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.

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.