CBP, Enforcement Arm of Federal Agencies

There are several US agencies which regulate articles of commerce. Among them are the FDA and the Alcohol and Tobacco Tax and Trade Bureau (TTB) which regulate the named products in the agency name and the Consumer Product Safety Commission (CPSC) which regulates products intended primarily for children. The CBP website maintains a list of these Partner Government Agencies (PGAs) and here is the link:


https://www.cbp.gov/trade/basic-import-export/e-commerce/partner-government-agencies-import-guides


This blog article will focus on just one agency, the Department of Agriculture (USDA). DHS and USDA have signed an inter-agency Memorandum of Agreement setting forth the details
by which CBP will act as the enforcement arm of the USDA at the border.

CBP agriculture specialists are on hand at select ports to inspect shipments of imported products and ensure that the required permits, sanitary certificates (for animal products), and phytosanitary certificates (for plant products) accompany each shipment. CBP will also determine whether entry of the agricultural product is restricted because of a published quota.

An examination of two rulings will show the types of issues that can arise in an entry of agricultural merchandise.

Imported Parmesan Cheese – HQ 086634

The first is ruling no. HQ 086634 (6/5/90) and concerns the entry of parmesan cheese made in Canada, New Zealand, and Italy blended into a single cheese product in Canada. The cheese is classifiable in subheading 0406.20.5020 of the HTS, a subheading subject to USDA licensing requirements and quota restrictions under subheading 9904.10.45.

CBP found that the blending of the three cheeses, one part from each of the named countries, did not substantially transform them into a new product in Canada that possessed Canadian origin for tariff and quota purposes since the beginning and end products were both parmesan cheese.

Under USDA licensing requirements at the time of entry, the Canadian cheese alone could have been imported under a USDA license and would be subject to the “other” absolute quota quantity limit of 13,063 kilograms per year. The remaining cheeses, however, could not enter the United States from Canada because the USDA regulations required a Through Bill of Lading and an invoice from the seller in the country of origin to a purchaser in the United States. Any interruption in the flow of the goods, as in the situation within the ruling, was considered a “diversion” after which no license could be issued.

Cattle Feed Supplement Imports – HQ 956192

The second ruling, no. HQ 956192 (7/25/94) concerns four animal feed products, imported from Germany. Classification was not in dispute since the importer and US Customs found agreement under heading 2309 of the HTS Preparations of a kind used in animal feeding. At issue was whether three of the four imported feed products were subject to import restrictions under subheading 9904.10.69 (note these import restrictions are currently found in heading 9904.06).

Effect of USDA Veterinary Permit

Importer had obtained a “Veterinary Permit” from the USDA which certified that the importation of a product will not jeopardize the health of domestic animals. US Customs ruled that this permit, however did not exempt the importer from import restrictions promulgated under Section 22 of the Agricultural Adjustment Act.

At issue next was the lactose content of the feed supplement. The HTSUS language provided a quota for “animal feeds containing milk or milk derivatives.”

The importer argued that the lactose element in the products was heat treated and a minimal amount in any event and these two factors should allow for an exemption. Customs ignored these arguments.

It declared:

“We note that neither the appropriate HTSUS provisions for the animal feeds nor the quota language included in subheading 9904.10.69 indicates that heat treated pharmaceutical grade lactose or products containing a small quantity of lactose should be exempt from the import restrictions.”

Customs concluded, “The product at issue contains “milk or milk derivatives” and is therefore subject to the quota.

The importer raised a third and final futile argument in its attempt to avoid imposition of the import quota. The German manufacturer changed the feed formula to include only U.S. origin lactose during the blending in Germany. The manufacturer should be applauded for this attempted creative end-around. However, it was fruitless.

U.S. Customs applied the Rules of Origin and determined that the origin of the feed formula was still German, the U.S. grade lactose did not change origin, and therefor the quota would be applied.

Conclusion

Importers of foreign agricultural products need to mindful of both USDA and CBP requirements. The initial step is properly classify the imported product as that will trigger both tariff and quota issues. Finally, sometimes tricky to apply rules of origin will apply when the final product is sourced from multiple countries.









Civil Penalties at the CIT – A Discussion of the Greenlight I, II, and III Cases

One of the most challenging times for any importer is having to defend an enforcement action brought by the Government at the US Court of International Trade (CIT).

