Myron Barlow - Welcome to Quimbee's CLE course on customs law. I'm your presenter, Myron Barlow.

Don Luther - And I'm Don Luther.

Myron Barlow - And today, we're gonna cover the basics of customs law for you. We'll begin with customs law and procedure, starting with the import entry process, moving through classification, origin and free trade agreements. And then we'll go onto reviewing some legal representations and remedies available, including within matters that concern Customs penalties, as well as judicial review.

Don Luther - Starting with global business.

Where you might think of a business as being a domestic business traditionally, a lot of domestic businesses over the past few decades have become global businesses. A lot of materials, parts, components, intellectual property may come from other countries. And these things can make a domestic business to be an international business, even if they're not aware of it. And compliance failures can lead to a lot of delays and problems, which are listed here. For those of you who have taken a trip abroad, when you come back, either through a land border, port or an airport, you've probably encountered a Customs or immigration officer asking you these types of questions: Who are you? What's your citizenship? Where have you been? How long? What are you bringing back? It's much the same when you import commercial merchandise. Customs needs to know the identity of the parties involved, the buyer and the seller, information on the merchandise, the description and tariff classification, which Myron will cover for you later, the value of the merchandise, the quantities, the country of origin and any other information that is necessary to enforce a variety of regulations. And, of course, they want their money, the duty payment.

This is done by US Customs and Border Protection. This agency is one of the oldest in America. It was the US Customs Service in 1789. Actually, I think it was the Bureau of Customs along the way, but it has existed since then. In 2003, it got renamed to the US Customs and Border Protection under the Homeland Security Department, which was created that year. CBP is one of Homeland Security's biggest and most complex components. Their missions include keeping terrorists and weapons and terrorist threats out of the US, securing and facilitating trade and travel, and enforcing every regulation there is on imports and exports, immigration and drug laws. They are the primary face that you see at the border, and they enforce laws and collect information on behalf of all kinds of other agencies. Increasingly these past several years, they're involved with humanitarian issues, such as forced labor, contact minerals and environmental concerns. At CBP, there are ports of entry. There are 301, I believe, ports of entry, and these range from large commercial ports, such as Los Angeles and New York, to small border crossings in the middle of North Dakota, where there's just an officer in a little building to clear people crossing from Canada into the US. But at the commercial ports, you'll have CBP officers. These used to be called inspectors. They target and examine, they do physical examination of the cargo, opening the box and seeing what's in it.

There are also import specialists who review the documentation for shipments and determine the correctness of tariff classification, valuation, and administer the duty rates that are applicable to merchandise, and also the admissibility requirements. Entry specialists do the fiscal and financial reporting requirements for Customs. There are also fines, penalties and forfeitures officers who do exactly what their name implies, do bad things to importers who have made mistakes. The traditional structure at Customs was the service port, such as Baltimore or Seattle-Tacoma or Miami, and at each of these ports, you would have a full range of experts on each type of transaction for commercial purposes. So if you imported auto parts into Baltimore or Miami, you would have an automotive team at each of those places. You would also have a textile and apparel team, a chemical team, et cetera. Over the past decade or so, Customs and Border Protection has tried to migrate to a Centers of Excellence and Expertise approach, where they have a center for each major industry. So there is a center for chemicals and pharmaceuticals. There's a center for automotive and aerospace, things like that. So they're trying to consolidate their expertise into a smaller number of fewer things so they can take a more holistic approach at looking at these transactions, and have more expertise in looking in depth at these industries.

Customs and Border Protection also has auditors, much like the IRS has auditors. They also have criminal investigators and special agents who do those side of things. Basically, like the same kind of thing as an FBI agent, but they work for Homeland Security and Customs and Border Protection. At Customs headquarters, they have field operations, people who provide technical and policy guidance to the field. And they also have an Office of Regulations and Rulings, which do what their name implies. Also within CBP, they have Laboratory and Scientific Services. They have scientists who, in addition to testing contraband to see if it's really drugs, they can also confirm technical aspects of merchandise. So if you were importing a waterproof jacket, they have the means to test it to make sure it actually qualifies as a waterproof jacket. In addition to the four branches of the military and the Coast Guard, we also have a sixth agency that has a whole lot of aircraft and boats, and that's this Customs and Border Protection agency. They have a lot of aircraft and marine assets for stopping contraband, et cetera. Now, what are imports? Imports are things that are brought into the US from any other country, including US territories outside of the Customs territory of the US. The Customs territory is the 50 states plus the District of Columbia and Puerto Rico. Other territories, such as Guam or the Marshall Islands, although they are US territories, they are outside the Customs territory of the US, and so they would be subject to the same thing as coming in from a foreign country.

It's also important to note, because people often forget, that Canada is a separate sovereign nation. You'd be surprised how often we are dealing with importers or companies in the US who think of their imports from China as imports, and they kinda think of their Canadian purchases as domestic, but they are not. Those are just as foreign as if they were from China or Japan or any place else. Imports are regulated principally by US Customs and Border Protection, although many other government agencies are also involved. The important term to know is the importer of record, which is defined in the statute. The importer of record generally is the owner or purchaser, and that's the person who's on the hook for making sure all of the transactions are done in full compliance. The importer of record is the one who's gonna get a bill for additional duty assessments or penalties, if that's applicable. If there's mistakes made, the importer of record is responsible, even if it was done by their customs broker.

