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What Importers Need Know About US Trade and Customs Practices

Planning for cross-border transactions often involves mitigation or elimination of US withholding taxes. Although planning for US withholding taxes is extremely important, in cases where tangible goods are being imported into the US, US tariffs and duties must also be considered. This article provides a broad overview of the US customs, duties, and tariff procedures that should be considered in any cross-border transaction which involves the importation of goods into the US.

Classifying Imports

US law requires that all items imported into the United States be classified under the Harmonized Tariff Schedule of the United States (“HTSUS”). Every importer is charged with the responsibility to use reasonable care in classifying its imports. The HTSUS classification of an item determines the duty rate applied to the item and various import restrictions that may apply to the item. Improper tariff classification can result in the underpayment or overpayment of duties owed to the US Customs and Border Protection (“CSP”). Improper tariff classification of imported articles can also result in significant monetary penalties.

The HTSUS is published by the US International Trade Commission (“USITC”), as directed by Congress in Section 1207 of the Omnibus Foreign Trade and Competitive Act of 1988. The USITC publishes annual editions of the HTSUS. The HTSUS is based on the Harmonized Commodity Description And Coding System (“HS”), which is a single, internationally recognized classification system shared by a majority of the large trading nations. The HTSUS provides a hierarchical structure for describing all goods for duty quota and statistical purposes.

The legal text of the HTSUS companies (i) General Rules of Interpretation (“GRIs); (ii) Additional US Rules of Interpretation; (iii) General Notes; (iv) chapters I-99 (organized into sections I-XXII); (x) section and chapter notes; (vi) headings and subheadings through the eight-digit level (with their numbers, article description, tariff rates and special tariff programmes; (vii) Chemical Appendix; (viii) Pharmaceutical Appendix; and (ix) Intermediate Chemicals for Dyes Appendix. The non-legal text includes the ten-digit statistical reporting numbers (annotations), notes, annexes, suffixes, units of quantity, table of contexts, footnotes, index, and similar elements.

The HTSUS utilizes the structured nomenclature of the HS, the numbered provisions of which appear in the schedule as four-digit headings and subordinate six-digit subheadings in Chapters 1-97. HTSUS classifications consist of ten digits; the four and six-digit HS product categories are subdivided into eight-digit unique US rate lines and ten-digit non-legal statistical reporting categories. Statistical provisions that may appear at the ten-digit level do not affect the legal classification of goods in trade. Changes in the HTS rate line provisions or rates of duty must be enacted by Congress. The non-legal statistical element, authorized under Section 484(f) of the Tariff Act of 1930 and chaired by the USITC. See 19 USC Section 1484(f). The interagency committee considers statistical changes twice a year, and importers and other interested parties may request these changes.

The HTSUS is divided into 97 chapters, arranged in 21 sections. HTSUS chapters are arranged by the complexity and sophistication of product types, beginning in chapter 1 with crude and natural products and continuing in further degrees of complexity by chapter to advanced, manufactured goods. The four and six-digit HS provisions are administered by the World Customs Organization (“WCO”), and their wording, numbering and coverage are internationally agreed and subject to periodic changes (usually implemented every 5 years.

The actual ten-digit HTSUS number is composed of a chapter number, heading and subheadings. The chapter number is represented by the first two digits of the HTSUS classification, and the next two digits denote the proper. See 19 USC Section 1484(f). For example, the first four digits of the classification of an MBS impact modifier (3903) denote that the MBS impact modifier is classified within chapter 39 and under heading 3903. Digits five and six provide a subheading classification, in this case determined based on the primary forms of polymers of styrene, for which subheading 3903.90 represents “other polymers.” Digits seven through ten would then further subdivide the “other polymers” into more specific categories.

The chapters (digits one and two), headings (digits two through four), subheadings (digits five and six) and suffixes are hierarchical; thus, the various parts of the HTSUS number must be determined in a hierarchical manner. The chapter and heading are determined first, and only then does one move to descriptions under the six-digit subheading, the eight-digit level and, finally, the ten-digit tariff classification. Consideration should only be given to comparable levels when making hierarchical classification decisions – thus, chapter versus chapter or heading versus heading, not heading versus subheading.

Each section and chapter of the HTSUS contains “notes”, which provide specific classification rules applicable to products within that section or chapter. These notes are located at the beginning of each section or chapter of the HTSUS. It is essential that the section and chapter notes be reviewed when classifying a product. Both section and chapter notes provide detailed information as to what may or may not be classified within the section and chapter.

GRIs

The GRIs are the legal principles that govern the application of the HTSUS. The GRIs are part of the legal text of the HTSUS and are located at the beginning of the tariff schedule. Six GRIs exist and must be applied in numerical order to determine the correct classification. In other words, if the classification can be determined under the first GRI, the analysis under the GRIs is complete. Otherwise, one must proceed numerically through each GRI until a classification can be determined.

