August, 2016

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Tariff Classification Lessons

Mark K. Neville, Jr.

Faithful readers of this space will recognize that the three principal attributes for the assessment of a customs duty on an imported article are its tariff classification, its value, for that majority of duties which are assessed on an ad valorem basis, and its origin. After even the most cursory of readings it soon becomes clear that there are deceptively complicated processes at play when properly ascertaining these features. We have discussed each of these issues previously and we leave customs valuation and origin for another day, but let us spend some useful time in looking again at tariff classification.1

Harmonized System

The tariff classification of imported merchandise is undertaken by virtually the entire trading world—certainly by the US and all of its usual trading partners-- by application of the Harmonized System (HS), which is essentially the process whereby the correct tariff classification is assigned to an imported article according to a taxonomy based upon some 10,000 or so tariff provisions, which are organized into a common 97 chapters within XXI Sections. First negotiated in the course of the 1980s at the World Customs Organization (WCO) in Brussels, the HS is an amalgam of the old Brussels Tariff Nomenclature (BTN) and the systems formerly used by the United States, the Tariff Schedules of the United States (the TSUS), and others. The US adopted the HS with effect from January 1, 1989, with the implemented version in the US being the Harmonized Tariff Schedule of the US (HTSUS).

Note the key word here is “harmonized.” We should first establish what that word does and does not mean. It does not mean that the countries that apply the HS will apply a uniform or identical body of tariff provisions. Nor do the countries necessarily apply the same duty rates to imported articles. Instead, the countries will agree on the proper tariff status of an imported article up through the first six-digits, the tariff subheading. Again, duty rates may, and probably will, vary.

Harmonization does mean that, if the principles are applied consistently, a widget imported into the US or imported into the customs territory of another country should be assigned the same 6-digit tariff subheading. In the US, and in many other countries, there is usually a different “breakout” beyond the 6-digit level. Counties will assign different 8- or 10-digit tariff provision because of an interest in tracking import volumes and/or in assigning different rates of duty. It would be a mistake to simply use the tariff provision supplied by a foreign supplier in clearing the goods into the country. The other country tariff provision may be correct in the sense that it will govern the import of an item into that country, but it is normally incorrect when applied to an import into another customs jurisdiction. To illustrate the divergences that may occur, in the EU, letter cards, plain postcards and correspondence cards are all classified within a single 8-digit tariff provision (4817.20.00) but in the US a 10-digit tariff provision must be applied, with a further delineation between sheets of writing paper with gummed or perforated edges, with or without inserts, prepared for use as combination sheets and envelopes (4817.20.2000) and “other” cards (4817.20.4000). You will note the use in both the EU and in the US of the 6-digit subheading, 4817.20, as well as the divergence. Importers into the US must use the correct 10-digit tariff classification, at the so-called “statistical level.”

Rules, Principles and Guidance

The fact that there are some 97 chapters and many thousands of tariff provisions does not mean that the importer is left without a map or a compass, or a GPS in today’s parlance, in his quest to assign the proper tariff classification to the imported article. Instead, there a number of signposts and trail markers, or buoys to mark the shoals if you will, that will assist the importer in getting to the correct 10-digit tariff provision.

First, the importer must apply the Section and Chapter notes and must also apply the General Rules of Interpretation (GRIs) and the Additional US Rules of Interpretation, if applicable. These will furnish many directions about the classification process. As a practical matter, the importer should refer to the Explanatory Notes issued by the WCO which give further guidance and what is and what is not meant by various tariff terms. Both US Customs and Border Protection (CBP) and the trade community make frequent reference to the ENs when discussing tariff classification matters. The ENs are often revised to take into account newly developed technologies and other product developments. Perhaps it is well to state at this point that the HS is under constant review and every five years there is a promulgation of an essentially new HS. The next such version will take effect on January 1, 2017.

