Some of the most important trade partners of the U.S. are raising concerns about the proposed U.S. plan to overhaul its tax code. The finance ministers of Europe’s five largest economies voiced concerns about the tax plan in a letter sent to Treasury Secretary Steven Mnuchin on Monday, December 11, 2017.

The letter was signed by Germany’s Peter Altmaier, France’s Bruno Le Maire, the U.K.’s Philip Hammond, Italy’s Pier Carlo Padoan and Spain’s Cristobal Montoro Romero.

The E.U. leaders are generally concerned that U.S. businesses will gain a competitive edge on international markets once the tax proposal is enacted. In the letter, the leaders voiced concern that the U.S. tax overhaul contains protectionist measures that could violate double-taxation treaties and breach the World Trade Organization (WTO) rules.

The letter mentions certain provisions in both the proposed House and Senate bills. Two provisions in particular have prompted pushback from the E.U. leaders.

First, the 20% excise tax provisions on payments to foreign affiliated companies that is included in the proposed House bill would impact payments that are made for foreign goods or services. The finance ministers said that this could discriminate in ways that are at odds with the WTO rules and impose a tax on profits of non-U.S. companies that do not have a U.S. permanent establishment.

The finance ministers also criticized the anti-abuse tax provisions of the proposed Senate bill. The letter states that the anti-abuse tax provisions would impact genuine commercial arrangements of payments to foreign companies taxed at an equivalent or higher rate than in the U.S. The letter further explains that this could be harmful for international banks and insurers because it would make cross-border, intragroup financial transactions subject to a 10% tax that would be non-deductible. The E.U. leaders are concerned that this would distort international financial markets.

In response to the letter, a Treasury spokesperson said that they “appreciate the views of the finance minsters” and are “working closely with Congress as they finalize the legislation.”

In consultation with the Department of State and pursuant to Executive Order 13662, the Director of the Office of Foreign Assets Control (“OFAC”) has updated Directive 4, which will expand sanctions on the Russian energy industry.

The new rules issued by OFAC prohibit certain activities by a U.S. person or within the United States, except where such activities are otherwise authorized by law or a license. The rules bar persons subject to U.S. jurisdiction from providing, exporting, reexporting (directly or indirectly) goods, services (except financial services), or technology in support of exploration or production for deepwater, Arctic offshore or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to Directive 4.

Additionally, Directive 4 further prohibits the provision, exportation, or reexportation (directly or indirectly) of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that meet all three of the following criteria: (1) the project was initiated on or after January 29, 2018; (2) the project has the potential to produce oil in any location; and (3) any person determined to be subject to Directive 4, including their property or interests in property, either has a 33% percent or greater ownership interest in the project or owns a majority of the voting interests in the project.

Examples of prohibited projects include, for example, drilling services, geological services, and mapping technologies. The prohibitions do not apply to the provision of financial services, for example, clearing transactions or providing insurance related to such activities.

The full text of Directive 4, as amended, can be found here.  For a listing of persons that are subject to a directive under Executive Order 13662, see OFAC’s Sectoral Sanctions Identifications List.

Recently OFAC also announced new sanctions on Russia’s financial sector and energy sector, as set forth in the revised Directive 1 and Directive 2, respectively.

In a recently issued Final Determination, U.S. Customs and Border Protection (CBP) confirmed that the roasting of coffee beans substantially transforms the beans into a product of the country in which the beans were roasted.

Coffee producer Keurig Green Mountain (“Keurig”) requested the determination as to the country of origin assignment to green coffee beans that it imported into the United States and Canada and then roasted in those countries.  Specifically, Keurig sought the determination as it relates to the procurement of its products by the U.S. government and certain regulatory waivers for  “U.S.-made end products.”

CBP answered unequivocally that it has consistently held that the act of roasting coffee beans substantially transforms green coffee beans into a different article of commerce pursuant to 19 U.S.C. section 2518(4)(B).  Noting numerous letter rulings dating back to the mid-1980s, CBP concluded that “roasting” or “roasting and blending” substantially transformed green coffee beans for country of origin purposes.