Customs brokers are licensed by US Customs and Border Protection to transact customs business on behalf of the importers. In order to be a customs broker, you have to take a fairly complicated exam and have a background investigation. There is a power of attorney that the importer issues to allow them to do that. It's essentially the same kind of thing as when you have an accountant file your taxes for you. Brokers typically are all about speed. They file the entry as fast as they can. It's important to supervise your broker because they are doing 100 or 1,000 things a day, and they can make mistakes. And the importer of record is who's responsible for those mistakes, even if it's the broker who made that mistake. So it's very important to supervise the work of brokers. And this is something that a best practice would be for importers to at least do some random checks on entries after they've been filed by brokers. Many brokers are involved in freight forwarding, either as part of a freight forwarding company, or they'll have a special relationship with a freight forwarder. If you don't know, a freight forwarder is kind of like a travel agent for cargo. They book the space on ships and planes and trucks and things like that. When the merchandise has arrived, it has to be entered, which is a formal process.

There's an example, there's two examples, handouts one and two in your handout package, for the traditional entry forms. And that's basically all that information we told you about before, the country of origin, the manufacturer information, the importer's information, their identity, the tariff classification, which Myron will cover, and all that stuff. And those are the forms that are used. There's consumption entry, which is things that are being consumed in the US.

There's also in-bond movements. If stuff has to move from one place to another, not having cleared Customs. Such as if you have cargo arrive in Los Angeles, and you wanna clear Customs in Chicago rather than Los Angeles, that's an in-bond movement. And these are mentioned here as well. Bonded warehouses are where goods are stored and pulled out as needed. And you don't pay duties until you pull it out of the bonded warehouse. You see this a lot with, say, alcoholic beverages, so that they don't have to run out at Christmas, but they'll have to only pay the duties when they pull it out. Foreign trade zones are kind of like foreign territory established in the US, and you get to do a lot of things in there. A lot of automotive factories are located in foreign trade zones so that automobiles only are subject to duty as the whole car, instead of all the parts that went in, and only for those that are used in the US. If they're exported to other countries, then they are not subject to that, either. Yeah, again, your entry forms are in handouts one and two. Now, when the goods arrive in the US, this form that are in your handout, this is provided to CBP.

Now, in actuality, these are, the vast majority, are just done electronically, but these forms still do exist, but you can see what they're there. Customs decides whether to examine the goods or release them. And then they do a review of the documentation, perhaps. And then, eventually, it is liquidated and finalized by Customs. The examination is done by a uniformed CBP officer, typically. It's important to know that Customs has border search authority, which means they can search for any reason or no reason. They don't need a warrant. They don't need probable cause. This is one of the broadest government authorities. They're basically looking to see if it's contraband or if everything is as it should be. And if not, then they will address the situation and correct it. Once the entry is processed or accepted and released, then you have somebody who may ask further questions, such as an import specialist. They may ask for a sample. They may liquidate the entry with an increase or a decrease in duties. And that's basically gonna be final, for most purposes, although we'll cover it in the remedies section later, what some of these remedies are. But basically, that's when it comes in. And it's also important to note that each transaction, each of these entries, even if you bring in the same thing every week, each transaction is a separate legal entity.

Myron Barlow - Very good.

Let's talk now about tariff classification.

Tariff classification is an attempt to assign to every item or good exchanged in international trade around the world. And what happens is there is a distinct number and name assigned to each category of merchandise. And the harmonized system is a system which, as its name suggests, is harmonized among almost all the countries of the world. In other words, all the countries use the same numbers and the same words. However, it should be noted that every country can interpret the tariff schedule differently.

So just because you're going into one country, your product is classified one way, does not necessarily mean it's gonna be classified that way going into another country. Each classification of a product will let you know what duty rate applies, what free trade agreement duty avoidance mechanisms might be available and other important information. For the most part, classification is fairly straightforward, but there are instances where the correct classification of a product is extremely complicated and a lot of work is necessary to figure it out. Here are some examples of products and where they're classified. We got a musical instrument, a saxophone, in 9205904040. We've got an automobile, an 870323024. And by the way, if you look in your handouts, at 3A and 3B, you'll find a copy of the tariff schedule for 0805, which covers our orange here, and 9205, which covers our musical instrument.

The tariff schedule is broken up into 22 sections. Now, chapters one through 97 cover actual products, whereas in the United States, chapters 98 and 99 are reserved for special classification, such as chapter 98, you'll find a special provision for American goods returned. If a US good is shipped overseas and brought back, you can avoid paying duty on it 'cause it's a US good returning. The General Rules of Interpretation provide guidance on how to classify merchandise within the tariff schedule. And additionally, of great help are the legal notes found at the beginning of the sections and chapters within the tariff schedule.

Now let's take a look at the General Rules of Interpretation. These are rules that were created to assist in classifying merchandise within the tariff schedule. There are a number of rules, but I'm gonna focus on the first three.