Additional US Rules of Interpretation

Listed just below the GRIs in the HTSUS are the Additional US Rules of Interpretation, which are also a part of the legal text of the HTSUS and must be given consideration in making all classification decisions. The Additional US Rules of Interpretation read as follows:

In the absence of the special language or context which otherwise requires:

(a) a tariff classification controlled by use (other than actual use) is to be determined in accordance with the use in the United States at, or immediately prior to, the date of importation, of goods of that class or kind to which the imported goods belong, and the controlling use is the principal use;

(b) a tariff classification controlled by the actual use to which the imported goods are put in the United States is satisfied only if such use is intended at the time of importation, the goods are so used and proof thereof is furnished within 3 years after the date the goods are entered;

(c) a provision for parts of an articles covers products solely or principally used as a part of such articles but a provision for “parts” or “parts and accessories” shall not prevail over a specific provision for such part or accessory; and

(d) the principle of section XI regarding the mixture of two or more textile materials shall apply to the classification of goods in any provision in which a textile material is named.

General Notes

The HTSUS also contains 35 General Notes. These describe the customs territory of the United States, the general (normal trade relations, NTR) rates and special rates. Special rates include descriptions of reduced tariff rate eligibility for US special programmes, such as the Generalized System of Preferences (“GSP”), the Caribbean Basin Economic Recovery Act (“CBERA”) and the African Growth and Opportunity Act (“AGOA”). They also include the rules of origin for all US FTAs. The General Notes explain how to properly read the duty rate information provided in the HTSUS so as to apply the proper rate to imports that may qualify for rate reductions under any of these programmes or agreements.

Special Classification Issues

1. Classification Pursuant to Use

The classification of articles is generally a two-step process. First, courts will enumerate and define each element of the heading, which is a question of law. Then, the court must determine under which heading the merchandise at issue falls, which is a question of fact. Courts have recognized two types of headings under the HTSUS: eo nomine (“by or in that name”) headings and “use” headings. Eco Nomine headings describe an article by a special name. Use headings by contrast, are defined by the goods’ use within the United States. When a disagreement arises with respect to classification, different analysis must be deployed, depending on the type of heading at issue.

The classification of goods under use headings involves a more nuanced analysis. Under the Additional US Rules of Interpretation, “a tariff classification controlled by use (other than actual use) is to be determined in accordance with the use in the United States … of goods of that class or kind to which the imported goods belong, and the controlling use is the principal use.” “Principal use” is defined as use “which exceeds any other single use.” The interpretation criteria used by the courts have become known as the Carborumdum factors and are routinely applied in subsequent classification cases involving use headings. The Carborumdum factors include the following:

1. Use in the same manner as merchandise that defines the class;

2. The general physical characteristic of the merchandise;

3. The economic practically of using the import as such;

4. The expectation of the ultimate purchasers;

5. The channels of trade through which the merchandise moves;

6. The environment of the sale, such as accompanying accessories;

7. The manner in which the merchandise is advertised and displayed; and

8. The recognition in the trade of this particular use. See United States v. Carborundum Company, 536 F.2d 373, 376-77.

2. Classification Pursuant to Essential Character

GRI 3(b) governs the classification of “mixtures, composite goods consisting of different materials or made up of different components, and goods put in sets for retail sale” that cannot be classified pursuant to a specific descriptive heading under GRI 3(a). Pursuant to GRI 3(b), mixtures, composite goods or goods of a set for retail sale made up of different components are to be classified as if they consisted of the material or component that gives them their essential character. Explanatory Note (IX) to GRI 3(b) explains that “a composite good made up of different components shall be taken to mean not only those in which the components are attached to each other to form a practically inseparable whole, but also those with separable components, provided these components are adapted to one another, are mutually complementary, and that together they form a whole which would not normally be offered for sale in separate parts.” A bag with an insulated cooler compartment permanently affixed to a non-insulated travel or sports bag compartment is an example of a GRI 3(b) composite good. According to Explanatory Note (VIII) to GRI 3(b), the factor that determines the essential character will vary among different kinds of goods. The essential character may be determined by the nature of the material or component, its bulk, quantity, weight or value or by the role of a constituent material in relation to the use of the goods.

3. Classification of Unassembled Articles

Unassembled articles are the components of merchandise that have not yet been put together to form a finished good. GRI 2(a) provides that complete or finished articles that are entered unassembled or disassembled are properly classified under the same HTSUS heading as if the entire article was imported and fully assembled. Classifying a good pursuant to GRI 2(a) as unassembled or disassembled merchandise requires that the article is a complete article with necessary assembly or reassembly, perhaps by using fixing devices like screws or nuts. The degree of complexity of assembly is not taken into consideration by CBP, but only assembly operations are permitted under GRI 2(a). If the good requires trimming or cutting after importation, it is likely not classifiable pursuant to GRI 2 because, at the time of entry, it was not an unassembled or disassembled article. The Explanatory Notes also explain that imported unassembled components of an article that are in excess of the number required to complete the merchandise are not allowed to benefit from classification under GRI 2(a). They should not be classified under the HTSUS subheading for the finished product, but rather under the subheadings for the individual component parts.

4. Country of Origin

The country of origin is a required element on a US customs entry, and, as with other data necessary to assess duty or to collect accurate import statistics, US law requires importers to use “reasonable care” in declaring the data on customs filings. An imported product’s origin is used to determine the applicable duty rates. Products from countries that have been granted NTR status with the United States are subject to general “column 1” rates of duty, while products from countries that are not granted NTR status are subject to much higher “column 2” rates of duty. The country of origin determines whether quotas, anti-dumping and countervailing duties or other trade barriers are applicable to imported merchandise. Eligibility for special benefits, including reduced duty or duty-free entry pursuant to FTAs and unilateral preference programmes such as the GSP and AGOA, is also dependent on the country of origin. The country of origin is also relevant for the purposes of procurement by government agencies and compiling trade statistics.

