Customs-Notes

CUSTOMS-NOTES

Written by George R. Tuttle Law Offices for informational use by the trade and import community on selected topics of general interest concerning Customs and import related matters.

August 26, 1997 CLASSIFYING MERCHANDISE UNDER THE HARMONIZED TARIFF SCHEDULES

Knowing how to correctly classify (a) making entry and providing merchandise imported into the United States information necessary for Customs to has taken on new significance with the determine whether the goods may be passage of the North American Free Trade released; Implementation Act (NAFTIA) November of 1993. Contained within its provisions is (b) completing the entry with the the Customs Modernization and Informed correct declared value, classification and Compliance Act (“the Mod Act”). rate of duty applicable to the goods and,

The Mod Act alters the basic relationship (c) providing any other information between Customs and the importer by shifting from necessary to enable Customs to properly Customs to the importer the legal responsibility for assess duties, collect accurate statistics and determining the correct value, classification, and rate of duty applicable to imported goods.1 determine whether all other requirements of 3 ACTING WITH law have been met. REASONABLE CARE Under the reasonable care standard, Section 484 of the Tariff Act of 1930, parties engaged in importing are presumed as amended by the NAFTIA now provides to be knowledgeable about customs that the “importer of record”2 shall use regulations, rulings, interpretations and “reasonable care” when: publications, as well as statutes, tariff

1 schedules (including explanatory notes), and Samuel H. Banks, Acting Deputy Commissioner of Customs, An judicial decisions which govern their import Overview of Customs Legislated Modernization, Global Trade transactions. Talk, Vol. 4, No. 3 (1994).

2 Use of the term “importer of record” has special legal significance to accept this obligation. Brokers who act indiscriminately as an “importer of record” for entry purposes for their clients will be in 1484 and liability for failure to use “reasonable care” will fall increasing their exposure to fines if they fail to take appropriate upon a licensed Customs Broker who acts as “importer of record” steps to ensure that reasonable care has been exercised. for consignees who do not qualify as the “importer of record” 3 because they do not own the merchandise, or otherwise choose not 19 USC 1481 (1993). Customs-Notes ... “The importer of record is responsible The HTS comprises approximately for knowing what he/she imports and the 5,000 article descriptions, which appear as terms of the transaction, and bears a legal four digit headings and six or eight digit responsibility for using reasonable care to subheading levels. These descriptions are correctly enter the merchandise.” Customs arranged in 97 chapters which are Service Discussion Draft of the Reasonable themselves and grouped into 21 sections. In Care Standard, dated January 22, 1996. general, the sections of group articles together according to common branches of If the party is not experienced in customs industry and commerce; for example: matters, it is expected that it will turn to  Section I: Live animals and Animal Customs for advice regarding the Products transaction, or retain the services of a licensed customs broker, attorney or other  Section II: Vegetable Products acknowledged expert who has the requisite experience and knowledge of customs laws,  Section V: Mineral Products regulations and procedures.4 The failure to exercise “reasonable care” when carrying  Section XI: Textiles and Textile Articles out its responsibilities will subject the importer of record to civil penalties under 19 In roughly the last third of the system, 5 U.S.C. § 1592. however, commodities are grouped more The Classification Of Goods according to their function or use; for example: Currently, all goods entered or admitted into the United States must be classified in  Section XII: Footwear, Head-gear, etc. accordance with the principles of the Harmonized Tariff Schedules, or the “HTS.”  Section XVI: General Machinery and The HTS has its roots in the "Harmonized Appliances, Electrical Articles Commodity Description and Coding System," which is an international  Section XVII: Vehicles, Aircraft, etc. convention for the classification of goods. The Harmonized Commodity Description It should be noted that the system is and Coding System was developed by the hierarchical. In order for an article to be international Customs Cooperation Council classified at a given subheading it must be (CCC). classifiable at its 6-digit level, and in order to be classified at the 6-digit level it must be Description of the Harmonized Tariff classifiable at the 4-digit level. System This is an important consideration The HTS is a complete product because section and chapter notes, which classification system organized in a have legal effect, delineate the coverage of particular framework and employs a the various sections and chapters. nomenclature system consistent with its Consequently, a given article must fall organizational arrangement. within its particular section and chapter before it can be classified in any one 4 House Report No. 361, 103 Cong., 1st Sess. 1993, page 120. heading or subheading.

