U.S. Customs Ruling Concerning Country of Origin for Section 301 Purposes

On September 13, 2018, U.S. Customs and Border Protection announced a new ruling that will be pertinent to any company seeking to shift production from China to Mexico (or Canada) in hopes of mitigating the effect of Section 301 duties. The most important take-away is that although the NAFTA Marking Rules (19 C.F.R. Part 102) are used to determine the country of origin of articles imported into the U.S. from Mexico for marking purposes, the traditional substantial transformation test is used to determine the country of origin of articles for Section 301 duty purposes.

CBP illustrated the application of the ruling using the example of parts of a motor imported into Mexico for assembly. The assembly operation in Mexico was sufficient to satisfy the applicable NAFTA Marking Rule and thus for marking purposes, the finished article was deemed to be a "product of Mexico." However, CBP went on to say that the traditional substantial transformation test is used for purposes of "antidumping, countervailing, or other safeguard measures[.]" CBP then applied the traditional substantial transformation test to the facts and reached the conclusion that the Mexican assembly operations were not sufficient to confer origin and, therefore, the finished motor imported into the United States was a "product of China" for Section 301 purposes. So, in short, the product had to be marked to indicate that it was of Mexican origin, but the importer had to pay the Section 301 duty applicable to Chinese-origin articles.

Importers should be aware of what CBP’s analysis indicates: while the traditional substantial transformation test and the NAFTA Marking Rules are intended to rest on the same origin principles, they do not always produce the same result due to the nature of the tests. This is largely because the NAFTA Marking Rules are objective and the substantial transformation test is more subjective. Further, where Section 301 is concerned, the traditional substantial transformation test must be used even if the goods are imported from an FTA-partner country such as Mexico, Canada, Singapore, etc. Thus the NAFTA Marking Rules may be useful to that analysis, but cannot be considered determinative. In some cases, then, a company might find that an article marked as a product of Mexico could still be subject to duties applicable to products of China.

Mistaken Importer of Record Held Liable for Duties After Liquidation

Lifestyle Furniture has been pursuing two separate federal court cases in an effort to avoid paying antidumping duties, which are being assessed because it was incorrectly listed as the importer of record on an entry.  According to CBP ruling HQ H157616, Lifestyle Furniture was listed as the importer of record for an entry to Puerto Rico in 2005 and is liable for antidumping duties of in the amount of 216.01% for wooden bedroom furniture from China.  

According to Lifestyle, Starcorp, the Chinese exporter, was supposed to be listed as the importer of record, but the customs broker listed Lifestyle Furniture by mistake.  Starcorp hired C.H. Robinson as its broker, but entries subject to antidumping duties were not eligible for remote filing under national permits.  Therefore, C.H. Robinson brought in Nestor Reyes, a local Puerto Rican customs broker to file entry.  Reyes had power of attorney (POA) for Starcorp, but not for Lifestyle.  Reyes proceeded to file the entry, but listed Lifestyle as the importer of record in error.  Both C.H. Robinson and Reyes have admitted fault in this error, but claim no responsibility for the duties owed.

Although Lifestyle protested paying the antidumping duties due to error, CBP advised that Lifestyle is liable because it is the parties’ responsibility to determine who will be listed as importer of record.  Because Lifestyle is actually an eligible importer of record as the consignee, CBP is not responsible to determine which eligible party to accept entry from.  While CBP sent a notice of liquidation to Lifestyle one month prior to liquidation, Lifestyle stated that it was not notified until receiving the final bill of liquidation, arguing it was not given time to correct the entry.  CBP held that it is the responsibility of the importer to maintain processes of checking entries to ensure that all entries with their name as importer of record are correct if they do not want to be held liable for errors, such as these.  Furthermore, Lifestyle, nor CBP can go after Starcorp for the duties owed because it has gone out of business.   

Lifestyle Furniture has now filed a lawsuit against CBP regarding its initial protest in the Court of International Trade, as well as seeking a ruling against both Reyes and C.H. Robinson in the district court of North Carolina.  At this time, neither case has been heard before the courts.

Aaron Ambrite, Extern, Global Trade Expertise

Supreme Court Denies to Hear Trek Leather Case

On May 26, 2015, the Supreme Court denied a petition to hear an appeal of Trek Leather, firmly establishing the lower court’s decision to hold corporate officers and employees of companies listed as the importer of record liable for customs violations.  The denial comes amidst a long list of other cases denied without explanation or comments.  The Supreme Court’s denial effectively lets stand the U.S. Court of Appeals decision finding that Harish Shadadpuri is personally liable for the corporation’s failure to declare assists on entry documentation. 