The reasonable care standard imposed on importers is found in 19 U.S.C. Section 1484. A failure to meet that burden can result in a penalty action brought under 19 U.S.C. Section 1592.

The level of civil penalty sought will depend on the level of culpability—negligence, gross negligence or fraud—and also whether the violation has resulted in a loss of revenue (LOR)—duties, taxes and fees—or not. Additionally, CBP can seek the unpaid or underpaid duties, taxes and fees. To top it all off, the statute of limitations is five years. In the case of fraud, the statute only begins to run when CBP learned of the fraud.

An able attorney for the importer may be able to argue that the Government suit should be dismissed on jurisdictional or procedural grounds.  This month’s discussion explores that strategy. The article analyzes three court decisions: United States v. Greenlight Organic, Inc. a 2018 case, and two subsequent decisions that are collectively referred to as Greenlight I, II, and III.

For a defendant in a civil collection suit brought by the Government, often the best course is to seek early dismissal of the action with a motion based on affirmative defenses. A defendant has every right to expect that the Government suit provides a level of detail sufficient to prepare a defense. The Greenlight cases provide a useful primer for those defendants faced with overly vague and imprecise charges.

For a a more detailed discussion of the Greenlight cases refer to Mark K. Neville’s October 2020 article “Penalty Case Defense at the CIT,” in the Journal of International Taxation.

Developments in the HMTX Court Case Filed in the CIT

Initial Complaint

As discussed in our previous Blog articles, on September 10, 2020, HMTX Industries LLC filed a summons and complaint at the Court of International Trade (CIT) challenging the authority of the United States Trade Representative (USTR) to impose Section 301 China Tariffs on imports falling under List 3 which were effective September 24, 2018. 

ITC will continue to monitor the HMTX case – the most tumultuous action filed in the CIT in decades. Approximately 3500 cases have been filed in the CIT on the heels of the HMTX filing.

Three-Judge Panel

On September 30, HMTX and its co-plaintiffs, through a legal motion, asked the CIT to assign a three-judge panel to hear the case. Attorneys for the US have signaled they are going to oppose this.

In the brief supporting their motion, plaintiffs stated that their action i) satisfies the court rules’ criterion of “having broad or significant implications” in the administration of the customs laws, and ii) raises a question of an “exceptional nature.”

Case Management Model

The DOJ is advising the CIT to implement a case management approach in order to lessen the confusion surrounding the thousands of separately filed cases challenging the 301 China Tariffs. Chiefly, the DOJ would like to see the Court select a test case or cases while the remainder will be suspended. Additionally, a Steering Committee of plaintiffs’ counsel would be authorized to coordinate the actions of the thousands of plaintiffs. There would be limited opportunity for the filing of mini briefs by those who are not test case plaintiffs. The plaintiffs are of like mind and would also like the government to commit to a refund mechanism if plaintiffs are successful. In fact, plaintiffs have asked that the 1990s Harbor Maintenance Tax case (US Shoe) procedures serve as a protoype: case management by a single judge and the substantive legal questions handled on the merits by a three-judge panel.

Filing Protests to Object to the China 301 Tariff an Act of Futility – And a Waste of Money

In previous articles we have brought to your attention various aspects of the China 301 Tariffs imposed by the US government on selected imports from China. These measures have been broken into four groupings: Lists 1, 2, 3, and 4A which were promulgated by the USTR and published in the Federal Register. The subject tariffs have been as high as 25% ad valorem. Importers by the tens of thousands filed Exclusion Requests through a specially designated USTR Portal and a fraction of them were granted, leaving most to pay the tariffs imposed in the 301 Tariff actions.

For the majority of the importers subject to these 301 Tariffs the question remains – what, if anything, can they do to object to these tariffs which are still being levied? Our last few articles have discussed the possibility of relief pursued through an action filed in the Court of International Trade (CIT). On September 10 HTMX Industries filed the first case challenging the US authority to impose the China 301 Tariffs against imports classified in Lists 3 and 4A and within two weeks over 3,500 other claims were filed by various aggrieved importers.

We have heard of some importers being advised to file protests with CBP to preserve their right to relief. That is the subject of this article, is it worthwhile for an importer subject to a China 301 Tariff to file a protest with CBP?