5 Id., at 121.

George R. Tuttle ... 2 Customs-Notes ... The HTSUS also contains Chapter 98, If there is more than one tariff provision which is devoted to special classification which describes the imported goods, the provisions relating to articles exported and tariff provision which provides the most returned to the United States, personal specific description is controlling.6 If, exemptions, articles released from customs however, the article consists of a retail set, a custody under bond and other special mixture, or a combination of two or more classification provisions. parts or components, then classification will be determined according to the article, Most, if not all of the sections and many material or component which imparts the chapters are preceded by notes which, like “essential character” of the article, provided the general interpretative rules, form an there are no specific section or chapter notes integral part of the HS and have legal force. which require other-wise.7 The function of the notes is to define the precise scope and limits of subheadings, Under the concept of “informed headings or groups of headings, chapters, or compliance,” Customs expects importers, sections. Generally, the notes provide when classifying goods, to be familiar with general definitions delimiting the scope of a the tariff schedules (including explanatory subheading or heading or the meaning of the notes) and administrative rulings, as well as, particular terms; or they provide a non- statutes and judicial decisions which govern exhaustive list of typical examples; or an their import transaction. exhaustive list of the goods covered by a heading or group of headings; or, finally, Often, however, controversies arise exclusions which list certain articles that between importers and Customs over which must not be included in a particular material imparts the “essential character” of subheading, heading, chapter or section. the article, or which function provides the article with its “principal function.” More The notes also provide various special likely, however, under the Mod Act, rules and serve the important function of importers and their brokers will discover preventing the overlapping of provisions. that two or more provisions may apply to a This is sometimes done by giving a heading, single good. chapter, or section precedence over another heading, chapter or section, and sometimes In either of the above situations, by referring an article from one heading, importers must ensure that the appropriate chapter or section to another. steps are taken to resolve the controversy in a manner consistent with the principles of Principles Of Tariff Classification the Mod Act.

In general, a good is classified under the Ruling Requests & Protests HTS according to either the material from Because of streamlined commercial which it is made or according to its function. operations, Customs and its import If the article is made from more than one specialists no longer review entries on a material, it is generally classified according transaction by transaction basis. This places to the material from which the “essential the burden of compliance on importers and character” of the article is derived. their agents to determine the most Likewise, if the article has more than one function, the function which provides the “principal function” is controlling. 6General Interpretative Rule 1, HTSUS. 7See General Interpretive Rules 1 and 2, HTSUS.

George R. Tuttle ... 3 Customs-Notes ... appropriate classification of the goods prior advise from local import specialists be to entry of the goods. included in the ruling request.