The first one states that classification shall be determined by the language of the four-digit heading and any relevant legal notes in the sections and chapters. And we're gonna review this a little bit more in depth in a moment.

GRI 2 also comes into play frequently. That's where if you have a product that is disassembled, but all the parts and components are present that are necessary to make the finished product, then you classify it as that single good, that finished product. In other words, if you have an unassembled bicycle, you do not classify it as two wheels, a handlebar, a chain, et cetera. You simply classify it as a single item, a bicycle.

Last, GRI 3 comes into play frequently. And this is used when you have composite goods, mixtures and sets. A set, for example, is a situation where you have multiple products that are all used together for a single purpose. If so, you classify the set according to what is the single purpose or essential character of that item. If you take a look at handout number three, you'll see a copy of the General Rules of Interpretation for your reference.

Now, when you're reading the tariff schedule, you have to be very careful that you do not simply jump to words that seem appropriate. You have to read it by each indentation from left to right. So let's take a look at one example that we have here. Let's say we have disposable surgical gloves that we want to classify. And we've got here heading 3926, which covers articles of plastics and articles of other materials. And if you go into one indent to the right, the first thing you see is office or school supplies. Well, that does not cover disposable surgical gloves. If you go down just below that, you'll see articles of apparel, including gloves. Well, that covers us, we're gloves.

So then we'll go into the next first indentation after that, 'cause we're under that subheading 392620. And we see gloves, and that describes us, and we see seamless, and that describes us. Now, you can see where someone could make a mistake easily here, 'cause if you look down a couple of lines, you see the word disposable there. And if you look down more towards the bottom of the page, you see disposable again. So if you just keyed in on that one word, disposable, you could easily be led astray. You have to very carefully follow the tariff schedule by reading each heading and subheading, by looking at the indentations from left to right. Valuation is an important concept in Customs law, as well, and this concerns how do we value or give a number to the value for imported merchandise when that merchandise, particularly, is subject to ad valorem duties?

For example, frequently you see Customs duties that are X percent of entered value. Well, that begs the question, what is entered value? And in addition to needing to know value for purposes of duty assessment, we need to know it for accurate trade statistics reporting. And it's important to note that the amount paid for merchandise is not necessarily the Customs value of that merchandise. Valuation is conducted according to the valuation statute. And the valuation statute sets forth a number of hierarchical valuation formulas or methodologies to be followed in order.

So first, we have listed here transaction value. If transaction value can be used to value imported merchandise, that's the valuation methodology you use. This, by the way, is the valuation methodology used for the vast majority of merchandise. There is a rule that says if it's a related party transaction, you're not to use valuation methodology. However, frequently, the transaction value is used for related party transactions because there are a number of exceptions that apply very broadly. We've listed here, as well, the other valuation methodologies. Although they're less rarely used, it's important to know they exist. These include identical or similar merchandise, deductive value, computed value and derived value. So in other words, if transaction value does not apply under the rules of the value statute, then you look to deductive value, which is essentially looking at a US price and deducting from that some domestic cost to get at a border or landed cost. Computed value, which is the opposite of that, looking at the cost to manufacture overseas, and then adding some additional cost to get to the border or land value. And lastly, derived value, which is essentially a catch-all that means you use whatever amalgamation of the above valuation methodologies that most make sense. We have included in the handouts the Customs Value Improved Compliance Publication. And I would refer you to that for more additional information on valuation.

This slide here, adjustments to value, this pertains to specifically the use of transaction value. Again, the most common valuation methodology used. If you're using transaction value, then there are certain things you add to the price paid or payable. So, for example, if you paid the foreign supplier $10 per unit, but then you also provided them some design or some material components that were used in the manufacture of that finished product, you have to add that to the total value of what Customs is going to assess the duties against. And certain costs are also excluded. Those include, most commonly, international freight and insurance.

Next, let's take a look at country of origin and marking. At first glance, country of origin might seem to be very obvious, and in some cases, it might be. This tree is located in this country. This apple grew on that tree. Okay, we know the country of origin of that apple. But what if that apple is shipped to another country, where it is chopped up? And then it is sent to another location, where it is cooked and processed. And then there are spices added to it that come from even more countries, to make applesauce, for example. Well, what's the country of origin? And, of course, that's a rather simple, low-technology example. These days, companies are sourcing, on really a weekly, if not a daily, basis, different parts and components for their manufacturing operations from sources all around the world. And it is important to keep note of the origin of the parts and components so that you can track the country of origin of the product. One of the most important parts of country of origin would be country of origin marking. There is a legal requirement that all imported goods be marked with their country of origin, so that the US consumer can decide whether that impacts their decisions with regard to purchasing that product.

But additionally, country of origin is important for a number of other reasons, including eligibility for free trade agreements or the assessment of additional duties that may be penalties imposed on products from certain countries. And you'll see in handout number six the Customs marking regulations give you more details on this information. One of the most important concepts of country of origin is the substantial transformation test. Essentially, this is a very subjective test that asks the question, is something processed enough in a country that that processing causes it to change its country of origin?

