Ruling of the Week 2016.22: Framing Substantrial Transformation

I like bikes. Lately, that is more in theory than in actual usage, but that is my fault. In reality, bikes are a transformative technology. They give kids their first sense of independence. They give everyone a means of transportation with zero carbon emissions. In some cases, the availability of that transportation may be lifesaving.

Thus, when I see something at work that involves bicycles, I usually take note. Such is the case with the September 21, 2016 Customs Bulleting and Decisions in which Customs and Border Protection revoked a ruling, N269994 (Nov. 20, 2015), on the country of origin of bicycles.

The bicycle in question is assembled in the United States from imported components, including frames. Customs had previously ruled that assembling components to a U.S.-origin frame produces a bike with the U.S. as the country of origin. In N269994, it apparently misapplied that same analysis to find the U.S. to be the country of origin of bicycles with imported frames.

In this new ruling, which is HQ H273304 (Aug. 11, 2016), Customs finds that the country of origin of the frame is the country of origin of the finished bike.

The starting point is the law, which requires that all articles of foreign origin be marked in a manner that will indicate to the ultimate purchaser the name of the country of origin. Note that the analysis is different for goods of a NAFTA country, that is not what we have here.

When the item is imported to be further processed, the question is whether the further processing is sufficient to make the item a product of the U.S. when sold to the ultimate purchaser. According to 19 CFR § 134.1(b), "Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the 'country of origin' within the meaning of this part . . . ." A substantial transformation occurs when the article that emerges from a process has a new name, character, or use different from that possessed by the imported article. When that happens, the processor is considered to be the ultimate purchaser and the imported item is exempt from marking.

Here, Customs ruled that the imported frames were not substantially transformed. Customs reasoned that the frame is the most costly and essential component of the finished bicycle. Furthermore, Customs held that the frame provides the overall shape, size and character of the bicycle. "Because the bicycle is assembled in the United States and is one of the bicycle's essential components, the frame, is made outside of the United States, [Customs and Border Protection found] that the country of origin of the bicycle would be imparted by the frame." Accordingly, the country of origin of the bike is the country of origin of the frame.

I hate this decision. For some reason, Customs and Border Protection did a great job of setting up the issue and explaining the legal test for substantial transformation. Then it whiffed at trying to apply that test. The question is whether the finished bicycle has a new name, character, or use different from the imported frame. The question Customs answered is whether the frame is an expensive and important component. Those questions will not always produce the same answer. Furthermore, it seems likely that the "essential component" test Customs applied is less likely to result in substantial transformations than is the actual legal test.

From Manchester Triathlon Club http://www.man-tri-club.org.uk/

Let's try it here:

The imported item is a "frame" at the time of importation. No one would call it a bicycle. True, it is an essential component of the assembled bike. It also dictates many aspects of the nature and use of the bike. But, it is a frame. It just is. That is what it is called. Customs has stated many times that a change in name is the least probative of the three elements of name, character, or use. Nevertheless, it cannot be ignored that there is a name change here.

What about "character?" This test is hard to define. We know a few things for certain. The frame is not a completely assembled vehicle as is a bicycle. It has no moving part and is generally uniform in construction (i.e., it is most likely a collection of metal tubes welded together). If you want to move it, you need to pick it up or drag it along the ground. The finished bike, on the other hand, is an assembled, mechanical vehicle. It has moving parts of gears connected by a chain, it has brakes connected by cables to hand controls. It has wheels that rotate about their axle and a front steering mechanism that works with handlebars connected to the fork through the head tube. If you want to move a bicycle, you can roll it or ride it.

And what about use? The imported frame has exactly one use: it can become part of a finished bicycle. A bicycle has as many uses as you can imagine. It can be used to tackle the cobblestones between Paris and Roubaix. It can be used to race across the continent. A bike can help a girl in India get an education. A bike can be used to get documents across town or in an unsuccessful effort to outrun a tornado. A bike can help you "meet the future" or find the basement at the Alamo. When necessary, and with the right help, it can let you fly.

So, as you might be able to tell. I don't buy it. I think an imported frame--in all its carbon, titanium, steel, or aluminum glory--is a static component of a bicycle. Assembling the finished machine, in my view, substantially transforms the frame into a useful bicycle. Customs and Border Protection might not agree. But, if it is going to disagree, it should apply the proper analysis to get there.

Ruling of the Week 2016.7: Microsoft Band

First things first, I admit that I am in the tank for Microsoft products. I have multiple Windows 10 computers and a Windows 10 tablet. I am also on my third Windows Phone. I stared with a Samsung Windows 7 device, moved to a Nokia Lumia 920, and now carry a Lumia 950, which I keep slightly ahead of the curve through the Insiders program. I recently got my hands briefly on a Surface Book, on which I have a serious crush. I also have most of my personal data in the Microsoft cloud via OneDrive and Office 365. I am, as you can see, all in on Windows. Nevertheless, I do not have a Microsoft Band fitness tracker.