If the importer or agent are uncertain If a party to whom a ruling was issued as to the specific classification of an disagrees with the conclusion, it may, if the article, it is incumbent upon them to bring transaction is still prospective in nature, 12 the matter to the attention of Customs and appeal the decision. Appeals are limited to 13 seek advice as to the preferred legal matters only. Filing an appeal on a classification of the goods. current transaction does not suspend liquidation of the entries in question. While the preferred method of bringing Protest Procedure such matters to the attention of Customs is 8 through the rulings procedure, informal When an importer disagrees with the consultations are acceptable when the classification of merchandise which is the classification is non-controversial. subject of current or past importations, the merchandise should continue to be classified When the importer’s preferred in accordance with the recommendation of classification is contrary to the local advice Customs, and an administrative protest, in provided by Customs, importers are the form and manner prescribed in 19 C.F.R. required to adhered to the advice and Part 174,14 be filed. contest the matter via the protest procedure in accordance with Part 174 of the Under normal circumstances, the filing Customs Regulations. of an administrative protest under 19 U.S.C. 1514 and its denial under 19 U.S.C. 1515 is Requests for rulings must set forth a a prerequisite to obtaining judicial review of complete description of the transaction and the matter before the United States Court of all of the facts associated with the International Trade.15 merchandise,9 and include the requisite certification statement.10 Additionally, A protest may be filed by the importer importers and their brokers are expected to or consignee of the merchandise to contest identify any rulings which are applicable to the any of the following:16 the classification of the merchandise, including those which are both pro and con  Appraised value with respect to the importer’s preferred classification. Where there are rulings  Classification and rate of duty which suggest that the merchandise should be classified differently than the importer’s  All charges or exactions suggested classification, the rulings must be 11 distinguished from the applicable situation.11 Customs Service “Discussion Draft” Of Reasonable Additionally, it is recommended that any Care Standard, dated January 22, 1996. 12Proposed Section 177.11. 8 See 19 C.F.R. § 177 for procedures regarding the 13Id. filing of ruling requests. Section 177 has also undergone a significant rewrite. See Custom 14Part 174 of the Customs Regulations regarding Discussion Draft regarding administrative rulings. Administrative protests is also undergoing a 919 C.F.R. 177. substantial rewrite. 1528 U.S.C. § 1581(a). 10Proposed Section 177.2(b)(7). 16 See 19 U.S.C. § 1514

George R. Tuttle ... 4 Customs-Notes ...  Exclusion of merchandise or a demand  The matter involves new facts or for redelivery arguments not previously considered in the previous decision.  Any issue associated with the liquidation or reliquidation of an entry Decisions to forward a protest for further review are made by the Port in which  The refusal to pay drawback the protest is filed. The decision, however, is made by a Customs officer who did not  The refusal to reliquidate on account of participate in the earlier decision which is clerical error or mistake of fact (19 the subject of the protest. U.S.C. 1520). 19 U.S.C. 1515(c) also provides an By law, all protests must be filed appeal process to contest the improper within 90 days of the date of liquidation of denial of a request for further review. the entry in question (classification, Requests to set aside a denial of a request for valuation or liquidation) or date of decision further review must be filed with Customs of the matter if it does not involve the headquarters’ within 60 days of notice of the liquidation of the entry. denial of AFR treatment. Requests To Correct Clerical Requests For Further Review Errors & Errors Of Fact In general, protests will be decided at Not withstanding the fact that a valid the port level upon on principles and protest was not filed within the time period precedents previously enunciated by provided by 19 U.S.C. 1514, an importer or Customs head-quarters. Where appropriate, consignee may, within one year from the however, and if requested by the importer, a date of liquidation, request reliquidation of decision on a protest will be made by an entry to correct a clerical error, mistake Customs Headquarters in Washington D.C. of fact or other inadvertence not amounting Requests for further review must be made at to a mistake in the construction of a law and the time of filing the protest. adverse to the interests of the importer.17 Further review will only be granted Generally, errors associated with the where it has been established that one of the classification and duty rate applicable to following conditions exist: merchandise are un-correctable under §  The challenged decision is inconsistent 1520 on account of the error being made in with a Customs Ruling or other decision the construction of a tariff provision, the by a different Port; applicability of which is a matter of law not fact. On the other hand, there have been a  It involves legal or factual questions not number of recent case where the court has previously ruled on by Customs or the found reliquidation appropriate under 1520 courts; for errors in classification where the error relates to the nature of the merchandise, and  It involves an issue Customs refused to not its classification. consider when presented with a request Additional Information for internal advice; or

1719 U.S.C. 1520(c)(1).

George R. Tuttle ... 5 Customs-Notes ... For additional information on how to correctly San Francisco, CA 94111 classify imported articles or to contest a Customs Tel. (415) 986-9780 Service decision, contact: Fax (415) 986-0908 Email- info @ tuttlelaw.com George R. Tuttle Law Offices Three Embarcadero Center Suite 1160

George R. Tuttle ... 6