Additionally, all imported products and their containers must be marked with the country of origin unless specifically excepted by US law. Other US laws also require country-of-origin marking according to different criteria, as in the case of the drug labeling requirements promulgated under the Federal Food, Drug, and Cosmetic Act. US law relies on two primary schemes for determining the country of origin. “Preferential” rules of origin apply to imported merchandise when determining eligibility for special treatment under trade agreements or special legislation. “Non-preferential” rules of origin generally apply to imported merchandise in the absence of such special programmes.

5. Non-Preferential Country of Origin

Non-preferential rules of origin are based on two concepts, “wholly obtained” and “substantial transformation”. A good is “wholly obtained” when it is the growth, product or manufacture of one specific country, which is thus the country of origin. See 19 CRF Section 102.1(g). When a good is not produced wholly from inputs obtained in a single country, the country of origin of that product is the last country to effect a substantial transformation. See 19 CRF Section 134.1(b). Generally, a substantial transformation occurs when a manufacturer or processor converts or combines an article such that the new article has a name, character or use different from that of the materials used to create that article. Exceptions to this rule exist for textiles and textile products (for which the definition of “substantial transformation” is based exclusively on a change in tariff classification) and for products imported from Canada or Mexico (for which the definition of “substantial transformation” is based on the North American Free Trade Agreement (“NAFTA”) rules and set forth in Title 19 of the Code of Federal Regulations (19 CFR) part 102).

In determining substantial transformation, CBP considers the totality of the circumstances on a case-by-case basis, with no single factor being determinative. The factors relevant to this inquiry, as well as the emphasis given to each factor, continue to evolve with the advancement of technology, especially in respect of the evaluation of origin for information technology products.

6. Country of Origin for Marking Purposes

As noted, US law requires that any foreign-made product imported into the United States must be marked in such a way as to indicate, to the “ultimate purchaser” in the United States, the origin of the article. Except in cases of products coming from NAFTA countries, the country of origin for marking purposes is based on non-preferential rules of origin, i.e. the criteria of “wholly obtained” or “substantial transformation.” Title 19 of the United States Code (19 USC), at Section 1304, requires that every article of foreign origin (or its container) imported into the United States, unless excepted by law, shall be marked in a conspicuous place, as legibly, indelibly and permanently as the nature of the article (or container) will permit, in such a manner as to indicate, to an ultimate purchaser in the United States, the English name of the country of origin of the article at the time of importation into the customs territory of the United States. When the country of origin of an item imported into the United States is the United States, these country of origin marking requirements do not apply. Interested persons may request binding country-of-origin rulings on prospective importations of merchandise.

Any article found by CBP to not be labeled in accordance with the marking requirements is subject to additional duties of 10%. See 19 CFR Section 134.2. Failure to properly mark imported goods can also result in (i) CBP refusing to release the merchandise until the properly marked by the importer; (ii) redelivery to CBP custody; or (iii) in the event of the importer’s failure to redeliver to CBP custody, liquidated damages equivalent to the domestic value of the merchandise. See 19 CFR Section 134.54.

Other US laws also govern how imported products may be marked with the country of origin. For example, the use of “Made in the USA” and similar claims on product labeling are construed as marketing claims, which are governed by the Federal Trade Commission (“FTC”) Act. Under FTC rules, unqualified claims of US origin are permitted only for products that are “all or virtually all” made in the United States, including inputs and labor content.

Country of Origin for Government Procurement

Non-preferential rules of origin are used to determine the country of origin for purposes of granting waivers of “Buy American” restrictions applicable to government procurement. The Buy American Act of 1933 (“BAA”) establishes preference for domestic-made products in government procurement. The Trade Agreements Act of 1979 allows a waiver of the BAA conditions in certain circumstances, essentially allowing goods produced in certain countries to have equally favorable treatment under government procurement as domestic end products. CBP issues country-of-origin advisory rulings and final determinations as to whether an article is or would be a product of a designated country or instrumentality for the purpose of granting waivers of certain “Buy American” restrictions in US law or practice for products offered for sale to the US government.

United States- Mexico-Canada Agreement

On 30 November 2018, the United States, Mexico and Canada signed the United States-Mexico-Canada Agreement (“USMCA”) to replace NAFTA. The USMCA modernizes previous commitments made under NAFTA, including (i) major changes to trade in agricultural products, automobiles and automotive parts and textiles; (ii) increased thresholds for low-value (de minimis) shipments subject to informal entry procedures; (iii) enhanced data protection for biological drugs; and (iv) the elimination of the formal certificate-of-origin requirement. The proposed USMCA consists of 34 chapters, which exceeds the 22 chapters contained in NAFTA, and covers new areas, such as labor, the environment, anti-corruption and regulatory policy, digital commerce, currency manipulation and monetary policy. It also contains a clause relevant to future FTA negotiations with non-market economies, most notably China, for which it requires advance notice of intent to negotiate, disclosure of the objective of negotiations and provision of the full text of the proposed agreement at least 30 days before signing. Notably, the USMCA also includes 11 annexes and 12 side letters. Four of those side letters specifically grant Canada and Mexico important concessions pertaining to the ongoing US investigation into imported automobiles and automotive parts.

