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.

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.

Approximately 800 Exclusion Requests filed as of today.

The filing period is of open until January 31 and nothing is lost as the exclusion if granted is retroactive back to the September 1 imposition of the duty.

ITC has been deeply engaged in mitigation strategies for clients. They range from:

1. Exclusion Requests from the China tariffs. We have submitted or are in mid-stream for almost 20 such requests and have a really streamlined protocol in place.

2. Shifting production to third countries (Dominican Republic and Vietnam for example); and

3. Valuation strategies, including First Sale for Export; and duty drawback refund applications.

Which Goods are Covered by List 4A?

The August 2019 action covers the products classified within the Harmonized Tariff Schedule of the United States (HTSUS) subheadings set out in Annex A and Annex C of the notice published at 84 FR 43304 (August 20, 2019) as modified by 84 FR 45821 (August 30, 2019).

Link to 4A:  https://ustr.gov/sites/default/files/enforcement/301Investigations/Notice_of_Modification_%28List_4A_and_List_4B%29.pdf

Which parties are entitled to file an exclusion request?

Requestors must provide their relationship to the product (Importer, U.S. Producer, Purchaser, Industry Association, Other)

How does a party file an exclusion request?

Only claims submitted on the USTR Web portal will be accepted. Here is a link to the Portal:

https://exclusions.ustr.gov/portal/s/

When is the deadline to file?

The process for the filing of exclusion requests was announced with an application open season of October 31, 2019-January 31, 2020. 

How long is USTR taking to adjudicate the requests?

There is no set time frame but decisions are usually delivered a few months after submission.

If granted how long will the exemption be in effect?

If granted, the exclusion will have retroactive effect to the date of first imposition (September 1, 2019) and will have a life of 1-year from the date of publication in the Federal Register.

What happens to product entered into the US before a grant is issues?

Care should be taken to preserve the right to a refund while the application is pending by requesting that the liquidation of the entry be suspended or that protective protests are filed after liquidation.

What percentage of requests are granted?

A review of the applications previously filed for exclusions of the tariffs imposed by Lists 1 and 2 reveals that the exclusions are granted on an exceptional basis—approximately 1/3 of the requests were granted. 

What is a single product?

Each request must cover a “single product” as defined by the USTR for purposes of the request process.

The starting point is the 10-digit subheading of the HTSUS applicable to the particular product requested for exclusion.

How should I further describe my product?

Each request demands a product name and a detailed product description which includes, but is not limited to, its physical characteristics (e.g., dimensions, weight, material composition, etc.). 

It is also necessary to discuss the product’s function, application (whether the product is designed to function in or with a particular machine or other device), the unit value of the product (please provide range if necessary), principal use, and any unique physical features that distinguish it from other products within the covered 8-digit HTSUS subheading.

Can I upload documents in support of my request?

Yes you will be given the opportunity to upload sales brochures and literature ss well as pictures.

What kind of corporate financial data will I be expected to produce?

Requestors must provide their specific data on the annual quantity and value of the Chinese-origin product, domestic product, and third-country product the Requestor purchased, in 2017, 2018, and the first half of 2019 (January – June). 

Requestors must provide information regarding their company’s gross revenues for 2018 and the first half of 2019 (January – June). 

For imports sold as final products, Requestors must provide the percentage of their total gross sales in 2018 that accounted for sales of the Chinese-origin product.

For imports used in the production of final products, Requestors must provide the percentage of the total cost of producing the final product(s) the Chinese-origin input accounts for and the percentage of their total gross sales in 2018 that sales of the final product(s) accounted for. 

Will my exclusion request be open to public inspection?

Most of the request will be viewable by the public. However, required information regarding the Requestor’s purchases and gross sales and revenue is business confidential and the information entered will not be publicly viewable. 

What if the product is subject to the China 2025 Program?

The final question in the Portal asks if the particular product of concern is “strategically important or related to “Made in China 2025” or other Chinese industrial programs.”

The “Made in China 2025” policy highlighted ten industries critical to advancing China’s economic development plan, including aviation, artificial intelligence, robotics, and advanced medical devices. China’s plan focuses on promoting high-tech innovation and intellectual property acquisition to drive Chinese manufacturing up the value chain.

If the requestor answers “yes” there is a significant chance that the USTR will deny the claim.

Will other parties be given an opportunity to comment upon my exclusion request?

