These are the slides from my ICPA 2014 conference in Orlando.

1. Tariff Engineering
All you can eat buffet or customs
fraud?

7. Try the other white meat?
• OK with wife?
• OK with kid?
• No other penalties or problems?
• Works for me

8. Apply that to tariff rates and you have
tariff engineering.
Is a cotton t-shirt too expensive to import?
Try a polyester blend instead.

9. Merritt v. Welsh, U.S. S.Ct. 1882
• Importer sued the collector at the Port of New
York
• Merchandise was sugar
• Grading scale was “Dutch standard in color”
– Up to 7: $0.0175/lb + 25%
– Above 7: $0.02 or more/lb + 25%

11. Background
• Collector believed the sugar was colored
intentionally with molasses
• Performed chemical analysis
• Found sugar to be of higher grade than color
indicated
• Applied higher rate of duty
A polariscope

12. Issue 1: What’s the Test?
[I]n making its election, Congress did not leave any room for
doubt as to its meaning. It used apt terms to express it;
terms free from all ambiguity and obscurity. If the test
adopted fails to effect the desired object, the inconvenience,
or loss to the treasury, need only be temporary: it can be
changed at any moment. And it is better to submit to a
temporary inconvenience than to set the laws all afloat by
laying down a canon of construction which leaves the plain
words, and seeks to spell out, or guess at, the supposed
intent of the legislature, contrary or supplementary to that
which is clearly embodied in the words it has used.

13. Issue 2: Is this Fraud?
It may be that our tariff of duties is evaded by giving to
sugars, in the process of manufacture, a low grade of color. If
this be so, it is no more than every manufacturer does;
namely, so to manufacture his goods as to avoid the burden
of high duties, provided he can do it without injuring their
marketability, or injuring it less than the duties involved. So
long as no deception is practised, so long as the goods are
truly invoiced and freely and honestly exposed to the officers
of customs for their examination, no fraud is committed, no
penalty is incurred.

14. U.S. v. Citroen, U.S. S.Ct. 1912
• 37 drilled pearls
• Divided into five lots
• When sold in Paris, they were strung into a
necklace
• ¶ 434 “Articles commonly known as jewelry . .
. Pearls set or strung . . . .” 60%
• ¶ 436 “Pearls in their natural state, not strung
or set . . . .” 10%

16. Decision
• Classification is ascertained by an examination of
the imported article itself, in the condition in
which it is imported.
• This, of course, does not mean that a prescribed
rate of duty can be escaped by resort to disguise
or artifice.
• When it is found that the article imported is in
fact the article described in a particular
paragraph of the tariff act, an effort to make it
appear otherwise is simply fraud on the revenue
and cannot be permitted to succeed.

17. Holding
• ¶ 436 “Pearls in their natural state, not strung
or set” includes drilled pearls
– “Not strung” implies that pearls may be ready for
stringing
– Pearls are often drilled immediately after being
removed from the shell
• ¶ 434 requires that the pearls be “set or
strung”

18. Michaelian & Kohlberg, Inc. v. U.S.,
Cust. Ct. App. 1935
• Chinese rugs
• Embroidered pink threads in one corner
• Two black dots for eyes
• “Embroidered Chinese dragon”
• ¶ 1116. “Oriental … rugs …” 50 c. sq. ft.
• ¶ 1529. “…articles embroidered…to whatever
use applied…composed…of…threads” 90%

21. Trial Court Decision
We do not see how the stitching on each end…can
be considered anything but the crudest kind of
embroidery, if by any reasonable stretch it can be
called embroidery at all… We are convinced that the
placing of this crude stitching on these rugs was
simply a subterfuge to escape in part the lawful duty
to which the rugs of this type in issue would
otherwise be subject to without question.

22. Appeals Court Reverses
• Merritt and Citroen control
• “…the rule is well settled, having been often stated
and approved by other courts, that an importer has
the right to fashion his merchandise so that it shall
be assessed with the lowest rate of duty.”
• Held: Rugs are “articles embroidered…to whatever
use applied”
– “to whatever use applied” is broad language
– The dragon, designed only to affect classification, is not
subterfuge, no matter how crude

23. Corporacion Argentina v. U.S.,
Cust. Ct. App. 1945
• Mixed canned dog food imported from Argentina
• ¶ 730. “…mixed feeds, consisting of … grain products
with …other feedstuffs” 10%
• Customs issued ruling that ¶ 730 required 8.6% grain
products
• Importer’s dog food:
– 82% beef
– 5.8% corn meal
– 12.2% other
• Customs classified as ¶ 1558. “…all articles
manufactured….not specially provided for” 20%

25. Holding
• “Mixed feeds” doesn’t require certain %
• 5.8% corn meal serves a “definite, useful
purpose in dog food”
• Not added “by disguise or artifice”
• “An importer in the absence of subterfuge or
deceit, has the right to so fashion his
merchandise that he may obtain lower rate of
duty than if not so fashioned.”

