Cost of Apparel, Other Consumer Goods May Increase as Customs Considers Revoking Precedents

U.S. Customs and Border Protection (CBP), seemingly oblivious to efforts by the President and a bipartisan Congress to stimulate a lagging economy, recently notified the public that it intends to revoke two long-standing positions that will result in higher costs to businesses and consumers alike. The increases will be borne first by importers, since their prices are locked in and they have already notified their margins to Wall Street.

Eventually, however, the additional costs of importing under CBP's proposed rules will be passed down to the American consumer. The impact of the proposed changes will be dramatic and can ill be afforded now.

CBP seems to be scratching its head as to why the trade community has become so exorcised over the proposal, but the reason is simple: There was no consultation, the net impact seems to have been ignored and CBP is unilaterally overturning court decisions.

How can CBP be so out of touch?

Proposed Revocation of First Sale Rule

CBP issued a notice on January 24 proposing to revoke the first sale rule. In a multi-tiered sales transaction and when certain court-defined criteria are met, the price that is paid by the middleman to the factory (the first sale), and not the price paid between the middleman and the importer (the last sale) may be used as the basis for assessing duties upon entry into the United States. CBP is proposing to revoke this practice and require that the last sale be used as the basis for duty assessment in all instances.

The first sale principle was first recognized by the federal courts in 1988 and has since been upheld in two significant decisions by the Court of Appeals for the Federal Circuit. Reportedly, CBP doesn't like the court's rulings. In fact, one reason it gave for revoking the decades-old practice was that it is difficult to administer. However, as we know, under the Customs Mod Act it is the importer that bears the burden of proving that they have complied with CBP regulations. It is therefore the importer that incurs the costs of ensuring compliance with the first sale rule and that must be prepared to demonstrate such compliance to CBP.

CBP also cited as a reason for the change a non-binding commentary presented by the Technical Committee on Customs Valuation, a subcommittee of the World Customs Organization. It is abundantly clear that such a non-binding international commentary cannot replace the reasoned guidance of the federal courts and certainly provides no reason to change U.S. policy and precedent. In fact, the Customs Valuation code allows countries to interpret the manner in which they assess duties differently. For example, some countries use CIF while others use FOB for value purposes.

Revoking the first sale doctrine would have a number of negative effects. Among other things, it could become more difficult for U.S. free trade or preferential trade partners to meet value-added origin requirements. One has to question if this change would therefore nullify benefits negotiated in good faith and run counter to the intent of Congress in providing such benefits to lesser-developed countries.

Proposed Tightening of Restrictions on Use of 9801.00.20

The proposed revocation of the first sale rule followed on the heels of CBP's notice to the public earlier in January that it intended to revoke previous rulings and a two decade-old interpretation regarding qualification under 9801.00.20 of the Harmonized Tariff Schedule (HTS). This provision permits the duty-free return of certain previously-imported goods that have been exported pursuant to a lease or similar agreement. The principal purpose behind its creation was to prevent double taxation. 

CBP is proposing to revoke a significant number of prior rulings that interpret HTS 9801.00.20 in a non-restrictive manner, as was intended by Congress when the coverage of the provision was expanded in the Trade and Tariff Act of 1984. In particular, CBP has long held that warehousing is a "similar use" under this provision. In fact, CBP issued the latest ruling to this effect in October 2007, yet by December 20 it had reversed itself. In doing so, CBP cited the same court case it had previously used to justify its warehousing rulings as the reason it could no longer justify such a determination. What happened in those two months? How can the same court case be used to support and then oppose the same issue?

What is also striking is that the concessions in HTS Chapter 98, and this provision in particular, were notified and included as part of NAFTA. The United States negotiators specifically sought to include these provisions because they wanted to bind Canada to apply them. Canada's equivalent provision is even more expansive than that of the U.S. If the eligibility of goods under this provision is reversed, one could imagine that Canada and possibly Mexico as well could claim that their rights under the agreement have been nullified. The NAFTA challenge that could result -- at a time when the agreement itself is being hotly debated in the political world -- would only add fuel to the fire.

CBP as a Partner?

Some in the trade community feel that they have been blindsided by CBP's proposals. In the years since the terrorist attacks of 9/11, the trade has willingly assumed the additional costs and bureaucracy associated with new data submission requirements, new terrorism protection plans and new inspections, certifications and verifications. They have willingly been a partner with CBP in the fight against terrorism.

However, the partnership with CBP on trade facilitation seems to have disappeared. Gone are the days of cooperation between government and industry to address concerns or to sound out new initiatives. Some in CBP have questioned why the trade is so up in arms over these proposals, but the reason is that the actions the agency is taking will have a direct and significant impact on corporate balance sheets. That gets immediate attention from chief financial officers and boards of directors, many of whom are now asking their operations managers why they should continue to work with CBP and participate in these "volunteer" programs on security if CBP is only going to attack their bottom lines. The actions proposed could therefore have long-standing ramifications and unintended consequences.

Sometimes it is best to say "mea culpa," reverse the action taken and start anew. It is times like these when that would appear to be CBP's best option.

Nicole Bivens Collinson is Vice President for Trade Negotiations and Government Affairs for Sandler, Travis & Rosenberg P.A. an international trade consulting and law firm (www.strtrade.com). To join the coalitions working on the 9801 and first sale issues contact Ms. Collinson directly at [email protected] or 202-216-9307.