Interestingly, CBP found that it did not have occasion to address whether other processes in coffee manufacturing would be considered substantially transformative.  For example, a portion of the green coffee beans at issue had been undergone a decaffination process in their country of origin, prior to importation into the U.S.  Accordingly, CBP did not address whether the decaffeination process alone would substantial transform a caffeinated bean to a new article of commerce.  Similarly, the beans at issue were roasted, flavored, ground, degassed, and packaged in the same country (either the U.S. or Canada).  Therefore, CBP did not have occasion to determine whether any of these other processes, alone or in combination, may create different articles of commerce throughout the coffee production process.

As is often the case, a seemingly conclusive determination by CBP can still leave open significant questions related to the issues not squarely placed before the agency. Experienced counsel can help business determine what avenues of trade remain open and which are truly settled issues.

Just in time for the holiday season, the U.S. Court of International Trade (“CIT”) recently held that certain components of a Santa Claus suit were of such quality that they should be subject to apparel duties, not the free duty assessed on costumes and other “festive articles.”

The articles at issue were imported by Rubies Costume Co. (“Rubies”) as a complete Santa Clause costume. Included in the “premier” set, which carried a retail price of $100, were red polyester and acrylic pants, jacket and hat – adorned with white faux fur, of course – white gloves, shoe covers, a belt, wig, beard, and sack. Upon importation, U.S. Customs and Border Protection (“CBP”), evaluated each of the components and determined that the jacket and pants were classifiable under chapter 61 as “wearing apparel” and assessed duties of 32% and 28.2%, respectively.  In addition, CBP determine that the gloves and sack were also subject to duties.

Rubies filed a protest, arguing that the Santa suit should be classified under heading 9505 as a “festive article” which in not ordinarily worn other than as part of Christmas festivities.  Rubies argued that, like the other costumes that it imports, the Santa suit is worn by those who want to depict Santa Claus and any practical utility in the garments is merely incidental.  CBP argued, essentially, that the articles are of such quality that they function as apparel and were appropriately classified as such.

The CIT defined the issue of the case as follows: “[t]he issue is not whether the Santa Suit is a costume or apparel as those terms are colloquially understood; rather, the issue is whether the Santa Suit is ‘fancy dress , of textiles, of chapters 61 or 62’ or a ‘festive article,’ as those terms are defined in the HTSUS and relevant case law, which is a legal question.”  The Court focused on Chapter Note 1(e) to chapter 95 which states that “fancy dress, of textiles, of chapter 61 or 62” are barred from classification under chapter 95.  In light of this unequivocal exclusion, the CIT needed only to determine whether the jacket and pants are properly classified as “fancy dress” under the law. The Court rejected the testimony of Rubies’ expert testimony regarding fashion theory and comparisons with couture gowns as the height of “fancy dress.” Instead, the CIT, in an extensive review of prior case law, determined that components of the Santa suit were above a threshold or floor of minimum quality to be properly considered “fancy dress.”  Unlike cases where low quality costumes that lacked finished edges, closure hardware, or the general durability to be worn repeatedly were found to be “festive articles,” the Santa suit components were fully finished, listed as dry-clean only, and had stitching of ordinary durability.  Accordingly, the CIT found that the jacket and pants met legal definition of “fancy dress” and, as such, were expressly excluded from classification under chapter 95. The CIT applied a similar analysis for the gloves and sack which were of similar quality.

Cases with familiar subject matter are great for headlines, but can also highlight important inconsistencies between ‘gut’ expectations and the legal outcome of a product classification.  Most people may not hesitate in thinking that a Santa Claus suit, regardless of quality, is inherently a festive costume.  However, as the CIT demonstrated, tariff classifications do not turn on colloquial definitions.  Rather, as here, the legally binding chapter notes and precedential opinions defined the outcome in a manner that might surprise the casual observer.  Experienced counsel can ensure that classification (and duty) expectations are consistent with prevailing law.

President Donald Trump announced his nomination of two Commissioners to the United States International Trade Commission (“ITC”) on September 28, 2017.

