Recent Customs Rulings Reflect Focus on Trade Enforcement: Trade Compliance Expert

But the challenge with rulings and other CBP pronouncements, such as the agency's tariff FAQs, is that there is still some gray area as to how regulations can be interpreted, and an enforcement-focused CBP can use that gray area to its advantage, according to a trade expert speaking on an Oct. 2 webinar sponsored by the Ireland-based International Trade Institute.

"As one of the partners I work with says, the Trump administration [says], we're going to do it, and [you can] sue us later if you don't agree. And that's how we've been seeing Customs enforce these rules," trade attorney Mollie Sitkowski said. She stressed that her opinions expressed on the webinar were personal and shouldn't be considered as legal advice.

She continued, "They will issue a request for information, and you have a very reasonable argument, [but] they will say, 'No, we don't agree with you.' And then, until you take it to Customs headquarters or take it to court, you're bound by what they've told you."

The gray areas in certain trade actions reflect the gray areas within the originating executive orders, according to Sitkowski. The new tariffs are being implemented via executive order versus by rulemakings or regulations, but the language of the executive orders can be unclear, she said. That lack of clarity can leave some elements open for interpretation, and it can result in CBP interpreting the language in a way that might benefit enforcement.

For instance, CBP might issue a FAQ on its website that the trade must follow. However, "the FAQ could be completely contrary to the language of the executive order. So we've been struggling with that," Sitkowski said. "And in those cases, we tell our clients, you can exercise reasonable care because it's contrary to the language of the executive order. But we can tell you [with] basically 95% certainty that if Customs comes and asks you a question, they're going to disagree because they have that FAQ up. So that's something that we've been dealing with."

Another example of how CBP can use gray areas to support trade enforcement may be seen by how the agency handled several first sale rulings over the summer.

"What Customs has done this summer is, especially with related party transactions, they look at, does that middleman actually have title and risk of loss? ... Before, if you had different Incoterms, you were generally pretty good. Now, they're starting to look at actual indications of title and risk of loss: do they have insurance and that kind of stuff?" Sitkowski said. CBP has also been scrutinizing purchase order terms and payment dates to show whether a bona fide transaction has taken place, she continued.

“Was the PO date of the importer before the PO date from the middleman to the manufacturer? What's the quantity on the POs and what was shipped?” Sitkowski said. “I mean, we all know if you cut a blanket PO, you're going to have a different quantity shipped every time. And it's still under that one PO. Customs wants to see it be exactly what you received.”

A another ruling on a related party transaction scrutinized payment dates, where payment terms were something “like 120 days on the bottom of the invoice, and the payment was actually made in 138 [days]. And Customs said because the payment was made after the payment date and no interest was charged, it's not a bona fide transaction,” Sitkowski said.

CBP also has at its disposal several tests related to determining origin that can be influenced by prioritizing trade enforcement.

Just as the trade community uses the "nebulous" origin test to make legal arguments and exercise reasonable care, CBP can also use this test to engineer an outcome that results in a higher rate of duty, according to Sitkowski. Another test that can leave open room for interpretation is the essence test, which bases the country of origin on what constitutes the essence of the imported good, she said.

There is also the Customs transfer price rule, where the seller has to recover all its costs plus a profit that's representative of the profit that the parent company makes in goods of the same class or kind. This rule doesn’t follow the guidelines of the IRS or the Organisation for Economic Co-operation and Development, and CBP may “start using that [rule] against importers more and more.”

U.S. trade compliance experts are not the only ones grappling with shifting trade compliance priorities. International companies seeking to export goods into the U.S. may also be struggling because the customs and trade laws of the international companies may differ from the U.S., according to international trade compliance expert Kolja Mendel, who also was speaking on the webinar.

"From the EU perspective, the case law approach in the U.S. with the substantial transformation analysis is a mystery. ... I think that's a chance but also a potential trap. You simply have to accept that there are dedicated U.S. rules, and you have to play by them," Mendel said. "You need a legal opinion to exercise reasonable care, or you have to go for a ruling to be on the safe side, which means you have to do risk analysis before to apply those measures correctly."

Because foreign exporters are also seeking clarity on trade compliance, they may be seeking rulings from CBP. But Sitkowski suggested that companies should also ensure that they have undertaken reasonable care.

"We really do recommend consulting with someone who's very familiar with these rules in the United States. If you ask Customs, you better have a very strong argument, because if you provide them a list of facts and their choices are between Liechtenstein and Switzerland, they're going to try and find it be Switzerland," Sitkowski said. "Yes, Customs rulings are the only way to have 100% certainty of how Customs is going to treat your import when it comes in, but Customs is very, very, very conservative, and they try and find any way they can to get the most amount of money from the transaction that you're presenting to them."

Companies may look to other rulings for guidance, as CBP has ruled consistently on some issues, such as what constitutes a single API [application programming interface] origin for motherboards. However, companies also should be aware that CBP has the discretion to rule otherwise, so companies also must be comfortable with potentially paying tariffs if CBP rules with a binding negative determination, she said.

"We can look at something and say, 'Oh, this is clear,' but we can imagine a way that Customs is going to say it's not clear," Sitkowski said. That's "the situation that we're in right now, is, the rulings are all so conservative that it's, in our opinion, better to exercise reasonable care by documenting it, relying on customs precedent and perhaps getting a reasonable care opinion from a U.S. expert, because that prevents penalties almost automatically."