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.