Authority for Protests / CIT Eligibility


There is a typical route to get judicial review at the CIT and it presupposes a denial of a protest.

Authority for protests is found within 19 U.S.C. § 1514 after a determination has been made by CBP. If CBP denied the protest the protestant is eligible to challenge the decision in the Court of International Trade (CIT) under the authority of 28 U.S.C. § 1581 (a). The language of the statute reads, “The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to contest the denial of a protest, in whole or in part, under section 515 of the Tariff Act of 1930.”

The proper authority to file a 301 Tariff action in the CIT is not via 28 U.S.C. § 1581 (a), however, because the matter is non-protestable under Section 1514. That is because the rile of CBP is ministerial only and it would not have made a protestable determination. Proper authority for a 301 CIT claim is found instead through the CIT’s residual grant of jurisdiction, 28 U.S.C. §1581 (i)(1).

“In addition to the jurisdiction conferred upon the Court of International Trade by subsections (a)–(h) of this section and subject to the exception set forth in subsection (j) of this section, the Court of International Trade shall have exclusive jurisdiction of any civil action commenced against the United States, its agencies, or its officers, that arises out of any law of the United States providing for—

* * * *

(B)

tariffs, duties, fees, or other taxes on the importation of merchandise for reasons other than the raising of revenue;”

All of the recently filed 3,500 court cases claimed jurisdiction through this authority.

This residual grant of jurisdiction is based on Section 1581 (a) being not available. In other words, the filing of protests and going to the CIT after protest denial is either a viable program or it is not. Sections 1581 (a) and Section 1581 (i) ae mutually exclusive.

Effect of the Conrad Case

A June 1, 2020 decision in the CIT has important bearing on the issue of the necessity of protests as a prerequisite to bringing a court action. See J. Conrad LTD v. United States, Slip Op.20- 79 (CIT 2020). Chief Judge Timothy Stanceu ruled that a court has great latitude to grant equitable relief regardless of whether a protest was initially filed for the underlying action. The Conrad plaintiffs found themselves in court on what the presiding judge deemed a “non-protestable decision by Customs.” In strong language on pages 24-25of the Slip Opinion, the judge proclaimed the extensive powers of the CIT in awarding relief.

“This Court possesses “all the powers in law and equity” of a district court. 28 U.S.C. § 1585. Accordingly, with exceptions not applicable here, this Court may award any form of relief appropriate in a civil action, id. § 2643(c)(1), including, generally, a money judgment against the United States in a civil action commenced under 28 U.S.C. § 1581. Id. § 2643(a)(1).”

· * * *
…liquidation of Plaintiffs’ relevant entries prior to judgment would not constitute irreparable harm.

The CIT’s vast equitable powers can provide relief, including the refund of duties, to any plaintiff that has filed a Section 301 case in court with or without a protest having been filed. This relief is available both to the Conrad plaintiffs or to any of the importers injured after paying China 301 Tariffs. Neither Conrad nor a successful Section 301 Claimant would have to file a protest in order to preserve the right to relief.

Accordingly, it is our conclusion that advice to aggrieved 301 Tariff payers to file a protest is errant and a meaningless or futile gesture. It is not necessary for these aggrieved importers to file a protest per the decision in Conrad and in the first instance these importers are not entitled to file a protest because no negative determination by CBP triggered the right to protest. Query, if a protest has been denied as being non-protestable, how would the importer get into court after Section 1581 (a) has been ruled out?

To be sure, there is one, narrow role to play here for protests. That would be in those instances in which the importer contests the levy of the Section 301 Tariff either on the basis that the tariff classification was wrong at entry, and the product was therefore not subject to the List 3 or List 4A Tariffs, or the country of origin of the imported article was not China, to the same effect.

Aggrieved parties can go straight to court as long as they are not time-barred. There is speculation amongst customs and trade lawyers that the two year statute of limitations on CIT challenges to the payments of China 301 Tariffs does not run until an importer has paid the 301 Tariff, under the Administrative Procedure Act. Some claims have been filed in the CIT even after two years had passed after the September 21, 2018 notice of the List 3 action being published in the Federal Register or the September 24, 2018 effective date for collection of those tariffs. List 4A activities were only undertaken on August 20, 2019 at the earliest, so there is unquestionably plenty of time within which to file a claim based on List 4A exactions.

