So You Want To Import: A Primer On Basic Customs Issues

Monday, January 1, 2007 - 01:00

Almost every important customs issue stems from one of four questions: What is it? Where did it come from? How much did it cost? How do you know? These questions resolve themselves into issues of country of origin, classification, valuation and record keeping.

As an importer, one should not rely solely on a customs broker to manage these issues, but rather should be able to direct and inform the broker on the issues and keep copies of documentation relevant to demonstrating the reasons for coming to certain conclusions. What follows is a brief discussion of the four questions as they pertain to an importation of Venetian blinds from Italy, followed by a note about compliance programs.

Classification

Correct classification of merchandise is the first step toward successful importation. Customs classification is based on the Harmonized Tariff System, a common classification system used by most of the world's countries. Each country's set of classifications is identical down to a certain level of specificity, after which each country is free to have its own subcategories of merchandise. The Harmonized Tariff Schedule of the United States is organized according to the base materials from which objects are produced, beginning with live animals and plants, and moving up to wood, fabrics, metals and finally to objects of mixed character that are not classifiable elsewhere. In fact, Venetian blinds made of plastic, metal and wood are classified differently under the schedule: in provision 3925.30.1000 for plastic blinds, provision 7616.99.5040 for aluminum blinds and provision 4421.90.4000 for wooden blinds.

If the classification remains unclear after a cursory look through the schedule, the importer may find it helpful to consult the Customs Rulings Online Search System (CROSS). This database, which is available on Customs' website at http://rulings.cbp.gov/, contains numerous opinion letters issued by the agency with regard to the proper classification of merchandise. These opinion letters can point an importer toward the correct classification for a tricky article. The database also provides letters regarding other issues, such as country of origin, valuation and eligibility for duty-free status under trade agreements.

Finally, importers should be aware of chapter 99 of the U.S. Harmonized Tariff Schedule, which reflects temporary legislation affecting duty rates. An importer should determine whether his merchandise is embraced by a chapter 99 classification before classifying the merchandise elsewhere. If a product is embraced by a provision in chapter 99, the product must be classified there, regardless of whether the merchandise would otherwise be classifiable in another chapter.

Country Of Origin

For almost every good, the country of origin is the country of its manufacture. When pieces of an item are manufactured in different countries, the country of origin will be the last country in which the merchandise underwent a "substantial transformation" that resulted in a good with a name, character or use different from that possessed by the article prior to processing. For example, if the slats in the Venetian blinds were manufactured from rolls of aluminum strip originally from Germany, the transformation of those rolls of aluminum, in Italy, into finished Venetian blinds would result in a substantial transformation. The source product - aluminum strip - is different than the final product - Venetian blinds - in name, character and use. Thus, Italy would be the country of origin for the blinds, even though source materials originally from other countries were used in their production.

The substantial transformation of a good (and thus its country of origin) can determine its eligibility for duty-free status under free trade agreements. An importer may generally determine whether a good manufactured in stages across various countries is eligible for duty-free treatment on the basis of the country of the last substantial transformation. However, the mere fact that a good undergoes a difference in tariff classification across countries may not be sufficient: several free trade agreements have complex rules limiting the ability of "tariff shifts" to result in duty-free treatment.

Customs requires that all goods entering the country be plainly marked with their origin in English, with the label placed in such a way that the ultimate retail consumer can find it. The best phrasing to use is "Made in ___" or "Product of ___"; more complex designations are frowned upon. The country of origin labeling should be as permanent as possible. Both the item and its packaging should be labeled, if at all feasible. In the case of our Venetian blinds, the phrase "Made in Italy," placed on the heavy bottom slat of the blind, either on a sticker or stamped directly into the metal, would be appropriate.

