United States: What Corporate Lawyers And Businesses Should Know About Customs Compliance

Last Updated: July 10 2018
Article by Derrick Kyle

Since the Trade Facilitation and Trade Enforcement Act of 2015 ("TFTEA") was signed into law in February 2016, U.S. Customs and Border Protection ("CBP") has increased enforcement of U.S. import laws and regulations. Increased enforcement and associated risks should drive an increased focus by importers on compliance with CBP regulations. However, there remains a knowledge gap among some importing companies and non-trade attorneys related to a few of the basics of import regulations. In this regard, businesses and corporate attorneys should familiarize themselves with the issues below in order to navigate the increasingly risky waters of customs compliance. 

Classification

Every item imported into the United States must be classified according to a 10-digit code listed in the Harmonized Tariff Schedule of the United States ("HTSUS"). The HTSUS consists of 99 Chapters and captures nearly all articles in international commerce, ranging from live animals to works of art and antiques. Typically, the first six digits of an HTSUS code are harmonized to correspond to the first six digits of most other countries' tariff classification for the same item.1

The HTSUS code for merchandise determines the amount of duty to be paid upon entry. If the classification of the merchandise is incorrect, the duty paid will likely also be incorrect, potentially leaving the importer liable for unpaid duties or causing an overpayment of the appropriate duty amount. The HTSUS code also alerts the importer to potential special duty rate programs (e.g., free trade agreements and the Generalized System of Preferences ("GSP")2). Upon entry, the declared HTSUS code will also alert CBP to any further requirements mandated by other government agencies, like the Food and Drug Administration or Environmental Protection Agency.

Valuation

Calculating the value to be reported for merchandise upon entry may seem like a straightforward proposition. In reality, customs valuations can be quite complicated and are a major stumbling block for many companies. First, there are six methods for determining customs valuation, applied in sequential order: (1) transaction value, (2) transaction value of identical merchandise, (3) transaction value of similar merchandise, (4) deductive value, (5) computed value, and (6) a combination of the other methods "reasonably adjusted" to arrive at a value.

In addition to selecting the appropriate valuation method, the importer must consider multiple other factors that may affect the value of the import, including, but certainly not limited to, related party transactions, assists, inland freight charges, and buying/selling commissions.  In an attempt to address all the potential pitfalls of customs valuation, CBP has published its "Valuation Encyclopedia," a 580-page document devoted to key issues related to customs valuation.

Reasonable Care

Per 19 U.S.C. § 1484, importers are required to use "reasonable care" when entering merchandise into the United States. This requirement applies to classification, valuation, and all other such documentation or information necessary for CBP to assess the correct duty and ensure all applicable requirements are met. To assist importers in the exercise of reasonable care, CBP has published a list of questions to be answered by the company for each import transaction. This reasonable care "checklist" is not exhaustive. Every import transaction will be different, and whether or not reasonable care is exercised will depend on the specific facts and circumstances of the import transaction.

If a company finds that it has not been exercising reasonable care in importing merchandise, it should review its past five years of import transactions and determine whether it has entered merchandise in violation of 19 U.S.C. § 1592.3 Section 1592 prohibits the entry or attempted entry by fraud, gross negligence, or negligence of merchandise using (1) documents, electronically transmitted information, written or oral statements, or acts which are material and false, or (2) material omissions. If a §1592 violation is discovered, the company, with assistance from legal counsel as necessary, should determine whether it would benefit from filing a prior disclosure of the violations with CBP. (Torres Law has previously addressed this topic in the article Should I File a Customs Prior Disclosure?)

ACE Reports

Those unfamiliar with customs compliance may be uncertain about the ability to effectively or efficiently conduct a five-year review of import transactions as mentioned above. The prospect of sorting through hundreds or thousands of invoices and other entry documents is understandably daunting—and that assumes the necessary records have even been maintained. However, CBP's Automated Commercial Environment ("ACE") is a useful tool to efficiently analyze import data. Within the ACE portal, importers and other parties to which the importer has given ACE access are able to create and customize import reports that can be exported to an Excel spreadsheet for easy viewing and analysis. Experienced import professionals will likely be very familiar with these reports.

To gain access to ACE reports, one must first apply for an ACE portal account on CBP's website. (Before applying, check with the shipping/receiving, import, export, and trade compliance departments to confirm the company does not already have an account.) Once an ACE account is established, a user is able to run the import report based on a variety of different data elements and filters. It may be helpful to first be familiar with CBP's Training and User Guides for creating reports. Importantly, the import information within ACE is the same data that is available to CBP for the purpose of monitoring imports and selecting audit targets.

TFTEA and Priority Trade Issues

As noted above, TFTEA has led to increased enforcement efforts on a variety of fronts, including more aggressive enforcement of: antidumping and countervailing duty ("AD/CVD") orders; forced labor import prohibitions; and intellectual property rights of rightful owners. These and other issues were designated by TFTEA as "Priority Trade Issues." CBP's current Priority Trade Issues, largely culled from TFTEA, include enforcement of: 

  • Agriculture and Quotas
  • AD/CVD
  • Import Safety (Prevention of Unsafe Product Entry)
  • Intellectual Property Rights
  • Revenue
  • Textiles/Wearing Apparel
  • Trade Agreements

Given these priorities, businesses involved in the import of textiles or agricultural products, as well as companies that utilize free trade agreements or import products potentially subject to AD/CVD laws, should be especially cautious. Further, CBP's focus on revenue collection reinforces the need for importers to exercise reasonable care to prevent the misclassification and undervaluation of imports.

Areas of Risk

One central risk for many companies is the failure to adhere to CBP recordkeeping requirements. An owner, importer, consignee, importer of record, entry filer, or other person who imports into the United States is required to maintain records for five years following the import and must make those records available for examination by CBP upon request. Records that are required to be maintained are listed at 19 C.F.R. § 163, including air waybills/bills of lading, Customs Form 3461, Customs Form 7533, a broker's power of attorney, commercial invoices, and various other documents specific to the import.

Customs brokers can also be sources of significant compliance risk. A good broker is often indispensable and can help guide your company or client through many of the complex, technical issues related to the proper entry of merchandise. However, some companies get into trouble when they become too reliant on their customs broker, utilize too many customs brokers, or fail to actively monitor the work of their customs brokers. An uninformed or unmonitored customs broker can also introduce a variety of risks under other legal regimes, such as export controls, economic sanctions, or anti-corruption.

Accordingly, importing companies must take responsibility for their own customs compliance because CBP will ultimately hold the importer, not its broker, responsible for ensuring that imports meet all applicable laws and regulations. Many minor (and major) issues with customs brokers can be corrected by simply auditing a percentage of imports every month or quarter by, for example, reviewing an ACE import report.

Footnotes

1 The HTSUS and most other tariff classification systems are based on the Harmonized Commodity Description and Coding System, generally referred to as the "Harmonized System," promulgated by the World Customs Organization ("WCO"). According to the WCO, over 98% of merchandise in international trade is classified in terms of the Harmonized System. What Is the Harmonized System?, World Customs Organization, http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx (last visited June 5, 2018).

2 The GSP is the U.S.'s largest trade preference program and allows for duty-free entry of over 3,500 specified products from 120 designated beneficiary countries.

3 The statute of limitations for a negligent or grossly negligent violation of §1592 is five years from the date of the violation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Derrick Kyle
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