Please refer to our September 27 blog entry, CIT Court Actions re: China 301 Tariffs, List 3 and List 4A, which discusses the deadlines for an aggrieved importer to bring a CIT action to court. Please contact our law firm if you have any questions.

CIT Court Actions re: China 301 Tariffs, List 3 and List 4A

Many of you will know about the challenges to the List 3 and List 4A tariffs–the hottest thing at the CIT in 25 years.

The lead case, HMTX Industries, LLC et. al. v. United States, was filed at the Court of International Trade on 9/10. The law firm behind the filing spent considerable time in drafting the 19 page complaint. After it was filed, 3,500 cases were swiftly filed in the following two weeks, relying on the same legal theories – that the USTR lacked the authority to impose a punitive tariff. ITC and co-counsel have already filed suits on behalf of 8 clients. Under one theory, if these lawsuits are successful, not only plaintiffs who filed suit will get a refund of 301 duties paid but also any importer who paid duties will be entitled to a refund. That last speculation is not tested, and prior experience under the Harbor Maintenance Fee cases 20-25 years ago has me doubting it. Obviously, it is safer to file suit.

It is most likely that the lead case will proceed on a test-case basis and all of the other cases will be suspended, with no regular activity other than housekeeping activities and monitoring developments.

Timing

Although there is a two year statute of limitations to bring such a declaratory judgment action in the CIT, the issue then becomes, when does the cause of action accrue?

For List 3 timing, a filing may still be viable even now, after the 9/18 date of the 301 announcement anniversary and the 9/24 date of first tariff collections. If the first imports took place after 9/24/18 the theory would be that the cause of action accrued with the first levy of the tariff–on another theory, a suit could be brought on even later filed entries as the cause of action would have accrued on the entries that were being challenged when the tariffs were paid

In the case of List 4A, the time to file is still 11 months away, actions can be filed until at least August 2021.

Bottom line—it is still possible to file on List 3 (especially if the $$ are substantial) and definitely ok for List 4A. A suit with challenges to both Lists 3 and 4A could proceed.

First Sale for Export – Duty Savings Through a Multi-Tiered Transaction

It is possible to lower the duty owing to at time of entry by lowering the value of the declared entry. A popular means to lower the value is through the use of a multi-tiered series of transactions.
    
In Nissho Iwai American Corp. v United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993).
In accordance with the Nissho Iwai decision CBP will presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, CBP will note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States” within the meaning of 19 U.S.C. § 1401a.
ITC has advised numerous importers on ways to successfully engineer a First Sale for Export program.

Court of International Trade (CIT) Action to Challenge China 301 Tariffs Under List 3 and List 4A

IF YOU HAVE PAID LIST 3 OR 4A TARIFFS FROM CHINA

A recently filed lawsuit may provide an opportunity for refunds of trade remedy duties. To preserve your opportunity to secure refunds, importers must file their own claims.

The deadline for filing claims is Friday, September 24. List 3 was announced in the Federal Register on 9/21/18 and took effect on 9/24/18 so the two year statue of limitations to file runs in a few days. The statute of limitations for List 4A does not run for a few months. List 4A was announced on 8/20/19 and took effect from 9/1/19–so there is plenty of time to file.

Importers must work with legal counsel to review their options and file claim(s).


An import company who has been paying trade remedy tariffs on imports from China has filed a lawsuit with the Court of International Trade. The lawsuit centers around the timing of tariffs levied on products covered by List 3 and by default List 4A. In essence, the case challenges the actions of the United States Trade Representative (USTR) and asserts that Congress did not empower the executive branch to transform investigations targeting specific practices by a foreign country into broad trade wars. The case also argues that in promulgating List 3 and List 4A, the USTR failed to follow required statutory provisions.

As you consider your options, you may access your import history via GEODIS’ IRIS system or ACE. If you have any questions, please contact GEODIS Trade Service at tradeservices.ff.us@geodis.com”

The Real Scoop for you:

The suit follows on the heels of the success in getting the US court (the CIT) to uphold the importers’ challenge to the Section 232 Turkish steel tariff. See attached. That came out in late July.