Yes – for a period up to 14 days after a party files a claim a respondent will be able to make public comments in support of or opposed to your request. These comments will be viewable by the public and a Requestor will have 7 days to file a rebuttal.

Can ITC assist with the filing of an exclusion request?

ITC has filed List 3 requests for exclusion and is drafting requests for List 4A. Parties contemplating filing an exclusion request can contact us for more information and assistance.

With the “global factory” concept many imported goods have been made with parts and processing steps that have been produced in or undertaken in more than a single foreign country. The question invariably arises, “What is the country of origin?” The answer to this question will often impact the applicable US duty rate. This is especially true now, when the product could be subject to an additional tariff if the origin were China. At the same time, origin status will determine eligibility for a lower duty rate, or even duty-free entry, under a tariff preference program, such as the Generalized System of Preferences (GSP).

In the GSP context, eligibility of an imported product for GSP will turn, inter alia, on the imported article being a “product of” the beneficiary developing country. CBP regulations spell out the test to determine origin here — simple combining or packaging operation will not suffice. A substantial transformation of the product in the beneficiary developing country must ensue.

In well-settled case law the substantial transformation test for origin should be based on a change in “name, character, or use.” In the context of GSP, the customs regulations prescribe that the necessary “product of” criterion will lie where there is a complex assembly or there is a fabrication-plus-assembly.

Nonetheless, in a flurry of recent rulings such as no. H303816, CBP has denied GSP eligibility for products that meet the origin tests under the regulations and settled case law, such as Uniden and Sassy. Instead, CBP has cited to the Energizer Battery decision, which was not even a GSP case, but one concerned with government procurement in the TAA context. The effect has been to ignore established law in favor of a simplistic and far-fetched “pre-determined end-use” principle.

For more details on GSP eligibility and CBP’s muddled application of the Energizer Battery case to GSP, origin and government procurement questions, refer to Mark Neville’s article in the September 2019 edition of the Journal of International Trade, “CBP’s Hammer: Misuse of Energizer Battery.”

In my first article I briefly described the process for filing an exclusion request with USTR for impacted goods appearing on List 4A. While the benefit of having a request granted is undeniable – the 15% tariff would be suspended for a given period – there is also a cost to consider in corporate time or actual dollars paid to outside advisors.

Before an interested party begins the costly process to submit one or more exclusion requests it must ask itself, “What is the chance our request would get tripped up and denied?” If denial is certain or near certain it may be prudent to refrain from filing the request in the first place.

Any product that is tied to China’s “Made in China 2025” program would appear to present one of the more common stop signs.

Elements of the Made in China 2025 Program

China has set forth ambitious technology-related industrial policies in its efforts to overtake the technological and scientific advances of the West and with the ambition to surpass it. In 2015 the Chinese State Council released the ‘‘Made in China 2025 Notice.”

Essentially, China has identified ten industries it wants to dominate by year 2025: 1) Information Technology, 2) Robotics, 3) Green Energy and Green Vehicles, 4) Aerospace Equipment, 5) Ocean Engineering, 6) Railway Equipment, 7) Power Equipment 8) New Equipment, 9) Medicine and Medical Devices, and 10) Agriculture Machinery.

Since 2006 China has articulated the concept of Introducing, Digesting, Absorbing, and Reinnovating foreign intellectual property and technology (IDAR). The IDAR approach involves steps which hinge on close collaboration between the Chinese government and Chinese industry to take full advantage of foreign technologies. Further, China has set “self-sufficiency” targets for each industry that are to be filled by Chinese producers both domestically and globally. An interested party considering the filing of an exclusion from China 301 Tariff must not ignore those vital details.

Is Your Product Related to China 2025?

The USTR asks this question directly in its Portal Questionnaire. A Silicon Valley high tech company recently asked us for advice in avoiding the 301 China Tariff. This company imported a product that is squarely contained within one of the10 industry sectors targeted by the China 2025 Program. we advised it to not bother filing an exclusion request which would most certainly be denied. Instead, we advised it to consider other options, including tariff engineering whereby final processing/production would be shifted to another jurisdiction so that origin would be conferred in a third country, whose products are not subject to a 301 Tariff. This alternative is itself an expensive proposition and the company can gauge its feasibility.

Whether an interested party’s product is caught up in China 2025 is in all cases a threshold question which should be examined up front.

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.