So for this first example, we have a T-shirt here. If we have a T-shirt from country A. It's shipped to country B, where they simply put a label or a graphic on it, and then it's imported into the US. Is the fact that in that second country, all we did to that T-shirt was add some language to the front of it, is that a substantial enough manufacturing process to substantially transform the article, such that it has a new country of origin, i.e., country B? And the answer there is no. The other example there we give is an example of when you do have a substantial transformation, and that's where you start with raw board lumber. And it's cut and it's sawn and it's reassembled and probably stained and finished into a finished product, which is a table. And there, you do have a substantial transformation.

Don Luther - Now let's talk about free trade agreements.

We've talked a little bit about how duties are assessed, with different tariff classifications having different duty rates. These duty rates are the same for all countries in the US that have normal trade relations or what's called most favored nation status with the US. Now, beyond that, we have trade agreements between the United States and other countries. There's a whole network of them.

The ones that probably you've heard of most are such as NAFTA or CAFTA. NAFTA, just a few years ago, was replaced by the US-Mexico-Canada Agreement, but it's essentially the same thing as it was under NAFTA. But these are bilateral or multilateral agreements that allow goods to move among the countries within the agreement, such as US, Canada, Mexico. Or in the case of Canada, with the case of CAFTA, it's the US and various countries in Central America. The origin, as Myron talked about, there's a substantial transformation test, but in most cases, for free trade agreements, there are specific rules that apply for each product. And it's kind of like a codification of the substantial transformation, but instead of just saying a subjective change has been done, they look at the tariff classification of the components and see if they've made a required change. There can also be a regional value content requirement, such as, say, 60% of the value must be attributable to goods produced in the territory of that free trade agreement. The goods have to be shipped between the FTA member countries. You can't make something in Mexico, and then send it to Italy, and then bring it back into the US and claim NAFTA or USMCA. There are always documentation requirements for using these FTAs, of course. When you look at the tariff schedule page, you'll see in column one there, that's the normal most favored nation duty rate, which applies to basically every country in the world. And then you have a special column, where you can see that it is free under A, U, AU, BH, CA, all this alphabet soup of letters. These represent different trade agreements.

If you look at handout eight, sorry, H8A, that's the legend of what all these things mean. CA and MX stood for Canada and Mexico under NAFTA. The letter S, like sierra, is now going to be used for USMCA. But here's a, back to those gloves there, there would be, well, surgical and medical, as you can see, were free, but office or school supplies, 5.3%. But if you qualify under USMCA, it would be free. You can see the non-preferential rate. That's in column two. That's 80% there for the office or school supplies. That only applies to countries from which we don't have normal trade relations. That's currently only North Korea and Cuba. Now looking at the tariff shift example under, say, NAFTA or USMCA, the rule didn't change between these two agreements. We look at tomato ketchup, which is classified at heading, sorry, subheading 210320. And the NAFTA rule of origin, which is, again, is the same as the USMCA rule, that non-originating materials must make a change to that classification from any other chapter, and the chapter is the two digit, except from subheading 2002.90. So if you had all the tomatoes grown in Mexico, that's not a problem. But what this rule is really focusing on is if you have prepared or preserved tomatoes, which is what belongs in 2002.90, then if they come from outside of the US, Canada, Mexico territory, the ketchup cannot qualify. So if you have Italian drums of preserved tomatoes being made into ketchup in North America, the ketchup won't qualify. If you have tomatoes from the US, Canada or Mexico, then they will. Now, all the other stuff, vinegar, spices, sugar, those are all classified in completely other chapters, so they can be from anywhere.

Myron Barlow - And let's just review for a moment.

When we were talking earlier, for example, for country of origin marking purposes, we were talking about the substantial transformation test. You could see where that was one origin test, that there was a subjective test, looking at just how much manufacturing was done. But here, we have a free trade agreement where an effort was made to more quantify, I think one might say, what is an operation that results in an actual or an origin-conferring event? And here, you've got a tariff shift rule, where we revert to looking at whether or not the products undergo a change in classification during the manufacturing process, such that they satisfy the rule of origin. And therefore, qualify as having a new country of origin. So there are a number of different origin rules out there, substantial transformation, tariff shift and a number of others, and that's important to keep in mind. Whenever you're going to try to determine the origin of a product, you have to ask yourself, what is the appropriate rule of origin to apply? It might be substantial transformation from marking, or it might be one rule under one free trade agreement, and a completely different rule under another free trade agreement.

Don Luther - That's right. And these rules often were negotiated by businesses, and clearly, somebody had an interest in protecting the North American tomato industry, and not have foreign, non-North American tomatoes used to make the ketchup. If you look in handout seven, there's an example of a NAFTA certificate, where the exporter or producer makes a declaration that the product qualifies. And if you look at handout eight, there is a side-by-side comparison of the different free trade agreements that Customs and Border Protection has put together. And it illustrates the different requirements under what kind of rules of origin apply, what kind of certification requirements there are, et cetera. But basically, we have a trade agreement with Panama, one with South Korea, one with Mexico and Canada, one with all the countries of Central America, et cetera. And again, as Myron said, they can be different. And you don't want to fall into the trap of thinking, well, this product I'm making qualifies under NAFTA. It must qualify under the US-Korea trade agreement as well. It may not. So that's why that side-by-side comparison chart would be very helpful to consider.