The legal theory is that CIT has jurisdiction under 1581 (i) which allows for a suit to be filed within 2 years of the cause of action accruing. Challenges to Lists 1 and 2 are out of reach but that still leaves Lists 3 and 4.

If you had List 3 and List 4 entries then you could file now in one lawsuit.

Mark Neville of the ITC law firm is registered with the CIT could organize CIT filings for you. If it is going to be like the successful Harbor Maintenance Tax challenge of 25 years ago, the suit would not entail much activity at all after initial filing–it would just be a protective filing and then passivity–if success, some heavy lifting in order to show what tariffs should be refunded–could be entry-specific–and that is when the process will get more involved . Decision cannot be expected before early 2022 and it will certainly be appealed.

Court filing fee–US$400; legal fees about $2,000-3,000 for each filing (it is filing of a summons, complaint (nearly 20 pages in length) and various forms. Later fees will be at normal billing rates and will be quite minimal (if filings are required by the court) unless importers are successful and it will be necessary to provide detail showing refunds due .

Bottom line– a long shot since Sections 232 and 301 are very different statutes–but maybe worth a shot.

List 4 China Tariffs—A Possible Exit Strategy

Under Section 301 of the Trade Act of 1974, the US has the right to retaliate against unfair foreign trade practices. Over the last year the US has slapped additional tariffs of between 10 and 25 % on almost all goods of Chinese origin. As its name implies, these tariffs are on top of the normal customs duties.

The tariffs have been rolled out in various Lists organized on an HTS basis. The first three Lists hit goods with a combined $250 billion in annual imports from China.

The 4th and final List assesses additional duties of 15% and covers the remaining $300 Billion worth of annual Chinese imports, many of them apparel and other consumer goods. It has been bifurcated into two parts – List 4A came into effect on September 1 while List 4B will be effective December 15. Note–the 15% tariff may be increased to the now-standard 25% tariff level.

Exclusion Requests: Three Month Window

The USTR has established procedures whereby importers and others (trade associations, Chinese producers) can petition for exclusions from the China 301 tariffs. The exclusions function as exemptions.

The window to file such requests for the first three Lists has closed. But the period to request an exclusion from the List 4A tariff hit has just been announced.

Stakeholders will have from October 31 to noon on January 31, 2020 to submit exclusion requests via the USTR web portal. If granted, the exclusions are good for a one-year period but they have retroactive effect, as well, so importers will want to take steps to protect their rights (suspended liquidations, protests) in the face of the steady liquidation of entries.

Request Process

The request process is very nuanced and has been altered slightly from the List 3 process. For instance, the exclusion request must be made on a 10-digit HTS basis rather than the former 8-digit approach. Also note that this is a public process, with open access to all of the filings. There is a provision for the protection of business confidential information, such as purchase history. Also know that domestic competitors can file negative comments.

We Can Help

ITC has filed List 3 requests for exclusion. Interested List 4 stakeholders can contact us for more information and assistance.

Trimil SA v. United States — CIT Finds Advertising Expenses and Trademark Royalties Non-Dutiable

In December, 2019 the Court of International Trade (CIT) issued its decision in Trimil SA v. United States, Slip Op. 19-161 (12/17/19). This promises to be a landmark decision regarding the non-dutiable treatment of advertising expenses and third party trademark royalties. The case was brought by a company involved in the importation of Armani apparel. The court closely examined two sets of agreements that provided for (1) design and advertising services and (2) for a trademark license. The agreements were between Trimil and a pair of related parties. Importantly, the licensors of the trademarks were unrelated to the apparel factories which were the sellers of the imported merchandise. In each case, the fees would be based on Trimil Corp.’s future U.S. sales.

The case did not go to trial but was decided in favor of Trimil by summary judgment. Trimil had conceded that the design services constituted dutiable assists. The court held that the advertising fees and the trademark royalty fees paid by Trimil were not dutiable—they did not comprise a part of “the price actually paid or payable” (the PAPP) for the imported merchandise, and did not fit within one of the statutorily authorized additions to the PAPP.