Customs Valuation

US law closely aligns with the WTO Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (“WTO Valuation Agreement”). Significant areas in which US law diverges or has special considerations include the following:

1. First sale for export;

2. Definition of “related parties;”

3. Standard approach to supporting related-party sales; and

4. Use of a formal programme to report adjustments to pricing.

Basis of Appraisement

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 and codified in 19 USC Section 1401a. The implementing regulations are contained in 19 CFR part 152. As in the WTO Valuation Agreement, there are five methods of valuation: (i) transaction value; (ii) transaction value of identical or similar merchandise; (iii) deductive value; (iv) computed value; and (v) the “fall back” method. Also aligned with the WTO Valuation Agreement are the additions to transaction value, exclusions from transaction value and limitations on the use of transaction value. Appraised value for imports into the United States is declared on a free-onboard basis (i.e. exclusive of international freight and insurance). If the rate of exchange is not agreed in advance of importation, the rate of exchange to be used for currency conversion purposes is that in effect on the date of exportation of the imported merchandise, as specified in 19 CFR Section 159.31.

Related-Party Pricing

US customs law establishes seven categories of related parties. Five are essentially the same as those in the WTO Valuation Agreement: (i) members of the same family; (ii) an organization and an officer or director of that organization; (iii) an officer or director of one organization and an officer or director of another organization, if each is also an officer or director in the other organization; (iv) partners; and (v) employee and employer. The final two specify:

1. Any person directly or indirectly owning, controlling or holding with power to vote, 5% or more of the outstanding voting stock of any organization and such organization; and

2. Two or more persons directly or indirectly controlling, controlled by or under common control with any person.

Comparing the language of these final two categories with the four remaining categories in the WTO Valuation Agreement, it may be seen that US law does not treat parties as related simply because a single person holds 5% of the voting stock of each; only a 5% shareholder and the organization thus owned are considered related. An evaluation of the relationship of two organizations must instead be made by examining whether or not the organizations are controlled by or under common control of two or more persons. Practically, this results in situations in which parties are considered related for customs purposes in some countries, but not in the United States. US rules concerning the acceptability of the transaction value when parties are related follow the WTO Valuation Agreement, requiring the importer to demonstrate either that the entered value closely approximates a test value or that the circumstances of sale demonstrate that the relationship of the parties did not influence the price.

CBP has an unusual interpretation of the “all costs plus a profit” test contained in the Interpretive Notes to the WTO Valuation Agreement and repeated in the US regulations:

“If it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time (e.g. on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced.” See 19 CFR Section

The CBP defines the “firm” as the parent company and it defines “equivalent” as “greater than or equal to.”

Adjustment to the Price Actually Paid or Payable

The payment made by the buyer to the seller must match the transaction value, as adjusted, reported to customs. When prices are established based on an Organization for Economic Cooperation and Development (“OECD”) profit-based transfer pricing methodology, it is quite common that prices are retroactively adjusted periodically (e.g. annually or quarterly). As a result, the price adjustments must be reported so that the final price paid matches the declared value. This applies to price increases as well as decreases.

Guidance from CBP for profit-based transfer pricing adjustments requires that (i) the transfer pricing policy meet five specified criteria; (ii) the importer participate in the US reconciliation programme; and (iii) the importer be able to demonstrate that the transfer pricing policy results in arm’s length pricing under the “circumstances of sale” test. When these requirements are met, importers may use the adjusted prices as transaction value, and receive refunds on downward adjustments of dutiable products.

The five criteria specified in the ruling are that:

1) A written “intercompany transfer pricing determination policy” must be in place prior to importation, and the policy must be prepared taking into account Internal Revenue Code Section 482;

2) The US taxpayer must use the transfer pricing policy above in filing its income tax return, and any adjustments resulting from the transfer pricing policy must be reported or used by the taxpayer in filing its income tax return;

3) The company’s transfer pricing policy must specify how the transfer price and any adjustments are determined with respect to all products covered by the transfer policy for which the value is to be adjusted;

4) The company must maintain and provide accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and

5) No other conditions may exist that might affect the acceptance of the transfer price by CBP.

Importer of Record

In the United States, only the importer of record (“IOR”) has the right to make an entry. The IOR is defined as the owner or purchaser of the goods or a licensed customs broker, when designated by the owner, purchaser or consignee. The terms “owner” and “purchaser” are broadly defined by CBP to include any party with a financial interest in a transaction, such as:

1) The actual owner or purchaser of the goods;

2) A buying or selling agent;

3) A person who imports on consignment;

4) A person who imports under loan or lease;

5) A person who imports for exhortation at a trade fair; or

6) A person who imports goods for repair, alteration or further fabrication.

A nominal consignee (e.g. a freight forwarder) does not have a financial interest in a transaction and cannot be an IOR. A nominal consignee effectively possesses no other right, title or interest in the goods except as possessed under a bill of lading, air waybill or other shipping document. While not eligible to make entry on his own behalf, a nominal consignee may designate a customs broker to make entry on his behalf. In this case, the broker must appear as an IOR, and the customs broker’s bond would be liable for the filing of the entry summary and payment of estimated duties.

