Customs Announces Expanded Enforcement in Global Supply Chain
Legal Alerts
4.04.11
Recently, the Commissioner of U.S. Customs and Border Protection announced the agency’s intention to place greater emphasis on trade enforcement in addition to the agency’s security-related duties. Although these remarks focused on deliberate evasion of tariff duties, they should serve as a reminder to importers of their obligations across the broad spectrum of Customs importation requirements and the potential penalties for noncompliance. In today’s increasingly global supply chain, two of the most common areas of potential error and resulting penalties are tariff misclassification and country-of-origin marking.
For many products, and particularly parts of products, classification can be complex, confusing, and subject to multiple reasonable interpretations. Typically, several different classifications may seem suitable for the subject importation, with substantially different duty rates depending on the classification chosen. A component of an automotive electrical system, for example, may be classified as a part of an electrical system, an automotive part under the parts classifications for motor vehicles, or as a specific article in its own right if the article is expressly called out in the Harmonized Tariff Code (HTS). Which classification is most appropriate (and the correct one in Customs’ view) will depend on application of the HTS rules of interpretation, as supplemented by various extrinsic aids, including court decisions and Customs rulings.
Country of origin presents its own unique set of issues. The Customs marking statute provides that, unless excepted, every article of foreign origin (or its container) imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. Thus, under this explicit language, every article itself or its container, unless specifically exempted from the marking requirement, must be properly marked with country of origin at the time of U.S. importation.
Country of origin is the country of original manufacture, production or growth of the article. Generally, the original country of origin will change only if the product has undergone a "substantial transformation" into a new or different article in another country. (Rules of origin for products imported from NAFTA countries differ somewhat.) "Substantial transformation" means the article has undergone a transformation creating a "new and different article, having a different name, character or use." In today’s global supply chain environment, where products may undergo manufacturing or related operations in multiple countries prior to U.S. importation, application of the "substantial transformation" principle may require detailed analysis of the physical processing done in each country and related costs. Often, as numerous Customs rulings attest, the result of this analysis may dictate that the country of origin for Customs purposes is quite different than one might expect based on the condition of the final product as imported.
Although tariff classification and country of origin are legally distinct constructs, they may intersect in critical ways that have substantial economic consequences for the U.S. importer and its customers. Many articles are imported into the U.S. under various preferential duty arrangements involving the U.S. and other countries. To qualify for such preferential import duties, the U.S. importer must establish that the article is a product of the country to which the preferential duty treatment applies. In some instances, the preferential duty arrangement will be limited to certain tariff classifications, in which case the importer must establish both that the article qualifies as originating from a qualifying country and that the tariff classification is among those eligible for preferential duty treatment from that country.
Importers are required to exercise "reasonable care" with respect to their imports. Depending on the nature and gravity of the violation, penalties can range from one-to-four times the total amount of duties that would otherwise have been due if the article had been properly classified or can be assessed on the value of the article. Since the Customs statute of limitations is five years, articles entered improperly over an extended period can result in significant total penalty liability.
Dykema attorneys can review importation issues with you to reduce liability exposure and can also assist you in seeking more favorable duty treatment for your imported products. Please contact Paul M. Laurenza at 202-906-8646 for more information.
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