Tuesday, April 26, 2011

Are You Filing a Valid Protest with CBP?

Last month the U.S. Court of International Trade sided with the importer in Estee Lauder v. United States, Slip Op. 11-23 (CIT March 1, 2011), in a decision that should remind a company fighting with U.S. Customs and Border Protection (CBP) how important it is to sufficiently describe products at issue in a protest.

Estee Lauder protested how CBP liquidated entries of its cosmetic kits. CBP classified the kits according to their individual components, rather than as the single component that gives the kit its essential character under GRI 3(b). In its protest, the company asserted that under GRI 3(b), the kits should be classified under HTSUS heading 3304, a duty-free provision for beauty or make-up preparations. Although the protest identified the contents of only one type of cosmetic kit, Estee Lauder also named entries containing a second type of kit. The second type of kit, which was not described in the protest, included a container for holding make-up brushes and was classified under HTSUS heading 4202, dutiable at 20%.

Pursuant to CBP’s request, Estee Lauder provided samples of both types of kits. CBP denied the protest by non-response under the accelerated disposition procedure. Upon denial, the company filed suit with the CIT, challenging the classification of the kits. CBP moved the court to dismiss the case for lack of subject matter jurisdiction, arguing that Estee Lauder failed to file a valid protest because the second type of kit was not specifically described in the protest.

By statute and regulation, a protest is valid when it “set[s] forth distinctly and specifically . . . each category of merchandise affected” and contains “a specific description of the merchandise affected.” 19 U.S.C. § 1514(c)(1) and 19 C.F.R. § 174.13(a). The U.S. Supreme Court has explained that this requirement exists to “compel the importer to disclose the grounds of the objection at the time when he makes his protest.” Davies v. Arthur, 96 U.S. 148 (1877). A protest must show the importer’s intent and adequately notify Customs of the protest’s “true nature and character.” Id. A century later, the Customs Court also explained that “[h]owever cryptic, inartistic, or poorly drawn a communication may be, it is sufficient as a protest . . . if it conveys enough information to apprise knowledgeable officials of the importer’s intent and the relief sought.” Mattel v. United States, 72 Cust. Ct. 257, 262 (1974).

The CIT denied CBP’s motion to dismiss, holding that Estee Lauder sufficiently described the kits in the protest and filed valid protests. Although the court agreed with CBP that it was unclear which items were included in the protested kits when comparing the protest description with the entry documents, the court found that this discrepancy was not “an insurmountable obstacle” to CBP deciding the protest. The CIT held that “[p]rotest sufficiency does not turn on whether Customs can decide the entire claims based solely on information contained in the papers submitted.” Slip-Op 11-23. Rather, “the protest is the tool whereby the collector seeks the precise facts.” Id. (citation omitted).

What can we take away from this case? Although Estee Lauder successfully defended the government’s attempt to kick the case out of court for lack of jurisdiction, it may have avoided a jurisdictional argument all together had there been no question about the merchandise included in the protests. Estee Lauder now must begin the fight on the substance on its argument: what is the correct classification? The company basically added an additional layer of litigation because it filed an unclear protest.

A good protest thoroughly explains why the classification it seeks is correct as a matter of law and fact, and why the classification CBP applied at entry was incorrect. One should not simply ask for reliquidation under the tariff provision you think is right without providing arguments why you are right. It is important to:
• Describe the product
• Set forth the specific issue
• Provide and analyze the law
• Apply the law to your facts
• Explain why your classification is correct
• Explain why CBP is wrong
• Conclude

Following these simple rules will lead to a better and more successful protest.

Thursday, April 21, 2011

Expansion of Documentation Permitted to Substantiate Duty-Free Claims under FTAs

U.S. Customs and Border Protection (CBP) recently issued a memorandum to its field regarding documents used to verify duty-free treatment of textile and wearing apparel under free trade agreements (FTAs). In this new memo, CBP has stated that it will now accept supporting documentation beyond a manufacturer’s affidavit to substantiate a trade preference claim. There had been inconsistent treatment among the ports regarding what documents were accepted in FTA verifications. Some ports were flexible, while other ports would accept only a sworn affidavit from the foreign factory. The confusion likely stemmed from a 2007 memorandum regarding manufacturer’s affidavits. The 2011 memo addresses this problem, while expanding the types of documents permitted to substantiate a duty-free claim under a FTA.

