff description, it includes all forms of the article, including improved forms. From that, the Court was able to find Snuggies to be blankets (with sleeves). The addition of sleeves, according to the Court, did not so modify the nature of the article to make it something other than a blanket. The sleeves are incidental to the warming cover that is a Snuggie.

Thus, the plaintiff wins (this round) and Snuggies are classifiable as blankets of 6301.40.00.

Ruling of the Week 2017.5: Copper Scrap

There are a number of Chapter 98 tariff items that permit partial duty exemptions for items of the United States that are sent abroad and returned to the United States. Given the current trade rhetoric, it might be worth explaining why that is the case. After all, why give a benefit to companies that send goods abroad for further processing? The short answer is that the duty exemption encourages the use of U.S. origin materials in manufacturing abroad. After all, if there is going to be manufacturing abroad, the U.S. should encourage that it take advantage of U.S.-origin components and materials. The alternative is to manufacture abroad entirely from foreign components.

The HTSUS item at issue in HQ H281950 (Jan. 26, 2017) 9802.00.60, which provides a partial duty exemption for:

Any article of metal (as defined in U.S. note 3(e) of this subchapter) manufactured in the United States or subjected to a process of manufacture in the United States, if exported for further processing, and if the exported article as processed outside the United States, or the article which results from the processing outside the United States, is returned to the United States for further processing . . . .

To qualify, the metal article must be manufactured in the United States. The question presented in this ruling is whether scrap metal collected from industrial production in the U.S. is "manufactured in the United States." The scrap metal at issue here is copper. The question is potentially complicated by the fact that some of the original copper was domestic in origin while some was originally foreign. Some of the scrap will be derived from production processes. Some will just be collected in the form of obsolete U.S-origin wire.

From exportindia.com

 The tariff does not define "manufactured" in this context. In prior rulings, CBP has held that metal is manufactured when it is subject to operations such as "splitting, annealing, milling, rolling, brushing, and leveling." Here, the industrial scap results from the application of those manufacturing processes to copper. As a result, Customs held that the scrap was also manufactured in the U.S.

Customs has also held that the process of making metal into U.S.-origin products is sufficient manufacturing to allow used, obsolete products to be considered manufactured in the U.S. [Note: I realize that seems self-evident, but that's the fact of the matter.]

Consequently, in this case, all of the goods, when re-entering the U.S. after further processing abroad, qualify for the partial duty exemption. There are, of course, documentation requirements. If you are going to try this, look at 19 C.F.R. 10.9.

What the Frak?

Spin up the FTL drive and meet me in the CIC, the Federal Circuit has issued its first 2017 decision in an appeal from the Court of International Trade.

Here is the sitrep: The case in question is Schlumberger Technology Corp. v. United States. The merchandise in question is bauxite proppants. These are the bits of granulated bauxite used in hydraulic fracturing operations to hold open cracks in the rock structures and, thereby, allow for the efficient extraction of oil and gas . In other words, these little bits of bauxite "prop" open the cracks. The proppants are produced from bauxite ore taken from the earth (or, in Hebrew, "Adama") and milled to a powder then granulated to produce larger particles. The particles are sorted by size, dried and kiln fired.

Customs classified the proppants in HTSUS Heading 6909 as "Ceramic wares for laboratory, chemical, or other technical uses; ceramic troughs, tubs, and similar receptacles of a kind used in agriculture; ceramic pots, jars and similar articles of a kind used for the conveyance or packaging of goods . . . ." Schlumberger countered that the correct classification is in  Heading 2606 as "Aluminum ores and concentrates . . . ." During litigation, the government proposed an alternative classification in 6914 as "Other ceramic articles."

Cutting to the chase, the government can only win this case if the bauxite proppants are ceramic wares or other ceramic articles. HTSUS Note 1 to Chapter 69 states that the Chapter covers "ceramic products which have been fired after shaping." Looking to a dictionary, the Federal Circuit held that shaping means "to give a particular or proper form to by or as if by molding or modeling from an undifferentiated mass" or "to give definite or finished shape to  . . . ." The Federal Circuit then noted evidence that the finished proppants vary in size by as much as 100%. This, according to the Court, does not equate to have a definite or particular shape. Thus, the merchandise would be excluded from Chapter 69.

Another important argument that supports the same conclusion is based on the legal principle of noscitur a sociis under which we determine the meaning of the word by looking at the words around it. So, what are the examples of ceramic items included in Chapter 69? We see troughs, tubs and similar receptacles; ceramic pots, jars and similar articles; mortars and pestles; beakers; letters, numbers, and sign-plates; and heating apparatus. All of which are products of a definite form and are quite unlike the bauxite proppants of varying size. This argument, therefore, is old-school felgercarb.

What about Heading 2606? The HTSUS does not define "aluminum ore." However, Note 2 states that "ore" refers to "minerals of mineralogical species actually used in the metallurgical industry for the extraction of" certain metals including aluminum." But, the note makes clear that material may still be an ore "even if [it is] intended for nonmetallurgical purposes." I wonder why that last point was necessary since aluminum ore is an eo nomine term, making its use almost irrelevant. Bauxite is the mineral from which aluminum is extracted. A significant amount of aluminum probably goes into making these.

The Note, however, excludes products that "have been submitted to processes not normal to the metallurgical industry." Normal processes include crushing, grinding, screening, agglomeration into grains, and drying. These describe the process of making proppants. The fact that the steps were not related to the extraction of aluminum does not matter to the outcome. Nothing in the note requires that the processes be for the purpose of extracting metal from the ore. Lastly, contrary to the government's argument, Heading 2602 is not, by its terms or any other authority, limited to ores in primary forms as opposed to ready to use finished products such as proppants.

How did the government react to this result? My guess is something like this:

Ruling of the Week 2017.2: Emergency War Material Covers Failed NAFTA Claim

I like this ruling. It is HQ H273101 (Nov. 4, 2016).