An IOR can be a resident or a non-resident. A resident US entity acting as an IOR uses its US federal tax identification number as its importer identification. In addition, a resident IOR must maintain a valid customs bond from a US surety and have the bond on file with CBP. The importing entity can prepare customs entries on its own or can retain a licensed customs broker to manage customs entry and clearance. A non-resident corporation or non-resident consignee can be a US IOR if certain requirements are satisfied. Non-US corporations that lack a US federal tax identification number must obtain a non-resident importer identification number from CBP in order to act as a non-resident IOR, using the following process:

1) File CBP Form 5106 to obtain a non-resident importer identification number;

2) Appoint an agent (e.g. a subsidiary or affiliate) that is a resident in the state where the port of entry is located, who must be authorized to accept service of process against the corporation;

3) Issue a valid power of attorney to a customs broker to act on a corporation’s behalf in customs matters; and

4) File a customs bond with CBP, obtained from a corporate surety resident in the United States.

In the case of both resident and non-resident IOR corporations, one division can make an entry for another division as long as they are the same legal entity. However, a parent company cannot make an entry for a subsidiary or sister corporation, since they are not the same legal entity.

Customs Brokers

Customs brokers are licensed individuals legally allowed to transact “customs business” on behalf of the IOR. “Customs business” includes those activities involving transactions with CBP, such as:

1) Making entry and determination admissibility of merchandise;

2) Merchandise classification and valuation;

3) Payment of duties, taxes or other assessed or collected by CBP on goods because of their importance; and

4) Refund, rebate or drawback of those duties, taxes and other charges.

The importer provides a power of attorney to the customs broker in a format specified by CBP. The power of attorney remains in effect until it is revoked by either party. If it is issued by a partnership, it is limited to a period not to exceed 2 years from the date of execution. A customs broker with a valid power of attorney from an importer can file entries on behalf of the importer as the IOR’s agent. However, it is important to note that the importer remains liable for acts undertaken by brokers on its behalf, including broker errors. For this reason, it is important that the importer’s employees provide guidelines to and make all important decisions (e.g. classification and valuation) with the assistance of the broker and do not rely entirely on the broker.

Documents to be Presented During the Importation

Entry

Documentation requirements differ by type of entry. CBP has different entry types for different categories of import-related transactions, such as entry for consumption or warehouse, admittance into an FTZ (FTZs are discussed in more detail below) or transportation in bond to another port of entry or country. This section focuses on import entries (also known as consumption entries). Within the category of consumption entries, there are two different types of entry. Formal entry is required for all shipments valued over $2,500. A lower threshold of $250 exists for goods in HTSUS Chapter 99, subchapters III and IV (temporary tariff modifications and safeguard measures). Informal entries are used for shipments valued at $2,500 or less, or at $250 or less for shipments under the relevant subchapters of Chapter 99. No bond is required for informal entries. Entry data can be transmitted to CBP manually or electronically; the vast majority of entries are electronic. For manual entries, the customs broker or importer files entry paperwork with customs. For electronic filing, the CBP Automated Commercial Environment (“ACE”) is used. As a general rule, all merchandise imported into the United States is required to be entered, unless specific exceptions apply. Exceptions to the entry requirement include merchandise described in General Note 3(e) of the HTSUS. In summary, General Note 3(e) includes:

1) Telecommunication transmission;

2) Business diagrams, records and data;

3) Articles returned from space;

4) Undeliverable articles returned within 45 days that have remained in the custody of the carrier or foreign customs service;

5) Aircraft parts or equipment removed from US-registered aircraft in international traffic because of an accident, breakdown or emergency and returned within 45 days of removal; and

6) Residue of bulk cargo contained in instruments of international traffic.

Also, the regulations include certain exceptions for specific vessels, instruments of international traffic, locomotives, freight cars and undelivered articles (all must meet certain requirements in order to be exempt). An entry is to be filed with CBP so that the admissibility of the merchandise can be determined and the goods released from CBP custody. The form used for entry is CBP form 3461. CBP Form 3461 serves as the entry document for imports and is filed to secure the release of the goods. The entry must be made for the merchandise by the consignee within 15 calendar days after the arrival of the shipment. Customs also requires various paperwork to be filed in order to secure the release of imported goods. This is commonly referred to as the “entry packet.”

Entry Documentation

The documentation always includes:

1) Entry Form 3461 or Form 7501;

2) Evidence of the right to make entry, such as: i) a bill of lading, air waybill or extract from a bill of lading; ii) a carrier’s certification; or iii) a blacket carrier’s release;

3) A commercial invoice;

4) A packing list; and

5) Other documentation that will help CBP decide the admissibility of the shipment.

Entry Summary

In addition, an entry summary, also called CBP Form 7501, is required. An entry summary is necessary to enable CBP to assess duties, collect statistics on imported merchandise and determine whether other requirements of law or regulations are met. It also reports the duties and fees owed by the importer. If not filed or needed at the time of entry, the entry summary must be filed with estimated duties attached within 10 working or business days after the time of entry, unless an alternative payment arrangement applies. The entry summary can be filed in lieu of CBP form 3461 and can serve as both the entry and entry summary. Failure to file can result in liquidated damages to the importer up to the full amount of the customs bond covering the import. The port director may require that the entry summary and estimated duties be filed at the time of entry and before the merchandise is released, on the basis of past importer deficiencies (e.g. the importer repeatedly failing to file the entry summary after entry in a timely manner, failing to promptly pay a claim for liquidated damages under its customs bond, supplying incomplete or incorrect entry summary documents or being habitually delinquent in the payment of CBP bills).