Most important, this directive signals flexibility in what documentation Customs will accept in FTA verifications. It should also prevent Import Specialists from the continued denial of claims based predominately on the format of the manufacturer’s affidavit. Of course, regardless of whether an importer relies on an affidavit or other documentation, the following information is still required:

• Statement of person with direct knowledge of the production;
• Identification of the actual production location;
• Legible, printed name of contact person, including telephone number, mailing address or email address of that person;
• Description of the goods, including fiber content, yarn count, fabric type, and commercial invoice or purchase order, as applicable.

Flexibility should help reduce risk to an importer. There is exposure to an importer when it is unable to substantiate a duty-free claim under a trade preference program to an Import Specialist’s satisfaction. Goods imported under a FTA are conditionally duty-free, meaning that if Customs denies the FTA claim, the goods will no longer be duty-free. CBP would rate advance the goods, seeking duty owed plus interest, as though they were not imported under a FTA. However, by that time, which can be several months after the entry of the goods, the merchandise typically has already been sold—thereby eliminating the ability to pass along the additional cost in duty to the customer.

The moral of the story is whether using a manufacturer’s affidavit or other document to substantiate duty-free treatment under a FTA, an importer must ask its manufacturer’s the right questions and must maintain good records to supply to CBP.

Tuesday, April 19, 2011

Final Rule Regarding MIDs for Textile and Apparel Importers

Importers of textile and apparel products may face higher levels of reasonable care now that U.S. Customs and Border Protection (CBP) has adopted (with some changes) the interim amendments to its regulations relating to the country of origin of textile and apparel products. Specifically, CBP eliminated the Textile Declaration, which used to accompany textile and apparel imports, but now requires importers to provide a manufacturer identification code (MID), defined as the company performing the operations that confer the country of origin of the imported article under sections 102.21 or 102.22. The MIDs must appear on CBP Form 3461 (Entry/Immediate Delivery), CPB Form 7501 (Entry Summary) and all electronic data submissions requiring manufacturer information.

CBP has stated that obtaining the MID will assist CBP, who has the responsibility of preventing entry of goods with false origin information, to verify the country of origin, leading to better enforcement of trade in textile and apparel products. This may be true, but this amendment also imposes increased obligations on the textile and apparel importer to exercise reasonable care to ensure that it is providing accurate manufacturer information. Under the revised regulations, CBP has the power to reject the entry, or take other appropriate actions, which may include civil penalties under Section 1592, if CBP is not convinced that the importer exercised reasonable care in providing the MID.

There are several situations where meeting this requirement may prove difficult for importers. For example, it may be difficult to determine the MID in those situations where the textile or apparel product is made in multiple countries. In these cases, it is imperative for the importer to ask at the time of ordering for the name and address of the manufacturer, information about the origin of fabrics and information about the work performed by the manufacturer. If CBP seeks additional information about the MID, CBP will expect the importer to produce documentation to demonstrate the information it provided is accurate. Failure to do so may constitute a failure of exercise of reasonable care and lead to civil penalties.

Second, verifying MID information may also be difficult where the U.S. importer is purchasing from a seller who is not the manufacturer, but rather serves as the intermediary and may not want to disclose the MID for fear that the buyer may contact the manufacturer directly and cut the intermediary seller out of the transaction. CBP has stated that this is not a sufficient reason to provide incorrect MID information. Importers are required to know the manufacturer, regardless of whether they are purchasing directly from the manufacturer or through an intermediary. Failure to provide MID, or providing inaccurate MID for this reason could lead to civil penalties.