The two nominees are Dennis M. Devaney and Randolph J. Stayin.  If approved, Devaney of Michigan will serve the remainder of a nine-year term expiring June 16, 2023, and Stayin of Virginia will serve the remainder of a nine-year term expiring June 16, 2026.

Devaney and Stayin were nominated to fill the Commissioner positions of Commissioners Kieff and Pinkert, who left the ITC this year.  The ITC is headed by six Commissioners who are nominated by the President and confirmed by the U.S. Senate.  Currently, the ITC is operating with only four out of six Commissioners.  On October 2, 2017, the Senate received the nominations and referred them to the Committee on Finance.

Devaney is currently counsel at a law firm where he works on international trade matters as well as labor and employment issues. Devaney is a former Board Member of the National Labor Relations Board and former General Counsel for the Federal Labor Relations Authority. Devaney previously served as an ITC Commissioner in 2001 after being appointed by President Bill Clinton.

Stayin focused his legal practice on international trade policy and regulation. Earlier in his career he served as chief of staff to Senator Robert Taft, Jr., and was his trade advisor in negotiating the passage of the Trade Act of 1974. Stayin has represented clients before the ITC, the U.S. Department of Commerce, the Office of the U.S. Trade Representative, the Court of International Trade, the Court of Appeals for the Federal Circuit, and NAFTA dispute panels.

In a recent decision, the United States Court of International Trade (CIT), upheld the classification of United States Customs and Border Protection (CBP) with regard to fiber optic telecommunications modules, finding that the “optical” quality of fiber optics trumped their use for data transmission.

ADC argued that, although fiber optic technologies use light (transmitted along glass cables), the technologies, including the modules at issue, are not “optical” instruments.  Further, ADC argued that the classification for optical products should be limited to articles that relate to the light spectrum visible to the human eye.

The CIT was not persuaded.  In a clinical application of the General Rules of Interpretation (GRIs), the CIT’s analysis centered on the common meaning of “optical.”  CIT found no ambiguity in the term optical (i.e., relating to light) nor any limitation in common definitions to the light spectrum which is properly considered optical. Having found no ambiguity in the term optical, pursuant to the GRIs, CIT determined that the modules were prima facie classifiable under subheading 9013 as “other optical appliances and instruments”.  CIT dispensed with ADC’s argument that its preferred classifications was equally apt, citing the relative lack of precision in subheading 8517.62.00’s description of data transmission machines and a significant note to Chapter 85 which expressly excluded from Chapter 85 all articles covered by Chapter 90.

The evaluation heirarchy set forth in the GRIs dictated the outcome of this decision. Although ADC’s modules are machines used for data transmission, their optical qualities made Chapter 90 the proper classification. Experienced counsel can help navigate the GRIs and other technical import rules and regulations and add certainty to an importer’s bottom line.

On October 12, 2017, the United States lifted its general commercial embargo on Sudan. Because Sudan has played a role in international terrorism, the U.S. has maintained a comprehensive embargo against Sudan since 1997. These sanctions were contained in executive orders and the Sudanese Sanctions Regulations (SSR).

Following a 16-month diplomatic effort, the United States removed sanctions that had prohibited U.S. persons from engaging in or facilitating most transactions that involved Sudan or its government. U.S. persons may now engage in most transactions without the need for a general or specific license from the Office of Foreign Assets Control (OFAC).

On January 17, 2017, the U.S. temporarily lifted sanctions with respect to Sudan and its government. OFAC issued a general license that temporarily authorized transactions prohibited by the SSR, which was contingent on the U.S. government’s determination regarding Sudan’s developments in key areas. Earlier this month, the Secretary of State provided a determination to President Trump that the government of Sudan has made positive development in the cessation of hostilities in conflict areas, improving humanitarian access throughout Sudan, and addressing regional conflicts and threats of terrorism.

Effective October 12, 2017, the temporary general license is no longer operable and OFAC authorization is not required for proposed transactions that were previously prohibited by the SSR, unless the proposed transaction implicates the Darfur Sanctions Regulations or other OFAC-administered sanctions regulations.

