Mitch Kostoulakos CTL,LCB

Good news for Trade Show exhibitors and exporters of “tools of trade” equipment.

Customs entries on imported merchandise involve calculating duties and taxes based on commodity classification (HTS), country of origin, and transaction value, along with special notes. In  previous posts we have discussed the importance of making sure that correct HTS codes are used. In most cases the commercial invoice or CI value is used for duty calculation. In situations where the transaction is not so clear Customs has established an “appraisement hierarchy” to determine entry value. The details can be found in US Customs and Border Protection regulations 19 CFR part 152.  Here is a summary:

Appraisement Hierarchy

1) Transaction Value- actual invoice value

2) Transaction Value of identical merchandise- same country, same class and kind

3) Transaction Value of similar merchandise- same country, commercially interchangeable

4) Deductive Value – start with US retail selling price and deduct commissions, transportation, insurance, duty/tax, and value of further processing

5) Computed Value- sum of the following. Importer can request computed instead of deductive.

• Cost of Materials
• Cost of Labor
• Cost of Packaging
• Profit
• Overhead
• G&A

6) Value if other values cannot be determined- if the value of imported merchandise cannot be determined it will be appraised on the basis of a value derived from the methods set forth in parts 152.103 thru 152.106.

Transaction Value cannot be used and the hierarchy comes into play when:

• There is a restriction on sale (except geographic)
• Merchandise is sold on consignment
• There is a barter transaction
• There is “goodwill” value involved
• Parties are related, unless relationship did not influence price

Unacceptable bases of appraisement:

• The selling price in the US of merchandise produced in the US
• A system that provides for the appraisement of imported merchandise at the higher of two alternative values
• The price of merchandise in the domestic market of the country of exportation
• A cost of production other than a value determined under 152.06
• The price of merchandise for export to a country other than the US
• Minimum values for appraisement
• Arbitrary or fictitious values

In a previous post we emphasized the importance of an annual review of Harmonized Tariff codes as a good business practice. Another good practice is to make sure you are taking advantage of regulations that allow importing on a duty free or preferential basis. Here are a few items for your annual customs review. Contact mitch@52.91.45.227 if you need help.

• Classification– review annual updates to Harmonized Tariff to make sure your codes and descriptions are accurate. Proper classification and valuation of imported goods are the first step in compliance. If you do nothing else, do this.
• Duty Drawback– this is a refund of duties paid on imports that are later exported. Record keeping is key here.
• Chapter 98 of the Harmonized Tariff allows duty free entry of certain categories of goods. Examples are: American Goods Returned, American Goods Repaired or Altered Abroad, and American Components Assembled Abroad.
• Trade agreements– programs which allow duty free or reduced duty rate entries. There are many agreements (such as NAFTA) in place.
• Customs rulings– consider requesting formal customs rulings prior to large transactions. This ensures compliance and eliminates uncertainty about imports. Rulings can be requested thru the CBP website.
• Correcting errors– when an entry mistake is discovered it can be corrected by a prior disclosure to CBP. The formal process is a Post-Entry Amendment/Post Summary Correction. A prior disclosure can help mitigate penalties.

All C-level executives are justifiably concerned with risk management. Best practices in export compliance will reduce exposure to steep fines and penalties. Here is some information from the BIS (Bureau of Industry and Security) website showing details. For help with export compliance contact mitch@52.91.45.227

Penalties

Violations of the Export Administration Act of 1979, as amended (EAA), 50 U.S.C. app. §§ 2401-2420 (2000), and the Export Administration Regulations, 15 C.F.R. Parts 730-774 (2007) (EAR) may be subject to both criminal and administrative penalties. When the EAA is in effect, criminal penalties can reach 20 years imprisonment and $1 million per violation. Administrative monetary penalties can reach $11,000 per violation, and $120,000 per violation in cases involving items controlled for national security reasons. When the EAA is in lapse, the criminal and administrative penalties are set forth in the International Emergency Economic Powers Act (IEEPA).

On October 16, 2007, President Bush signed into law the International Emergency Economic Powers (IEEPA) Enhancement Act, Public Law No. 110-96, amending IEEPA section 206. The Act enhances criminal and administrative penalties that can be imposed under IEEPA and also amends IEEPA to clarify that civil penalties may be assessed for certain unlawful acts. Criminal penalties can reach $1,000,000 and 20 years imprisonment per violation and the administrative penalties can reach the greater of $250,000 per violation or twice the amount of the transaction that is the basis of the violation. See Endnote below.

Violators may also be subject to denial of their export privileges. A denial of export privileges prohibits a person from participating in any way in any transaction subject to the EAR. Furthermore, it is unlawful for other businesses and individuals to participate in any way in an export transaction subject to the EAR with a denied person.