Thursday, June 17, 2010

A Customs Fairy Tale and Importers Nightmare

Once upon a time, there was a large importer of computers and parts. The computer equipment lived in a large brick warehouse called a foreign trade zone (FTZ). When the computer equipment left the FTZ, the importer entered the secondary batteries for notebook computers as automatic data processing machines under 8471, which was the same HTS code as the notebooks. The classification carries a free rate of duty. The importer was very happy!

One day while the importer was minding their own business, Customs and Border Protection Officers came knocking on the door. The officers demanded that the importer change the classification of the batteries to other storage batteries under 8507 and a 3.4% rate of duty. The importer was not happy!

The importer tried to explain that customers ordered the notebook containing the primary battery and then had the option of ordering additional items such as the secondary battery. The standard notebook package contained the computer, primary battery, power cord and operator manuals. When secondary batteries were ordered, they were tossed in the box and classified under the same provision as the computer.

The officers didn’t like this explanation and a big argument ensued. The importer and officers could not come to an agreement, so they decided to let a judge decide what they should do. The judge took out his rulebook and cited the General Rules of Interpretation, and something about common meaning. He also used a big book call the Explanatory Notes to help him decide. He told the importer and officers if they didn’t play nice together that he would throw that big book at them!

The importer offered two reasons why their classification was correct. First, they argued that the secondary batteries were functional units of the notebook. Just in case the judge didn’t like that idea, the importer added that the batteries should be classified as a component of the retail set under GRI 3(b). The importer was hopeful!

The judge took these arguments into consideration and tossed them both out. The batteries couldn’t be functional units because they are not essential to the performance. The primary function of the computer is served by the primary battery that is already encased in the computer. In reviewing the argument that the batteries are a component of a retail set under GRI 3(b), things started to look better for the importer, as the secondary battery helps meet a particular need or carries out a specific activity required by GRI 3(b). However, the judge dug a little deeper and discovered that 3(b) requires that the merchandise be “put up” together with the other components. The importer argued that the batteries were put up with the rest of the components, but the judge got out the big book, which explained that “put up” means that the goods are offered together for retail sale or displayed or shown together for retail sale. The batteries were offered for sale as individual units and customer could purchase one or more secondary batteries, along with other items when purchasing the notebook. The additional items were tossed in the box that already contained the computer. The judge ruled that the batteries should be classified under 8507 and told the importer and agents to play nice in the future.

The End!

HERE to read the true story this fairy tale was based on.

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