I just heard and interesting story on NPR regarding the concerns of internationally traveling musicians and the enhanced import/export restrictions placed on ivory.  The restrictions stem from a recently announced "National Strategy for Combating Wildlife Trafficking" made by the White House on February 11th, 2014.

For reference, here is the link to the White House announcement

http://www.whitehouse.gov/the-press-office/2014/02/11/fact-sheet-national-strategy-combating-wildlife-trafficking-commercial-b,

the link to a Q&A from Fish and Wildlife explaining important aspects of the regulations
http://www.fws.gov/international/travel-and-trade/ivory-ban-questions-and-answers.html#7,

and the NPR story
http://www.npr.org/2014/04/07/300267040/musicians-take-note-your-instrument-may-be-contraband.

I suppose the most surprising aspect to me is the extent to which ivory is contained in some stringed instruments and their bows.  I think most of us understand ivory and piano keys, but stringed instruments are much more mobile, of course, and prone to be taken by musicians on their international trips.

In a nutshell, here are the restrictions that the musicians will run into:
"Orchestras, professional musicians and similar entities will be allowed to import certain musical instruments containing African elephant ivory if the instruments qualify as pre-Convention and are not destined to be sold. Worked African elephant ivory imported as part of a musical instrument will continue to be allowed provided the worked ivory was legally acquired prior to February 26, 1976; the worked elephant ivory has not subsequently been transferred from one person to another person in pursuit of financial gain or profit; and the item is accompanied by a valid CITES musical instrument passport or CITES traveling exhibition certificate."

Should we expect that most traveling musicians know when the ivory contained in their instruments was initially "acquired", whether the instrument was subsequently resold for a profit, and whether the musician is familiar with the international agreement rules for CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora)?  I can just hear the interesting conversations among musicians, Fish and Wildlife, and CBP officers as they try to decide whether to seize a musical instrument at the port of entry or export.

If I were a musician planning on traveling in the near future, I would first determine where I was going to be exiting the US and what port of entry I would be returning.  I would then contact Fish and Wildlife at those locations (if they have a presence there) and explain the kind of ivory containing instrument I would be carrying, and find out what the expectations will be at those ports.  It wouldn't hurt to try and contact Fish and Wildlife at the national level to learn about the current and planned future rules, but individual ports of exit and entry are notoriously famous for different interpretations of regulations (understandably so) and the last experience a musician or anyone else wants to go through is an unexpected seizure of their livelihood.

It's not news that importers and exporters without dedicated personnel for trade compliance responsibilities can find themselves in a jam when they discover some aspect of the regulations with which they were unaware.  What is interesting about the following example is the degree to which the public got to weigh in as a result of the importer posting about the situation on the company blog.

The issue in this example is an International Trade Commission (ITC) exclusion order for Digital Multimeters (for background, a multimeter is an electronic measuring instrument with basic features such as the ability to measure voltage, current, and resistance).  The importer, Sparkfun Electronics, had been importing the multimeters for years without a problem, and the exclusion order had been in effect for many years as well. What they "didn't know wasn't hurting them" as long as they did not have an inspection that included a Customs officer who was familiar with the exclusion order.

You may have to be a real compliance geek to read through all of the comments in the blog posting, https://www.sparkfun.com/news/1428, but I'll point out a couple of things to pique your interest.

Included in the post is an image of the notice from Customs notifying Sparkfun of the violation and their options on what to do with the product.
There is also a link to the actual exclusion order which is very instructive itself on how exclusion orders come about and what they can cover.
From a somewhat humorous perspective, there is a link to a different blog post by a gentleman named Steve Schwartz who waxes eloquent on the "Three types of Knowledge", that is, Sh** You Know, Sh** You Know You Don't Know, and Sh** You Don't Know You Don't Know.

Probably the most salient parts of the discussion relate to the fairness of exclusion orders to small businesses, the problems associated with our current Patent system and the validity of what patents are issued for, and the disposal options for an importer when one of their shipments is deemed to fall within the scope of an exclusion order.

Bottom line, if you are an importer with even a hint that the products you import can fall under a patent held by someone else, you may want to research  ITC records to see if there are any active exclusion orders.

A Federal Register Notice for Monday March 10, 2014 modifies previous CBP notices regarding the Centers of Excellence and Expertise (CEE) “test” that has been underway since August of 2012. The test, broadly speaking, is a formalization of an “account” based approach to handling an importer’s Customs declarations so that importers receive consistent treatment to their import transactions across the country, and at the same time avail themselves of the best expertise within CBP as it pertains to their particular industry.

