Protecting your interests

U.S. Customs Law

INTRODUCTION

The power to impose tariffs come from clause 1 (taxing power) and clause 3 (commerce power) of article 1, section 8 of the constitution. Initially tariffs were used to raise revenue but today they are really used to regulate imports. The mission to enforce the customs laws and regulation falls on the U.S. Customs Service, now called Customs and Border Protection. The responsibilities include
- inspection and clearance of carriers, persons and merchandise;
- classification and valuation of imported merchandise;
- assessment and collection of duties on imported merchandise;
- detection and prevention of smuggling; and
- enforcement of import quotas and other restrictions.

The Customs Modernization Act of 1993 (Title VI of NAFTA, PL 103-182)) dramatically changed how CBP treats importers. The Customs Modernization Act placed the legal responsibility on the importer to declare value, assign classifications and determine rate of duty on the goods. The cornerstone of the act is the concept of ‘informed compliance’ which sets a standard of reasonable care for how the importer handles its legal responsibilities. Informed compliance requires the importer to use “reasonable care” in fulfilling CBP requirements. Informed compliance does shift much of the burden to the importer but it can help the importer achieve speedier clearance especially when the importer has a history of voluntary compliance. In addition, after September 11, 2001, the Customs Service merged with Border Protection Service into Customs and Border Protection, security regulations dramatically increased often creating delays. Therefore, the importer is now obliged to follow CBP laws and regulations of face harsh penalties.

“Reasonable care” is not defined but the legislative history indicates the importer should seek guidance from a pre-import ruling, using a Customs broker or other trained staff, or scientific experts where relevant. Good faith mistakes will not be penalized but negligence, gross negligence or fraud will be penalized under section 592 of the Tariff Act. For example, blatant mis-classifications of a product or importing goods with an unlicensed trademark. Here is a link to a Custom Service publication explaining the reasonable care standard and helpful checklists for importers. Notice prior to imposing a penalty for fraud must be provided to the importer if the penalty exceeds $1,000. The notice must state the grounds of the penalty and the supporting facts (19 CFR 171.1) Customs Service must consider and responses to the notice and notify the importer of its decision. The importer may seek a review under Section 618.

Note: Section 333: of the Uruguay Round (GATT) Implementation Act (19 USC 1592a) authorized the Secretary of Treasury to publish a list of foreign producers, manufacturers, suppliers, sellers, exporters or other foreign persons found to have violated section 592. There are special requirements for “reasonable care” when importers purchase from so named entities.

ENTRY PROCESS
A shipment has not ‘entered’ the country until after it has arrived at a port of entry, shipment is authorized by CBP and duties have been paid. The goods cannot be shipped to its final destination until these steps are completed. First, proof of ownership of the shipment is required. This is usually a bill of lading or waybill. If a customs broker is used, a power of attorney will be needed to give them authorization to act on your behalf. (CBP org chart and ports of entry list)

Upon arrival in port the articles are under the jurisdiction of the Customs Service. A customs inspector will need a
- delivery release;
- commercial invoice
- packing list
- other product specific documents such as chemical testing or scientific certifications.

Most of the documentation process can no be done electronically through the Automated Broker Interface (ABI). This is one of the advantages of using a customs broker unless you are a large volume importer. The importer has 15 days from arrival to file entry documents at the POE:
- Entry manifest (CBP Form 7533)
- Evidence of right to make entry
- commercial invoice or pro forma invoice if no commercial invoice
- packing lists if applicable
- other related documents as applicable
- surety is needed showing proof of bond for CBP expenses (many customs brokers permit the use of their bond for this purpose)

The customs inspector will do a physical examination either by sampling of full inspection depending of various factors. Customs Border Protection will inspect for such things as
- value of goods and duties
- country marking requirements
- prohibited articles
- accurate invoices
- accurate quantities
- illegal narcotics

Upon a satisfactory examination, the inspector will authorize the release of the shipment and returns the original entry documents to the importer or customs broker. The broker must then file documents for customs classification and pay any applicable duties. Incorrect entry documentation such differences in quantity of characterization of the shipment are subject to penalties if CBP believes there was fraud or gross negligence (essentially violations of the informed consent standard (discussed below)). (see e.g. 19 USC 1592) Sometimes other agency requirements must be met before CBP will release a shipment, for example, the Food and Drug Administration.