This is a case where the importer made a NAFTA claim. When asked by Customs and Border Protection, the importer either could not or just did not support the claim. It happens. Sometimes, subsequent review turns up a problem with the NAFTA documentation. Sometimes, the broker should not have made the claim to start with. Lots of things happen in the real world.

This particular product is a multi-sensor electro-optical surveillance and targeting turret from Canada. As you might imagine, a multi-sensor electro-optical surveillance and targeting turret is a piece of military equipment. When the NAFTA claim failed, the importer asserted that the merchandise is entitled to duty-free entry as war material certified as such by a military procuring agency under HTSUS item 9808.00.30. It submitted the necessary certificates.

Customs liquidated the entry at the applicable 4.5% rate of duty and the importer protested. Customs granted the protest. It noted that in the absence of willful negligence or fraudulent intent, the importer can, prior to liquidation, submit documents to support a claim for free or reduced duties. The regulation that supports this is 19 CFR 10.112. Note that the regulation allows for the documents to be submitted even after liquidation but before the liquidation is final. That is a narrow window of 90 days following liquidation. See 19 USC 1501.

Why do I like this rulings? It is not just because the importer won. It is also because the importer, or its counsel, took a step back from a problem, surveyed its options, and found a creative solution. I also like it because it reaffirms for importers and brokers that the filing of the entry is not necessarily the end of the process. If there is a better option or a way to reduce duties after the entry summary has been filed, go ahead and submit the appropriate documents. There is money to be saved, go save it.

Ruling of the Week 2017.1: Geeks Will Eat Anything

It is a new year and a lot has changed in the world. People in my field are either excited about the possibilities of major changes in trade policy or are horrified by the possibilities of major changes in trade policy.

I have had several calls about whether the U.S. will withdraw from NAFTA, impose new duties on goods made in Mexico by U.S.-based companies, and raise tariffs on goods from China. My answer so far has been, "I wish I knew." The new President and the new Congress will have a lot of authority under domestic law. The bigger questions will relate to how our trading partners respond. The U.S. has agreed many times to hold or lower duties. Going back on those promises will mean violating WTO obligations and multiple free trade agreements. Some people may not care. The U.S. remains fully sovereign and can violate any international agreements it choses. As a former partner used to say, "The WTO has no army."

But, the WTO has the ability to authorize trade retaliation. That means our trading partners will likely raise tariffs on U.S. goods in retaliation for stiffer U.S. tariffs. That makes it harder for U.S. companies to export. Add to that the impact of U.S. tariffs making it harder to import. We could end up with a situation in which domestic producers face higher costs for imported raw materials and components and then can't export their finished goods. That is a bad scenario.

Despite those two paragraphs, I tend to be an optimistic person by nature. I don't really expect the professionals who will be running White House trade policy and Congress to brazenly flout trade agreements and obligations. I don't think anyone wants to start an old fashioned trade war. But, as I said, I can't see the future. It's possible.  We all need to be watching closely. No matter your business needs and policy desires, this is a good time to make sure you have your Senators and Representative on speed dial.

Happy New Year. 2017 will be interesting.

Which brings me to the ruling of the week, N126516 (Oct. 19, 2010), in which we learn that human beings will eat just about anything. In this case, we are talking about snacking on arthropods.

Item 1: Giant toasted leafcutter ants.

Via Wikipedia

Item 2: Oven-baked tarantula spiders.

Also Via Wikipedia

According to the importer, the ants are "grown specially for human consumption" and have a "nutty, bacon-like taste." The spiders, on the other hand are "crisp, crunchy, ready-to-eat snacks." The importer also requested a ruling on scorpions that have been farm raised, detoxified, and are uncooked. For whatever reason, CBP decided it was lacking the necessary information to rule on that tasty snack.

The actual classification of the ants and spiders did not seem to controversial. These are food items prepared and packaged for human consumption. There not being a more specific place these delicacies, CBP classified them as "other prepared or preserved meat, meat offal, or blood." When canned, the classification would be 1602.90.9080; un-canned it is 1602.90.9080.

The importer here is a company called Think Geek Inc. I believe this is its website. Let me just say that this is right in my wheelhouse. I would like one of these and this and this (XL) and even this. Take all my money. I might even trade tariff classifications for gift cards. What I don't want is to eat tarantulas. And, yes, I am fully aware that arthropods provide a valuable source of protein and calories. The fact of the matter is that I get too many calories as it is. Unlike Chicago-mix popcorn and frozen yogurt, I can pass up the spiders and ants.

Is that a Pine Nut?

I watch competitive cooking the way a stereotypical American male might watch baseball. I don't care if it is Top Chef or Chopped at the high end or the dreck that is Cupcake Wars and The Great American Food Truck Race. I don't watch kids compete, that's where I draw the line. I also like to eat. As a result, I am familiar with a lot of strange food items.

Pine nuts are not all that odd. I recently learned a lot more about pine nuts when I read Specialty Commodities Inc. v. United States, which involves the tariff classification of the seed of the Korean pine nut, Pinus koraiensis.

Customs and Border Protection classified these seeds as "Other nuts, fresh or dried, whether or not shelled or peeled: Other: Other: Shelled: Other" in HTSUS item 0802.90.97. The plaintiff believes they are best classified in 0802.90.25 as "Pignolia: Shelled." Clearly, the question is whether the seed of the Koreas pine, from China, is a "Pignolia" for purposes of tariff classification. Note that both classifications are in subheading 0802.90. This question is all about the last two digits.

While it may seem that a pine nut is a pine nut, that is not the case. The Explanatory Notes to the Harmonized System, which are not binding on U.S. Customs and Border Protection but are authoritative interpretations of the international parts of the tariff, state that the nuts of Heading 0802 include "pignolia nuts (seeds of the Pinus pinea)." It turns out that Pinus pinea is the Italian Stone Pine, which is native to Europe, north Africa and the Mediterranean, which would exclude both China and Korea and is in contrast to the Pinus koraiensis.

Seeds of Pinus koraiensis via Wikipedia

What this comes down to is whether the seeds of the Pinus koraiensis are within the common and commercial meaning of "pignola nuts," giving due weight to the Explanatory Notes additional notation of "Pinus pinea."