While most sanctions were lifted, significant restrictions remain in place for those seeking to trade with Sudan, primarily with respect to export controls and individuals and entities listed on the Specially Designated Nationals List (SDN List). OFAC sanctions related to the conflict in Darfur still remain in place, and the revocation does not affect OFAC’s designations of any Sudanese persons pursuant to other sanctions authorities.

Additionally, this does not impact Sudan’s status as a state sponsor of terrorism. Pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), an OFAC license is still required for certain exports and reexports to Sudan of agricultural commodities, medicine, and medical devices as a result of Sudan’s inclusion on the State Sponsors of Terrorism List (SST List).

General License A, which went into effect on October 12, 2017, authorizes exports and reexports of certain TSRA items to Sudan. General License A is available for review here. General License A replaces the need for any existing general or specific licenses currently issued to authorize conduct that was otherwise prohibited under the Sudan sanctions program.

U.S. persons are still required to comply with the export and reexport controls of the Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, Bureau of Industry and Security (BIS). These requirements include restrictions that are maintained as a consequence of Sudan’s inclusion on the SST List and apply to certain exports and reexports of items on the Commerce Control List. BIS also maintains end-use and end-user controls on the export and reexport to Sudan of EAR99 items by U.S. persons and non-U.S. persons.

Despite lifting the general commercial embargo on Sudan, the sanctions revocation does not affect past, present or future OFAC enforcement actions related to violations of the SSR that occurred prior to January 17, 2017. Additionally, the revocation does not mean that sanctions cannot be quickly reimposed by the U.S.

In recent decision, the Court of International Trade entered a $1.6 million award against shoe importer, Sterling Footwear, Inc. (“Sterling”), for what it found to be grossly negligent product misclassification.  Granting the U.S. Government’s motion for summary judgment in part, the Court left open the possibility of additional penalties of up to $20.8 million once the liability of Sterling’s owner and a related company  are determined at trial.

The Court found that in 337 entries between 2007 and 2009, Sterling had misclassified footwear as “rubber tennis shoes” under subheading 6402.91.40 of the Harmonized Tariff Schedule of the United States (“HTSUS”) which covers footwear for which 90% of the exterior of the shoe or boot is covered with rubber or plastic.  When U.S. Customs and Border Protection (“CBP”) examined samples from the entries, it found that the shoes had rubber soles but that the upper part of the shoes were made of fabric and connected by a foxing band (a strip of material that covers and secures the joint between the upper and lower part of the shoe).  Therefore, the shoes were not properly classified under subheading 6402.91.40 and were subject to a higher duty.

CBP sent several notices to Sterling regarding the misclassification.  CBP also met with Sterling leadership and their broker to explain the basis of their conclusions with regard to classification.  Despite these communications with CBP, Sterling took no action to amend their entries or defend its classification, prompting CBP to undertake a comprehensive investigation of Sterling’s voluminous entries. The Court found that — despite their assertions to the contrary — Sterling’s leadership had instructed its brokers as to how the shoes should be classified and disregarded the broker’s input.  Significantly, Sterling took no efforts to change the classification of its products after CBP’s notices of misclassification.

In light of the Court’s finding that the misclassification was the result of gross negligence, Sterling and the other defendants face a potential penalty totaling four times the actual and potential losses to the government.  In this case, $1.6 million in actual loss (mitigated down from $2 million through protests and surety payments) has already been awarded; however, $3.2 million in potential losses from misclassified entries have been identified by the government.  The $5.2 million penalties for actual and potential losses, which can be quadrupled in light of the grossly negligent conduct, leaves a potential penalty of $20.8 million still to be determined.

While proper classification of goods is every importer’s goal, this case illustrates that one must heed the instructions of CBP with regard to classification.  If you dispute CBP’s position there are avenues to challenge classifications both retrospectively and prospectively.  Doing nothing in response to CBP notices, however, is simply not an option.  Proper counsel can help you navigate classification issues before entries arrive in the U.S. and are essential if you receive a notice from CBP.

In a recent opinion, the Court of International Trade upheld the determination by U.S. Customs and Border Protection (CBP) that certain doorknobs imported by home-improvement retailer Home Depot are properly classified as locks and subject to a higher duty than other doorknobs.