Although Shadadpuri was not listed as the importer of record, the U.S. Court of Appeals found him personally liable because he introduced goods into the United States by providing invoices that did not report assists provided to the manufacturer.  The court found that the transmission of the inaccurate invoices to the customs broker amounted to the “introduction” of the merchandise into United States commerce under 19 USC 1592.  Shadadpuri argued that he could not be held personally liable for a corporate importer of record unless he was found to have personally “aided and abetted” the violation, but, ultimately, the court sided with the government.

The decision has garnered significant criticism from importers and their representing bodies as the judgment is expected to dramatically expand the scope of liability for corporate executives, compliance officers, and other employees involved in daily import transactions or transmissions.  One such representing body, the American Association of Exporters and Importers (AAEI), filed a brief in support of Shadadpuri stating that the court’s decision has effectively lowered the government’s burden of proof for finding a natural person liable for customs violations by eliminating the requirement for the court to prove fraudulent intent. Further, AAEI feels that the term “introduce” has been wrongly reinterpreted to include “all activities to bring goods to the threshold of the process of entry,” so that, in effect, “every negligent entry by a corporate importer of record will always be accompanied by a negligent introduction.”  AAEI is concerned that this court decision will increase the trade industry’s risk and cost of doing business due to subjecting import compliance managers to massive penalties.  Some employees may not wish to work in jobs associated with higher personal risk of liability, or employees might seek additional compensation for their duties.  Further, AAEI suggested that some importers might choose to allow foreign suppliers to act as non-resident importers of record in order to have import transactions handled outside the reach of US jurisdiction.

Importers anxiously awaiting a Supreme Court hearing on Trek Leather are likely to be disappointed by the denial as the decision will have definite repercussions for the trade community.  Importers will surely continue to watch other cases to determine how far the court will take the Trek Leather case in applying it to other importers.   

Aaron Ambrite, Extern, Global Trade Expertise

CBP Rules Time Limit for Liquidation Begins Day After Triggering Event

In Headquarters Ruling Letter H173819, dated September 12, 2014, Customs and Border Protection ("CBP") determined that it had correctly liquidated an entry made by Coaster Corporation of America within the six-month required timeframe that starts the day after the triggering event.

Coaster Corporation imported furniture from China in 2008.  At the time of entry, Coaster paid antidumping duties of 7.24%.  The antidumping order dated January 4, 2005 regarding the imported product actually set the duty at 6.65% and instructed CBP to suspend liquidation of all entries of the subject merchandise.  On August 18, 2010, the Department of Commerce published the Federal Register dictating a new antidumping duty of 216.01% for the subject merchandise.  On February 18, 2011, CBP liquidated the subject entry and assessed the 216.01% antidumping duty.

“CBP is obligated to suspend the liquidation of entries once Commerce makes an affirmative preliminary determination of dumping pursuant to 19 U.S.C. § 1673b(d)(2).  Once suspension is removed, 19 U.S.C. § 1504(d) requires CBP to liquidate the entry within six months after receiving notice of lifting of the suspension, unless liquidation is properly extended.” HQH173819.  If CBP does not liquidate within six months of receiving notice, the entries are deemed liquidated at the rate of duty declared by importer.  The court has determined that publication of the final results of the Federal Register constitutes notice from the Department of Commerce to CBP that the suspension of liquidation on entries subject to the administrative review is removed.  

Coaster argued that CBP did not liquidate “within” the required six-month time period after receiving notice from the publishing of the Federal Register and that the entry should be deemed liquidated at the 7.24% duty initially entered.  Coaster asserted that the statutory time limit expired at the end of the day on February 17, 2011, which is six months after the Federal Register was published on the August 18, 2010.  CBP, however, ruled that the end of the day on February 18, 2011 was the last day to liquidate within the six-month required timeframe.  CBP declared that both the courts and the CBP have consistently calculated statutory deadlines starting the day after the triggering event and including the entirety of the deadline day.  CBP ultimately concluded that the end of the day on February 18, 2011 was the last day to liquidate within the six-months because the time limit begins the day after the triggering event.  

Aaron Ambrite, Extern, Global Trade Expertise