General Importing Information:
Below, please find a letter that addresses the most common issues encountered by importers. This letter is written in a manner that will make it useful to U.S. persons as well as non-native English speakers. If you have any questions, please contact our office for a more detailed discussion.
The following discusses many of the tariff provisions and Customs procedures that commonly challenge importers or which present opportunities for minimizing or recovering duties. Some of the subjects covered here may seem elementary. Sonnenberg & Anderson’s experience, however, has shown that often importers are not familiar with these subjects or misunderstand them. The purpose of this document, therefore, is to provide a basic framework for understanding how Customs and Border Protection [“Customs”] handles imported merchandise and what importers can do to make the importing process more predictable, while at the same time minimizing duty payments and problems.
This document should not be considered legal advice. The law firm of Sonnenberg & Anderson has a long history of successfully addressing legal issues, business concerns, and Customs and trade issues that are covered by this general synopsis. Legal advice requires an analysis of specific fact patterns which may vary widely from importer to importer. For comprehensive legal advice on these and other issues, please feel free to contact our office. Via telephone at 312-899-1100 or by sending us an email
![General Importing Procedures

Customs and International Trade Attorneys
Table of Contents
I. Informed Compliance/Reasonable Care
II. The Basic Principles of Importation - Classification and Valuation
A. Customs Tariff Classification of Imported Merchandise
1. Classifying Imported Merchandise
2. Designing Products to Obtain Lower Duty Rates
B. Customs Valuation of Imported Merchandise
III. Liquidation of Entries
IV. Communications with Customs
A. Import Specialists
B. Special Agents
V. Miscellaneous Tariff Provisions and Considerations
A. Country of Origin Marking
B. Recovery of Customs Duties on Damaged, Defective or Nonconforming Merchandise
C. Unused Merchandise Drawback (Same Condition Drawback)
D. Manufacturing Drawback
E. Importation of Goods under NAFTA
VI. Avoiding Customs Penalties
A. Civil Penalties under 19 U.S.C. ' 1592
1. Potential Penalties
2. Mitigation of Penalties - Prior Disclosure and other Petitions
3. Areas Which Frequently Result in Customs Penalties
a. Currency Fluctuations
b. Entry Under HTSUS subheadings 9801.00.10; 9802.00.50; and 9802.00.80
c. Supplemental Payments (Double Invoicing)
d. Assists
B. Other Penalties
1. Recordkeeping Penalties
2. Drawback Penalties
I. Informed Compliance & Reasonable Care
On December 8, 1993, President Clinton signed the Customs Modernization and Informed Compliance Act [“Mod Act”] into law as Title VI of the North American Free Trade Agreement [“NAFTA”] implementing legislation. The Mod Act introduced a number of changes in the U.S. customs laws. The most fundamental change introduced by the Mod Act was the concept of “informed compliance” whereby Customs and the importing community “share” the responsibility of administering the U.S. customs laws. Under “informed compliance,” Customs is responsible for defining an importer’s obligations. The importer is responsible for ensuring that those obligations are met.
This “informed compliance” concept places an affirmative burden on importers to exercise reasonable care in the discharge of their responsibilities relating to the importation of merchandise. An importer must exercise reasonable care in all facets of the importing process, including the manner in which it describes, classifies and values imported merchandise. Reasonable care means that an importer will act reasonably, and with knowledge of the facts and its legal obligations. An importer who guesses or assumes without reasoned inquiry would not be exercising reasonable care.
In meeting the reasonable care standard, the legislative history of the Mod Act expects that importers will seek the advice of competent customs experts such as customs brokers and customs attorneys. In consulting these experts, importers are responsible for providing full and complete information sufficient to allow the expert to give properly reasoned advice. The failure to consult a customs expert, as well as the failure to provide a customs expert with all the pertinent information, could be found to constitute a failure to exercise reasonable care in certain situations.
Importers who fail to exercise reasonable care may be subjected to civil penalties in an amount up to the domestic value of the merchandise, depending upon the level of culpability. In light of these severe civil penalties, importers are urged to exercise reasonable care in all facets of the importing process.