26. Wiley v. U.S., Cust. Ct. 1966
• Pistol barrels and frames in separate cases
from Germany
• Arrived on separate planes on same date
• Entered on same date
• Same exporter/importer
• Parts to be attached to form finished pistols
• Finished pistols, $1.80 each + 35%
• Parts and fittings for pistols, 52.5%

27. Pistols or Gun Parts?

28. Decision
• They’re parts
• “The purpose and intent of the importations
notwithstanding, the importer had the right to
have his goods manufactured or imported in the
manner which would produce the lowest possible
duty. Customs examination must focus on the
identity of the articles as disclosed in legitimate
entries. As the court of appeals indicated a long
time ago … if the condition is or becomes
undesirable, the remedy lies with Congress.”

29. Feather Dusters, 1991
HQ 089090
• Importer classified articles as “feather dusters” under
Heading 9603
• Customs discovered that after importation, the feather
dusters were disassembled, and the feathers were
dyed, cleaned, or bleached
• Then the feathers were sold as feathers or sewn into
boas and hats
• Customs reclassified articles as feathers under Heading
0505
• Articles were not entered into the stream of commerce
in their condition as imported = artifice

31. Heartland By-Products v. U.S.
1999 - 2001

32. Background
• Heartland was Canadian sugar refiner
• U.S. tariff rate quota on refined sugar syrups
• 1702.90.10 - syrups with 6% or less non-sugar solids
(excluding foreign substances) = quota
• 1702.90.40 - syrups with more than 6 % non-sugar
solids (excluding foreign substances) ≠ quota
• Heartland’s process added molasses to its syrup prior
to the export to the U.S.
• Before starting, Heartland asked Customs for ruling
that molasses is not a “foreign substance”

33. Background
• 1995: Customs ruled molasses is not a “foreign
substance” –> 1702.90.40 ≠ quota
• Heartland’s entire business model depended on ruling
• U.S. sugar industry petitioned to revoke ruling
• Claimed Heartland deceived Customs by removing the
molasses from syrup after importation
• 1999: Customs revoked ruling
– Molasses is a “foreign substance”
– Heartland’s tariff engineering was an “artifice”

34. Ruling Revoked by Customs
We conclude….that there are no commercial
identities or uses for the syrups as imported.
Furthermore we conclude that the addition of
the molasses prior to importation and the
extraction of the molasses after importation is an
artifice and that the resulting syrup is used in the
same manner as other syrups classified in
provisions of the tariff that are subject to tariff
rate quota provisions.
– NYRL 810328, Aug. 25, 1999

35. Court of International Trade,
Oct. 19, 1999
• Heartland appeals
• CIT says not so fast Customs
• CIT reverses
• Held: molasses was not a “foreign substance”
• Heartland engaged in acceptable tariff
engineering
• Combining raw sugar with molasses before
importation was a “legitimate step in the refining
process”
• Not an “artifice”

36. Court of Appeals for the Federal Circuit
Aug. 30, 2001
• CIT must give deference to Customs new ruling that
molasses was a “foreign substance”
• Court did not reach the tariff engineering question
• Concurring opinion commented: “Since the addition
and removal of the molasses from the sugar served no
manufacturing or commercial purpose, the conclusion
is irresistible that the only purpose for this strange
arrangement was to create a fictitious product that,
because of the temporary presence of the molasses,
qualified for the lower rate of duty on sugar imports
containing specified amounts of non-sugar solids.”