This case is a good read for anyone interested in learning how customs lawyers muster lexicographical evidence of common and commercial meaning. Plaintiff put forward a number of definitions broad enough to encompass edible pine nuts of any source. These were taken from dictionaries, trade publications, government sources, and various websites. The government put forward a similar collection of more restrictive definitions taken from other sources and challenged the plaintiff's interpretation of some of its sources. None of this competing reference material was sufficient to resolve the matter.

The plaintiff also pointed to prior CBP rulings as evidence that Customs has established the meaning of "pignolia." These rulings, however, relate to infused oils and do not directly address the classification of the pine seeds.

The Court next looked to the historical treatment of pine seeds in U.S. tariff acts. This is something we don't often see. Prior tariffs are only relevant today when the language is similar to the current law, which is often the case when an item is called out by name (or eo nomine). In this case, the Court looked at the 1921 Summaries of Trade and Tariff Information and the Tariff Act of 1922. The government, however, pointed out that neither the subsequent Tariff Act of 1930 nor the 1946 revision use the word "pignolia." This is meaningful because during that time, all pine nuts appear to have been classified as "other" and the seeds of Pinus pinea only subsequently specified as pignolia. Furthermore, a 1968 tariff report indicates that the pignolia nut is gathered in Italy, Portugal and Spain, presumably excluding similar products from China and Korea.

That took the Court back to where we started: the Explanatory Notes. In 1986, the Explanatory Notes used the phrase "pignolia nuts (Seeds of the Pinus pinea)." That language remained in subsequent editions.

This does not resolve the issue because there is no disagreement as to the proper heading and subheading (i.e., to sixth digit), which is as far as the Explanatory Notes go. Nevertheless, the Notes clearly limit pignolia to the European variety. The U.S. drafters of the HTSUS presumably knew that and were also aware of the 1968 report. Taken together, that indicates to the Court of International Trade, that these particular pine nuts are not pignolia for classification purposes.

This is the point where I usually find something in the decision to pick at. Initially, my concern was that the Explanatory Notes insert a limitation to pignolia that is not in the HTSUS and should, therefore, be ignored. That would broaden the meaning beyond seeds of Pinus pinea. But, the Court addressed this saying that there was not sufficient evidence of a common and commercial meaning to establish a conflict with the Explanatory Notes. Touché.

Now, I will go home, open my basket, and make dinner from pine nuts, squid ink, elk loin, and a Boston cream pie. If my entre does not cut it, I will be Chopped.

Quick Post: Tyco Affirmed

The Court of Appeals for the Federal Circuit has affirmed the Court of International Trade decision in Tyco Fire Products v. United States. You can read the background on this case here. The Federal Circuit held that liquid-filled glass bulbs of the sort used in fire sprinklers are properly classified as articles of glass in Heading 7020 rather than as mechanical appliance of Heading 8424.

There are two interesting points to take away from this decision. The first is that the Federal Circuit, at least this panel, is skeptical of the value of the Brussels Tariff Nomenclature Explanatory Notes when interpreting the current Harmonized Tariff Schedule of the United States. This is in part because Customs declared the HTSUS to be a wholly new system and that the BTN Notes are of no value when interpreting the new text. The CAFC did not definitively decide this issue, but it certainly creates doubt as to the continuing value of the old notes.

The second point is that the CAFC indicates that tariff language requiring a "high proportion" of some material should usually be read to mean "more than 50%." Again, this is not a definitive holding and the Federal Circuit itself pointed out that this will not be the case where there are more than two materials. Nevertheless, this is useful guidance for interpreting the Tariff and the legal notes going forward.

Customs Law: Presidential Edition

Next week we in the U.S. will have a new president-elect. Getting there has been an unusually disheartening referendum on the mood and direction of the country. Voting always matters, but it might matter more this year than in a very long time.

With that, we take a quick look at Von Stade v. Arthur, 28 F. Cas. 1274 (S.D.N.Y. 1876)(I cannot find a fee link). Here is the decision in its entirety:

SHIPMAN, District Judge.  The second section of the act of June 6, 1872 (17 Stat. 231), provided, that, on and after August 1st, 1872, the existing duties upon the articles which are enumerated in the section should be reduced ten per centum.  The section specifies, among the enumerated articles, "all wools, hair of the alpaca goat, and other animals, and all manufactures wholly or in part of wool, or hair of the alpaca and other like animals, except as hereinafter provided." The question in this case is, whether the duty of fifteen cents per pound upon hogs' bristles was reduced by virtue of the act which has been cited.

Waiving the question, whether it was the intention of congress to reduce the duty upon the hair of all animals, whether such hair was used or not in the manufacture of textile fabrics, I am of opinion, that, in the tariff acts, the article of bristles is separately classified, and is regarded as a different article from hair. This will appear from the act of June 30, 1864 (13 Stat. 212), which prescribes a duty upon bristles of fifteen cents per pound, and upon hogs' hair of one cent per pound. The language of the Revised Statutes of 1874 (page 480) is "Bristles, fifteen cents per pound;" "hair of hogs, one cent per pound." The term "bristles" is used in the tariff acts to denote a separate and distinct article from hair, and the bristles are not included in the general words "the hair of an animal," but have a distinct classification.

Let judgment be entered for the defendant. 

The issue here is whether a bill reducing the duty on certain animal hair applies to hog bristles? My initial thought was, are bristles hair? It turns out that they are, but that they are a unique variety of short, stiff hair. Most important to the decision is that the Tariff Act of 1864 had a separate and more specific paragraph covering bristles. By this early application of the rule of relative specificity, the Court upheld the higher duty collected by Customs.