The notice reminds us of the following:
Divvying up the tariff schedule by “industry” and the responsibilities of importation related functions has never been a simple task within CBP and its predecessor Customs Service.  Industries are not neatly contained in one Chapter or Section of the Harmonized Tariff Schedule (HTS), and the complexity of import regulations don’t lend themselves to open and shut decision making for any given type of import declaration.  Lastly, there are the logistical, resource, and political realities that have to be dealt with anytime work is parceled out within any organization, be it government or private.

The notice itself can be found here and clearly describes the modifications to the test, http://www.gpo.gov/fdsys/pkg/FR-2014-03-10/html/2014-05115.htm, but here is a condensed summary:

I. Modification of the Scope of Coverage for Certain Centers
a. Automotive & Aerospace Center
Adds tariff heading 8511 which was previously covered by the Machinery Center
                    
b. Base Metals Center
Removes tariff headings 7414, and 7309 through 7311
Adds tariff headings 7415, and 8307 through 8311

c. Consumer Products & Mass Merchandising Center
Removes tariff heading 7013
Adds heading 9619, 8210, and 8539
        
d. Industrial & Manufacturing Materials Center
Removes tariff heading 4414 and 4815
Adds headings 2501 through 2530, 7013, 7309 through 7311, and 9406

e. Machinery Center
Removes tariff heading 8485, 8210, 8539, 8307 through 8311, 8511, and 9406

f. Petroleum, Natural Gas & Minerals Center
Removes tariff headings 2501 through 2530
Adds heading 3826

II. Modification to the Types of Entries Processed by the Centers
• In addition to the consumption entry types already processed by the Centers, it includes the entry types for Informal Entries (type 11), Temporary Importation Under Bond (type 23), and Trade Fair (type 24). 
• There are also promises for additional entry types to be transitioned in the future, including Reconciliation entry type 09.
• Regarding Anti-Dumping and Countervailing Duty (entry types 03), the call is to have entries filed before the importing participant joined the test to be processed by the ports, and those entries filed after joining the test to be processed by the Centers.

III. Waiver of Additional Regulation for the Center Test
Waives Sec. 10.847(c) of the regulations so that when a test participant discovers that they made an erroneous duty free claim under Sec. 10.847(a), they can file a correction with the Center instead of with the port of entry.

IV. Submission of Responses to Requests for Information (CBP Form 28) and Notices of Action (CBP  Form 29)
Clarifies that test participants must respond to these Customs Forms electronically.  (To me it is not clear whether they mean through the ACE portal or simply through Email.)

This article deals with a recent Customs ruling and the age old issue of whether a product can be considered a “festive article” under tariff heading 9505 (and the desirable FREE rate of duty the heading carries).  More curiously, however, is the time frame it took to get the issue addressed for this particular importer, and why the importer had to deal with the issue at all.  The importer had first received an unfavorable ruling where the article was considered not to be a festive article, and this new ruling overturns the first one (see Customs Bulletin notice http://www.cbp.gov/linkhandler/cgov/trade/legal/bulletins_decisions/bulletins_2014/vol48_02192014_no7/title.ctt/title.pdf).

 First the Basics

Here is the actual language of the heading and sub heading under discussion:
Heading 9505 – Festive, carnival or other entertainment articles, including magic tricks and practical joke articles: parts and accessories:
Subheading 9505.10- Articles for Christmas festivities and parts and accessories thereof:

Legal precedent sets forth a two part test as to whether a product can be a considered a festive article.  First, the article must be closely associated with a festive occasion, and second, the article must be used or displayed principally during that festive occasion.

In this instance, the imported article under consideration is a polyester poinsettia wreath with plastic berries and a twig base.  Based on the two part test, I’m questioning why there was any need for the importer to receive an unfavorable ruling in the first place.  To me, it seems pretty clear cut.  What is interesting is that the debate over the definition of what constitutes a festive article never comes up in the original ruling.  Without pointing to a particular authority, the ruling simply states “Wreaths that have a base made of natural twigs are precluded from classification as festive foliage in Chapter 95”.  That’s it.

The new ruling goes into exploring the elements of the two part test and, of course, the article is deemed to be festive enough to be placed in 9505.  But here is the most puzzling part:  the original ruling was issued on May 22, 2008.  The importer (Jo-Ann Stores, a place my wife frequents and which she is unable to drag me into) wrote a letter and asked for reconsideration on May 18, 2009.   Why on earth would it take until January 27, 2014 to get the thing reversed?

I have no idea as to the amount of import volumes or duties that had to be paid between the time of the first ruling until now.  At a minimum, these types of delays create extra work for importers as they try to keep track of the outstanding entries with the incorrect tariff number, and deal with the significant burden and cost of filing protests.  As an outside observer, none of this was necessary.

