The Bureau of Customs and Border Protection (CBP) is planning to reverse several of the gains which importers have recently won concerning the tariff classification of “festive articles”. Despite court decisions classifying a wide range of goods duty free as “festive” articles under Harmonized Tariff Schedule (HTS) heading 9505, Customs is likely to adopt a contrary position regarding the classification of many goods imported on and after January 1, 2004.

     Customs’ change in position will be based on an amendment to the international Explanatory Notes to the Harmonized System.

     In Park B. Smith, Ltd. v. United States, No. 01-1578 (October 21, 2003), the Court of Appeals for the Federal Circuit again confirmed that imported goods may be classified as “festive articles” of HTS Heading 9505 if they are (1) closely associated with a festive occasion and (2) “used or displayed principally during the festive occasion.” Affirming its decision in Midwest of Cannon Falls, Inc. v. United States, 122 F. 3rd at 1429 (Fed. Cir. 1997), the Federal Circuit again rejected the government’s argument that the “festive articles” of HTS Heading 9505 are limited to “entertainment articles”, and do not include functional articles which have a holiday or festive motif.

     However, at the 31st Session of the World Customs Organization’s Harmonized System Committee (HSC), held in Brussels in May 2003, the HSC voted to amend the Explanatory Notes to the international Harmonized System nomenclature, effective January 1, 2004.      The amendment will indicate that “functional” goods are outside the scope of HTS Heading 9505. Specifically, the Explanatory Note for HTS Heading 9505 will be amended to insert the following new paragraph:

The heading also excludes articles that contain a festive design, decoration, emblem or motif and have a utilitarian function, e.g., tableware, kitchen ware, toilet articles, carpets and other textile floor coverings, apparel, bed linen, table linen, toilet linen, kitchen linen. [Emphasis in original]

     The Explanatory Note amendment, which was urged by the United States and Canada, therefore suggests an interpretation of HTS Heading 9505 which is directly contrary to the interpretations adopted in the Federal Circuit’s Park B. Smith and Midwest of Cannon Falls decisions.

     Government officials have indicated to us that, as soon as the Explanatory Note amendment becomes effective on January 1, 2004, Customs will apply it to the classification of festive articles. Thus, Customs will no longer classify “functional” articles with festive motifs under HTS Heading 9505. The gains won before the courts will be reversed.

     However, importers of festive goods will want to protest the assessment of duties on functional articles having festive motifs. It is far from clear that an amendment to the Explanatory Notes will have any binding effect in the United States.

     Technically, the Explanatory Notes have no legal force, and are not binding on United States courts. The courts may simply hold that the amended Explanatory Notes should be disregarded. The government will bear the burden of demonstrating that, as a result of the change to the Notes, the Federal Circuit should reverse its Park B. Smith and the Midwest of Cannon Falls decisions. [Indeed a strong argument could be made that Customs is bound to apply the law in accordance with those decisions, until such time as the legal text of the HTS is amended]¹.

     However, Customs will change its practice concerning the classification of “festive articles” beginning January 1, 2004. Certainly, Customs will refuse “festive article” classification to any functional articles which have not been expressly ruled upon by the Courts, and may refuse to accord HTS heading 9505 classification to many goods on which the Courts already have ruled.

     Importers of festive articles will want to protest the assessment of duty on their products. Indeed, importers may wish to try and force an early judicial determination on the effect of the Explanatory Note change on United States classification².

     Despite their hard-won gains, importers of festive articles will likely have to endure another round of litigation in order to retain duty-free treatment for their products³.

     Neville Peterson LLP stands ready to furnish any additional information or assistance which might be required concerning this matter. Please contact us if you have any questions.

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1. The World Customs Organization does enact changes to the text of the Harmonized System itself, but only issues such changes in 5-year “cycles”. The next set of changes is not scheduled to enter into force until January 1, 2007. It is anticipated that, at that time, a new legal Note to HTS Chapter 95 will be introduced, limiting the scope off the Heading 9505 “festive articles” provisions. United States law contains provisions for the adoption of such changes into the nation’s tariff, pursuant to International Trade Commission (ITC) recommendations, and subject to Congressional “layover” requirements. See 19 U.S.C. §§ 3004- 3006.
   
   
2. An early determination might be sought, for example, by refusing to provide a textile visa for a textile product with festive motive, protesting the exclusion of the product, and raising the classification issue in court in a lawsuit to challenge the denial of the exclusion protest.
   
   
3. There may be a long-term benefit to securing judicial rulings concerning the classification of “festive articles”. If the HS nomenclature itself is amended in 2007, the United states will no doubt amend the HTS to conform to these changes. However, in prior cases where the HTS has been amended to conform to WCO decisions, the United States has preserved the duty rates previously applied by court decisions when making amendments. [The most recent example involved the reclassification of various types of “cooler bags”].

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