Customs Bond

A customs bond is required by CBP for formal entries. A customs bond is a form of contract among three parties: the principal, the surety and the creditor. The principal is the IOR, bonded carrier, bonded warehouse operator or FTZ operator. The surety is the insurance company that underwrites the bond. The creditor is CBP. The same party cannot be both the principal and the surety on a bond. As principal on a basic importation bond, the IOR agrees to comply with the bond conditions, which may include, but are not limited to, the agreement to:

1) Pay duties, taxes and charges;

2) Make or complete entry;

3) Produce documents or evidence;

4) Redeliver merchandise;

5) Rectify any non-compliance with provisions of admissions; and

6) Hold merchandise for examination.

Customs bonds are filed with CBP on CBP Form 301. There are different types of bonds for customs entry. A continuous bond never expires, but must be terminated. There is typically an annual renewal. A single transaction bond covers only one entry. Bond riders can also be obtained for specific situations, such as the reconciliation program.

Invoice Requirements for Entry

For most shipments, a commercial invoice must be presented for each import into the United States at the time at which the entry summary is filed. A pro forma invoice may be used in place of a commercial invoice if it contains information adequate for the examination of merchandise, the determination of duties, information (and documentation verifying the information) required for statistical purposes and a statement by the importer verifying the document as true and correct.

In summary, the commercial invoice must include:

1) The date;

2) The port of entry;

3) The buyer and seller, including the name and address of the foreign entity invoicing the product;

4) The name of the employee of the exporter who has knowledge of the transaction;

5) A detailed description of the product, including the product number and name of the product, as well as any available marks, numbers, symbols or trade names used by seller to the trade;

6) The quantity of items;

7) The purchase price;

8) The currency of the transaction;

9) All charges on the product, itemized by name, including freight, insurance, commission, packing costs and inland freight to the port of export;

10) All discounts, rebates, drawbacks and bounties;

11) All goods or services furnished for the production of the product;

12) The country of origin; and

13) The number of packages.

In general, each commercial invoice should conform to the requirements set out in the regulations. Each commercial invoice should represent one distinct shipment; photocopies of invoices are acceptable in place of the original. The invoice must be written in English or have an accurate English translation attached. The required information may be stated on the invoice itself or in an attachment. When more than one invoice is included in the same entry, each invoice, with attachments, is to be numbered consecutively on the bottom of the face of each page, beginning with number one. Multiple-page invoices, including attachments, are to be numbered consecutively on the bottom of each page (i.e. “1 of x pages” or “Invoice 1, Page 1; Invoice 2, Page 1”, etc.). All notations made on the invoice by the importer or broker must be in blue or black ink.

In addition to the commercial invoice, a packing list can be provided if the commercial invoice does not contain all of the necessary information. The packing list should state, in adequate detail, which items are packaged in each individual box, and any markings.

All entries must be “liquidated.” Liquidation is CBP’s final computation of the duties or drawback accruing on an entry. All issues, such as tariff classification, duty rate and valuation, are resolved when an entry liquidates. The date of liquidation serves as the date on which many important legal time frames either begin or end. Liquidation occurs upon action by CBP (an entry is typically liquidated by CBP after 314 days if there are no issues or questions) or by matter of law. Unless CBP extends or suspends the liquidation of an entry, liquidation automatically occurs as a matter of law within 1 year of the date of entry. Liquidations can be tracked electronically by importers and customs brokers. CBP can also hold an entry open, by extension or suspension of the entry, to review or investigate an area. An importer can also request that CBP extend liquidation on an entry if needed, which might or might not be granted by CBP.

Liquidation may be extended by the port director for a period of one additional year, with a maximum of three extensions. Possible reasons for CBP suspending liquidation include when it is required by statute or court order or by an antidumping or countervailing finding/order. Under the CBP reconciliation programme, liquidation is extended for specified (“flagged”) issues. Even if an entry has been liquidated, CBP can still review entries within the timeframe provided by the statute of limitations. The statute of limitations stipulates 5 years from the date of discovery for fraud and 5 years from the date of occurrence for violations involving negligence or gross negligence

Calculation of Customs

When goods are imported into the United States, certain procedures must be followed to clear the goods through customs and to pay duties and fees. The entry of merchandise is a two-part process, consisting of (i) filing the data necessary to secure the release of the importer’s merchandise from customs custody; and (ii) filing the data required for duty assessment and statistical purposes.

Duty Rates

Duty rates vary based on the type of product being imported and the country of origin of the imported product. Therefore, correct tariff classification and valuation are important, as they directly determine the amount of duty owed. Duty rates are listed in the HTSUS. When goods are dutiable, rates may be assessed on an ad valorem, specific or compound basis (ad valorem rates are the most common). Examples of each are as follows:

1) Ad valorem: a rate based on a percentage of dutiable value (e.g., 6.4%);

2) Specific: a rate based on a set amount per unit imported; and

3) Compound: a rate that is a combination of both ad valorem and specific rates.