Why is this my "Presidential Edition?" This is why:

The defendant in this case is the Collector of Customs in New York, a man known as Chester A. Arthur. President Grant had given Republican New York Congressman Roscoe Conkling authority to dole out the federal patronage jobs in New York. The Collector was the plum appointment. In that position, Arthur was able to hire hundreds of customs officers to collect duties at the then-busiest port in the country. The Collector earned as much as any federal official at the time including a portion of the value of seized property and penalties assessed. That created an incentive to find real or imagined violations. Eventually, this stopped and Customs employees became members of a professional civil service with regular salaries.

Arthur continued to rise through Republican ranks. He eventually became the leader of the party in New York and then Vice President to James Garfield. Things did not go well for Garfield.

Garfield, shot by Charles J. Guiteau, collapses as Secretary of State Blaine gestures for help. Engraving from Frank Leslie's Illustrated Newspaper

Thus, the Collector of Customs becomes President of the United States.

Ruling of the Week 2016.21: Holy HoloLens!

Over the years, I have opined on the tariff classification of a number of gizmos that I think are probably computers. Often, Customs and Border Protection disagreed with me. Usually, this has to do with whether the particular item is "freely programmable" as opposed to having a specific and limited function. For example, here is a discussion on big industrial digital printers. Here is another on a music editing system and another on a smart watch. I also previously admitted to being a middle-aged Microsoft fanboy. So, this next post is right in my wheelhouse.

If you are not familiar with Microsoft's HoloLens, watch this video.

The imported merchandise is the Microsoft HoloLens and its associated "clicker" controller. HoloLens is a computer [spoiler]. It has a 32-bit processor, 2 GB RAM, 64 GB storage, a graphics processor, and Wi-Fi connectivity. Most important for our purposes, it runs Windows 10 and supports applications written for that environment. What distinguishes HoloLens from your laptop is that it sits on your head, includes sensors to track your position, and places three-dimensional stereo displays before your eyes. The result is that the user can be completely immersed in a virtual world or, perhaps even more exciting, in an augmented version of reality.

I can imagine an entirely feasible scenario of basic law office productivity using HoloLens. In that world, I sit at my desk or walk about my office with Word documents and Excel spreadsheets virtually pinned to my walls until I want them. I might have a 3-D virtual model of a client's product siting on my desk. The old practice of staring into a two-dimensional monitor that sits in a fixed location will be replaced by having the data you want, everywhere you want it. HoloLens and a Bluetooth keyboard for text entry might be the ultimate set up. With cellular connectivity, the headset could replace my main laptop, my tablet, my XBox, and my phone.

Don't get me wrong. I don't expect everyone in a law firm or other enterprise to spend the entire day in a HoloLens headset. I have not been in one, but I doubt they are that comfortable. I am just waxing poetic about the possibilities, not the practical realities. I leave that to those of you who have actual access to a HoloLens (or similar device). [Side note, T-Mobile recently announced it will be selling an Alcatel IDOL Windows Phone with VR goggles, which may be the entry way to VR for many of us.] I view HoloLens as the promise of something between the current headset design and the form factor of Google Glass. That is all the functionality of your phone and PC without ever reaching for a physical device.

So, what about the ruling? Oh, that. It is N273804 (Apr. 7, 2016). Customs noted that the primary function of the HoloLens is data processing. It is a general purpose device that allows users to access multiple applications, of their choosing, including mundane tasks like word processing and spreadsheets. Customs, therefore, had no problem concluding that it is a freely programmable automatic data processing machine. Customs classified it in 8471.41.0150, which is entirely correct.

Essential Identity & Mobile Homes

When I saw that the Court of International Trade issued an opinion in a case called Pleasure-Way Industries, Inc. v. United States, I was hoping for something more salacious than the tariff treatment of mobile homes from Canada. Despite my prurient disappointment, this is an interesting case and raises a couple interesting questions.

As with many classification cases, the material facts are not in dispute. The plaintiff purchased Sprinter vans in the United States and exported them to Canada. In Canada, the plaintiff converted the vehicles into motor homes (or possibly the "tiny house" to which I aspire). That conversion included new flooring, cabinets, plumbing (including a toilet and shower), kitchenette, and a propane system. When returned to the US, the plaintiff believes the vehicles should be afforded a duty preference under HTSUS item 9802.00.50 as “[a]rticles returned to the United States after having been exported to be advanced in value or improved in condition by any process of manufacture or other means . . . .”

Pleasure-Way took the smart initial step of seeking a binding ruling from Customs on this question. It received a positive response indicating that the imported mobile homes qualified as duty-free under 9802.00.50. Customs, however, subsequently revoked that ruling on the grounds that Pleasure-Way had failed to disclose that similar or identical transactions had taken place or were pending. That is an important lesson. While this rule, 19 CFR 177.1(a)(2)(ii), is often ignored or finessed by both sides, it does technically preclude a ruling in this circumstance. Thus, the bind ruling was revoked and declared void. But, read it. The analysis is perfectly reasonable.

Customs then liquidated the vehicles without the benefit of 9802 and, therefore, assessed duty. Plaintiff protested. Surprisingly, Customs did not adopt the analysis it previously employed in the revoked ruling and denied the protest. That brings us to the Court of International Trade.

The issue here is not whether the vehicle was advanced in value or improved in condition in Canada. It was.  The question is whether the article returned to the US is the same article that was exported. This may seem silly, but it matters because 9802.00.50 only applies to items returned to the US. That means that the processing in Canada cannot produce a new and different article. It if does, the item is new and is not “returning.”

This feels a lot like other customs questions, but it is unique. This is not an issue of substantial transformation and whether the mobile home is an article of Canada. That is a similar question, but it is not what defines 9802.00.50. This is also not a question of “essential character,” with which it is sometimes confused. The question here is whether the exported Sprinter retains its “essential identity” after being converted to a mobile home. Put in that light, this is a more complex question.

The customs regulations address this issue at 19 CFR 181.64. According to the regulation, the duty preference does not apply “to goods which, in their condition as exported from the United States to Canada or Mexico, are incomplete for their intended use and for which the processing operation performed in Canada or Mexico constitutes an operation that is performed as a matter of course in the preparation or manufacture of finished goods.” What this regulation does is tell us that advancing in value and improving the condition does not include the manufacturing of the finished article. In other words, the exported item needs to be the finished article and the processing in Canada or Mexico can only improve on that finished article.

