GDLSK ALERT: Proper Tariff Engineering Can be used to Achieve More Favorable Tariff Treatment

The Court of International Trade recently issued an important decision which reaffirms an importer’s right to “tariff engineer” its products by designing them to qualify for more favorable duty treatment.

In Slip Opinion 17-102 issued on August 16, 2017, the U.S. Court of International Trade agreed with Ford Motor Company that a vehicle called the Transit Connect was properly classifiable as a passenger vehicle.   In doing so, the court acknowledged tariff principles dating back to the 1800s which hold that importers may engage in legitimate tariff engineering–structuring their products, and locating their manufacturing operations in different countries to achieve favorable duty treatment.   The court also applied the well-established principle that all goods are to be classified in their condition as imported.  While this case involves the classification of motor vehicles, the principles that have been affirmed here have application to a number of products and import transactions.

Ford imported the Transit Connect into the United States in both van and passenger models.   Ford developed both models from a passenger vehicle that was being sold in Turkey. Both models had the identical additional safety features added in production so they could meet U.S. safety standards imposed by NHTSA.   Both vehicles had many of the same structural and auxiliary features.  The rear seats in the van model started out the same as the rear seats in the passenger model, but they were made a bit less expensively in later years.   The passenger model was delivered to customers in the United States in its condition as imported.  The van version was changed after Customs clearance by removing rear seats,  adding a flat floor to increase the cargo area at the expense of the passenger area, and making other modifications.  The structural features present in the van that made it a passenger vehicle at importation remained in the vehicle after U.S. processing, so it could be converted back to its imported condition if the user so desired.

The question presented was whether these Transit Connect models were principally designed for the transport of persons.  The duty rate on “passenger vehicles” is 2.5{bfa08a400c7550404055ff04715e84c9172815d33c25eb3b84e230636ecdc007} and the duty rate on cargo vehicles is 25{bfa08a400c7550404055ff04715e84c9172815d33c25eb3b84e230636ecdc007}.   The court agreed with Ford for a number of reasons.  First and foremost, the court applied the same standards created by the Court of Appeals for the Federal Circuit im Marubeni Am. Corp v. United States which classified the Nissan Pathfinder as a passenger vehicle.  The court’s determination in Marubeni was based on a review of the structural and auxiliary features of the vehicle.  In addition, in the Ford case, the court reviewed the Explanatory Notes to heading 8703 and found that Ford’s van fit squarely with the features that defined passenger vehicles.  The court was also impressed with the fact that many of the same features in the van version were also found in the passenger version which Customs agreed was a passenger vehicle.

The major to benefit to all importers comes from the fact that the court agreed with Ford that tariff classifications are to be made based on the condition of the merchandise at the time of entry.   If this were not the case, then Customs would be charged with following all products into commerce to see what they are made into and how they are used. The court also reviewed a number of vintage court cases where the condition of importation principle was established.  There were cases where sugars that had been made with unusual colors to obtain favorable duty treatment, cases involving the separate importation of gun stocks and barrels, and a case which sanctioned the disassembly of a pearl necklace overseas to import “pearls”  at a more favorable duty rate than pearl necklaces.   The point of all of these case is that the condition of the merchandise at the time of importation should be compared to the text of the statute to see if the imported product meets the terms of the statute.   If the product is not disguised (like hiding good tobacco leaves in bales of ordinary tobacco) and the invoicing is not deceitful, then the product should be classified based on its condition as imported.  Importantly, the intention of the importer is not relevant in these determinations.  That is, it does not matter if the importer intends post entry operations to assemble the gun parts or reassemble the pearls into a necklace because Customs must classify products based on their condition as imported.

Legitimate tariff engineering, whether it relates to structuring products or transactions has been given a huge reaffirmation by this court decision.  It is too soon to tell how Customs will react to this decision because the decision can be appealed or limited.  The case law is solid, but over the years, Customs has created some limits to the use of this concept.  This decision puts tariff engineering back on its rightful footing.  Please feel free to contact our office if you should have any questions as to how tariff engineering can be incorporated into your business.