Duest

Here's a question. Assume pots and pans from Thailand individually qualify for duty-free entry into the United States under the Generalized System of Preferences ("GSP"). That means they have 35% of their value derived from Thai-origin materials or costs and are shipped directly from Thailand to the U.S. So far, so good. Now assume that glass lids for the pots and pans are added to the imported goods and those lids are from China, which is not a GSP-eligible country. Do the pots and pans continue to qualify for duty-free entry under GSP or is the entire set disqualified due to the presence of the lids from China?

That is the question presented in Meyer Corporation US v. United States. The tricky thing about this situation is keeping separate tariff classification rules, entry documentation, and GSP eligibility. The classification of the pots and pans plus the lids is controlled by General Rule of Interpretation 3(b), under which the retail set is assigned a single classification based on the one item in the set that imparts the essential character. In this case, that was the pots and pans. As a result of this rule, the entire retail set is usually assigned a single rate of duty.

Following a 1991 Treasury Decision (T.D. 91-7), Customs argued that the 35% value added test must be applied to the entire set, including the lids. According to Customs, the mere packaging of the lids with the pots and pans was not sufficient to substantially transform them into articles of Thailand, making them count against the 35% requirement.

Rather than focus on the Treasury Decision, the Court of International Trade looked at the GSP statute. In 19 U.S.C. 2463, Congress extended GSP benefits to "any eligible article which is the growth, product, or manufacture of a beneficiary developing country" if that article satisfies the other statutory requirements. The pots and pans, individually, are eligible articles. The set, as a whole, is not.

According to the Court, the GSP statute extends to the individual articles that make up the contents of the set, not the set itself. The fact that GRI 3(b) produces a single rate of duty applicable to the retail set does not collapse the contents of the set into a single article for GSP purposes. Thus, the pots and pans arguably retain their individual GSP status. That is the legal conclusion. Whether the facts establish that to be true or not, is not decided in this preliminary decision.

There are other related issues to be settled. For example, if the pots and pans get duty-free status under GSP, does that mean that the lids are dutiable as products of China? If so, at what rate, the rate applicable to the pots and pans, which provide the essential character or at the rate applicable to glass lids from China? The Court did not resolve that and noted that further briefing is necessary to do so.

Next, the plaintiff asserted that the proper valuation for purposes of entry and, therefore, the GSP calculation should be the sale price of the lids from the Chinese manufacturer to the company in Thailand. This is first-sale valuation under Nissho Iwai (Fed. Cir. 1992). To determine whether the first sale is a bona fide sale for purposes of appraisal, Customs looks to the level of profitability of the "firm." In this case, CBP treated the firm as the parent of the importer. There is a debatable question of whether that is a reasonable data point for comparison. The Court also noted that the first sale might be influenced by China's status as a non-market economy. In the end, the Court determined that there are not sufficient facts available to make a decision on this point.

As a result, the Court ordered the parties to confer and propose how to proceed.

The legal decision here should not be lost in the details. This case holds that combining GSP-eligible and non-GSP-eligible items in a retail set does not strip the benefit of the GSP from the eligible articles in the set. That is the takeaway and is big, if it holds up on appeal.

There is a practical question of how entry will be made. A footnote in the decision discusses the possibility of separate line items or even separate entries of the items within the set. The resolution of that also remains to be seen. But, keep in mind that the contents of retail sets must be itemized on the entry anyway. This is the X/V reporting requirement contained in the instructions (see page 14) for completing the 7501. One would assume that adding the A prefix to the HTSUS number at the V-line level would take care of that (if more than one Special Program Indicator can be applied). If not, a new SPI covering both V and A might need to be added to the system.

There have been a few cases of note that I have not yet reviewed. Call it Olympic Distraction Syndrome or Summer is Rapidly Ending Depression. Either way, I've read the cases so you don't have to.

First up, Zojirushi America Corp. v. United States, from the U.S. Court of International Trade. This case will go down in legal history as the genesis of Zombie Protests. You heard it here first.



Zojirushi is an importer of vacuum bottles and jars, home appliances, and housewares. It made several entries that Customs and Border Protection liquidated as entered. Zojirushi then protested the liquidation and asserted a claim for duty-free treatment under the Generalized System of Preferences. Customs, following its internal policy, "rejected" the protest as asserting a non-protestable claim.

This case is important and complicated enough to merit bold-face headings, a rarity in this blog.

Jurisdiction: 1581(a) or 1581(i)?

Usually, Customs will either approve or deny a protest. When it denies a protest, the protestant can bring an action to the Court of International Trade under 28 USC 1581(a). Absent a denied protest, the Court of International Trade will not be able to hear the case pursuant to 1581(a).

The alternative is to bring the case pursuant to 1581(i), which is the so-called residual jurisdiction of the CIT. It is applicable to cases involving the collection, administration, and enforcement of customs duties that are not properly the subject of a denied protest.  Because Customs rejected the protest rather than denying it, Zojurushi filed its case under (i). The problem for Zojirushi is that (a) and (i) are mutually exclusive and if it could have filed a case under 1581(a), then it cannot proceed under 1581(i).