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II. Basic Principles of Importation: Classification and Valuation
Of major concern to importers is the amount of customs duties which will be assessed with regard to imported merchandise. Customs duties are determined on an ad valorem basis. Thus, the amount of duties owed with regard to a particular importation will depend upon the duty rate applied and the value of the imported merchandise. The duty rate to be applied to imported merchandise is determined by its tariff classification and its country of origin.
Prior to the passage of the Mod Act, importers were solely responsible for providing true and complete information regarding the transaction and the merchandise at the time of entry. Customs was responsible for determining the proper classification and appraised value of the imported merchandise. Under “informed compliance,” importers are now responsible for using reasonable care in determining the classification and appraised value of merchandise on the entry declaration to Customs. In light of the potential penalties, importers should always exercise reasonable care in determining the proper tariff classification and value of imported merchandise. Where appropriate, importers should consult with a customs expert.
A. Customs Tariff Classification of Imported Merchandise
1. Classifying Imported Merchandise
There are over 12,000 separate subheadings in the Harmonized Tariff Schedule of the United States (“HTSUS”) under which imported merchandise may be classified. As mentioned above, the duty rate applied to imported merchandise depends in part upon the tariff classification of the imported merchandise.
Under the Mod Act, it is the importer’s responsibility to exercise reasonable care in determining the tariff classification of imported merchandise. In order to do so, an importer must examine the nature of the imported merchandise and the language of the HTSUS. An importer may also be expected to examine Customs rulings and court cases which relate to the imported merchandise. Exercising reasonable care does not mean that importers and Customs will always agree with regard to the classification of imported merchandise. Reasonable care only requires importers to examine the merchandise and determine a classification and value supported by the law. Nevertheless, importers must have reasoned support for their determinations. Thus, an importer should retain all records supporting its classification claims in the event that they are ever questioned by Customs. Of course, importers must classify merchandise in accordance with any binding ruling issued by Customs with regard to identical merchandise. Importers can search and review Customs published rulings through Customs website at Customs' Website.
In order to determine the proper classification of imported merchandise within the HTSUS, an importer must be familiar with the HTSUS general rules of interpretation. Failure to know these rules may result in the improper classification of imported merchandise. In many instances, an article may seem to fit exactly within a tariff provision, and yet not be properly classified under that tariff provision because it is more specifically described by another provision. For example, HTSUS subheading 8214.10.0000 provides for pencil sharpeners. Under the 2005 HTSUS, merchandise classifiable within this subheading is subject to duty at the rate of 0.3 cents each plus 4.2% ad valorem. Pencil sharpeners, however, are classified in this subheading only if they are non-mechanical, such as the small kind used by children to sharpen pencils or crayons. Electric pencil sharpeners or manual pencil sharpeners used in the office are classified as office machines under HTSUS subheading 8472.90.4000. Under the 2005 HTSUS, merchandise classifiable within this subheading is subject to duty at the rate of 2.6% ad valorem. Thus, the importer who improperly classifies mechanical pencil sharpeners under HTSUS subheading 8214.10.000 is at a competitive disadvantage with his domestic competitors and with other importers who classify their mechanical pencil sharpeners under HTSUS subheading 8472.90.4000.
Oral advice from an import specialist is not binding on Customs, and generally can be changed at any time. Importers may obtain a binding ruling from Customs by submitting a ruling request in writing and a sample (where appropriate) to Customs Headquarters or to the National Import Specialist in New York City. Binding rulings are often worth pursuing since they add predictability to the importing process. Even binding rulings, however, may be modified or revoked by Customs if the agency provides proper administrative notice.
2. Designing Products to Obtain Lower Duty Rates
Importers have the right to design their products or transactions in any manner in order to obtain the lowest possible duty rate. Classification of merchandise is guided by the state of the item at the time of importation. So long as the items are properly invoiced and freely and honestly presented to Customs, they may be altered, assembled, disassembled, etc. to exploit more favorable classification and duty rates, at the time of importation.