Additional Fees

Additional fees can also apply to customs entries. For example, a “harbor maintenance fee” (“HMF”) applies at many ports for shipments by vessel. Commercial cargo loaded onto or unloaded from a commercial vessel, if the loading or unloading occurs at a port that is any channel or harbor (or a component thereof; CBP designates applicable ports) in the customs territory of the United States that is not an inland waterway and is open to public navigation, is subject to an HMF based on a percentage of its value. This fee is presently 0.125% of the customs value. There is no minimum or maximum fee. There may also be a merchandise processing fee (MPF). The rate is 0.3464% ad valorem. The minimum and maximum are adjusted for inflation annually. The MPF is waived for certain products (e.g. products of insular possessions of the United States, some products of least-developed beneficiary developing countries and products imported under certain special trade programmes). Rates of duty that are applicable to imported merchandise are the rates in effect at the time of entry, except for (i) warehouse entry and re-entry; (ii) FTZ entry; and (iii) immediate transportation shipments (non-quota goods). These exceptions may allow for the application of favorable rates of duty to imported merchandise, as the time of entry may be different from the time of import (i.e. of entering the customs territory).

Payment of Duties and Fees

In general, estimated duties are required either to be deposited with the customs officer designated to receive the duties at the time of filing the entry documentation (or the entry summary documentation, when it serves as both the entry and entry summary) or to be transmitted to CBP according to the statement-processing method. Interest accrues from the date on which the importer is required to deposit the estimated duties or fees.

Export Duties

The United States does not impose export duties or taxes on merchandise leaving the US customs territory. See Art 1, Section 9 US Constitution: “No Tax or Duty shall be laid on Articles exported from any State.”

Bonded Transportation

Products imported into the United States may be transported under bond to another port of entry selected by the importer for entry for the purpose of consumption, admission to an FTZ, entry into a customs bonded warehouse or exportation. Entry for transportation under bond is made without appraisement, and the product is immediately released to the bonded carrier for transportation. Many common carriers, including pipelines for transporting petroleum products, are bonded. This regime allows significant use of inland ports of entry for CBP processing or FTZ operations. Subchapter XIII of HTSUS Chapter 98 allows articles to be imported temporarily duty-free, subject to a bond. The duration of the importation is generally 1 year, subject to extension for up to 3 years.The amount of the bond is double the amount of duties, fees and taxes that would otherwise be owed on importation. The following categories of imports eligible for temporary import under bond:

1) Articles imported to be repaired, altered or processed;

2) Models of women’s apparel imported by manufactured for models in their own establishment;

3) Articles imported by illustrators and photographers for use as models in their own establishment, in the illustrating of catalogs, pamphlets or advertising matters;

4) Samples for use in taking orders;

5) Articles intended for testing, experimental or review purposes;

6) Automobiles, motorcycles, airplanes, boats, and other vehicles brought temporarily into the United States by non-residents for races or contests;

7) Locomotives and railroad equipment for emergency use;

8) Containers for compressed gasses or reusable containers for use during transportation;

9) Professional equipment and tools of trade;

10) Articles of special design for use in producing items for export;

11) Animals for breeding, exhibition or competition and related equipment;

12) Works of fine art, photos and philosophical and scientific apparatus for exhibition and for use in the encouragement of art, science and industry; and

13) Automobiles and automobile parts for show purposes.

Free Trade Zones

A Free Trade Zone (“FTZ”) is an area that is physically located within the United States but is treated as outside of the customs territory of the United States. Authorized by the Foreign-Trade Zones Act of 1934 (“FTZ Act”), FTZs operate as public utilities pursuant to grants from the Foreign-Trade Zones Board (“FTZ Board”). Operations are governed by the FTZ Act and regulations issued by the Department of Commerce and CBP. In addition, CBP publishes an FTZ manual that serves as a guide for all FTZ participants. The FTZ Act provides that FTZs must be located in or adjacent to US ports of entry and that each port of entry is entitled to at least one FTZ. All merchandise located in an FTZ (except merchandise unladen for immediate delivery into customs territory) assumes one of four different status designations, each of which receives different customs treatment:

1) Privileged foreign (“PF”) merchandise: PF merchandise is subject to appraisal and tariff classification according to its condition and quantity at the time at which the operator makes an application for PF status. As a result, when PF merchandise enters customs territory, duty is calculated using the value and rate established at the time at which the merchandise was designated as PF. An application requesting this status may be made at any time prior to the use of the merchandise in a production process. Once elected, PF status cannot be abandoned, except in the case of recoverable waste. If the PF merchandise is exported or properly withdrawn for supplies, equipment or repair material of vessels or aircraft, no duties or taxes are paid. See 19 CRF Section 146.41.

2) Non-privileged foreign (“NPF”) merchandise: NPF merchandise is dutiable at the rate applicable at the time of its transfer from the zone into customs territory. Value added in the zone is excluded.

3) Domestic merchandise: domestic status may be granted to merchandise that was produced in the United States or previously entered US customs territory for consumption. No application or permit is required for the admission of domestic merchandise into a zone. Domestic merchandise may be returned to customs territory free of quotas, duty or tax.

4) Zone-restricted merchandise: this status applies to merchandise that is taken into an FTZ for the sole purpose of exportation, destruction (except for the destruction of distilled spirits, wines and fermented malt liquors) or storage. Zone-restricted merchandise may not be relocated to customs territory for domestic consumption unless the FTZ Board finds the return to be in the public interest. An application for zone restricted status may be made at any time that the merchandise is located in the FTZ, but zone-restricted status cannot be abandoned once it is granted. Zone-restricted merchandise may be considered “exported” for the purpose of any customs law, including drawback. See 18 CFR Section 146.44.