For the uninitiated, being able to qualify goods for waivers from the “Buy American” clauses of federal procurement regulations requires the goods be eligible under the Trade Agreements Act (TAA) of 1979. Basically, if you can convince Customs and Border Protection (CBP, the agency tasked with ruling on a product’s “origin”) that a final “substantial transformation” of the good occurred in the US or a TAA designated country (see list, http://gsa.federalschedules.com/resource-center/resources/taa-designated-countries.aspx ) then your product will be in compliance with Buy American origin restrictions.

It is fair to say that over the last few years, in keeping with the realities of current supply chain models where production of hi tech goods is outsourced to low labor cost countries, companies have been trying to get their goods qualified under TAA by doing most of the manufacturing in non TAA countries and then finishing the software installation in a TAA country hoping that the software installation constitutes a substantial transformation.

The basic argument that gets made is the idea that the product is unusable for its intended purpose in its current state, and that the software installation in the US or TAA country creates a new and different product. My impression has been that in more cases than not, this argument usually wins the day, especially if the software development (with its relative high cost) occurred in the US.

However, back in December of last year, we noticed a ruling (HQ H241177) on Ethernet switches where the qualification attempt was based on downloading done in a TAA country, with software developed in the US.  The switches were basically assembled in Malaysia, and the software downloading/installation was done in Singapore with software developed in the US.  It was determined that Singapore was not the country of last substantial transformation, Malaysia was.

Just recently on February 3rd, we have a new ruling (HQ H248027) where CBP found that a wireless headset and dongle that were fully assembled in non-TAA countries, and later TAA country origin firmware and software were downloaded into the headset in a TAA country, did not qualify for TAA. The last substantial transformation was where the products were fully assembled.

The ruling goes into quite a bit more, http://www.gpo.gov/fdsys/pkg/FR-2014-02-12/html/2014-03029.htm, but the gist of it is that “downloading and installing” software and firmware is not the same thing as the more complex activity of “programming”.  Even if the software was developed in a TAA country and installed in a TAA country, the final software installation in a TAA country does not by itself constitute a significant enough transformation.

It seems a company’s best bet is to have the final software loading done in the same TAA country in which the software was originally developed, or preferably both activities occurring in the United States.  That may go against the grain of cost containment plans, but more likely to result in a positive TAA ruling outcome and increased chances of being able to win government contracts.

Brussels sprouts seem to be all the rage now a days, so when I saw a recent Customs Notice regarding the classification and NAFTA eligibility of certain Brussels sprouts imported into the US, I thought I would take a look.
 It turns out Brussels sprouts are actually grown in Belgium.  Who knew?!

 Two takeaways for this ruling:

• You need to understand the classification difference between uncooked frozen vegetables and vegetable that are considered to be “prepared”.
• When evaluating NAFTA eligibility, you need to make sure there are no exceptions in the NAFTA rules that provide a carve out for sectors of the economy that have protections (that’s probably not a surprise for products in the Agriculture sector).

Here we have Brussels sprouts of Belgian origin sent frozen to Mexico where they are packaged with US origin frozen butter chips into microwaveable packaging. 

The interested party was advocating for the product to be classified in tariff heading 0710, “Vegetables (uncooked or cooked by steaming or boiling in water), Frozen”, but Customs determined the correct classification heading to be 2004, “Other vegetables prepared or preserved otherwise than by vinegar or acetic acid, frozen,…”. 

The determining factor?  Although the Explanatory Notes (Harmonized Commodity Description and Coding System Explanatory Notes) are only used for guidance and not legally binding, their language is quite clear in this situation.  If only sugar or salt had been combined with the frozen Brussels sprouts, they would have remained in 0710, but the butter chips throw them into heading 2004 as being “prepared”.  A court case is also cited as defining what “prepared” can mean.

Regarding NAFTA eligibility (which is significant since it would change an 11.2% duty rate to no duty), relying on a tariff shift for the Belgian Brussels sprouts is not applicable due to the existence of General Note 12(s) in the tariff schedule.   Basically, a vegetable preparation in Chapter 20 can be treated as originating under NAFTA only if the fresh good were wholly obtained or produced in a NAFTA country.

Oh well.  The duty doesn’t seem to be affecting their current popularity.  One of my sister’s brought them over for Thanksgiving.   I guess the next time in the supermarket I’ll see if I think the price is too high.

Here is a link to the Customs Notice,

http://www.cbp.gov/linkhandler/cgov/trade/legal/bulletins_decisions/bulletins_2014/vol48_01292014_no4/general.ctt/general.pdf

I was reading a trade report from Sandler, Travis, & Rosenberg and  noticed a reference to a Customs Notice, 
http://www.cbp.gov/linkhandler/cgov/trade/legal/bulletins_decisions/bulletins_2014/vol48_02052014
_no5/title.ctt/title.pdf
that included modifications to several customs rulings regarding the  classification of child seats for bicycles.  The determination boiled down  to a Chapter Note and the accepted interpretation of what it means to be an accessory.