Myron Barlow - Now let's review some other considerations.

One of these would be special classification provisions. In the tariff schedule, in chapter 98, there are a couple of interesting duty-free provisions. I believe we already referenced one of these before, which would be American goods shipped overseas and returned back to the United States. Additionally, foreign goods that were previously imported to the US, exported, and then reimported again, are not subject to duty. The concept there being, of course, if it's a US good or a good that was already duty paid, then there's no reason to assess additional duties on it every time it crosses the border. Chapter 99 in the US tariff schedule covers some kind of special duties, such as what one might call a trade remedy or trade war duty, such as the section 301 duties that were imposed upon goods from China for China violating certain intellectual property right considerations. Other considerations would include antidumping, countervailing duties, IPR enforcement and other government agencies, which I'll cover in greater detail in the next slide.

Antidumping duties, or ADD, and countervailing duties, or CVD, are additional duties, sometimes very high, triple-digit ad valorem duties that are applied to imported merchandise in cases where it has been determined that the foreign supplier is selling its products in the US market at lower prices than it sells it in its home market in order to drive US competitors out of the market, and then have a monopoly position. Or with regard to CVD, there's a foreign government subsidy giving an unfair advantage to that foreign supplier of products coming into the United States. And antidumping and countervailing duties are initiated by a petition brought by a domestic party or industry. And the International Trade Commission and the Commerce's International Trade Administration are involved in administering this program. Intellectual property rights are something that are currently being very strictly enforced by Customs. Historically, Customs viewed a dispute regarding intellectual property rights as a dispute between two private parties.

For example, well, one company, such as Disney, arguing that another company's T-shirt has something that looks a little bit too much like Mickey Mouse, which is a protected property right that Disney owns. But it was established quite clearly before Congress that a large percent of US corporate wealth is actually in the form of intellectual property rights. And if the government does not step in and protect those property rights, it's really handing over the keys to the kingdom, so to say, in terms of a lot of US wealth and investment. When we talk about intellectual property rights, we talk about patents, trademarks, trade names, copyrights. And the way Customs enforces IPR at the border is that if a US property right, intellectual property right, owner has a right registered with the Patent and Trademark Office or the Copyright Office, that company may then register, also, with Customs. And then what happens is if Customs inspects imported merchandise and sees, for example, a Mickey Mouse figure on a T-shirt, it will get in touch with Disney and say, "Well, this is not a Disney company importation. "Is this someone who's authorized by you "to bring in Mickey Mouse T-shirts, "which is a protected "intellectual property right?" And then Disney will let them know yes or no. You know, seize that and destroy it, or yes, let it in. It's acceptable. That's a company we're working with.

So this has been a very interesting development in just the past, oh, I'd say five or so years, the protection of intellectual property rights by Customs. And it's something that importers need to really be careful and keep in mind what kind of names or references might be included. For example, we've seen instances where someone's importing a, say, a briefcase that's perfectly shaped to hold a Mac Air laptop, an Apple product. And so they put, fits the Mac Air. Well, just using the word Mac Air triggers an intellectual property right. So it's something that can easily be avoided, but for some reason, can often slip through the cracks if people are not paying attention. US Customs enforces the laws of many, many other agencies at the border, because those agencies do not have officers physically present at the border to inspect merchandise as it comes in.

For example, we've listed a few here. One of them is the Food and Drug Administration. If there's a pharmaceutical product coming in or a medical device or cosmetics, anything regulated by the Food, Drug, and Cosmetics Act, Customs will enforce the requirements. And this is important for protecting domestic consumers in the market. Because if we're only requiring the US manufacturers to follow certain requirements, and we allow foreign suppliers to circumvent those requirements, then we can run afoul of some very significant problems, such as counterfeit medicine that doesn't heal people when it comes in, even though it's alleged to do so. Now, most of these other agency requirements are enforced through very modern electronic data transmissions between Customs and these other agencies that have interfaces with Customs. A lotta times, this issue comes to play for importers when they're importing something outside their normal range of products. And we've seen this with regards to promotional items, marketing materials, et cetera. For example, an automobile company is importing T-shirts that have its brand name on it for marketing or other purposes. And they're just not familiar with the complex rules regarding apparel importation and classification, and so they can make mistakes because it's something outside of what they will normally do. All right, next, we're gonna go on to our second section of the customs law presentation today, which is representation and remedies.

Don Luther - We talked earlier about how the import entry process works. Basically, the shipment comes in. It's submitted by the customs broker to Customs. They decide whether or not to examine it, and then decide whether to look at the entry. One of the things that might happen to a given shipment is that you might have an import specialist or other Customs officer will look at the entry, see something that maybe looks funny to them, maybe something they don't understand. They have the right to ask questions, perhaps get a sample of it. Ask questions, what's this food product made of? What's the fiber content of this jacket? Give me a sample of this allegedly waterproof jacket so we can test to make sure it really is. And that's often gonna happen under a Form 28, Request for Information. That's handout nine is an example of one of these forms. They can look at this entry. If they determined it's correct or incorrect, then they liquidate it as entered or they liquidate it with a change. Then if the importer disagrees, then the importer has the right to protest. And we'll cover more of this in a second. Matter can also be referred to investigators or auditors. So it's very important for importers to carefully consider the answers they provide to a request for information. A lot of major enforcement cases can start with a simple, innocent-looking inquiry from somebody at Customs. They may ask about the classification, they make ask, or the value.