In the first instance, the fees were not paid to the seller nor were they for the benefit of the seller, as defined by statute, 19 U.S.C. § 1401a(b)(4)(A). In the CIT’s own words, the meaning of the phrase “to or for the benefit of the seller” should be given a narrow meaning.  The court accepted Trimil’s position that the fees fell “squarely within the context of post-import transactions.” Moreover, in the case of the royalty fee, the fees were not a condition of the sale, which is a criterion for dutiable royalty status. The court pointed out that the presence of legally enforceable condition could not be inferred where an express condition was absent from the contract. The fact that the non-payment of the royalty might lead to a halt in production does not make the royalty payment a condition of the sale of the imported goods. The court accepted Trimil’s argument that the trademark royalty fees were a “selling expense associated with the clothing’s resale value after importation into the United States.”

Impact of the Trimil Decision

First, the most striking thing about the case is that the government neither appealed the loss nor, at the time of this writing, issued a Limiting Treasury Decision.

So, as of now, the decision stands as the last word. Of course, the decision may spawn later court challenges by the government seeking to re-litigate these issues or by importers seeking to challenge other CBP interpretations.

This decision makes happy importers who think that CBP should interpret the statutes strictly. But importers have been reluctant to challenge CBP and shoulder the considerable expense of taking a case to trial. Thus rarely does the CIT hear an important valuation case and when a decision is reached the trade world takes notice. Perhaps importer passivity has emboldened CBP to unfairly apply Customs rules and regulations and maybe this case, a win for the importer, will inspire the customs Bar to challenge CBP more often. Importers may challenge other weak positions CBP has taken in recent years – see numerous criticisms to the pre-determined end use test for origin enunciated in Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016).

The Trimil case also opens up a planning opportunity.. Importers can rely upon the Trimil case to artfully draft agreements to avoid dutiable value if fees for advertising expenses and trademark royalties are paid to third party licensors and the standards set out in Trimil are observed.

Supporting Free Trade Agreement Eligibility – Preparing Documents Needed to Respond to a CF 28

The US is party to 14 FTA’s involving 20 countries. Maybe you wear a shirt or own a towel marked “Made in Jordan?” If so the textile was likely entered duty- free under the Jordan Free Trade Agreement ((JOFTA). Maybe you own a household item made in the Dominican Republic or Honduras? If so the item was likely entered duty free under the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). There are another dozen FTA’s, including the granddaddy of them all, NAFTA, which will be re-worked and relabeled as the forthcoming U.S. – Mexico – Canada Agreement (USMCA).

This blog article does not delineate the specifics of these FTA programs. You can refer to the USTR website, the General Notes of the HTSUS, or the regulations1 for specifics. A common feature is that the finished good is shipped directly to the US from the participating country. There is usually a tariff-shift requirement which has to be satisfied, to ensure that components which enter from a third country jurisdiction undergo sufficient processing that results in a “substantial transformation” to the goods so that they can be considered “originating.” Alternatively, or additionally, there is often a regional value content feature in which the percentage of local value can vary depending on the HTS of the finished article. Finally, there is normally a de minimis rule, that allows a limited number of parts or raw materials to be non-originating. The rules for FTA eligibility can be quite complex — our law firm guides clients through the layers of rules.

This brief article will focus on the supporting documents which the foreign producer and US importer should have on hand when claiming FTA eligibility.  We know of importers, caught flat-footed, who had trouble meeting the 30-day obligation to respond to a CF 28. A harried importer, sometimes sitting half way around the world, who calls a customs lawyer in the middle of the the night at the 11th hour to ask, “How should the BOM be organized?” will complete the response to the CF 28 in a timely manner, if at all, only through heroic efforts.

The Customs Modernization Act requires importers to act with reasonable care, but CBP does not require an importer to first obtain a binding ruling2 prior to making entry under an FTA program. The documentation requirements vary depending upon the FTA program in question and CBP and the regulations should be consulted to confirm precisely what documents are required at what particular stage.  In some cases, Manufacturer’s or Exporter’s Certificates vouching for origin must be obtained prior to entry, while in others the importer can wait until after entry is made and only upon CBP’s request.

It is important to consider that CBP has the right to ask any importer to support eligibility for an entry made under an FTA3. Often the request will be made pursuant to a CF 28, the standard form used to question an importer. The following questions are typical of the sort issued post-entry to an importer claiming FTA status — this set, recently issued to an ITC client, asks the importer to produce two sets of records.