Finally, under section 102.21(e)(2), the country of origin of some products depends upon where “the fabric comprising the good was both dyed and printed when accompanied by two or more of the following operations….” Under this scenario, it will be difficult to determine the origin-conferring operation if more than one manufacturer performs these operations within one country. CBP has indicated that in this situation, it will consider the entity performing the final step of these origin-conferring operations as the MID. CBP has recommended that importers seek a ruling if the company is unsure about which company confers the country of origin.

Thursday, April 14, 2011

The Impact of the Food Safety Modernization Act on Importers

To Inspect, or not to inspect… that is the question. Earlier this year, President Obama signed into law the Food Safety Modernization Act (FSMA or the Act), with the goal of shifting the focus of the Federal Drug Administration (FDA) from to responding to food contamination problems to preventing them. Yet, this week, the president’s budget proposal includes cuts to nearly all food inspection programs, including overseas inspections of foreign food manufacturers that supply U.S. importers of food. Does anyone else see the contradiction here? FSMA, which amends the Federal Food, Drug and Cosmetic Act, may have a huge impact on importers of food products. Overall, the Act contains five major elements: (1) a mandate to the FDA to establish prevention-based controls for the food industry; (2) inspections and compliance, including specifications on how the FDA should inspect food producers; (3) imported food safety, including requirement that food importers must verify that their foreign food suppliers possess sufficient preventive controls to ensure safety; (4) mandatory recall authority to the FDA for all food products and; (5) partnership among federal, state, local and foreign agencies to work together to enhance food safety. Of significance to food importers is the third element above—imported food safety—and how the requirements under that section will increase the burden, both in time and money on importers of food products. Under FSMA, food importers must have internal controls that ensure that the food they are importing into the United States is safe. One of the largest potential burdens on importers under this new requirement is the Foreign Supplier Verification Program (FSVP). Under the FSVP, importers need to verify that their foreign suppliers also have adequate public health protection controls in place that meet the U.S. standards under the new law. The FDA describes such verification as “risk-based” that should focus on validating that imported food was not contaminated or adulterated in any way and that the imported food was produced in compliance with proper FDA controls. However, left open for interpretation is what constitutes “risk.” Is it country of origin based? Is it food product based? Another open issue is what an importer needs to do if it finds that the supplier does not have adequate controls. Is it permitted to import food from that supplier while the supplier improves its controls and procedures? Or, must the importer stop production at that plant? Does it depend on what the problem was? What happens if the importer decides to continue to import while the foreign manufacturer improves its procedures and something is contaminated—is the importer liable too? Finally, the FDA has some additional duties under FSMA too. It now has the power to conduct foreign inspections and can deny an entry of a shipment of imported food if the manufacturer does not permit FDA inspection. This brings us back to the beginning. The whole purpose of the law is to protect the public, which does involve cooperation between importers and the FDA, and between importers and their foreign suppliers. However, given that the Obama administration has just proposed to cut the FDA budget for foreign supplier inspections, it is likely that the FDA is going to struggle to do its part under the Act, thus placing even more burden on the food importer.

Wednesday, April 6, 2011

April 2011 - Preliminary Answers

Determining potential answers for the broker's exam questions after the test is different in a few key ways from taking the test, but none is more key than the fact that we have more than four hours. That means that we can take the time to research as much as we need to in order to get the most accurate (though still unofficial) document possible to all of you. This first attempt is not 100% complete, but this will be corrected and more answers added as new updates are posted.

Click here for our preliminary unofficial exam answers.

As always, remember that these answers represent only our opinion. The official answers will come from Customs and Border Protection in a few weeks and will be posted on their site. In other words, we probably answered the majority of the questions correctly, but these answers do not guarantee whether or not you've passed; it merely is presented as a helpful tool for broker students who are (quite understandably) eager to have any idea of where they stand.

If you would like to share your answers, explanations and comments, we invite you to post them as comments to this blog; however, we ask that comments be professional and to the point. We cannot respond to all of the comments, but this forum will provide you an opportunity to converse with each other.

Happy browsing!