Insights

Breaking News: Claus’s Customs Compliance is Naughty

Date: 12/06/2023

            Importing merchandise into the United States can be a tricky process for even magical folk. There are a variety laws and regulations enforced by U.S. Customs and Border Protection (“CBP” or “Customs”), and violations can lead to significant consequences including monetary penalties. In a more practical sense, lack of compliance with the Customs regulations can cause increased regulatory scrutiny, delay the release of merchandise by CBP, and affect an importer’s ability to meet internal deadlines or other obligations related to the imported merchandise. Quite the impediment for a man whose distribution business is conducted over the course of one night!

            Ditching his sleigh-based, North Pole-centric model, this year Claus has decided to use a traditional import operation to realize efficiencies and leverage synergies and other corporate speak he heard in the opening scenes of a Hallmark Christmas movie. From correctly classifying products to conducting supply chain due diligence, there are many different types of compliance practices that importers may need to engage in to avoid violations of Customs regulations. In the spirit of the Holiday season, this article will examine some Customs-related issues that Santa Claus has run into as he prepares to distribute toys across the U.S. (and the world) on Christmas Eve.

Classification

            19 U.S.C. §1484 requires parties importing goods into the United States to exercise “reasonable care” to enter, classify, and determine the value of imported merchandise. CBP is ultimately responsible for the final determination of value and classification of merchandise. However, importers must first provide documentation to CBP that declares accurate classifications and valuations and provide any other information that is necessary for CBP to assess duties, collect statistical data, and determine whether applicable legal requirements have been met. That’s a lot of recordkeeping for jolly old Saint Nick!

            Correctly classifying merchandise under the Harmonized Tariff Schedule of the United States (“HTS”) is a key aspect of the Customs entry process, but an area where importers are prone to making mistakes. Knowing that bikes are a popular item on children’s Christmas lists, Santa has been importing various types of bicycles into the U.S. for months to ensure he has enough inventory. Santa and a few of his elves worked together to classify the bicycles but admittedly were not too familiar with HTS classifications.

            After several bicycle shipments were entered into the U.S., Santa’s customs broker, Yule Log-gistics, notified him that some bikes were probably classified incorrectly. Specifically, Santa was classifying many of the bikes under an HTS code for bikes with a front wheel between 55cm and 63.5cm and a rear wheel exceeding 63.5cm in diameter. However, the customs broker told Santa that most of the imported bikes did not have a rear tire exceeding 63.5cm in diameter, and thus needed to be classified under HTS code 8712.00.15 for bikes with both wheels not exceeding 63.5cm in diameter. Unfortunately for Santa, the duty rate under the correct HTS code is 11% instead of the 5.5% duty rate under the HTS code Santa has mistakenly been using. Thus, Santa realized he has underpaid customs duties for the past several months and was negligent in not checking for errors in his classifications.[1]

            As previously mentioned, importers are responsible for providing correct HTS classification information to CBP and failure to do so can result in an investigative or enforcement action by CBP, including the assessment of monetary penalties. The North Pole legal department has advised Santa that he should consider taking immediate action to file a Prior Disclosure (“PD”) as described in 19 U.S.C. § 1592(c)(4). When submitting his Prior Disclosure, Santa will need to submit payment for the amount in duties he should have owed (based on the corrected HTS code) on the bikes imported under the wrong HTS code. However, submitting the PD and owed duties will significantly decrease the probability and extent of any CBP enforcement action or monetary penalties.[2] Hopefully, upon receiving a PD from SC, Customs will review in the same spirit of charity that motivates Father Christmas.

Section 301

            Another issue Santa has run into are additional duties on certain Chinese-origin products. To meet an unusually high demand for bicycles this Christmas, Santa has been using manufacturing plants in China to produce more bikes and importing them into the U.S. When communicating about the bicycle classification issue with Yule Log-gistics, Santa learned that the bikes imported from China and classified under the newly corrected HTS code are subject to Section 301 tariffs.[3] Products imported from China can be subject to additional duties of up to 25% depending on their HTS classification.

            The bikes Santa is importing under HTS code 8712.00.15 are subject to a normal duty rate of 11%. However, products under this HTS code are subject to an additional duty rate of 25% under the Section 301 tariffs. Although the USTR has excluded certain products from the Section 301 tariffs, bikes classified under the above-mentioned HTS code are not listed on the product exclusion lists.[4] Therefore, the bikes Santa is importing from China classified under 8712.00.15 will be subject to a duty rate of 36%.

Section 321

            Because Santa now must pay significantly higher duties on the bicycles he is importing, he now considers ways to decrease costs of imports. One program Santa finds appealing is CBP’s Section 321 Program for low-value shipments. Under 19 U.S.C. § 1321 (“Section 321”), certain shipments imported by “one person on one day” will be admitted free of duty if the “fair retail value” of the imported goods does not exceed $800. For Santa, the Section 321 Program seems like a great way to reduce some of the costs associated with importing, especially because goods imported under Section 321 are not subject to applicable Section 301 duties.[5] Therefore, the bikes that are now subject to a higher rate of duty based on the corrected HTS classification could be entered duty-free if the conditions for entry under Section 321 are met.

            Unfortunately, Santa cannot use Section 321 to enter the bicycles duty-free because of the high quantity he needs to import. Santa needs to import hundreds of more bikes before Christmas Eve and quickly realizes that the shipments he imports are not going to be valued under $800. However, one of Santa’s craftier elves had the idea to separate large orders of the bicycle imports into smaller shipments under $800 to take advantage of Section 321 privileges.