B. Customs Valuation of Imported Merchandise
Customs valuation is a very complicated area, and one which can have a major effect on Customs duties. A common mistake made by importers is believing that imported merchandise will be valued (appraised) at the transaction price, or the price actually paid for the merchandise by the importer. Most appraisements are made at transaction values. However, Customs may use other methods of valuing imported merchandise. Some of the other methods employed by Customs are:
1. The price paid by another importer for identical merchandise.
2. The price paid by another importer for what Customs determines is “similar” merchandise.
3. The price at which identical or “similar” merchandise is sold in the United States, less charges such as ocean freight, Customs brokerage, Customs duties, and “amounts” for general expenses and profit in the United States (“Deductive Value”)
4. The cost to the foreign manufacturer of producing the merchandise, with certain minimum amounts added for general expenses and profit (“Computed Value”).
A detailed review of Customs valuation is beyond the scope of this discussion. However, you should note that Customs can appraise imported merchandise at higher than invoice values, and often does so. Therefore, if imported merchandise is appraised for Customs purposes at any value higher than invoice value, you should make certain that such valuation is proper. In some cases, even where valuation at a price higher than invoice value is proper, it is possible to restructure the transactions so as to make a different method of valuation apply to the goods. Often the new method of appraisement will result in a lower dutiable value.
Also, transactions between related parties may be subject to higher levels of scrutiny.
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III. Liquidation of Entries
Many importers believe that once documents are submitted to Customs and “estimated duties” are paid, their customs duties have been determined. This is not true. When Customs “accepts” entry documents, this means nothing more than the documents appear to be in order (the totals add up and necessary documents are attached) and that the proper amount of duties appear to have been deposited. It is important to note that the money paid to Customs at the time a shipment clears Customs is a “deposit of estimated duties.”
The final accounting for customs duties occurs at liquidation of an entry. At liquidation, the import specialists fully review the entry documents and then finally assess Customs duties based upon their knowledge of the value of the imported merchandise and the rate of duty provided for in the HTSUS. Liquidation may occur months or even years after goods are released by Customs. At the time of liquidation, import specialists may use information that has just come to their attention. Therefore, an importer will not know its liability for duties until the act of liquidation has occurred. Further, it should be noted that Customs is given the authority to reliquidate entries within 90 days of the liquidation date, even if a protest of the original liquidation has been filed during those 90 days.
Official notice of the liquidation of an entry appears in the bulletin notice of liquidated entries posted at the Customhouse. Upon liquidation of an entry, Customs will typically send a “Courtesy Notice” to the importer. The courtesy notice will notify the importer of the liquidation date and the amount of duties and fees assessed on the entry at liquidation. Customs, however, is not required to issue a courtesy notice. Similarly, any errors in the information on the courtesy notice will not affect the liquidation of the entry as the only “official” notice of liquidation is that which appears in the Customs house.
In the past, there was no limit to the time in which Customs could liquidate an entry. Thus, entries could remain unliquidated for years without any notice to the importer. As of 1979, however, Customs is required to liquidate entries within one year from the date of entry. Entries not liquidated will be Automatically liquidated one year after the date of entry unless liquidation is extended by Customs or suspended by statute or court order. Customs is required to notify the importer in writing if an entry is extended or suspended for any reason. When entries are automatically liquidated, notice is not required to be given to the importer. Currently, it is Customs’ practice, generally, to liquidate entries 314 days after the date of importation when neither an increase in duties nor a refund is involved. This cycle is commonly described as the “no-change” liquidation cycle.
Entries will not be automatically liquidated one year from the date of entry where Customs notifies an importer in writing that liquidation is being withheld. Customs usually will send such a notice when it (i) needs more information, (ii) has not decided the final rate or value of the goods, or (iii) suspects noncompliance with the importing laws. Likewise, an importer may request that automatic liquidation of an entry be delayed. An importer may want to make such a request if it is arguing for a lower duty rate or value or is waiting for a formal Customs ruling.