Are you related to this company that has a very similar name to you? And do you provide them material assist or do you send them royalties? And maybe things that haven't been declared properly to Customs. Now, an importer can make mistakes, and you have the option to correct an entry prior to entry summary filing. Again, you have the entry, which clears the cargo, and then an entry summary, which includes the duty payment. That's typically 10 days apart. The importer can have their broker make a correction to the entry before it's even filed. Now, anytime prior to liquidation, which is your point of relative legal finality, where Customs has made their decision, or they have not acted on it at all and it just automatically gets liquidated at that 314-day line, the importer can file a protest. And they're basically protesting the fact that Customs didn't change it. It used to be protesting an active action by Customs, but now you can just basically protest your own mistake and get money back. After a liquidation, you can file either a protest or a prior disclosure. A protest lets you contest something by Customs, or your own mistake, even. A prior disclosure is where you go to Customs prior to them notifying that you are under investigation. You can then make a correction and limit your exposure to penalties. That's a whole complicated thing, and there's a lot to be said about that that we don't have time for here, but basically, it's a way to come clean about a violation and save on penalties.

Now, about the protest. In handout 10, there's the Form 19, Protest. Basically, any decision of Customs can be protested, including an increase of duties. Or if they deny your right to make entry, if they say, "No, the way this is classified, "we can't even let this into the country," the importer or the or their agent can protest it. Has to be within 180 days of date of liquidation or the decision. And there's rules on how you have to protest and what information is present. There is something called an application for further review, because the protest is typically acted on by the same person at Customs who made the decision. But if you wanna be able to go over their head, if you meet certain criteria, you can have it. If you anticipate denying this protest, Customs official, then you have to send it to Customs headquarters, where it becomes a much more formal thing and results in a ruling.

Now, the tenet that Customs has is that the importer is required to exercise reasonable care. There is no precise definition for this, but it's basically understood to be the absence of negligence or how a reasonable importers should act. You'll see this a lot in tort law, where a reasonable shop owner should keep their floor dry, or at least put up the wet floor sign, so that if somebody walks into the shop, they don't slip and fall. And if they've put up the sign, then they're covered. An importer can cover themselves by exercising reasonable care, such as making sure they look up the proper classification, seek guidance from Customs, maintain in-house experts or consult with outside experts, such as Customs consultants and attorneys, establish procedures and controls that are designed to find, detect and correct problems as they occur. Those are evidence of reasonable care that the importer should strive for.

Myron Barlow - Very good. Now let's take a look at what kind of penalties Customs can impose on importers if they do fail to exercise reasonable care.

The most common type of penalty imposed by Customs on importers can be found at 19 USC section 1592. And these are penalties assessed for a false statement, act or omission related to imported merchandise that is material. And the penalty will depend upon the degree of culpability. It could be negligence, which is merely the failure to exercise reasonable care. Gross negligence, which is considered wanton disregard. And actual fraud, which is knowing or intentional wrongdoing. And it's important to note that under section 1592, even if the mistake did not result in an underpayment of duties, penalties can still be imposed. A lot of times, importers think that they made a mistake, but it did not have any impact on the amount of duties they paid, so there's no way that Customs could impose penalties on them for that mistake, but that is not true.

The amount of penalties will depend upon the degree of culpability. With regard to negligence, if the mistake caused a loss of duties, then the penalty will be up to two times the loss of duties. If, however, the error did not result in an impact on revenue, then the penalty is 20% of entered value. For gross negligence, the number is four times loss of duties or 40% of entered value. And for intentional fraud, the penalty is up to the domestic value of the imported merchandise. So note that that's different than the imported value. And frequently, Customs believes that the domestic value, for penalty purposes, can be assessed at twice the imported value. Customs can mitigate penalties down. There's an administrative process whereby one petition comes to Customs to mitigate penalties down. And in doing so, Customs will take a look at what mitigating factors may be present.

Such mitigating factors are frequently in the form of a new importer who is inexperienced. Or an importer who has only made this mistake this one time, and has never made this mistake before. Or an importer who has cooperated with Customs to correct the mistake. The statute of limitations in section 1592 is five years from the date of entry, although it's, in cases of fraud, five years from the date of discovery. Another form of penalty that's sometimes overlooked is recordkeeping penalties. These are, very simply, penalties that are assessed against importers for failing to keep the necessary records or documentation supporting their declarations they made to Customs at the time of importation. And frequently, the type of records one might be required to keep and to provide to Customs would be the types of records kept in the normal course of business.