Applying that analysis here, the Court found that the “finished goods” refers to the imported mobile homes, not the exported Sprinters. Further, the Sprinters are exported as part of the supply chain for making the mobile homes, which means the exportation is performed as a matter of course in the manufacture of the mobile homes. Thus, 9802.00.50 is inapplicable and the Court rendered judgment for Customs.

There is a little more to this, and that is where the problems arise.

First, the HTSUS, which is a statute, does not include the limitation found in the regulation. The HTSUS says, in its entirety,

 

9802.00.50 Articles returned to the United States after having been exported to be advanced in value or improved in condition by any process of manufacture or other means: Articles exported for repairs or alternation: Other.

Ignoring the regulation, can Plaintiff win this case? If so, then the question is whether the regulation is consistent with a “permissible” (meaning “reasonable”) reading of the HTSUS. If Congress made it clear that this HTSUS provision should apply in this circumstance, no regulation from Customs can change that. In that case, the regulation would be invalid as ultra vires. But, I don' think that happened here. The tariff item clearly requires that the article be returned. Implied in that is that it is the same article coming back to the US. The mobile home was, according to the Court of International Trade, not the same article as the Sprinter that was sent to Canada.

On balance, this strikes me as a good result. One thing I really don't like is that rather than focus on "essential identity," as has been done in prior cases, the Court inserted the intent of the exporter into the equation. Intent is notoriously hard to prove after the fact and classification generally should not depend on intent. In this opinion, intent is a small point and not necessary to the holding, so it is not an issue. On the other hand, we should be wary of "intent" creeping into classification where it does not belong.

                 

Ruling of the Week 2016.20: Bottle Toppers

Ruling of the Week? Who am I kidding? This is number 20 in my 2016 rulings of the week series, not number 43 as it should be. I'll either try to step it up next year or come up with a more truthful name for the series.

Today's ruling is HQ H264771 (Jul. 28, 2016) in which Customs trods over ground I thought was well settled and reaches the conclusion opposite from what I might have done. Let's see how that happened. It's a close call, so reasonable minds might differ on this one.

The merchandise in question is plastic "SippaTop" bottle toppers. These are plastic, spill-proof, reusable, tops for juice bottles. They are in the form of popular licensed characters and are, therefore, marketed as collectible. According to the company, they give young children more independence and parents more peace of mind, which I take to mean that they don't spill and that keeps everyone happy.

The importer entered these in 3923.50.00 as plastic lids, stoppers, caps or closures. Customs liquidated accordingly. The importer then protested the liquidation, asserting that the bottle toppers are best classified in 9503.00.00 as toys. Customs denied the protest in this ruling.

If you have been around customs classification for a while, you may be experiencing deja vu. The Court of International Trade looked at similar merchandise in a case called Minnetonka Brands back in 2000. That case involved plastic bottles and caps in the shape of various characters, including Cookie Monster and Big Bird. The bottles were accurate representations of the characters with appropriate shapes and colors. Although the caps were removable, according to the Court, "none of the limbs are moveable." (See page 3.) That part will be important later. Finally, the Court noted that when looking at the complete set, it was not immediately obvious that the plastic item was a bottle and cap rather than a plastic model of the character. That is also important.

Together, the bottle and cap were sold filled with bubble bath solution, but the items were imported empty. Testimony presented to the Court stated that the bottles were designed to add "toy or play value" to the company's product line. Regarding the "heads," the Court found that they do not enhance the ability of the bottle to contain bubble bath and do not add to the utility of the overall package.

The CIT held that a "toy" is designed for amusement or diversion, rather than practical utility. Furthermore, it held that Heading 9503 is a use provision requiring evidence that the class or kind of merchandise to which the imported item belong is principally used as a toy. The Court concluded:

the court finds the subject merchandise to be of the class or kind of merchandise whose principal use is amusement, diversion or play, rather than the conveyance or packaging of goods.  The unique physical characteristics of the merchandise, the design and marketing of the merchandise as items of amusement (rather than as bubble bath containers), the anthropomorphic nature of the merchandise, the expectation of the ultimate purchasers that these objects will be used for play, the regular use of the merchandise by children for amusement purposes, the fact that the merchandise does not compete with (and sells at a large premium to) bubble bath in flat plastic bottles, and other facts revealed at trial, support this conclusion.  Accordingly, Plaintiff has rebutted the presumption of correctness (28 U.S.C. § 2639(a) (1994)) that attaches to Custom's classification.

Why the different result?

Here, Customs found that whatever the amusement value of the SippaTops, that value was outweighed by their utility as spill-proof bottle tops. CBP seems to have been taken by marketing copy that indicates the use of the SippaTops would encourage children to drink healthy beverages, which is a matter of practical utility rather than amusement.

Customs cited its prior rulings on similar merchandise. Specifically, in HQ 966633 (Mar. 18, 2005), Customs analyzed plastic bottle toppers as composite goods consisting of a plastic lid and molded character. That makes sense. Using that analysis, Customs held that the plastic lid provided the essential character and that the decorative topper was incidental to the lid. Thus, it was classified in 3923 rather than as a toy of 9503. Customs noted other similar rulings in which it found that bottle toppers lacked value in "manipulative play" as compared to their utilitarian value. Here, Customs did not treat these as composite goods and did not venture beyond GRI 1.

All of that makes sense. The problem I have is that it is not consistent with the Minnetonka decision. Customs distinguished Minnetonka on the grounds that the merchandise there was full bottles, not just toppers. Customs also says that the bottles in Minnetonka had moveable limbs. That does not appear to be correct based on the Minnetonka decision. Moveable limbs would obviously add "play value," which is something future tariff engineers should keep in mind.