An importer has a right to contest a determination made by Customs on an entry and to receive the refund of any excess customs duties paid. In order to do so, the importer must file a protest within 180 days from the date of liquidation of the entry. A protest is a standard form filed with Customs detailing the entry and the decision being challenged. It is extremely important that protests be filed within 180 days from the date of liquidation of an entry. If a protest is not filed within 180 days from the date of liquidation, an importer will not receive refunds of excess customs duties even where Customs is later found to have been wrong. A prudent importer, therefore, will closely monitor the liquidation status of its entries. This is most easily accomplished through the development of a liquidation log, which tracks entries and liquidations.
If an importer regularly monitors the liquidation status of its entries, it may be able to determine the “usual” length of time between date of entry and date of liquidation at a particular port. As mentioned above, Customs current practice is to liquidate “no-change” entries 314 days after importation. An importer can then track its liquidations and verify that all its entries are moving through Customs smoothly. Such a liquidation log will alert the importer if entries are not being liquidated within the “usual” time. It is typically a serious matter when Customs stops liquidating entries. For example, if entries are not being liquidated during the “usual” time, the import specialist may have questions regarding the classification or value of the merchandise, or Customs may be investigating the importer. If entries are not being liquidated during the “usual” time, an importer or its Customs counsel should follow-up with Customs to ensure that no serious problems exist.
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IV. Communications with Customs
A. Import Specialists
Import Specialists are Customs officials who are responsible for the day-to-day work involved in monitoring merchandise imported into the United States. They will review the classification and appraised value of imported merchandise, administer quotas, check for country of origin markings, check documents for correctness and completeness, and perform other day-to-day tasks. Import Specialists are divided into teams, which are responsible for different commodity areas. They attend trade fairs, read trade magazines, and handle a number of products within a commodity area, and thus develop expertise in the commodity areas.
Visits and telephone calls from import specialists are not cause for undue alarm. However, it is a good practice to keep accurate records of matters discussed with import specialists and copies of all documents given to them.
Import specialists often request information so that they can properly value and classify imported goods. For example, Customs may request a description of imported goods or information regarding a company’s pricing practices. Such requests for information usually are made on a “Request For Information,” Customs Form 28. Great care should be taken in responding to a Request For Information as your response may affect the classification or valuation of the imported merchandise. It is generally a good idea to ensure that you know why Customs is asking for particular information before you reply. Also, you may need to learn the Customs meaning or interpretation of certain terms of art.
As a general rule, once Customs decides on the duty rate or value of imported merchandise based on a reply to a Request for Information, it is difficult to change their decision. While answers to Customs must be truthful, sometimes it is possible to anticipate Customs' action, and argue that a lower rate is correct or a lower value is correct. Such arguments, if made after your reply, may not be carefully considered.
Customs will generally inform an importer of a decision on a Notice of Action, Customs Form 29. If an importer disagrees with the action proposed in a Form 29, it should immediately notify the import specialist of this fact. Where appropriate, the importer may wish to submit further information and argument. Failure to register your disagreement may result in Customs assuming that you agree with the proposed action.
All Requests for Information (Customs Form 28) should be answered promptly. Often, when Requests For Information are not timely answered, Customs will send the importer a Notice of Action proposing action that would substantially increase the value of the merchandise or apply a much higher duty rate. Failure to reply to Customs inquiries may also cause the import specialist to withhold liquidation of your entries.
B. Special Agents
Special Agents are not involved in day-to-day Customs work. Rather, Special Agents almost always work on suspected Customs law violations. Therefore, a telephone call or visit from a special agent is a serious matter. Sonnenberg & Anderson strongly urges you to immediately contact a Customs and International Trade attorney if such an even occurs.
It is important to know that Customs has a right to examine an importer’s business records. Nevertheless, requests to examine such records must be specific and reasonable notice must be given to the importer. Therefore, it is perfectly proper to ask that a Special Agent provide a specific description of the records to be examined and that a reasonable time be given to gather requested documents. A meeting can then be scheduled for a mutually convenient time. Requests for immediate examination of documents or persons should be politely, but firmly, refused.