Valuation

Most valuations will be relatively simple, but complexity can arise where the importer is related to the manufacturer, or where the importer has provided the manufacturer with "assists" - goods that will assist the manufacturer in producing the merchandise (such as parts). In those situations where the importer purchases from an independent, unrelated foreign manufacturer that is solely responsible for the manufacture of the item, Customs will consider the importer's purchase price to be the correct value, with some slight modifications. Where the importer purchases from an unrelated manufacturer, valuation for Customs purposes should reflect the invoice price from the manufacturer to the purchasing importer, minus any included freight, insurance and other Cost, Insurance and Freight (CIF) charges, and plus any packing expenses incurred by the buyer and not already reflected in the invoice price.

Trouble areas include commissions paid to the seller's agent, royalty payments and nonmaterial assists (such as artwork designed outside of the United States for incorporation into the merchandise). The importer should be aware of whether any of these elements are implicated in the purchase of the merchandise to be imported, as their presence may require the goods to be valued under a different method than the simple invoice price.

How Do You Know?

Every importer is required to keep certain documents relating to its import activities on hand, and to make them available to Customs officials upon request. The period of retention is five years from the date of importation, and the documents that must be maintained are listed in Treasury Decision 96-1. These include most documents that would be generated in connection with the entry of merchandise, such as:


A bill of lading.


Customs Form 3461 (Immediate Entry) and/or Customs Form 7501 (Entry Summary) - listing classification, origin and value of merchandise, along with other salient information identifying the importer and broker.


A packing list (if appropriate).


Bond information.


A vessel manifest (filed by the carrier).

In addition to the documents above, the importer is required to maintain those "business, financial and accounting records" that would otherwise be generated in the normal course of business with regard to the transaction. The most important of these will be the manufacturers' invoice, as it demonstrates value. The importer should arrange with its broker to receive copies of all documents received and filed by the broker in conjunction with entries. Establishment of such procedures from the beginning of the broker/importer relationship is important. A broker who does not promptly and routinely provide such records should not be employed. The importer must maintain the records so as to be able to retrieve them quickly for Customs' inspection. Failure to produce records in a timely manner can result in fines for recordkeeping violations. Thus, the importer should develop a specific system for recordkeeping.

Customs Compliance

A compliance manual can be of great assistance in maintaining records, dealing with classification and origin issues and determining value. Such a manual should outline basic procedures for classifying and valuing merchandise, determining country of origin and identifying the documents to be retained, and should provide direction as to how and where they are to be filed. Customs provides a sample manual on its website (accessible at www.cbp.gov/ linkhandler/cgov/import/reg_audit/archive/fap_documents/exhibit4a.ctt/exh4a.pdf). Although the sample manual is likely too long for most practical applications (particularly for smaller companies), it is a useful representation of Customs' basic expectations. It covers issues such as determining who in the company is in charge of keeping records, how merchandise is appraised and other issues that may not be relevant to all companies at all times, such as American goods returned from abroad and antidumping duty liability.

While a manual is of great practical use in everyday situations, it also serves a purpose if Customs determines to audit or investigate an importer's activities. Having a compliance manual and an overall compliance program in place can make the difference between a slap on the wrist and hefty fines. The existence of a manual demonstrates to Customs that a company is aware of the regulations, has thought about how they should be implemented in the company's importing practices and has made a good-faith attempt to educate employees and maintain consistent compliance.

In conclusion, the import of most items can be successfully accomplished by reference to the four basic questions of customs law: What is it? Where did it come from? How much did it cost? How do you know? When considering the importation of a new product, it is good practice to consult counsel to ensure that no agency besides Customs regulates the importation of the goods, and to ensure that due diligence has been conducted with regard to the answers to the four questions posited above. However, with time and experience, many importers can manage their own importing and compliance programs.

Timothy C. Brightbill is a Partner in Wiley Rein & Fielding's International Trade Group. He represents clients on all aspects of international trade law and policy, including import trade remedies (such as antidumping, countervailing duty and safeguards investigations), global trade policy and trade negotiations, export controls (compliance and licensing), customs matters and international e-commerce issues. He can reached at (202) 719-3138. Maureen E. Thorson is an Associate in the Group and a former law clerk with the U.S. Court of International Trade. She can be reached at (202) 719-7272.

Please email the authors at tbrightbill@wrf.com or mthorson@wrf.com with questions about this article.