CIT Finds Importer Negligence Despite Consulting Broker on Tariff Classification
The Court of International Trade on July 13 found an importer negligently misclassified entries of bags for storing cold beverages, despite having consulted its customs broker as to the correct classification (here). Farhan Khan did not exercise reasonable care because he should have consulted other sources after receiving three conflicting suggestions from his broker, and improperly relied on his broker's opinion to classify related but different beverage bags, CIT said.
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Khan, who operated the Florida-based company Artistic Creations, had asked his broker, Priority One, for assistance in classifying the CoolSack, a freezable PVC bag containing liquid used to keep wine chilled. Within the span of 20 minutes the broker's representative sent three emails suggesting different classifications, with the third promised as the "last on this subject" after the Priority One representative discussed the matter with his manager.
Khan subsequently followed his broker's final suggestion, classifying entries of the CoolSack as an "insulated food or beverage bag" under subheading 4202.92.1000, which is dutiable at 3.4%. Khan also classified entries of the similar CanCooler and Wine Bottle Wrap in that subheading.
CBP reclassified all the merchandise under subheading 4202.92.90, dutiable at 17.6%, which covers bags "other [than insulated food or beverage bags]," despite letters sent by Priority One arguing to the contrary. It then sent a pre-penalty notice to Khan identifying a total revenue loss of $90,758.42 and proposing a penalty of $181,496.84, before reducing the penalty amount to $45,374 and seeking $8,228 in unpaid duties in the final penalty notice. By then, Khan's surety had covered the majority of the lost revenue.
CIT agreed that classification as insulated food or beverage bags was incorrect. "An 'insulated food or beverage bag,' as used in subheading 4202.92.1000, HTSUS, must be able to retard the passage of heat to or from a hot, as well as a cold, food or beverage," CIT said. Khan's beverage bags are only able to keep beverages cold by cooling the liquid inside the bags in a freezer.
CIT also found Khan did not exercise reasonable care in classifying the merchandise. "Under these circumstances, a reasonable importer would have taken some further steps to investigate the proper classification given the uncertainty created by the broker’s disparate recommendations in such a short time," CIT said. "Yet, [Khan] admits that he never questioned or further discussed Priority One’s recommendation prior to importation," the court said. Nor did Khan seek a binding ruling or consult CBP's CROSS rulings database, "the tariff schedules, informed compliance publications, court cases, a lawyer, accountant or customs consultant," CIT said. Khan also should not have relied on his broker's advice on the CoolSack to classify the CanCooler and Wine Bottle Wrap, it said.
However, though it found Khan's misclassification constituted negligence, CIT only authorized CBP to collect the unpaid duties and any interest accrued up to now. More information is needed to decide the correct penalty amount, including Khan's history of previous violations, ability to pay, the appropriateness of the size of the penalty and its effect on Khan's ability to continue doing business, CIT said. The court ordered both sides to file a joint status report on how the case should proceed.
(U.S. v. Farhan Khan, Slip Op. 17-85, CIT # 15-00250, dated 07/13/17, Judge Kelly)
(Attorneys: Guy Eddon for plaintiff U.S. government; Matthew Glen McKinney for defendant Farhan Khan)