Beyond the sources internal to the HS itself (the GRIs and the Additional US Rules of Interpretation and the Section and Chapter Notes) and the closely related ENs, the importer can look for administrative guidance from CBP. That guidance can take the form of a tariff classification rulings issued in response to a request. It can also take the form of a ruling previously issued to another importer. Many thousands of tariff classification rulings are freely available on the CBP website.2 A word to the wise here—not only can a published ruling be useful for the importer which had sought the ruling but it may play a role beyond being useful for other importers. In actual fact, the position taken by CBP on a tariff classification question may be binding on any importer of an identical or even a similar article. Unless the importer can effectively distinguish his imported article from that which had been the subject of an earlier CBP ruling, then CBP will want to apply the “reasonable care” standard dictated by 19 USC § 1484 against the importer if the tariff classification previously assigned in that earlier ruling has not been declared with his entry.

Beyond the large body of tariff classification rulings, importers must be mindful of any court decisions which may have been issued on the tariff classification of their imported merchandise. Those decisions are controlling and must be followed. Otherwise the importer who deviates from that course will be liable to be subject to a change in the tariff classification and the issuance of a civil penalty, most likely under the authority of 19 USC § 1592. We have a recent decision by the CIT which demonstrates the rigors of the tariff classification process.

CIT decision

The first note that must be sounded here is that importers and their advisors must be able to master the intricacies of any and all product lines which form the imported merchandise. In a way, this is can become a “jack and master of all trades” exercise. The importer will normally be working within a given trade or an industry and, with experience, will become fully conversant with the nuances presented by the imported articles. But the importer has it relatively easy. The importer of widgets may know all there is to know about widgets—how they are made, what they are made of and what they are meant to do. The widget importer may not know anything at all about gidgets and, more importantly, in the ordinary course may not need to know anything about gidgets. But their advisor cannot relax and be content with such a narrow focus. In other words, the widget and the gadget importers may each engage the same advisor. That means that the advisor will need to master both trade lines.

From personal experience, over the course of a long career one may expect to be forced to acquire detailed knowledge of the automotive, chemistry, pharmaceutical, apparel, food, watches, furniture, home furnishings and a myriad of other product sectors. The CIT decision gives us an example of the challenge.

In the case that led to Chemtall, Inc. v. United States,3 the importer of acrylamido tertiary butyl sulfonic acid (“ATBS”) was locked in a dispute with CBP over tariff classification. The importer classified its ATBS entries under HTSUS subheading 2924.19.11, which covers “Carboxyamide-function compounds; amide-function compounds of carbonic acid: Acyclic amides (including acyclic carbamates) and their derivatives; salts thereof: Other: Amides: Acrylamide.”

CBP rejected this classification, opting instead for the “other: other” category for acyclic amides under subheading 2924.19.80, HTSUS.

As is the point with many of these tariff classification disputes, the issue was not simply the question of assigning the correct tariff provision. It was a “money point,” to borrow a phrase. The importer wanted a duty rate of 3.7% while the tariff provision favored by CBP carried a duty rate of 6.5%.

The opinion carefully distinguishes between what is an “amide” and a “derivative of an amide.” This may be interesting if you are a chemist or a chemical engineer and, if so, you may or may not need to engage an expert to assist you in your understanding. If you are not a chemist or a chemical engineer it is almost a certainty that you will need to hire an expert to help you parse these terms.

Lesson Learned

The decision is a good illustration of the various pathways that the importer and his advisor may (or must) follow in order to arrive at the correct tariff classification “home” for an imported product. This will include a close study of the HS terms themselves, as well as a resort to the ENs and trade or industry authorities as well as the enlisting of the services of a suitable expert, where that is a prudent step.

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1. Slip Op. 15-82 (July 30, 2015) (Grobest III). Note that this company is the successor in interest to Grobest & I-Mei Industrial (Vietnam) Co., Ltd, hence the continuation of the “Grobest” caption.

2. See Certain Frozen Warmwater Shrimp from the Socialist Republic of Vietnam, 70 Fed. Reg. 5,152 (Dep’t Commerce Feb. 1, 2005) (amended final determination and antidumping duty order).

3. Grobest III, Slip Op. at 16-17.

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