So, for example, if you're using the transaction value method to import merchandise subject to ad valorem duties, and you declare to Customs that based upon the price you paid to the foreign supplier, the value was $10 per unit, well, you need to maintain a copy of that invoice from the foreign supplier, as well as proof of payment to that foreign supplier, showing that the value was indeed $10 per unit. Recordkeeping penalties are the kind of penalties where it's very simple and easy to satisfy the requirements, but failing to do so creates significant liabilities. Liquidated damages are a type of penalty assessed against the Customs bond. An importer must post a bond in order to import merchandise. That bond is something that Customs can liquidate and take money from, in case the importer disappears or goes bankrupt or is unable to pay its obligations to Customs. Now, the types of liquidated damage claims typically apply to merchandise that is inadmissible. In other words, merchandise that is not even allowed entry into the United States because it violates some law, such as it violates the Food, Drug, and Cosmetics Act because maybe it has been tampered with, or perhaps it contains some intellectual property rights that belong to another company.

But the most common types of problems causing liquidated damages stem from untimely filing of the entry or entry summary, untimely payment of duties or failure to redeliver/release cargo pursuant to a Customs redelivery notice. Liquidated damages may not exceed the value of the bond. However, if Customs does liquidate a bond, your surety that provided that bond will certainly be notified of this, and then you will have great difficulty in the future obtaining a bond and making efficient imports in the future. We spoke briefly before that there's something called a prior disclosure. A prior disclosure is when an importer has made a mistake and comes forward voluntarily to Customs and discloses that mistake to Customs before Customs is aware of it.

A couple of important things, however, that one must remember about prior disclosures. They are optional, they are not required. And so it's a business decision whether or not to file a prior disclosure. Whenever a company decides, when they're determining whether it makes sense in a particular instance to file a prior disclosure, it's very important to remember that you will receive protection from penalties for your prior disclosure only if your prior disclosure satisfies every required element in the prior disclosure statute and regulations. So it's very important that you really dot your I's and cross your T's and review your disclosures before you submit them. Otherwise, you'll be notifying Customs of a mistake that your client made, but not giving your client protection from Customs. And Customs will say, "Thank you "for giving us the rope to hang you with, "and we're gonna proceed with a penalty case."

Other types of enforcement mechanisms available to Customs include seizure and forfeiture. Seizure means Customs takes physical possession of the imported goods and holds on to it. Forfeiture means the government actually takes title to imported merchandise. Again, we're talking about goods that are inadmissible, that are not eligible to even be imported into the United States of America. If you find yourself in a seizure or forfeiture situation, you should be aware of the fact that in addition, Customs may also impose penalties from other customs law sections for the exact same mistakes. You may be faced with a seizure, as well as penalties.

Also, we note that Customs is authorized to pursue criminal cases in conjunction with the Homeland Security investigations officers. Now we're going to review judicial review of Customs disputes. One of the most common paths for judicial review is through the exhaustion of administrative remedies, such as, for example, filing a protest at Customs of a Customs decision, such as a decision made by a Customs officer at a port of entry, and then having that protest denied. That protest denial is what gives jurisdiction and opens the door for review by the courts. There are two types of courts at the trial level that can hear Customs disputes.

There's the US Court of International Trade, which is a specialized court for customs and trade disputes. And then there are the US District Courts. Typically, the US District Courts only hear seizure and forfeiture cases, and all other types of customs disputes are heard by the Court of International Trade, but there are exceptions. And then, in addition to the first level of judicial review, you have review with the US Court of Appeals for the Federal Circuit and the United States Supreme Court. The US Court of International Trade is an Article III court. It's physically located in New York City, but it has national jurisdiction.

In other words, it can sit in any courthouse anywhere in the country. It was designed to be a specialized court because it was understood that customs. international trade litigation and legal matters are highly specialized. And they wanted to have a group of judges who handled only this type of work so that they could develop an expertise and more efficiently handle and reliably handle these types of disputes. Typically, the CIT will have one judge decide a case, but sometimes, such as in constitutional disputes or other extraordinary examples, there will be a three-judge panel. Typically, customs matters go before the CIT under protest jurisdiction, which would be 28 USC 1581. And this is essentially where you have the denial of a protest.

A protest is filed. A protest is denied. And then there is 180 days from that date for the importer to file its summons and complaint at the Court of International Trade. If there's a duty dispute involved, those duties have to be paid to Customs before the dispute is brought to the CIT. There are, in rare instances, review at the CIT of customs matters for products that have not even been imported yet, pre-importation review. That's largely for cases of irreparable harm. And the CIT does also hear antidumping and countervailing duty disputes. In addition to the protest denial jurisdiction the CIT has under 1581 , it also, interestingly, has, under subsection 1581, residual jurisdiction over other forms of customs dispute. So if a matter can be protested, generally, that's the route to take to get to customs, but be aware that many customs and international trade issues can come before the CIT under this residual jurisdiction provision. Matters brought before the CIT against the United States, for example, by importers, would include actions to recover duties. There's a dispute between an importer and Customs as to where a product is classified in the tariff schedule, and therefore, what duty rate applies or what the valuation is. And therefore, how many duties should be paid on imported merchandise. That's a common type of dispute before the CIT, but there are many other types as well.