In this first set, CBP was looking to verify the CF 7501 claims corresponding to Classification, Value, Origin, and Quantity.

Please provide documents translated into English:

1. Documentation substantiating the HTSUS classification number (schematics, pictures, end use of the good, how it functions and analysis), as appropriate.

2. Entry packet documents (invoice, packing list, bill of lading, etc.)

3. Contract (if any).

4. Purchase Order.

5. Proof of Payment.

6. Statement that the value of all assists (engineering, equipment, materials, etc.) provided to the producer at less than market value have been declared.

In the second set of questions, CBP focused on the FTA and the importer was asked to prove program eligibility. The CF 28 stated:

In order to substantiate that your good originates by means of a tariff-shift rule, please provide the following translated documentation, as appropriate:

1. Manufacturing process flow chart, narrative, description, etc.

2. Bill of Materials (BOM) indicating the HTSUS number (six digits) and the originating status of each material.

3. A statement that the BOM is complete.

4. For those materials that must originate for the good to meet a tariff-shift rule, provide a certification of origin under the terms of the CAFTA-DR Free Trade Agreement.

5. Manufacturer’s Affidavits should state where the material is manufactured and that it originates under the terms of the CAFTA-DR Free Trade Agreement.

6. If the tariff-shift rule requires an RVC analysis, provide the RVC formula and computation. And clearly state the composition of all values.

7. If an inventory management method (FIFO, LIFO, average) is used to differentiate originating from non-originating goods or materials, elaborate on the methodology.

8. Other document or explanation as appropriate.

Many importers claim entry under an FTA without much or any thought given to the documentation needed to prove the claim. This is a mistake because, in many situations, 30 days is inadequate for the importer to pull together the necessary paperwork, especially since some of the material is only available from the foreign seller (e.g., the BOM) or a supplier to the seller in the case of a Manufacturer’s Affidavit. My advice to an importer participating in an FTA program is to keep these CF 28 questions in mind and to prepare the documents before the first entry. 

Focusing on the second set of documents, the flow chart is typically prepared in Power Point or Excel. It should be as detailed as possible and break down each step and sub-step. The flow chart should start at the beginning, when components or raw materials enter the FTA country. Ideally, it would state that the material is entered into inventory4 and only later pulled from the same inventory. Every stage of fabrication/assembly should be described in detail, with attention given to the investment made, the capital equipment used and the training of the personnel. The flow chart should proceed through testing and final packaging. Ancillary material such as pictures or videos can be included.

The Bill of Materials, or BOM, is arguably the most important element of the entire submission. A BOM is usually a table prepared in an EXCEL spreadsheet program that lists the part name, internal part number or SKU, price and origin of the part.

Most FTA programs impose a tariff-shift rule in which each component / material piece must either be produced in country or, if brought in from another jurisdiction, it must experience a tariff shift. The HTS number assigned to the imported component must undergo a requisite shift to the HTS number/classification assigned to the final good that is imported into the US. Obviously this requires a close tariff classification study of the finished product and the components on the BOM.

CBP will verify whether the final good is an “originating good” of the FTA country by analyzing the BOM. If a tariff shift is required, CBP will validate that the component HTS numbers have “shifted” to the HTS number of the finished good. Local country of origin for a material, if claimed, can be supported, if the component was self-produced by the manufacturer or by a Manufacturer’s Affidavit provided by a local supplier.

A good narrative should tie together the flow chart and BOM and describe how each component in the BOM is used in the fabrication process. It could also discuss staffing levels and training and equipment used.  

I will close by saying that an actual submission to CBP in response to a CF 28 should also include a carefully drafted cover letter to CBP that explains the submission and serves as a road map.  Every document submitted would be assigned an exhibit number (this could mean a dozen or more exhibits) and the cover letter would explain how all the exhibits are tied together in support of the FTA.  

With the exception of the cover letter, I advocate that an importer making entry under an FTA program gather together all of its supporting records well in advance of the first entry. This would avoid making an FTA eligibility claim without doing the homework first, which in some cases could be violation of the importer’s reasonable care obligations. I also make that recommendation after seeing importers thrust into chaos struggling to understand CBP’s questions and produce the necessary documents and explanations under an ever-shrinking, fast-approaching deadline.