I think that Minnetonka turned on the fact that the bottles were designed to be distinguishable from normal, utilitarian, flat bottles that simply hold bubble bath. The bubble bath character bottles did not compete with bubble bath in basic bottles and sold at a premium. They had anthropomorphic designs intended ad amusement and encourage play. Because the bottles had no moveable limbs, that play must have been limited in nature. I image a child in the tub holding the bottle like a crude a puppet, making up imaginative scenes. What I think is key in Minnetonka and is missed here is that if the importer wanted a bottle cap, it could have purchased one without the time and expense of designing three-dimensional characters, paying licensing fees, etc. Why would it go to that time or expense? Not to make a better bottle cap. If anything, the addition of the plastic head detracts from the utility of the bottle cap functioning as a bottle cap. The importer made a bottle cap that appeals to children as an article of amusement or diversion.

The SippaTops are not full bottles and cannot be mistaken for full-bodied representation of the characters. They are clearly bottle tops, which are plastic lids. But, at least to me, diversion is a pretty low threshold. The Michelangelo Teenage Mutant Ninja Turtle SippaTop seen above is designed, marketed, and no doubt functions as a diversion for children. By replacing a normal bottle top, with an entertaining and diverting one, parents can encourage kids to drink. That is useful, but not so useful, at least to my mind, to outweigh the diversion value of the item.

That said, this is a admittedly a close call. At some point, a bottle cap is a bottle cap. If this were a normal bottle cap simple painted with an eye-catching design, would it be a toy? No. But, that is not where we are. What we have are three dimensional, plastic forms that can be collected, traded, and (when the XBox is unavailable) treated like puppets. That strikes me as a toy of Heading 9503.

Ford Case Transits to Trial

I've been waiting for a potentially block-buster decision in Ford Motor Co. v. United States, which is pending before the U.S. Court of International Trade. We now have a preliminary decision which is interesting, but is not yet in a position to bust any blocks.

This case is about the tariff classification of imported Ford Transit Connect vehicles made in Turkey. At the time of entry, all Transits have swing-out front doors with windows, second-row sliding doors with windows, and swing-out rear doors, some of which have windows. The imported vehicles also have two rows of seats, rear passenger windows, rear passenger seat belts, child-locks on the rear sliding doors, a rear cup holders in the front console, a full length cloth headliner, coat hooks, and a map pocket in the second row. Starting in 2010, Ford created a "cost reduced" second row seat for use in Transit vans. The second row seats lack headrests, "comfort wires," a tumble lock mechanism and labels. Finally, the rear seats are made of a "cost reduced fabric." There are two trim levels, so the details vary somewhat, but this should be enough detail to convey the point.

Shortly after customs clearance, but while still within the legal confines of the port of entry, the rear seats, rear door windows, and other passenger amenities are removed to convert the vehicles to the small cargo vans you probably see every day. They look like this:

There are passenger wagon versions of the Transit, but the case only involves vehicles that are ultimately delivered as cargo vans.

Why would Ford go to all this effort? Because in the 1960's, the US got into a spat with Europe over its duties on chicken imports from the US. In retaliation, the US imposed a 25% duty on trucks. That duty remains on the books today and is called "the Chicken Tax." The duty on cars for the transport of persons is, on the other hand, just 2.5%. That difference makes it worthwhile for Ford to import tall passenger cars and, after importation, convert them to trucks, saving 22.5%. That, ladies and gentlemen, is an example of tariff engineering. Or, as the government contends in this case, it is an impermissible "artifice or disguise" to avoid the correct assessment of customs duties.

Think about all the Transit Connect vehicles you see in the course of a day. I see lots. This is obviously a big deal case for Ford and for Customs and Border Protection. It is also a big deal in general because this case might set the parameters for legally acceptable tariff engineering. That's why it has been closely watched.

The starting point for this analysis is that the classification of an article must be ascertained by examining it in the condition in which it was imported. Processing subsequent to importation is generally not relevant. However, an importer cannot "resort to disguise or artifice" to avoid an applicable duty. That means that if the imported article "is not the article described as dutiable at a specific rate, it does not become dutiable under the description because it has been manufactured or prepared for the express purpose of being imported at a lower rate." The Court of International Trade expressed this as a "bright line test" of "does the article, as imported, fall within the description sought to be applied?"

Thus, if the imported Transit, with reduced cost seats and rear windows is, in fact, classifiable as a passenger car, then it will be classified as such regardless of subsequent modification. That is the important legal conclusion at this point of this case. What the Court is saying is that Ford's motive of reducing duty liability and subsequent processing does not dictate the classification. Rather, if the imported Transit vehicles, which are described as passenger cars, are passenger cars when imported, then Ford will win this case. That is a big deal, if it holds.

To determine whether the Transits are passenger cars, the Court of International Trade started to appy the analysis of a 1994 Federal Circuit case involving early sport-utility vehicles, Marubeni Am. Corp. v. United States. That case set out lots of features that indicate that a vehicle is designed primarily for passenger use or primarily for cargo use.

According to the Court, it has a lot of details about the vehicle as imported and post-conversion. But, it lacks some necessary information about the cost reduced rear seats. The Court believes that the missing information is necessary for it to apply Marubeni and make a final determination in this case. Consequently, the Court denied motions for summary judgment filed by both parties. That means that the parties will have to either present additional evidence, possibly in the form of an agreed set of facts, or the case will have to be decided following a trial on the open questions of fact.

Either way, we don't know the result yet. It appears that if (and I don't know this to be true) the rear seats installed in imported Transits are not adequate for passenger use, Ford may have a a problem. But, it might be that the seats are just awful and at the same time perfectly adequate for passenger use. Although some other facts may be at issue, this seems to be the sticking point. So, we need to wait for a complete result. Obviously, I will keep watching.

Explanatory Notes Discounted

No, this article is not about where to find a cheap copy of the Explanatory Notes to the Harmonized System. Rather, it is about the Federal Circuit decision in Sigma-Tau Healthscience, Inc. v. United States, in which the Court of Appeals discounted the legal impact of a definition in the Explanatory Notes.

