April, 2015

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Return of leased goods

Mark K. Neville, Jr.

It would be a gross oversimplification--a serious mistake, actually-- to conclude that the importation of goods is a cut and dried process once the tariff classification is determined. We know that, for many, the entire customs clearance process is an ordeal, something to be anticipated and then endured, with a “’twere well it were done quickly”1 rush. But tariff classification is not the only aspect of that process—indeed, it is often the easiest task in the bunch and, once done, we know what the proper duty rate should be. For starters, there is the customs valuation and also origin points to consider. These are the issues which establish the basis against which the customs duty is to be levied and whether the products are eligible for any tariff preferences.
,br> And then we come to the various special regimes, those which deal not only with the three basics—What is this? How much is it worth? Where is it coming from?—but also such questions as, “How was it used in the foreign country? or How is it to be used after import? or Is this a US product that is coming back?”
,br>In the United States, these are the questions that are associated with Chapter 98 of the Harmonized Tariff Schedule of the United States (HTSUS) and, inter alia, Parts 10 and 54 of the Customs Regulations.
,br> As the title suggests, we will be focusing on the treatment of one class of imported goods, goods that had been sent to a foreign country under lease and are now being returned to the US, with a special emphasis on examining how Customs and Border Protection (CBP) administers that regime.

Leased Goods—the Legal Frame

A useful starting point is the customs regulations, which provide2 for the general rule that duty is owed on previously imported goods that have been re-exported and are now being imported a second time

Dutiable merchandise imported and afterwards exported even though duty thereon may have been paid on the first importation, is liable to duty on every subsequent importation into the Customs territory of the United States” unless specifically exempted therefrom under the HTSUS.

So, the first question is whether there is an exception. Subheading 9801.00.20, HTSUS, provides an exception, with duty-free treatment for:

[a]rticles, previously imported, with respect to which the duty was paid upon such previous importation or which were previously free of duty pursuant to the Caribbean Basin Economic Recovery Act or Title V of the Trade Act of 1974, if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States.

CBP Discretion

The implementing customs regulations3 provide, in pertinent part, for a great degree of discretion for the CBP port director. We find that free entry shall be accorded under subheading 9801.00.20, HTSUS, whenever it is established to the satisfaction of the port director that the article for which free entry is claimed was duty paid on a previous importation, is being reimported by or for the account of the person who previously imported it into, and exported it from the United States without having been advanced in value or improved in condition by any process of manufacture or other means, and was exported from the U.S. under a lease or similar use agreement. CBP does not treat this discretionary authority lightly. CBP has denied treatment under subheading 9801.00.20, HTSUS, in situations where such evidence was not provided.4 Let’s discuss one of those denials.

Denial of Importer’s Claim—Ruling no. H216475 (1/16/15)

This ruling provides a wonderful insight into the close scrutiny that may be given to a 9801 claim. Here, the importer was a Canadian company which made entry as a non-resident importer of record. We learn that the goods in question ladies swim tops, which were entered at the Port of Champlain.
,br> The merchandise was originally shipped from the manufacturer in China, passed in-bond through Montreal, and arrived at the importer’s address in the U.S. The importer paid duty on the merchandise based on the sales transaction between its overseas buying agent and the Chinese manufacturer. After entry was made on January 13, 2011, the importer immediately exported the merchandise back to Montreal on the same day and CBP issued a Certificate of Registration to protestant for “Articles reported for export to Canada for similar use agreement, storage and warehousing and/or re-ticketing. To be re-exported to the USA.” The goods were entered into Canada and warehoused at a Canadian bonded warehouse under a duty deferral program.
,br> The importer stated that the merchandise was exported to be warehoused in Montreal “until such time as they were needed for distribution in the U.S.” The importer also stated that the warehouse at issue is located at the same address as the importer. The importer and the Canadian warehouse have one shareholder in common, and the importer noted that while they are related parties for purposes of customs valuation, they are two separate corporate entities with distinct corporate structures, employees, and business operations. The importer noted that, during the warehouse period, the merchandise never entered the commerce of Canada. A copy of the warehouse agreement between the protestant and the Canadian warehouse was provided as was an invoice issued by the Canadian warehouse. The warehouse agreement was signed on behalf of the importer by its president and on behalf of the Canadian warehouse by the president of the Canadian warehouse, who are the one and the same person.
,br> The port closely reviewed all of the supporting facts and circumstances and was of the opinion that the warehouse agreement between the Canadian warehouse and SGS is not a lease or similar agreement because the same person is president of both companies, and when the goods were imported into Canada, they were delivered to SGS and not to the Canadian warehouse. The port also stated that the invoice from the Canadian warehouse to SGS for the “warehousing fee” is broken down to include the warehouse salary for the employees, group insurance, wage levies, payroll service charges, and CSST fees instead of the services rendered which might include pick-and-pack services and inventory. In addition, the inventory records submitted by the Canadian warehouse is printed by “User Name: Sue” which does not resemble any of the Canadian warehouse employees’ names, but resembles SGS employees’ names.