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V. Miscellaneous Tariff Provisions and Considerations
A. Country of Origin Marking
All merchandise of foreign origin imported into the United States must be marked with the country of origin. The enforcement of country of origin marking laws is currently a high priority with Customs. All importers should ensure that imported merchandise is properly marked.
Section 304 of the Tariff Act of 1930 covers country of origin marking in general. There are also numerous other special marking and labeling requirements for particular articles. The Customs marking requirements in Section 304 are as follows:
...Every article of foreign origin (or its container...) imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit in such manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin of the article.
There are many exceptions to the above rule, so an answer to any country of origin marking question must take into account the particular product involved. This can be a very fact specific analysis.
The country of origin of an article is the country of manufacture, production, or growth of the article. Further work or material added to an article in another country will normally not change the country of origin of the article unless such further material or work “substantially transforms” the article. A substantial transformation occurs if the manufacturing processes result in a different article of commerce, with a different name, character, or use.
In general, goods imported into the United States must be marked in a conspicuous manner with the English name of the country of origin. In order for the marking to be considered conspicuous, it must be legible, easily found and read without difficulty. If a U.S. locality or address appears on an article, the name of the country of origin preceded by the words “Made in” must appear in close proximity to the U.S. locality or address. The degree of permanence must insure that the marking will remain on the article (or its container) until it reaches the ultimate purchaser unless it is deliberately removed.
Goods must be marked in such a manner to indicate the country of origin to the ultimate purchaser in the United States. The ultimate purchaser is generally the last person in the United States who will receive the article in the form in which it is imported. Often, the ultimate purchaser is the retail consumer of the imported product. In this case, each imported product (or its container) would have to be marked with the country of origin. At times, however, the importer may be the ultimate purchaser. For example, where basic components are imported by a company and are assembled in the U.S. into a finished product, the importer would be considered the ultimate purchaser if the imported merchandise is substantially transformed by the U.S. manufacturing processes into a product with a name, character or use different from the imported merchandise. If the importer is considered the ultimate purchaser, the country of origin marking requirements probably would be met by marking the container in which the components are shipped from the foreign supplier.
Failure to properly mark an imported article to indicate its country of origin can result in a special 10% ad valorem marking duty. Furthermore, Customs may withhold release of the goods from Customs’ custody until they are properly marked. If the articles have already been released from Customs’ custody, Customs may order “redelivery” of the articles. Failure to redeliver the articles can result in liquidated damages equal to the value of the merchandise not returned to Customs.
Note that special marking rules apply to goods imported from a NAFTA country – Canada or Mexico. Also, the Federal Trade Commission (“FTC”), not Customs, has jurisdictions or any labeling of products for sale in the United States that contain the phrase “Made in USA” or similar statements. The FTC imposes a strict standard that “all or virtually all” of the content must be of U.S. origin and final processing must occur in the United States.
B. Recovery of Customs Duties on Damaged, Defective or Nonconforming Merchandise
When imported merchandise is found to be damaged, or not in accordance with specifications, the merchandise may be appraised in its condition as imported, with an allowance made to reflect the lower value due to the damage or incorrect specifications. Many importers are not aware that claims for refunds based on damaged merchandise are routinely allowed by the Customs Service. Often, an importer may place damaged or defective merchandise in inventory, and not learn that it is damaged or defective until months or years after it is imported. Even in these situations, Sonnenberg & Anderson has found that Customs often will refund the full amount of duties less 1% if the merchandise is exported or destroyed within three years of its importation.
C. Unused Merchandise Drawback (Same Condition Drawback)
When imported merchandise or merchandise which is “commercially interchangeable” with the imported merchandise, is exported to a foreign country or destroyed, 99% of the duties paid at importation may be recovered, if the following conditions are met:
• The merchandise must be exported or destroyed within three years of the date of importation.
• The merchandise must not have been used in the United States before being exported or destroyed.