In essence, the dispute came down to a question of whether a doorknob that locks is (i) a doorknob or (ii) a lock.

Doorknobs are classified heading 8302 of the Harmonized Tariff Schedule of the United States (HTSUS) which covers “[b]ase metal mountings, fittings and similar articles suitable for . . . doors . . . .”  The relevant Explanatory Notes clarify that heading 8302  “covers general purpose classes of base metal accessory fittings and mountings, such as are used on furniture, doors, windows, coachwork, etc”  and that the term “[m]ountings, fittings and similar articles suitable for buildings” includes “handles and knobs for doors, including those for locks and latches.” Doorknobs classified under heading 8302 are subject to 3.9% duty.

Locks, on the other hand, are classified under HTSUS heading 8301 which covers “[p]adlocks and locks (key, combination or electrically operated), of base metal.” Locks classified under heading 8301 are subject to a 5.7% duty.

Home Depot argued that its products, doorknob sets consisting of exterior and interior doorknobs with trim, a latch component, strike plate, keys, and installation hardware, were plainly doorknobs under heading 8302.  Home Depot argued that the products were an “improved” doorknob with a lock function. CBP argued that products were, first and foremost, locks to secure an exterior door, as evidenced by the “key-operated” nature of the products.  The Court agreed with CBP, finding that the doorknobs were part of the lock, specifically, they were the lever used to open the lock.  The Court also cited Home Depot’s testing and advertising of the knobs as locks.  The Court clarified that doorknobs without this locking function are still properly classified under heading 8302.

One take away from the Court’s decision was its rejection of Home Depot’s argument that the products at issue were similar to other knobs that had been classified under heading 8302.  The Court reiterated that HTSUS does not call for a comparison of articles under a giving heading, but rather that each article is to be compared to the wording of the tariff provisions.  As advocacy to CBP and the Court is often by done by analogy to similar articles, it is important to always remain focused on the language of the tariff provision itself.

In a recent post, we discussed the lawsuit brought by battery behemoth Duracell against a company that it was importing “gray market” versions of its copper-topped products. In that action, Duracell has argued that the warranty that comes with its U.S. batteries is ten times longer than the warranty that comes with the batteries that Duracell sells to electronic manufacturers and which the defendant sought to import.  Accordingly, Duracell argued that this material difference in the warranty should permit it to block the importation of the unauthorized batteries under the Lever-rule which permits the restriction of gray market imports which are materially different from those generally offered to U.S. consumers.

Duracell’s battle to control gray market goods, however, is one fought on many fronts.

In the recently amended complaint in a separate action before the Court of International Trade, an Milecrest Corp., an importer and distributor of gray market Duracell batteries, challenged U.S. Customs and Boarder Protection’s grant of Lever-rule protection to Duracell.  Specifically, the Milecrest alleges that CBP failed to comply with the Administrative Procedure Act, 5 U.S.C. 551 et seq., when it granted Duracell Lever-rule protection in March 2017 based purported material differences in “label warnings, consumer assistance information, product guarantees, and warrant coverage.”  Milecrest alleges that CBP did not take required public comment before issuing the grant notice and, if it had done so, it would have been made aware that many of Duracell’s own products are not sold with label warnings, customer assistance information, guarantees, or warranty information on the batteries themselves, which would have undercut Duracell’s claim for Lever-rule protection.  In addition, Milecrest argues that the grant is arbitrary and capricious because CBP should have considered Duracell’s own non-conforming batteries and denied the request for protection.  Finally, Milecrest argues that the grant is vague because it fails to specifically identify the products to which it applies or what warnings, etc. will trigger Lever-rule protection and which products will be permitted to be imported.

An interesting aside, the Court recently rejected Milecrest’s efforts to proceed anonymously, holding that potential infringement lawsuits by Duracell were not a sufficient reason to warrant concealing the company’s identity in connection with this matter.

Duracell’s ongoing efforts to control gray market goods demonstrates how producers and importers must be constantly vigilant and take appropriate offensive as well as defensive positions regarding the same goods and the same core legal issues.  Proper counsel can help companies navigate when offensive legal action are advantageous and when defensive advocacy becomes required to protect ones’ business.