Allowances: Merchandise damaged in-route without commercial value upon arrival are deemed a “nonimportation” and no duties are assessed. There are special procedures for partial damage and for perishable goods such as fruits and vegetables. Also, the concept of ‘tare’ give allowance for packing material when assessing weight.

Commingling: If products are packed together in such as way that CBP cannot easily determine the quantity or value of each product, then the total lot will be levied at the highest rate applicable unless the importer separates the lot under CBP supervision. This commingling rule will be waived in certain circumstances. Also, sometimes there are predefined tariffs for certain commingled products.

Tip: Help CBP help you: commingling should be minimized, everything should be clearly marked outside and inside, pallets should be used.

Immediate Delivery/Postponed Delivery:
In limited circumstances Customs and Border Protection permits immediate release of shipments by filing a special permit CBP Form 3461 prior to arrival at POE. Conversely, should an importer wish to warehouse a shipment rather than take delivery, CBP permits a shipment to be warehouse in a authorized bonded warehouse for up to 5 years. (see section 311 of the Tariff Act (19 USC 1311)).

Trade Agreements

In the aftermath of the Great Depression, there was a push for multilateral trade agreements because many believed protections trade wars help push the world into a depression. This resulted in the General Agreement on Tariffs and Trade (“GATT”) of 1947. GATT sets out the rules of trade between member nations. GATT introduced two major ideas: most-favored nation status and dumping. Later, the World Trade Organization (WTO) was created to give GATT more formal structure. WTO members agree to accept the 1994 GATT agreement and other agreements which may be selectively accepted (WTO Annex 4) WTO members are to follow a uniform set of trade rules and procedures for such matters as trade disputes. (WTO member list)

The United States still enters into many other trade agreements. One of the most significant in recent years was the North American Free Trade Agreement (NAFTA). NAFTA eliminates, over a 10 year period, almost all tariffs on goods made in North America. NAFTA contains extensive rules to determine what is considered made in North America (see Article 401 NAFTA). This a complicated issue because so much final assembly is done in Mexico for finished products imported into the United States. Essentially if the a “substantial transformation” occurs then the final product will qualify as North American.

The U.S. also has many free trade agreements with individual countries. Between 2003 and 2010 the U.S. concluded FTAs with these countries: Australia, Bahrain, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Morocco, Nicaragua, Oman, Panama, Peru, Singapore, and South Korea.

GENERALIZED SYSTEM OF PREFERENCES (GSP)

THE GSP is a system of implementing most-favored nation status permitted by GATT. It lists 3,400 categories and states which are duty-free (‘preferred’) from all or certain countries. The list changes as new treaties are signed and old ones expire. The GSP programs can be found the U.S. International Trade Commission website.

GSP entitlement requires the following:
- merchandise must be a “product of” a beneficiary country, meaning
1- goods are wholly the growth, product, or manufacture of a beneficiary country, or
2- if materials are imported into beneficiary country and transformed in beneficiary country a statement to this effect must be included on the commercial invoice.
- the goods must be imported directly from the beneficiary country
- the cost or value of materials produced in the beneficiary country and/or the direct cost of processing performed there must be at least 35 percent of the appraised value of the goods.

There are additional requirements for many countries based on individual trade agreements.

Harmonized Tariff Schedule
The Harmonized Tariff Schedule is a directory of all the tariff classifications and their corresponding tariff rates including any preferential treatment under GSP. The Harmonized Tariff Schedule requires some learning but is vital for any importer. The schedule is online at the U.S. International Trade website along with helpful resources on how to use it.

Conclusion
CBP requirements can be daunting for the uninitiated. However, if taken step-by-step the requirements are manageable. If you are a small importer you most likely will be using a customs broker who can handle these requirements. The key is to do this BEFORE the shipment leaves the supplier.