It interested me because at one point I was a Customs Import Specialist Team Leader in San Diego responsible for the furniture chapter in the HTS, and had been an associate on the team handling the vehicle chapter.  Not only is the outcome significant for the importers in question (a 10% duty rate as
opposed to the Free Rate of Duty they have been paying), but I think it goes against the normal inclination of CBP to err on the side of something being “specifically provided for” as opposed to a being a “part or accessory”.  We don’t know what drove the re-evaluation of the rulings, but I’m sure the
importers weren’t complaining about the free duty rate (if anyone knows, please pipe in).

The existing classifications were in Chapter 94, the chapter for “Furniture…” and a bunch of other home furnishing type items. The very first heading in the chapter is for “Seats (other than those of heading 9402), whether or not convertible into beds, and parts thereof:” The 9402 refers to medical type furniture.

That seems pretty straight forward to me in terms of a bicycle seat being a seat (specifically provided for).  However, CBP points out that Chapter 94 Note 1(h) excludes from Chapter 94 parts and accessories for bicycles.  
 
Customs goes on to explain that in keeping with precedent, the bike seats qualify as bicycle accessories.  The bike seat must be used “solely or principally” with a bicycle (I think we can agree that criteria is met), and the bike seat must “… contribute to the effectiveness of the principal article (e.g., facilitate the use or handling of the principal article, widen the range of its uses, or improve its operation).”

So, is a bicycle made more “effective” by virtue of a person being able to take their kid for a ride? As a parent I guess I can go along with that. As an importer now paying 10% duty instead of zero, I might have an issue.

Who Should Own Compliance?

This topic has been discussed before, but it has come up a few more times recently so I thought I would kick it around again.  That is, where should the Trade Compliance organization rollup to?  In the realm of Legal/Finance/Ethics or the more operational segments of Procurement/Supply Chain/Logistics?

Decent arguments can be made for all sides, and it probably depends on your place in the business as to where you come down on the issue.

If you are in the trade compliance group itself, you probably prefer to be in Legal or some other function such as Ethics where you are removed from the day to day operational pressures of keeping freight moving.  You want to be able to give the best compliance advice without compromise. You’re more apt to be listened to and taken seriously if belonging to these groups as well.

If you are managing the supply chain then you probably want the trade compliance functon to reside in or somewhere alongside Logistics in order to have quicker access to  possible solutions to the daily challenges that arise moving freight across international borders.

What are some of the issues associated with residing in the supply chain?  Can you be an effective part of keeping imports and exports flowing smoothly on a situational basis without compromising compliance?  I think it depends largely on how busy you are overall and the nature of  your commodities.  That is, what kind of volume are you moving, and what are the import and export compliance risks associated with your particular product mix?

Care to weigh in?  What are some of the pros and cons?

It has always been a challenge for existing export trade regulations to maintain their relevance in the wake of technological advances, but may have reached a new level in trying to fit a square peg in a round hole with the onset of cloud computing in a global economy.

Most companies have already gotten their heads around the risks associated with using EMAIL or FTP to transmit technology over the Internet (software files, technical specification, etc.) even if they have not managed to implement complete control over that activity. They understand that these kinds of transfers clearly fall under the definition of what constitutes an export.

Cloud computing and the provision of IT services over the Internet, however, present different fulfillment models that need to be evaluated for the need to implement export controls.

Since the Export Administration Regulations (EAR) do not specifically address cloud computing, the only thing in writing we have to go on is an Advisory Opinion issued in January of 2009 to a provider of “cloud” or “grid” computing. The following questions are put forth and answered by BIS:

(1) Whether grid and cloud computing services, in the absence of any transfer of software or technology subject to the EAR, is subject to the EAR under part 734;
(2) Whether grid and cloud computing services constitute an “activity unrelated to exports” under 744.6 of the EAR;
(3) Whether grid and cloud computing service providers are “exporters” or any derivative data resulting from the use of the computational capacity and liable for export screening on that basis alone;
(4) Whether computational access restrictions found in 740.7(b)(2) of License Exception APP apply to grid and cloud computing service providers; and
(5) Whether the grid or cloud computing service provider must inquire about the nationality or the customer (or user).

As you can see these are all very good questions. Check out the answers in the actual advisory opinion here:

http://www.bis.doc.gov/index.php/forms-documents/doc_download/527-application-of-ear-to-grid-and-cloud-computing-services

While this does not cover every scenario of Software as a Service (SaaS) that is being created these days, the answers definitely lay the groundwork and can act as a guideline for the basics that have to considered for export compliance (i.e., customer screening, classification of any software that may be exported, knowledge of customer end-use).

While an advisory opinion may not give the solid assurances some companies may desire before incurring costs to implement trade compliance solutions, smart executives would be wise not to wait for the necessary regulatory updates to occur.