Before we discuss why I have so far skipped the Microsoft Band, we should talk about its tariff classification. I raise this because Customs recently ruled on the question. According to HQ H265035 (Jan. 19, 2016), the Microsoft Band is classified in subheading 8517.62.00, HTSUS, as an apparatus for the transmission or reception of voice, images, or data . . . ." This is a good result for Microsoft because the duty rate is free. I have no intention of trying to muck that up here. Also, the analysis is entirely consistent with Customs' prior decision on a Samsung smart watch, which we analyzed here.

In a nutshell, Customs stated that the Band is a device comprised of multiple electronic components including a display, sensors for heartrate and acceleration, a GPS receiver, a Bluetooth transceiver, and a wrist watch. Given that no one HTSUS heading describes the product, Customs determined the proper classification under General Rule of Interpretation 3(b) based on the one component that imparts the essential character. Customs then found that the Bluetooth connectivity to a paired mobile phone enables many of the Band's functions. Unpaired, the Band has limited utility. Consequently, the Bluetooth transceiver imparts the essential character.

My minor complaints about the analysis remain minor and are well explained in the smart watch post. I will leave it at that.

That brings me back to why I do not yet own a Microsoft Band. The reason is that I currently own a relatively old but perfectly functional Polar C300 cycling watch. The watch uses a chest strap heart rate sensor and on-bike speed and cadence sensors to capture data. The Band would add GPS ride data, which would be great, but I can get that with a phone app and would lose cadence. Also, I have read that the Band's heart rate sensor records data less frequently than does the Polar HRM.

Here is what I want. Microsoft, if you could do me this favor, I would run out and buy a Band. Please add on-bike sensors to capture cadence and possibly a chest-strap for better heart rate data. The Band has Bluetooth, so wireless sensors should be possible. Then, I would gain GPS tracking, all the great connectivity features of the Band and not lose any cycling data. The alternative of a new Polar V800 seems a little excessive given that my current watch is working perfectly. Still, my birthday is coming up, so keep that in mind.

Ruling of the Week 2015.24: How Wide is Your Bike Lock?

Although I have actually been on my bike a shamefully few times this year, I remain interested in all things related to cycling, particularly commuting by bike. A key tool for a bike commuter is a good, solid lock. Thus, I noticed H168717 (July 17, 2015) in the August 12, 2015 Customs Bulletin. You will need to scroll to page 90 to find the ruling.

The issue is the proper classification of Master Lock cable locks. Customs originally classified the locks in HTSUS item 8301.10.50 as "Padlocks: not of cylinder or pin tumbler construction: Over 6.4 cm in width." That tariff item has a duty rate of 3.6%. Master Lock argued for classification in item 8301.10.20, which covers locks with a width not over 3.8 cm and has a duty rate of 2.3%.

I am going to save myself two thousand words by saying, this is what we are talking about:

8020D: Picture from Amazon

8119DPF: Picture from Amazon

You can see where this is going, right? The sole question is, "What is the correct way to measure the width of these locks?"

There are a couple of possible answers. First, it might be the length between the red lines in the top picture. That seems to encompass the width of the locking mechanism. The curved inserts on each side would be considered other parts of the assembly; probably extensions of the cable. Another way to measure the width is to consider it to be the distance between the far ends of the "shoulders." This extends the width further.

While you think about that, ask yourself this illuminating additional question: How long is the lock?

Think about it.

The answer matters.

It turns out that CBP has not been measuring the width of the lock at all. Rather, it has been measuring that segment of the length made up by the lock itself. "Length" refers to the longest dimension of a body. Put another way, length is the longest straight line that can be drawn through a body. Based on that, CBP has always included the cable in the length of the lock. It is, therefore, inconsistent (and incorrect) to treat the length of the lock as its width.

Customs and Border Protection has made a course correction. It now recognizes that the width is the line perpendicular to the length. As a result, it is approximately, this:

Note that the picture here is based on a picture in the ruling. It appears to me that W does not include the height of the "shoulder." This image is one I made to approximate what is in the ruling. Don't rely on it as an exhibit.

Having re-measured the locks, Customs agreed with Master Lock that they are classifiable in 8301.10.20 as being less than 3.8 cm in width. That is a win for Master Lock and a good decision by CBP.

Ruling of the Week 2015.14: The "Treatment" of Bicycle Seats

Note, this is not another post about tariff classification. Read through the facts to get to the more interesting issue.