The case is about the classification of two stabilized forms of the chemical carnitine, which may or may not be a vitamin. Carnatine, which is also known as vitamin Bt, is not called out by name in the Tariff Schedule. Customs classified this merchandise as chemical products and preparations of the chemical or allied industries not elsewhere specified in Heading 3824. Sigma-Tau protested and asserted that the correct classification is as vitamins of 2936. Complicating matters, the Court of International Trade held that the merchandise is classifiable in Heading 2923 as "Quaternary ammonium salts and hydroxides; lecithins and other phosphoaminolipids, whether or not chemically defined: Other." Sigma-Tau appealed. On appeal, the U.S. sought classification in 2923 and Sigma-Tau argued for 2936, leaving 3824 out in the cold with no suitors.

This case is mainly complicated because it involves a fair amount of organic chemistry and a little medicine. The classification, on the other hand, gets resolved by applying General Rule of Interpretation 1, which is not how the Court of International Trade did it. That is an important point. The Federal Circuit took the CIT to task for moving beyond GRI 1 and applying the rule of relative specify under GRI 3. As we will see below, applying the legal text was sufficient to resolve the question.

The key here is Chapter 29, Note 3, which states that merchandise classifiable in two or more headings of Chapter 29 is to be classified in the heading that occurs last in numerical order. This Note has the force and effect of statute and must be followed. The only Chapter that is relevant on appeal is Chapter 29 and the last of the potential headings in numerical order is 2936, vitamins. Consequently, if this stuff is vitamins, then 2936 must be the correct Heading.

When a term is not defined in the tariff, the proper meaning is the common and commercial meaning. Where dictionaries and other sources of definitions differ, the court looks for the consensus understanding of the meaning, focusing on the commonality in the various definitions. A problem arose here because although the HTSUS allows for other vitamins and provitamins to be classified in Heading 2936, the Explanatory Notes provide less room to maneuver. The EN state that vitamins cannot be synthesized by the human body and, therefore, must be obtained from outside sources. Carnatine, it turns out, can be synthesized in the body, except for by newborns, who must consume it.

To me, this is the interesting point of the case. What should the Court do with the limitation in Explanatory Notes, which does not appear in the HTSUS? The Court noted that the Explanatory Notes are not binding on it. They are generally useful guides that are informative, but, according the to Court of Appeals, "we shall not employ their limiting characteristics, to the extent there are any, to narrow the language of the classification heading itself." This is consistent with a case called Archer Daniels Midland, which it is important to note, is an appeal I won on a similar point.

That created the question of whether this limitation is part of the common and commercial meaning. According to the Court, it is not. As a result, the fact that the human body can synthesize carnatine does not prevent it from being a vitamin. As evidence of that, the Court noted that vitamin D can be synthesized by the body and it is commonly understood to be a vitamin.

The Court arrived at a consensus definition of "vitamin" as compounds that are necessary for normal physiological function and that are not synthesized by the host in amounts adequate to maintain normal functioning.  It turns out that carnatine can be synthesized in adequate amounts by adults, but not by newborns. The government contended that the test should be limited to adults, but there was no such limitation in the common meaning of the term nor in any of the legal text. Consequently, the Federal Circuit found Carnatine to be a vitamin.

Having made that conclusion, it follows that the correct classification is in Heading 2936. Specifically, in the residual tariff item 2936.29.50. That means that the Court of International had to be reversed.

Ruling of the Week 2016.19: Wherein A Christmas Tree is Not Festive

"Ruling of the week," who am I kidding? This one comes to you via an annoying slow GoGo In-Flight connection and an extremely small seat 10C on an American Airlines RJ700 bound for San Antonio. Read it with that in mind. It may not be my best work.

Welcome to fall, the time of year when retailers are filling their shelves with Halloween decorations and their warehouses with of Christmas goods ready to be unleashed on the shopping public. It is also a good time of year to revisit the question of when decorative items are classifiable as festive goods of Heading 9505 and, therefore, entitled to duty-free entry. That is exactly the question Mr. Christmas Inc. asked Customs and Border Protection to reconsider is HQ H258442 (Aug. 18, 2016). Seriously, the importer was Mr. Christmas. I did not make that up.

The merchandise is a set of tapered glass cones that are 13.5” tall and 3.5” at their widest. The cones contain randomly placed LED lights that are activated by switch located at the bottom of the base. The manufacturer ensures that LED lights are placed at the tip of each cone, to create a glow at the tip when the LED lights are on. The glass cones are sold in sets of three in one of the following colors: green, gold, red, silver, or blue.  Here is a picture taken from the ruling itself.

Stop right there. You tell me: Is that a Christmas decoration? Of course it is. How do I know? The same way I know pornography: I know a Christmas decoration when I see one. We have been down this road here and here.

Over the years, I have devised an essentially foolproof test for determining whether something is a festive article related to a Christian holiday. Just ask a rabbi. If the rabbi says, “I would never have that tchotchke in my home,” it is a festive article. I can pretty much guaranty that this item looks enough like a Christmas tree to keep it off the mantel at the rabbi’s house.

Sadly, that is not the law. According to Customs and Border Protection, to be classified in Chapter 95 as a festive article the item must be (1) closely associated with a festive occasion and (2) must be used or displayed principally during that festive occasion. This is not a low bar. In fact, the item must be so closely associated with the festive occasion that using during another time of year would be aberrant.

According to Customs, it would not be aberrant to display these glass cones at times other than Christmas. Keep in mind that they are sculptures of trees, lighted, and in sets of green, red, blue, silver, and gold. I am getting all festive just thinking about them. But, CBP noted that the cones lack indications of branches, leaves or other characteristics of trees. Moreover, the beading on the cone is not ball-shaped or otherwise indicative of Christmas tree ornaments and the interior lights do not stay in place to ensure that the tip of the “tree” is lighted. Consequently, the art critics at CBP determined that the cones do not closely resemble Christmas trees. Keep in mind that Customs previously ruled that a lighted penguin wearing a Santa hat was sufficiently associated with Christmas to be a festive article of Chapter 95.