With respect to condition 2 above, it should be noted that “incidental operations” not constituting “use” may be performed on the merchandise. These operations include, but are not limited to, testing, cleaning, re-packing or inspecting the imported merchandise. Operations on the imported merchandise in the United States which amount to manufacturing or production would disqualify the merchandise for unused merchandise drawback. However, if manufacturing operations are performed on the merchandise or if the merchandise is used in a manufacturing operation, it may be possible to obtain refund of duties under manufacturing drawback, which is discussed below.
Before refund of duties under unused merchandise drawback is attempted, you should familiarize yourself with Customs requirements for inspection of the merchandise prior to its exportation or destruction.
D. Manufacturing Drawback
Manufacturing drawback is a tariff mechanism that has been established for the refund of Customs duties paid upon merchandise previously imported into the United States. Under manufacturing drawback, 99% of the duties paid on imported merchandise, which is incorporated into an article manufactured in the United States that is subsequently exported or destroyed, may be recovered.
Manufacturing drawback essentially covers the use of imported materials (or substituted materials) in the domestic manufacture of new that are subsequently exported from the United States or destroyed under Customs’ supervision. Thus, there are three essential elements:
• Imported materials upon which duty is paid.
• Use of the imported materials (or substituted materials) to manufacture a product in the United States
• Export or destruction of the product.
Please note, domestic or imported materials “of the same kind and quality” as the imported materials may be used in place of imported materials (“substituted”) in the manufacture of a new product which is exported from the United States. In other words, drawback of duties paid on imported merchandise will be granted where domestic or imported merchandise of the same kind and quality as that imported is used in the manufacture of U.S. products. This particular benefit is referred to as “substitution of merchandise” because refunds can be received where none of the imported duty-paid merchandise was used in the actual products exported from the United States.
The concept of manufacturing drawback has existed in U.S. tariff law for more than 200 years. Its goal is simple: Encourage exports of domestic manufacturers by refunding import duties paid on materials used in the manufacturing of the exported product. The regulations covering manufacturing drawback are complex. A thorough understanding of the regulations and protocol is required before a company embarks on a manufacturing drawback program.
E. Importation of Goods under NAFTA
Under the North American Free Trade Agreement [“NAFTA”] parties may receive preferential duty treatment for “originating” goods imported into a NAFTA party - either the United States, Canada or Mexico. Implemented on January 1, 1994, NAFTA sought to eliminate nearly all tariffs between the U.S. and Mexico by 2008 and to eliminate nearly all tariffs between the U.S. and Canada by 1998. NAFTA further removes many non-tariff barriers, including import licenses, which previously excluded U.S. goods from the other two markets, especially Mexico. NAFTA contains four basic rules under which a good may be considered “originating” for the purposes of receiving preferential duty treatment:
• Goods wholly obtained or produced entirely in the United States, Canada, or Mexico;
• Goods which contain non-originating materials which satisfy the Annex 401 rules of origin. These are usually based on a change in tariff classification, a regional value-content requirement or both;
• Goods produced entirely in a NAFTA party of materials that are considered originating since they meet the requirements in Annex 401;
• Certain goods which contain a small amount (usually 7%) of non-originating materials that are not considered to be originating under Annex 401.
Please note that these are generalizations of the NAFTA rules of origin. There are specific rules for special sectors, such as agriculture or automobiles. There are many intricacies and exceptions to these basic rules which may apply. In order to determine whether a specific product would be considered “originating” under NAFTA, an importer must examine the transaction and the specific rules of origin provided in the NAFTA. Sonnenberg & Anderson would strongly urge importers to seek the advice of competent Customs experts with regard to this matter.
Regardless of which rule of origin confers the status of “originating good” on a particular item, any good that is claimed to qualify for preferential treatment under NAFTA must be accompanied by a NAFTA Certificate of Origin. The exporter or producer of the product must complete and sign the certificate. An importer claiming preferential duty treatment under NAFTA should have the NAFTA Certificate of Origin in its possession at the time of entry, though it may not be required to present the certificate to Customs at that time.
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VI. Avoiding Customs Penalties
A. Civil Penalties under 19 U.S.C. Section 1592
1. Potential Penalties
Under the U.S. customs laws it is unlawful to enter, introduce, attempt to enter or introduce any merchandise into the United States by means of a material false statement or omission, whether by fraud, gross negligence or negligence. It is also unlawful to aid another in doing so.
