CIT Decision 'Reaffirms' Use of Tariff Engineering by Importers, Customs Lawyers Say

A recent Court of International Trade decision reaffirms the right of importers to use tariff engineering to obtain lower duty rates, customs lawyers said after the Aug. 9 decision was released publicly on Aug. 16. The addition of stripped-down seats to a Ford Transit Connect cargo van and their removal immediately after importation constitutes “legitimate tariff engineering” to obtain a lower duty rate applicable to passenger vehicles, CIT said.

Tariff classification is determined based on an article’s condition at the time of importation, the trade court said. A manufacturer has the right to make its goods as it chooses, even if a process lacks a "manufacturing or commercial purpose” and is meant only to achieve a lower duty rate, CIT said, citing an 1881 Supreme Court ruling. Tariff engineering is legitimate as long as not by means of “disguise or artifice,” it said.

The decision runs counter to CBP’s current position on permissible tariff engineering. “Customs has adopted the position that where the imported product has no independent commercial utility other than avoiding a higher tariff, then there is disguise or artifice,” said Lawrence Friedman of Barnes Richardson. “One example Customs uses is of ‘temporary’ products that are changed after importation to a product that would have had a higher rate of duty if imported. This case is important because it reaffirms that tariff engineering remains permissible,” Friedman said. “Goods are classified in their condition as imported, without regard to subsequent processing.”

The Ford Transit Connect vans at issue in the case were imported from Turkey for several years as a passenger vehicle in subheading 8703.23.00, dutiable at 2.5 percent. The vehicles had been manufactured as cargo vans, then seats were added and other changes were made in Turkey, including the addition of reinforcements and supports to meet U.S. motor vehicle safety rules. Knowing the seats would be scrapped, Ford had stripped the seats down over time to save on cost by removing headrests and seatback wires, among other things, the court said. But Ford said it ensured they still met safety standards.

After clearing customs but before leaving the port, Ford removed the second row seat and made other changes to convert it into a cargo van before delivery to the customer. At the time, cargo vans imported from Europe were subject to a 25% retaliatory duty known as the “chicken tax,” put in place in the 1960s to counter European tariffs on U.S. chicken. CBP became aware of the practice during a Trade Compliance Management Review. The agency reclassified the vans at the higher duty rate after issuing an internal advice ruling, HQ H220856, at the request of CBP Baltimore. After Ford sued, CIT said it needed more information to decide the case, in a ruling issued in October (see 1610050054).

According to CIT, the Supreme Court’s limitation on disguise or artifice “emphasizes changes to the appearance, not the physical characteristics, of the article.” For example, in another Supreme Court case decided in 1890, the high court ruled against an importer that hid high quality tobacco in a bale of inferior tobacco, and tried to classify it in the provision for the lower quality product. “In contrast, the purposeful manufacture or preparation of an article to avoid higher tariffs is not disguise or artifice; rather, that is legitimate tariff engineering,” CIT said. For example, courts have found legitimate the addition of colorants to sugar and the removal of pearls from a string to obtain lower duty rates.

Ford performed its legitimate tariff engineering by design, and not by deception, the court said, rejecting the government’s argument that designing an article only to avoid tariffs constitutes disguise or artifice. “Parsing manufacturing steps and the reasons behind those steps in an effort to uncover disguise or artifice threatens to turn the concept of legitimate tariff engineering on its head,” and would be difficult to enforce, CIT said. “Calling upon CBP to examine the purpose and genuineness of steps in the manufacturing process as part of its classification process would impair the timely and sound administration of the customs laws,” and would run contrary to the Supreme Court’s direction that a manufacturer has the right to make its goods as it pleases.

Despite changes to save costs, the seat in Ford’s Transit Connect “is still a seat, albeit a cheaper and, perhaps, less attractive one,” CIT said. Taken as a whole, the van's “principal design,” at the time of importation, is “for the transport of persons,” and is classifiable in heading 8703 as a passenger vehicle with a 2.5 percent duty rate, CIT said.

“This is a substantial win for Ford and it clarifies the law surrounding tariff engineering,” Friedman said, calling an appeal “inevitable.” Whether the Federal Circuit upholds the decision may be uncertain. “Ford was kind of walking the knife edge between tariff engineering and an impermissible sham, but advocacy carried the day for them,” said John Peterson of Neville Peterson. The Justice Department did not comment. A spokeswoman for Ford said the company is pleased with the decision.

CBP's response to the ruling remains to be seen, law firm Grunfeld Desiderio said on its website. "Legitimate tariff engineering, whether it relates to structuring products or transactions has been given a huge reaffirmation by this court decision," the firm said. "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."

(Ford Motor Co. v. U.S., Slip Op. 17-102, CIT # 13-00291, dated 08/09/17, Judge Barnett)

(Attorneys: Gordon Todd, of Sidley Austin, for plaintiff Ford Motor Co.; Beverly Farrell for defendant U.S. government)