The Court framed the issue as whether the GSP claim was properly protestable. If so, then jurisdiction is proper under 1581(a). If not, then (i) may be the proper avenue for the plaintiff. This is an important question because it goes to the heart of whether an importer can protest a no-change liquidation. After all, CBP liquidated the entry without GSP benefits because that is what the importer requested. If CBP did what the importer asked, why allow the importer to challenge Customs' decision? Is it fair to say that CBP made no decisions that can be protested?

Let's look at the law. Protestable decisions are defined in 19 USC 1514, which permits a challenge to "any clerical error, mistake of fact, or other inadvertence . . . adverse to the importer, in any entry, liquidation, or reliquidation, and, decisions of [Customs and Border Protection] . . . as to . . . the liquidation . . . of an entry . . . pursuant to . . . section 1500 of this title." According to the CIT, the protest in this case involved an inadvertence that is adverse to the importer. That would be the failure to assert the GSP claim. Furthermore, the inadvertence related to the entry and was reflected in the liquidation. On its face, the statute seems to make this a protestable decision.

The Department of Justice was not without arguments. Relying on Customs' regulation 19 CFR 10.172, Justice argued that a claim for GSP is only protestable if made at the time of entry. The Court disagreed. The regulation states, in part, that "If duty-free treatment is claimed at the time of entry" the claim is to be noted noted by appending the letter A to the HTSUS number. The "if" clearly implies that there are circumstances where the claim is not made at the time of entry. The regulation makes this explicit when it later says, "If duty-free treatment is claimed subsequent to the time of entry . . . ", other documentary requirements apply. This language was added in 1977 precisely to permit post-entry claims. Similar language is in a 1994 Treasury Decision.

Is there a Decision?

Getting to what I see as the meat of the debate, Justice argued that because there was no claim at the time of entry, Customs made no decision regarding GSP when it liquidated the entry. Without a decision to challenge, there can be no valid protest. To support this proposition, Customs relied on a ruling, HQ H193959 (Jul. 30, 2012). The ruling, while not a formal regulation, is entitled to judicial deference proportional to its "power to persuade."

The CBP ruling was based on two prior decision of the Court of Appeals for the Federal Circuit. In Xerox and Corrpro, the Federal Circuit said that under the applicable statutes and regulations, an importer cannot first assert a NAFTA claim in a protest. The question before the CIT is whether that principle applies to GSP claims. According to the CIT, the Federal Circuit did not go that far. In fact, the Federal Circuit explicitly said it was not suggesting that an as-entered liquidation can never give rise to a protest. The decision was limited to preferential claims under NAFTA. The ruling, therefore, was not persuasive.

Form this, the CIT concluded that the post-entry GSP claim can be first asserted in a protest. In other words, there is a protestable decision.

But, is there a Denied Protest?

Customs did not affirmatively deny the protest; it rejected the protest as invalid. Since 1581(a) requires a denied protest as the basis for jurisdiction, there is an issue of whether CBP's action constitutes a denial.

It is easy enough to conclude that what CBP did was not an allowance of the protest. Was it a denial?

This is where things turn ugly for the importer.

Let's assume it was a denial. In that case, the summons to the Court of International Trade would be due 180 days from the date of denial. In this case, the summons was filed beyond that date, but within the 2-year period allowed under 1581(i). If 1581(a) is the proper basis for jurisdiction the case is time barred.

But, CBP did not deny the protest. If it had, Customs would have followed the required procedures including providing a reason for the denial and notifying Zojirushi of its right to seek judicial review. Everything CBP did appears to have been calculated to communicate that no denial had occurred because the protests was simply rejected as not properly filed. Consequently, the rejection cannot be interpreted as a denial.

Where does that leave Zojirushi? Not without recourse. It turns out that a rejected protest is not exactly dead. But it is not quite alive either. It has not been denied but is not exactly pending either. I am certain that as far as CBP is concerned, the issue is decided and over. What we have here is The Walking Dead of Protests. But, unlike the walkers on TV, this one can be cured.

The law provides that whenever "a protest has not been allowed or denied in whole or in part," the protestant can force a decision by seeking accelerated disposition under 19 USC 1515(b). Under the much maligned decision in Hitachi, the protestant can do this any time, even after the 2-year period in which CBP was supposed to act.  Here, Customs has neither allowed nor denied the protest, that makes it open to accelerated disposition. If the protestant takes that route, it will likely have a denied protest after 30 days, and a ticket back to Court.

Because Zojirushi can get adequate relief under 1581(a), it cannot proceed under 1581(i). That means the case is dismissed but very much alive if Zojirushi demands accelerated disposition.

I am not a fan of the result in Hitachi, though I think it is legally correct. As a matter of policy, I think CBP should required to act on a protest within the 2-year period. If it can't do that, I think the importer deserves finality and the protest should be deemed granted. At a minimum, it should be deemed denied and open to judicial review. But, I am not Congress and that is not the law. The nice thing about this decision, is that it makes lemonade out of what I think of legislative lemons by finding a means for the protestant to get to Court when CBP. That is a good result.