Mr. Christmas argued that its (his?) marketing information showed that these cones are sold as Christmas decorations around the holiday. CBP dismissed this by noting contrary evidence and the fact that marketing is only one piece of evidence to be considered. One piece of contrary evidence was a QVC clip in which the designed or a similar item suggests that the cones are appropriate decorations year-round.

In the end, Customs was not convinced that the lighted tree sculptures are Christmas decorations. This is an admittedly subjective analysis and I know that CBP is required to draw lines around product classifications. I just think these items are on the festive side of that line. CBP classified them in 7013.99.90 as glassware at 7.2% ad valorem. My guess is that this may not be the last we see of these glass cones.

Breaking News: Otter Products is Still Correct

You may know that one of the more closely watched appeals has been Otter Products, LLC v. United States in which the Court of International Trade previously overturned the tariff classification Customs and Border Protection assigned to covers for mobile devices. My original post on the case is here.

Customs classified the covers in HTSUS Heading 4202, which includes, among a large number of other things, suitcases, camera case, backpacks, and similar contains. The Court of International Trade held that mobile device covers are not "similar" to the exemplars listed in the heading and, therefore, could not be classified there. The principle reason supporting that conclusion was that none of the exemplars allow the user complete and functional access to the contents while in the container. To put it in colorful terms: I can't wear my socks when they are in a closed suitcase but I can use my device when it is in the OtterBox Commuter and Defender cases at issue. The alternative is to classify these products as "other articles of plastic" in Heading 3926. The applicable rates of duty are 20% for tariff item 4202.99.00 versus 5.3% for tariff item 3926.99.90.

The Federal Circuit has now affirmed. The decision is, in my opinion, close to perfect.

Looking to the legal text, the Court noted Chapter 39, Note 2(m), which states that Chapter 39 does not cover trunks, suitcases, handbags, and other containers of Heading 4202. That means that if the device covers are properly classified in 4202, they cannot be classified in 3926.

To fall within 4202, the covers must be "similar containers," meaning similar to trunks, suitcases, and other listed containers. To be fair, some of the listed containers are kinda, sorta similar to device cases including spectacle cases, tobacco pouches, and beverage bags. When trying to decide whether something is similar to the listed containers, the Court considers "the unifying characteristics" of the listed products and determined whether the imported item shares those characteristics and does not possess a "more specific primary purpose that is inconsistent with the listed exemplars." A number of prior decisions have identified the unifying characteristics of Heading 4202 as being the ability and purpose of "organizing, storing, protecting, and carrying various items."

Right out of the blocks [Metaphor alert: I must have recently watch too many hours of Olympic track.], the Federal Circuit determined that mobile device cases that provide continual, useful access to the enclosed device are not "containers" at all, let alone "similar containers." The point here is that the common definition of "container" includes examples of items such as boxes, crates, cans, and jars, all of which usually require some minimal effort on the part of the user to get to the enclosed item. The Court of International Trade noted that the device covers at issue, on the contrary, are designed to let the user get to and manipulate the device without opening the cover or removing the device. It is, however, easy enough to envision an open box, for example, permitting access and use of the enclosed item. Consequently, while important, neither the Federal Circuit nor the CIT ended its analysis with this point.

Next, the Court noted that the Commuter and Defender covers are not "similar" to the listed exemplars. Here, the real question was whether the test for "similar containers" required the container to have all four of the unifying characteristics or whether any one is enough. This was an open question and, in my view, a false dichotomy. The answer need not be one or the other in all cases. As the Federal Circuit eventually found, the proper analysis takes all the factors into consideration but applies them in the context of both the item to be classified and the text of Heading 4202. According to the decision:

We take this opportunity to clarify that there is no requirement that the subject merchandise meet all four characteristics to qualify as a “similar container” under Heading 4202.  Courts should consider the four characteristics collectively and then determine whether, in light of those considerations, the classification would lead to an inconsistency.  If, for example, an item met only one of the four characteristics, it almost certainly would not qualify as a “similar container” under Heading 4202.  Allowing a single factor to satisfy the inquiry would, in almost all conceivable scenarios, render the scope of “similar containers” so broad that it would lead to absurd results and make consistent application of the standard all but impossible.

Turning to those individual characteristics, the Federal Circuit first looked at whether the covers organize the devices. They do not. A phone on the table or in my pocket is just as organized as a phone in a case on a table or in my pocket.

Looking to "storage," the Court held that because the devices remain fully accessible and useable, the covers are not "storage" containers.

It was undisputed that the covers protect the devices.

Finally, the covers do not facilitate carrying the devices. The Court observed that, if anything, the device carries the case. Furthermore, when it comes to carrying the device, there is little difference between carrying the naked device and one in a cover. Thus, the covers do not "carry" the device.

The examination of the four factors did not end the analysis. The government argued that the CIT imposed an additional fifth factor that the item must be removed from use while in the container. The Federal Circuit disagreed. This was not a new factor. Rather, it was a recognition that the digital device covers have a characteristic and purpose that is inconsistent with the examples in 4202. That characteristic is that the enclosed device remains fully useable. That was not an error on the part of the CIT.

This is a really good decision, and not just for Otter Products. There are many importers with pending protests or summonses waiting for this decision. They should all be very happy. Moreover, this is an important decision because the Federal Circuit did not get tripped up by trying to create a simple black and white test composed of all four factors or of any one factor. Instead, the Court took a thoughtful approach to both interpreting Heading 4202 and applying that interpretation to the specific products at issue. It is possible to imagine a variety of mobile device covers that should properly stay in Heading 4202. They might have some sort of handle or a cover that needs to flip open to use the phone. By focusing on the particular items at issue, and recognizing that it is was not necessary to make one hard and fast rule for all possibilities, the Court avoided future problems and added clarity to the law.

Taking all of that into consideration, the Federal Circuit found the device covers to be classifiable in 3926 and affirmed the Court of International Trade.

A win is a win. A win that makes good law is even better. Congratulations to all involved. [Go ahead, click the link.]