The amounts of penalties imposed depend upon the level of culpability, but can be up to the domestic value of the imported merchandise. If Customs believes that an importer fraudulently evaded duties, it may assess a penalty up to the amount of the U.S. resale value of the merchandise. “Fraudulently” means done voluntarily and intentionally, with an intent to deceive, to mislead, or convey a false impression. If Customs believes that an importer violated Customs laws because of gross negligence, it may impose a penalty of up to four times the loss of Customs duties, or if no duties were involved, up to 40% of the dutiable value of the imported merchandise. “Gross negligence” means that the importer was seriously negligent, acting with actual knowledge or wanton disregard for its legal obligations. If Customs believes that an importer was negligent, it may impose a penalty of up to two times the loss of Customs duties, or if no duties were involved, up to 20% of the dutiable value of the imported merchandise. “Negligence” means a mistake or error that Customs believes an importer exercising reasonable care would not have made.
2. Mitigation of Penalties - Prior Disclosure and other Petitions
When a violation of the Customs laws has occurred, an importer may avoid the imposition of the harsh penalties described above by filing a prior disclosure or a petition to mitigate penalties.
A prior disclosure is a detailed explanation of the circumstances and factors resulting in a false statement or material omission. The importer wishing to submit a prior disclosure must show that the circumstances are disclosed before an investigation commenced, or without knowledge of an investigation. The benefit of prior disclosure is that (i) Customs will not seize any goods which it may otherwise have the authority to seize, and (ii) the limit of potential penalties to be assessed are lowered substantially.
An importer may also petition for cancellation or mitigation of penalties. Cancellation will only occur if upon investigation, it is evident that the violation did not occur. Mitigation is possible upon the consideration of the following factors: (1) whether the importer has been cooperative with Customs; (2) whether the importer is experienced or inexperienced; (3) whether the importer has taken immediate remedial action; and (4) whether the importer has a prior good record.
3. Areas Which Frequently Result in Customs Penalties
Penalty cases may be initiated by the Customs Service for many reasons. However, certain areas deserve special attention:
a. Currency Fluctuations
Where the U.S. dollar or other currency of account fluctuates, an importer and a manufacturer often agree to share costs of currency. For example, often prices are renegotiated in view of currency fluctuations. Such agreements are legal from a Customs standpoint, as long as Customs is informed of the agreement. Customs, however, has taken the position that any currency-sharing arrangement must be fully reported. Thus, the rule in such cases is that Customs should be told of the agreement. In many instances, such payments may not increase an importer’s Customs duties or may result in only small duty increases. However, failure to inform Customs of such currency-sharing arrangements can result in substantial penalty demands.
b. Entry Under HTSUS subheadings 9801.00.10; 9802.00.50; and 9802.00.80
These tariff subheadings involve the use of special rates for goods that are being returned to the United States from foreign countries. Penalty cases involving these items are common, so as a general matter it is prudent to make sure that these items properly apply to a proposed transaction. The brief descriptions of items 9801.00.10; 9802.00.50; and 9802.00.80 which follow are designed to acquaint you with general principles. They should not be relied upon as authority that one of these items is applicable to a particular transaction.
Tariff item 9801.00.10 provides that when products of the United States are returned to the United States from a foreign country without having been advanced in value or improved in condition by any process of manufacture while in the foreign country, they are entitled to duty-free entry. In many instances, foreign articles are mixed with products of the United States, and duty-free entry is claimed for all of the articles. It should be noted that an article does not become “American” simply because import duties have been paid upon its previous importation. Generally, to be an “American” article, the article must be produced in the United States.
Tariff item 9802.00.50 is a provision which allows a company to send any article to a foreign country for repairs or alterations, and when the article is returned to the United States, pay import duty only on the value of repairs or alterations performed in the foreign country. The terms “repairs” and “alterations” are strictly interpreted by Customs. If there is any possibility that the work done abroad might be more than “repairs” or “alterations,” advice should be sought.