A pre-condition for the invoking of subheading 9801.00.20, HTSUS, is that the goods are exported under lease—or a similar use agreement. A lease or similar use agreement of this subheading requires a temporary transfer of rights to property or a delivery of property from one party to another for a specified reason for the benefit of one or both parties.5

No lease—Bailment?

The importer was apparently unable to prove a lease arrangement, so it claimed that the agreement under which the importer exported the apparel to Canada was a bailment, and that a bailment is a “similar use agreement” for these purposes. According to Black’s Law Dictionary (6th ed. 1990), the definition of a bailment is a delivery of goods of personal property, by one person (bailor) to another (bailee), in trust for the execution of a special object upon or in relation to such goods, beneficial to either the bailor or bailee or both, and upon a contract, express or implied, to perform the trust and carry out such object, and thereupon either to redeliver the goods to the bailor or otherwise dispose of the same in conformity with the purpose of the trust. The relationship of bailor-bailee arises when the owner, while retaining general title, delivers personal property to another for some particular purpose on an express or implied contract to redeliver the goods when the purpose has been fulfilled, or otherwise deal with the goods according to the bailor's directions. Maulding v. United States, 257 F.2d 56 (9th Cir. 1958).
,br> In its review, CBP observed that, although the warehouse agreement was purportedly executed between the Canadian warehouse and SGS, there is evidence which suggests that they are not two separate entities. These include the following four points:
  1. when the goods were imported into Canada, they were delivered to SGS and not to the Canadian warehouse.
  2. the invoice issued by the Canadian warehouse charges SGS for their employees’ wages rather than pick-and-pack services or warehousing.
  3. the inventory record provided by the Canadian warehouse is produced by Sue, on the SGS employee list. Other inventory records provided at the meeting showed that SGS and the warehouse systems are easily accessible by both parties, if not just by SGS.
  4. a review of the General Ledger Reports from SGS and the Canadian warehouse show that the monies which are to be invoiced by the warehouse are loaned to SGS from the warehouse prior to the invoice being issued by the warehouse to SGS. Then the monies are paid back to the warehouse via a company transfer in the form of credit at the end of every month.
CBP reached the following conclusion: Given these circumstances, we find that the merchandise was not entitled to duty-free entry under subheading 9801.00.20, HTSUS, when reimported into the U.S. As the goods were sold to a U.S. customer per the invoice of March 25, 2011, the goods should be entered and appraised under the price paid by the U.S. customer.


The ruling presents a very well-organized, carefully written analysis. First rate, really. The importer was unable to make its claim because the goods had not been either leased or bailed out to a separate entity in Canada. As a result of the goods’ round trip to/from Canada, the importer paid US duty twice on the goods.

The most interesting point is one that was not discussed at length—and that is the customs valuation of the goods on the two entries. Presumably the value declared for the first entry was the purchase price from the factory.

If successful, the importer would have turned Canada into a foreign trade zone of sorts, but with a better result. If the importer had been successful with its subheading 9801.00.20 tactic on the reimportation, there would have been no need to tender any additional duty, even though the goods would have been sold to a US customer at that point. The paying of duty on the lower price on the first entry, the importer’s purchase from the factory (via its agent) rather than its resale price, would have been the end of it. If the importer had, instead, admitted the goods into an FTZ in the US in the first instance, then no duty would have been paid at that point and the duty that would be collected when withdrawn from the FTZ would be assessed on the higher resale price. But there would have been still another option. At the cost of additional warehousing charges—recall here that the importer had access to its related Canadian Warehouse and such Canadian charges would presumably not have been truly incremental6--if the importer had simply kept the goods in inventory in the US after an initial entry for consumption, the only duty would have been on the price at which SGS had purchased them.

Still, the lease/bailment tactic would have been a coup for the importer. To be sure, better facts could lead to a different result. Because it failed, however, the importer found itself having to pay on the marked up price at reimportation, after having already made a duty payment on the presumably lower customs value on the initial entry.


1. If it were done when 'tis done, then 'twere well It were done quickly.
Macbeth, Act 1, Scene 7

2. 19 CFR § 141.2.

3 19 CFR § 10.108.

4. See, e.g., HQ 556538, dated May 27, 1992 (duty-free status under subheading 9801.00.20, HTSUS, denied because documentary requirements were not satisfied and no evidence was provided to indicate that the subject merchandise was exported under a lease or similar use agreement).

5. See generally, ruling nos. 546561 (3/16/98), where a bailment agreement was considered to be a similar use agreement for purposes of this subheading and W563474 (12/13/07), in which CBP found that, because the same entity both imported the merchandise into the U.S. and stored and repackaged the merchandise in Canada, the merchandise had not been exported pursuant to a lease or similar use agreement and the merchandise did not qualify for duty-free entry under subheading 9801.00.20, HTSUS, when re-imported into the U.S.

6. Indeed, one reason why the importer lost was that it was unable to show such incremental charges.

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