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INTERNATIONAL TRADE AND CUSTOMS LAW NEWSLETTER PREPARED
FOR THE CLIENTS AND FRIENDS OF THE FIRM, FOR VIEWING ON THE WORLD WIDE
WEB.
Volume XI, Number 5
June/July, 1997
FEDERAL CIRCUIT:
EXPORT HMT IS
UNCONSTITUTIONAL
By a 4-1 margin, the U.S. Court
of Appeals for the Federal Circuit (CAFC)
has confirmed that the Harbor Maintenance Tax (HMT), 26
U.S.C. Section 4461, is unconstitutional as applied to waterborne
exports. The CAFC's decision in United States Shoe
Corp. v. United States, No. 96-1210 (June 3, 1997), affirmed
that the export HMT is in fact a "tax", laid directly
on exported goods for the purpose of raising revenue, and thus
violates the Export Clause of the U.S. Constitution.
In so ruling, the CAFC rejected
the government's claim that the export HMT is a constitutionally-permissible
"user fee". The CAFC held that exporters were not
the direct "users" of ports whose maintenance is funded
by the tax (carriers are), and that, in any event, the tax
is not based on a "fair approximation of use" of the
ports. For example, the CAFC majority noted that small, high-value
cargoes are more heavily taxed than cheaper bulk cargoes, although
bulk cargoes make greater use of port facilities. In addition,
exporters using ports which do not receive HMT-financed maintenance
receive no benefit from the tax at all.
Judge Holt Mayer
dissented, arguing that the Courts should respect Congress' intention
to enact a "user fee", and should adopt any reasonable
construction of the HMT which avoids holding it unconstitutional.
He also argued that exporters were the "ultimate beneficiaries"
of the tax, and that the method of assessment, while not calculated
precisely according to port use, was nonetheless constitutionally
adequate.
Copies of the United States
Shoe decision are available from our offices, together
with an analysis [GTR #97-501], and a "question and answer"
memorandum concerning actions which exporters should take
the protect their rights to potential refunds [GTR #97-502].
NEXT STOP FOR HMT
CASE: SUPREME
COURT?
The government now has 90 days in
which to appeal the United States Shoe decision
to the U.S. Supreme Court, and every indication is that
an appeal will be filed. Whether the Supreme Court will hear
the challenge remains uncertain. The Court's 1996 decision in
International Business Machines Corp. v. United States
(striking down a tax on foreign insurance premiums as violating
the Export Clause) reaffirmed decades of the Court's Export Clause
jurisprudence, and the Justices may be reluctant to revisit the
issue. On the other hand, the claim that the export HMT is a "user
fee" was not considered in the IBM case. This
factor, coupled with the dissent in the Federal Circuit, increases
the potential that the Supreme Court will entertain the appeal.
If the Supreme Court takes up the United States Shoe
case, a final determination should be rendered by June, 1998.
If the Supreme Court declines to hear the appeal, the CAFC decision
will become final later this year.
Pending final resolution, the
U.S. Customs Service is still empowered to continue collecting
the export HMT, and exporters who have paid the tax should
continue to seek administrative and judicial refunds.
ITA ENTERS INTO
FORCE, AS CIT
TURNS AWAY A
CHALLENGE
The Information Technology Agreement
(ITA), a multilateral pact eliminating tariffs on a wide range
of computer hardware and software and components thereof, entered
into force on July 1, 1997. However, the U.S. Court of
International Trade first turned away a challenge to the pact's
validity.
In Kemet Electronics Corp.
et al. v. Barshefsky et al., Slip Op. 97-84 (June 27,
1997) domestic manufacturers of capacitors and resistors sued
to enjoin U.S. implementation of the ITA, alleging that Section
111(b) of the Uruguay Round Agreements Act unconstitutionally
delegates Congressional tariff-setting authority, and "constitutes
an unconstitutional attempt by Congress to alienate one of
its basic functions". The plaintiffs also allege that
the ITA is void, as to capacitors and resistors, since (1) tariff
reductions for these articles were not included in Uruguay Round
discussions, (2) the President failed to consult with the appropriate
private sector advisory committees before implementing the ITA,
and (3) the President lacked negotiating authority to completely
eliminate duties on these items in any event.