Bonded Warehouse

The United States has a bonded warehouse program. As opposed to an FTZ, a bonded warehouse is in US customs territory, and consequently, an entry for the warehouse must be made. Bonded warehouses are privately owned and are approved by the CBP port director for the port of entry where the warehouse is located. The warehouse proprietor must maintain records detailing the entry of goods into the warehouse and the release of goods for domestic consumption or export, as well as meet CBP security standards. Goods held under bond without payment of duty must generally be segregated from other goods. Goods may generally be kept in the bonded warehouse for up to 5 years without payment of duty.

There are a number of separate classes of bonded warehouses. Below is a sample of the categories of bonded warehouses:

Class 1: premises owned or leased by the government for storage of merchandise undergoing examination or seizure;

Class 2: Private bonded warehouses used for the proprietor’s goods;

Class 3: Public bonded warehouses used exclusively for imported items;

Class 4: Yards or sheds for bulky merchandise, pens for animals and tanks for bulk liquids;

Class 5: Bins or elevators for grain storage;

Class 6: Warehouses for the manufacture, solely for exportation, of articles made in whole or in part from materials subject to excise tax.

Class 7: Warehouses for manipulation of imported items.

Class 8: warehouses for manipulation of imported items.

Class 9: duty-free stores.

Class 10: warehouses for international travel merchandise.

Class 11: warehouse for storage and disposition of “general order” merchandise.

Audit Process

The Customs Modernization Act of 1993 provided a framework for CBP and US importers to share the responsibility for trade compliance. The importer is responsible for exercising reasonable care in providing accurate and complete entry information (e.g. customs values, tariff classifications, quantities and the applicable rate of duty) and implementing a documented system of import-focused internal controls. CBP is responsible for informing the importer of its rights and responsibilities under the law, and the CBP Regulatory Audit (“RA”) regional offices are responsible for auditing major importers and entities involved in international trade compliance.

The most common CBP audit is a compliance audit under the FA programme, conducted by CBP’s RA division. FA audits constitute a complete evaluation of a company’s CBP activities and are aimed at maximizing voluntary trade compliance using a risk-based approach. Import volumes and risks are taken into account when determining an audit approach. Depending on the size and complexity of the importer, CBP assessment and testing may focus on, e.g. internal controls for larger importers or on compliance for smaller importers (in the latter case, less formal processes and procedures are anticipated).

CBP officers are authorized to examine any relevant entry or other records following the provision of proper notice. An approach to gathering additional information commonly used by CBP is CBP Form 28 (a “Request for Information” regarding a specific entry), which does not imply official action. In contrast, CBP issues Form 29 (“Notice of Action”) when CBP has liquidated or intends to liquidate the importer’s entry differently from the way it was entered by the importer.

Penalties

Importers must exercise reasonable care, as described in section 3.1.1. Failure to meet this standard may result in a violation under section 592 of the Tariff Act of 1930, as amended, codified at 19 USC Section 1592.243 A violation of section 1592 occurs when a person, through fraud, gross negligence or negligence, enters, introduces or attempts to enter or introduce any merchandise into the commerce of the United States by means of any document, written or oral statement, act that is material and false or omission that is material “[w]ithout regard to whether the United States is or may be deprived of all or a portion of any lawful duty, tax, or fee thereby.” See 19 USC Section 1592(a)(1). A document, statement, act or omission may be material if it has the potential to alter the classification, appraisement or admissibility of merchandise, duty liability, reporting and collection of accurate trade statistics or determination of source, origin or quality, or if it intends to conceal an unfair act involving patent, trademark or copyright infringement or an unfair trade practice under anti-dumping or countervailing duty laws or other federal laws.

Importers in violation of section 1592 may be liable for penalties in addition to any outstanding duties, taxes, fees or interest owed. Interest payments may accrue on underpaid duties, taxes, fees or overdue bills. Rules governing interest calculations may be complex and are outlined in 19 CFR Section 24.3a(b). Penalty amounts vary according to the level of culpability and require distinguishing between dutiable and duty-free imports. When certain mitigating factors can be demonstrated, penalties may be subject to mitigation. Importers may also obtain penalty protection when prior disclosure is properly filed. Penalties range from 5 percent to 80 percent of the value of the merchandise.

In addition, An owner, consignee, importer of record, entry filer or other person who conducts certain prescribed import-related activities must maintain – and produce on demand – entry records listed by CBP on the “(a)(1)(A) list.” Failure to maintain or produce entry records pursuant to written, oral or electronic notice may result in substantial penalties and possible reliquidation of entries. See 19 USC Section 1509(g)(2). Administrative penalties assessed under the record-keeping provisions may be mitigated in certain circumstances.

Finally, articles not properly marked at time of importation may be subject to additional duties of 10% of the final appraised value unless correctly marked, exported or destroyed under CBP supervision before liquidation of the entry. See 19 USC Section 1304(h)(i). Additional duties for marking violations are not subject to mitigation. In addition, the intentional concealment of any required marking under 19 USC section 1304 may result in substantial fines and possible criminal penalties. See 19 USC Section 1304(l).

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.

Anthony Diosdi

Written By Anthony Diosdi

Partner

Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.

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