How much controversy could there possibly be over the tariff classification of an add-on child safety seat for bicycles? Apparently, enough to general HQ H170637 (Feb. 11, 2015).

Kent International imports the Wee Ride child safety seat that is designed to mount in front of the saddle on an adult bicycle. Here's what it looks like:

Back in 2005, CBP issued a ruling classifying the Wee Ride as a bicycle accessory in 8714.99.80, subject to a 10% rate of duty.  Customs subsequently issued rulings to other importers classifying similar safety seats in 9401.80.40 as seats, which is a duty-free provision. Obviously, that gave competitors an advantage and probably annoyed Kent. Kent even got some protests approved on the basis of the subsequent rulings. However, Kent's subsequent entries were liquidated in 8714, forcing anther round of protests, which included an Application for Further Review, the intent of which seems to have been to convince Customs to revoke the earlier unfavorable ruling.

The bad news for Kent is that CBP revoked the later inconsistent rulings and determined the correct classification to be as bicycle accessories in 8714. See HQ H180103. In other words, CBP stuck to its guns and affirmed the earlier decision issued to Kent.

What options does that leave Kent? Remember, there has been a substantial period in which it paid a higher rate of duty than did competitors importing similar products. Can it get that money back to level the proverbial playing field?

Kent first argued that the rulings classifying safety seats in 9401 and CBP's liquidation of some of Kent's safety seats constitutes a "treatment." The legal effect of a "treatment" is that, like a ruling, Customs cannot modify it without providing public notice and comment pursuant to 19 USC 1625. But, a treatment is not a ruling. According to CBP, the fact that Kent asked for and received a ruling on the product trumps any argument it may have that CBP developed an inconsistent treatment of these products, which it then modified without proper notice. Rather, the ruling issued to Kent remains in effect until modified or revoked, which never happened. Strike one for Kent.

Picking up on this point, Kent next argued that CBP implicitly revoked or modified the ruling it received when CBP issued the conflicting subsequent rulings to other importers. According to Kent, the appropriate remedy for this is that it should receive the more favorable treatment accorded to the other importers. That, of course would be entirely fair and reasonable.

But, based on the epic litigation involving the classification of "white sauce" in International Custom Products I, CBP disagreed. In that case, the Federal Circuit held that a subsequent Notice of Action was not sufficient to modify or revoke a ruling without the other requirements of section 1625. As a result, the subsequent modification was null and void. Applied to this case, the subsequent rulings were not section 1625 notices of the proposed modification of the ruling originally sent to Kent. As a result, the subsequent rulings had no impact on the ruling issued to Kent. In other words, Kent is stuck with the ruling issued to it until that ruling is modified or revoked. Strike two.

Finally, Kent argued that CBP's rulings and liquidations of seats in Heading 9401 constitutes a de facto established and uniform practice. This is a little different than a mere "treatment." An EUP usually involves a finding by the Secretary of the Treasury. When there is an EUP, Customs cannot increase the rate of duty on merchandise until 30 days after the publication of notice in the Federal Register. See 19 USC 1315(d). On top of that requirement, the courts have found that in some cases there can be a de facto EUP even without a finding of the Secretary of Treasury.

It is hard enough to establish that there is a de facto EUP. It is even harder to do so when CBP has issued a ruling on your product that is inconsistent with the alleged EUP. Moreover, the practice with respect to these seats was not "uniform;" some of Kent's products were liquidated as bike accessories and some as seats. Consequently, CBP declined to find an EUP. That is strike three.

As a result, CBP did not grant any relief to Kent. Under GRI 1 and, specifically, Note 1(h) to Chapter 94, Customs found the bike seats to be classifiable as bike accessories. The problem with all this is that the classification applied to Kent's products appears to be correct (at least we can assume that for now). By applying the correct classification to Kent and an incorrect, more favorable rate of duty to other importers, CBP did potentially substantial damage to Kent. The question is whether someone who got the correct rate of duty has any remedy in this circumstance. Based on these facts, it does not appear that Customs thinks so.

What will the Court say when this get there, as I assume it will. First, there is the classification. Let's hope Kent is protesting entries on which it is paying duties. That will provide a remedy going forward. For the prior period in which Kent was at a tariff disadvantage, it seem Kent needs some kind of equitable remedy. Here's hoping Kent finds it.

What lessons can be learned from all this? First, remember that if you seek a ruling, you will be bound by the result. Do not take that process lightly. Submit a fully supported, well reasoned request that actually advocates for your desired result. A ruling that says "Here is my sample. Please tell me the correct classification," is a recipe for potential disaster. Second, stay abreast of what is happening in your industry. When the conflicting rulings were issued, Kent could have stepped up as an interested party and argued against the results. This might have shortened the period in which it was at a disadvantage.