Under HTSUS subheading 9802.00.80, importers may reduce the amount of duties paid on imported articles which are assembled abroad with components produced in the United States. If a party meets the requirements of HTSUS subheading 9802.00.80, the duty amount will be based upon the full value of the imported article less the cost or value of the U.S. components. Thus, the importer does not pay duties on the value of the U.S. components. The duty rate assessed on the dutiable portion of the imported article will be the rate applicable to the imported article as a whole. Item 9802.00.80 is a provision which allows an importer to deduct the value of “American” components sent abroad for assembly from the final Customs value of the imported merchandise. This tariff provision is used widely by the U.S. electronics and wearing apparel industries. Although the concept is straightforward, use of this provision can involve somewhat complicated accounting and Customs valuation considerations. Problems typically arise in these areas as well as whether an operation goes beyond mere “assembly.” Another common problem involves whether the components are the product of the United States. Often, products purchased in the U.S. are actually of foreign origin.
c. Supplemental Payments (Double Invoicing)
Most international payments are handled by letters of credit. Payment under letters of credit is geared to preserving the integrity of the letter or credit. Therefore, additional payments to foreign manufacturers sometimes will be made without amending the letter of credit. Where additional payments are made to a foreign manufacturer, of course, increased Customs duties may be due. Therefore, any accounting system should be designed to make sure that additional payments are brought to the attention of a responsible company official. Disclosure and payment of any additional duties then can be made to the Customs Service. These considerations apply whether or not a letter of credit is used. Any payment in any form in addition to invoice price must be declared to Customs.
d. Assists
An “assist” is anything of value that a U.S. buyer provides directly or indirectly to the foreign seller free of charge or at a reduced cost, for use in the production of the imported merchandise. There are two general types of assists: Tangible Assists and Intangible Assists.
Tangible Assists consist of such things as materials, components and tooling. For example, if a production mold is provided free of charge to a foreign producer, Customs will require that the value of this mold be included in the value of the goods. Customs takes the position that if the mold was not provided free of charge to the foreign producer, a similar mold would have been purchased or made by the foreign producer and the additional costs incurred by the foreign producer would have been passed on to the U.S. importer in the purchase price.
Intangible Assists include design work, artwork, development, engineering, plans and sketches. The general rule is that if these items originate in the United States, they are not part of dutiable value. However, if they originate outside the U.S., they may be required to be added to the dutiable value. For example, design work for men's jackets done in the U.S. and given to a Hong Kong maker free of charge is not a dutiable assist. However, work done by a designer in Italy paid for by the U.S. importer and transferred free of charge to the Hong Kong maker would be a dutiable assist and would be a part of dutiable value.
B. Other Penalties
1. Recordkeeping Penalties
With the implementation of the Mod Act, importers need to be aware of the additional sizeable penalties which may be imposed for failing to keep and present proper records. Under this law, the duty to maintain customs records is extended to any owner, importer, consignee, importer of record, entry filer, or any other party who is involved in such import-related activity. Customs has compiled a list of records which must be maintained for five years (the “(a)(1)(A) list”), but importers should also take care to keep related business documents for the same period of time.
Penalties which may result from the failure to maintain the records on the (a)(1)(A) list are stiff, and are in addition to the penalties which may otherwise be imposed for fraud, gross negligence or negligence. For willful failure to maintain the listed documents, a fine up to $100,000 or 75% of the appraised value may be imposed for each release of merchandise. If Customs deems the failure to be a result of negligent behavior, the fine imposed may reach up to $10,000 or 40% of the appraised value.
2. Drawback Penalties
The various drawback provisions were discussed above. In essence, drawback is obtaining refunds of duties paid for various reasons. As of 1994, penalties will be imposed for the fraudulent or negligent improper receipt of drawback refunds. If Customs determined that the refund was induced by fraud, up to three times the amount of the loss of revenue may be imposed as a penalty. If negligence was involved, then the penalty may range from 20% to 100% the value of the loss of revenue. The law permits prior disclosure, which will protect the claimant from the full amount of penalties.
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