37. Anatomy of a Shoe

38. Footwear Disputes
• Shoes have two parts for classification purposes:
– Upper: the entire part of the shoe that covers the foot
– Outer sole: exposed part of sole that contacts the ground
• Classification depends on materials of the outer sole
• Footwear with plastic soles (6404) and rubber soles
(6402) are subject to higher duties than footwear with
outer soles made with textiles, “other footwear”(6405)
• Importers engineered shoes to contain enough textile
material in the outer sole to avoid higher duties

40. “Wool felt” soles, 1994
HQ 955720
• Importer glued “wool felt” onto plastic outer sole of wool
clogs
• Classified them as 6405.20.60, “other footwear with uppers
of textile materials, with outer soles and uppers of wool
felt” 2.8%
• Customs re-classified the shoe under 6404.19.35,
“footwear with outer soles of … plastics … and uppers of
textile materials”, 37.5%
• The shoe was not a “commercial reality” (i.e., a fictional
product)
• Felt was easily removed, eliminated any traction, and easily
wore off with normal use in a short time
• Not permissible tariff engineering

41. Slip-ons, 2002
HQ 964978
• Slip-on shoes with outer sole of molded
rubber/plastic, thick layer of textile material
over 70% of the outer sole
• Heading 6404, “footwear with outer soles of
rubber, plastics…and uppers of textile
materials
• Heading 6405, “other footwear”

42. Permissible Tariff Engineering?
• Customs acknowledges its “financially
advantageous” to import shoe with outer sole of
textile materials
• But distinguishes this case from Heartland
• Textile material is part of sole when it is imported
• Shoe sold in exactly the condition as imported
(i.e., it’s not a fictional product)
• Textile covering on sole not removed prior to sale
• Addition of textile layer not artifice or disguise

43. House Slippers, 2002
HQ 965752
• Slipper with upper of textile material with outer
sole composed of unit-molded rubber plastics
over which was “thin layer of textile fabric”
• Material could wear off in short period of time
• Customs ruling classified as “other footwear”
6405.20.90, 12.5%
• Domestic shoe industry lost business
• Petitioned for reclassification, slippers with
rubber/plastic soles, 6404.19.20, 37.5%

44. Commercial Reality
While there is little case law concerning finding tariff
engineering to be a fraud or artifice, there are many
Customs rulings on this issue. The general position
taken by Customs in these rulings is that if Customs
finds the article, at the time of importation, is a
commercial reality, then the tariff engineering will not
be considered a fraud or artifice. In the cases in which
Customs has found that the tariff engineering was a
fraud or artifice, Customs concluded that the article
was not a commercial reality because the article was
not sold or otherwise entered into the stream of
commerce in the condition as imported.

45. Ruling
• Customs ruled for the importer
• “No apparent deceit” as to nature of the slippers
• Slippers imported and sold with textile material in
tact
• Even if textile material wore off quickly, consumer
wore it with textile embedded into outer sole
• Introduced into stream of commerce as entered
• Commercial reality

46. What is ‘Disguise or Artifice’?
• For an importer to benefit from tariff engineering, the
article must be a “commercial reality”, have a
“commercial identity” or “commercial use” in its
imported condition
• Or it must be a finished product traded or used in its
condition as imported
• The product, as entered, must be part of a “genuine
step” in the manufacturing process
• If the added feature of the product that allows the
importer to obtain a lower duty is removed shortly
after importation, the tariff engineering is an “artifice”

47. Wickless Wax Candles?

48. Background
• In 1986, Department of Commerce imposed
antidumping duty on against certain wax candles
from China
• ADD for “candles” classified under Heading 3406,
54% in 1986, increased to 108% in 2004
• Imported product was wax cylinder with hole
drilled down center
• Importer classified under Heading 9602, “molded
or carved articles of wax”, 1.8% no ADD
• Customs Ruling HQ 105015, Dec. 7, 2010

50. Ford Transit Connect Vans?

51. Background
• Heading 8703 “motor vehicles principally designed for
the transport of persons” 2.5%
• Heading 8704 “motor vehicles for the transport of
goods” 25%
• Vans imported with four doors, rear bench seat with
seatbelts, and rear side windows, importer classified as
passenger vans
• Soon after entry near port, bench seat removed and
cargo bay installed, rear windows replaced with
painted coverings, bench seat discarded
• Sold for retail as cargo vans
• Customs Ruling HQ 220856, Jan. 30, 2013

53. Thank you
Questions?
Contact:
Lawrence Friedman
Barnes, Richardson & Colburn, LLP
Global Trade Law
303 E. Wacker Drive, Suite 1020
Chicago, Illinois 60601
Tel: (312) 565-2000
E-mail: lfriedman@barnesrichardson.com