These include actions brought by the United States, not an importer, but by the United States against an importer, also to recover duties or also to assess liquidated damages, to collect civil penalties that have been imposed on importers and certain other matters. Regarding appeals from the Court of International Trade, appeal is directly to the US Court of Appeals for the Federal Circuit, located in Washington, D.C. And then appeal is available to the Supreme Court of the United States if the Supreme Court accepts cert, of course. Lastly, we have legislative remedies. These are situations where one goes to Congress to receive relief from a customs legal matter. Congress has the authority to address specific issues and grant remedies. One example of this would be miscellaneous tariff bills, which are passed, are supposed to be passed every Congress, i.e., every two years. In recent years, that's been delayed, so it doesn't frequently happen on time. And one type of common miscellaneous tariff bill one would see, for example, would be temporary duty suspension bill, such as a company would come forward. They're importing a product, and they're requesting that for over the next two years, the collection of duties on that product be suspended. And if the revenue impact is less than $500,000, that request will typically be granted. Recently, the miscellaneous tariffs bill process for these temporary duty suspensions have been conducted through the ITC.

Don Luther - Oop. Okay, now, to wrap things up, we're gonna just cover some compliance best practices for your clients to keep out of trouble or get out of trouble.

First of all, in dealing with compliance for imports, proper communication and planning cannot be emphasized enough. The compliance planning should be part of the purchasing and sourcing operation. And you'll need data if you're the compliance person. There should be a compliance person whose responsibility it is to get customs stuff right. That person needs information from all over the company, R and D, marketing, finance, et cetera. Myron and I can both tell you lots of horror stories where during, say, a Customs audit, there's been a certain classification used for years or a free trade agreement. A claim had been made for years. And then when they actually have a request for a sample, it turns out that perhaps two years ago, the engineering division changed the design of the product, so it's no longer classified in the same place correctly as they've been classifying it. Or they stopped using Canadian-made sheet metal, and started using Korean-made sheet metal, so it doesn't qualify for NAFTA anymore, and you find out, say, during an audit. And it can be very, very costly. Companies should inform themselves on the regulatory requirements of importing. Consult with outside experts, such as attorneys, brokers, consultants.

And I'll direct you to your handout page, sorry, handout 11A, which is a list of some of the informed compliance publications that Customs and Border Protection has produced. They're very good. They're available on cbp.gov. And there are some general ones on classification and value and marking, and there are also some very specific ones on particular classes of products that have been considered problematic. If you have a questionable issue on classification, you can get a binding ruling from Customs so that there's no ambiguity and you'll know exactly how Customs would view that product and how it would be classified. And that's binding on the agency at all ports, and also binding on the importer. Internal procedures and controls, that's something that CBP has really pushed over the past two decades.

During the '90s, back when I worked at CBP, or US Customs back then, they did a lot of studies in their audit process. And they found that their revenue recovery from a company that had internal procedures and controls was much smaller than the typical revenue recovery from a company that didn't have such procedures and controls. So what they really wanna see is procedures that are designed to periodically check, identify and correct compliance problems. And companies that have that going on are in much better shape than companies who don't. And I already talked about importer of record being responsible for everything. Now we'll go to binding rulings.

Again, this is a procedure where you can request a prospective ruling on a new product and get a written guarantee of how Customs is gonna treat that. There's a website there, rulings.cbp.gov. These are searchable. And while the rulings are binding only to the company to whom they are issued, everybody else uses them as a tool in how to classify something. So if you're trying to classify a new item and you find somebody else's ruling on something quite similar, you could use that as a basis to show you exercised reasonable care, because I looked at this ruling for something very similar, and that's why I'm classifying my product in that way. They're issued either by request or in response to an internal advice from Customs. Or when you check that application for further review box on your protest, that will eventually result in the issuance of a ruling, too.

 Now, one of the things we recommend is for importers to review their data. This is available through a FOIA request, where they give you a CD-ROM, or whatever they're doing now, or maybe it's a file transfer protocol site, but you can also get it through the ACE Portal, which is the login where you get to pull out your data. This is a very, very, very valuable thing to do. Internal audits or reviews, risk assessment or prior disclosures. Identify your duty savings opportunities. We do it all the time, where we have pulled the data for a company and create for them a profile where they can identify if somebody else is using their importer record number, but they shouldn't be, or how much money they're spending on duties in different ways, and identify ways they could save money through the use of trade programs, et cetera. This is also very important in the case of mergers and acquisitions. This would be a very good thing to do, that most companies don't, when they acquire or merge with a company. You should really know what you're buying. You could be buying a company with 15 years' worth of open antidumping entries whose final rate hasn't been established yet. Those can be a real ticking time bomb. And so it's something we do recommend for companies.

Basically, every company should take its own pulse with the use of this data. And you can identify problems, you can identify duty savings opportunities, et cetera. And especially if you're acquiring somebody else, then it's definitely worth doing. Just some points to walk away with. It's good for an importer to not be noticed by Customs, but you should monitor your customs brokers so you can get your data. And just because you can qualify for a free trade agreement doesn't mean you have to, 'cause it's extra burden and it may trigger scrutiny. And then we've talked about prior disclosures and how to deal with your things like that.

And you have our contact information on the first slide, so feel free to contact if there's any questions.

Myron Barlow - Thank you, Don. This concludes the Quimbee CLE presentation on customs law. We hope you've learned a bit about customs law and enjoyed your time with us.