            Santa considered the elf’s idea but has ultimately decided that it would constitute abuse of the Section 321 Program. In fact, at 19 C.F.R. § 10.151, the Customs regulations state that CBP will not allow duty-free entry of shipments sent separately for the express purpose of receiving duty-free treatment under Section 321. Thus, Santa has decided he will not attempt to use Section 321 to enter the bicycles.

UFLPA

            Although Santa is now paying higher duties on the bicycles he imports from China, he is glad that the classification issues have been cleared up and that the import process has remained on schedule. However, Santa has now received a Notice of Detention from CBP regarding a recent shipment of bicycles from China. The detention notice states that the shipment has been detained by CBP due to concerns that the bicycles were produced via forced labor.

            Santa recently began manufacturing some of his bikes at a factory located in the Xinjiang Uyghur Autonomous Region (“XUAR”) after ensuring that he had adequate due diligence systems and other internal controls in place to address forced labor concerns. Unfortunately for Santa, the Uyghur Forced Labor Prevention Act (“UFLPA”), establishes a rebuttable presumption that any goods manufactured or produced wholly or in part in the XUAR or by an entity on the UFLPA Entity List are products of forced labor and prohibited from being imported into the U.S.[6]

            Santa believes that his bikes are not produced with forced labor and plans to provide evidence of this to CBP so that his shipment can be excepted from the rebuttable presumption described above pursuant to Section 3(b) of the UFLPA. Under this provision, Santa must show by clear and convincing evidence that the bicycles were not products of forced labor. In addition, Santa must provide specific documentation described in Section IV of the UFLPA Operational Guidance for Importers including information on the due diligence system he has in place, the supply chain for the bicycles, and details related to workers’ wages and production output. Although Santa has the appropriate procedures in place to ensure his bicycles are not made with forced labor, the process of demonstrating this to CBP will be burdensome and time-consuming as Santa will need to coordinate with the factory in China, involved suppliers, and North Pole workers to prepare and compile the required documentation. Thus, Santa is now considering moving the production of the bicycles to an alternative location outside of the XUAR.

USMCA

            Due to the above-described issues related to the forced labor detention, which also poses a reputational risk for Santa, Santa decides to move his manufacturing hub back to the North Pole, which for the purposes of this next illustration must be located in Canada. (It’s much easier to move supply chains quickly when you are a magical immortal.) Because our North Pole is located in Canada, Santa will be able to obtain duty-free treatment for qualifying goods under the United States-Mexico-Canada Agreement (“USMCA”).

            Since Santa’s bikes are now sourced completely from Canada, they qualify as originating goods under Article 4.2 of the USMCA. Santa can make a claim for preferential tariff treatment upon importation of the bicycles into the U.S. When making such a claim, Santa is required to have in his possession a Certification of Origin proving that the bikes are sourced from Canada. While the Certification does not have to be in a particular format, it must contain certain information listed in 19 C.F.R. § 182.12 including the certifiers name and contact information, a “sufficiently detailed” description of the items, and the applicable HTS classifications. Luckily for Santa, the bicycles are now completely manufactured and produced in Canada making it simple to determine that the bikes are “originating” for purposes of claiming preferential tariff treatment.

Conclusion

After sorting through relevant U.S. Customs requirements, Santa now only needs to figure out the customs regulations for about 190+ more countries for his one-night journey around the world. While he is glad to have finally resolved the issues related to importing his bicycles into the U.S., Santa is thinking that he may need to recruit some more elves to help him with Customs compliance for future Christmases. 

***

If your company has questions about the laws and regulations mentioned in this article or has run into issues similar to those Santa encountered, please feel free to contact the attorneys at Torres Trade Law, PLLC for assistance.

 

 

[1] HTS code 8712.00.44 “Bicycles and other cycles (including delivery tricycles), not motorized: Bicycles having a front wheel exceeding 55 cm but not exceeding 63.5 cm in diameter and a rear wheel exceeding 63.5 cm in diameter, weighing less than 16.3kg complete without accessories and not designed for use with tires having a cross-sectional diameter exceeding 4.13 cm, valued at $200or more each” has a duty rate of 5.5%. HTS code 8712.00.15 “Bicycles and other cycles (including delivery tricycles), not motorized: Bicycles having both wheels not exceeding 63.5 cm in diameter” has a duty rate of 11%.

[2] 19 C.F.R. § 162.74.

[3] 83 Fed. Reg. 14906 (Apr. 6, 2018).

[4] See 87 Fed. Reg. 17380 (Mar. 28, 2022); See also 88 Fed. Reg. 62423 (Sep. 11, 2023) (Notice that product exclusions have been extended until December 31, 2023.).

[5] CBP FAQs Section 301 Trade Remedies, “Are products entered under the Section 321 de minimis exemption subject to Section 301 duties?,” available at https://www.cbp.gov/trade/programs-administration/entry-summary/section-301-trade-remedies/faqs (last modified Sep. 11, 2023).

[6] See 19 U.S.C. § 1307; See also UFLPA Operational Guidance for Importers, CBP Publication No. 1793-0522 pp. 4-5, available at https://www.cbp.gov/sites/default/files/assets/documents/2022 Jun/CBP_Guidance_for_Importers_for_UFLPA_13_June_2022.pdf (June 13, 2022).

Categories

Contact

GENERAL QUESTIONS OR COMMENTS?