The CIT rejected plaintiffs' request
for a temporary restraining order (TRO), finding that the plaintiffs
had not established that they would suffer irreparable harm if
the ITA were implemented. The Court also expressed doubt that
the plaintiffs will prevail on the merits of their case, finding
that the Congressional delegation of tariff-cutting authority
to the President will likely be found lawful, since Congress has
provided a "intelligible principle" to guide the President's
exercise of the delegated power.
A preliminary injunction hearing
in the Kemet case has been set for July 10, 1997. It seems
unlikely that an injunction will be granted, and it is unclear
whether the plaintiffs plan to press their ITA challenge beyond
that point. Our office has copies of the Kemet
decision [GTR # 97-503], as well as copies of the United States
[GTR # 97-504] and Canadian [GTR # 97-505] proclamations implementing
ITA tariff reductions.
GSP EXPIRES
AGAIN: USTR
SEEKS COMMENTS
The Generalized System of Preferences
(GSP), which provides duty-free treatment for a wide range
of products produced in developing countries, expired, once again,
at midnight on May 31, 1997. Customs is thus required
to collect deposits of Most Favored Nation (MFN) tariffs on
goods which were previously GSP- eligible. Rep. Phil Crane
(R-IL), Chairman of the House Ways & Means Trade Subcommittee,
has introduced legislation to extend the GSP through the year
2007; however, Congress must still locate revenues to fund
the measure. The House has also expressed support for a budget
item which would fund GSP for two years. The Administration has
also expressed interest in overhauling GSP, "graduating"
some countries from the program, while expanding benefits available
to products of the "least developed" countries.
Anticipating GSP renewal, Customs
will once again allow importers who file entries using the Automated
Broker Interface (ABI) to make entry of GSP-eligible goods
using the Special Program Indicator "A". If/when
GSP is restored retroactively, Customs will automatically reliquidate
these entries and issue duty refunds to importers. Importers
who do not use this procedure may be required to file special
GSP refund applications.
On the eve of the GSP's expiration,
Customs at long last announced the final results of its 1995
Annual Review of the GSP, adding a few new products to the
list of GSP-eligible goods, and deleting others. These changes
will be effective with respect to goods imported on and after
July 1, 1997. On that date, too, Cambodia will become a GSP
beneficiary. Copies of Customs' instructions for GSP entries
[GTR # 97-506] and the final results of the 1995 annual GSP review
[GTR 97-507] are available from our offices.
TEXTILES:
EUROPE SEEKS
WTO RELIEF FROM
U.S. ORIGIN RULES
The European Union has formally
requested that the U.S. enter into "consultations",
under World Trade Organization (WTO) dispute settlement
procedures, regarding the U.S.'s controversial rules of origin
for textile and apparel products, set out in Section 334
of the Uruguay Round Agreements Act. The consultation request
follows an EU ultimatum that the U.S. enact legislation
modifying its textile origin rules, particularly to remove
"fabric forward" rules for a wide range of bedding,
home furnishings, and other non-apparel textile articles.
U.S. textile negotiators traveled to Geneva in June for informal
discussions with their EU counterparts, but no settlement
on the origin rules controversy was reached. A U.S. offer
to change origin marking rules for silk scarves
was rejected by EU negotiators as inadequate, as it did not address
fabrics, bedding products and other European products impacted
by the Section 334 rules.
If the consultations fail, the E.U.
may refer the dispute to a formal WTO dispute resolution panel,
seeking a formal declaration that the U.S. rules violate WTO
commitments. At least nine other countries are likely to support
the EU in any such formal proceeding.
CUSTOMS PUBLISHES
REVISED "REASONABLE
CARE" GUIDES
The U.S. Customs Service has
issued for public comment a second draft of its "question
and answer" format guide, designed to help importers
ensure that they have used "reasonable care"
in transacting "Customs business". The questions in
the revised guide are designed to help importers determine whether
they have made a thorough evaluation of applicable laws and
regulations in determining the tariff classification, appraised
value, country of origin and marking requirements, and "other
Copies of the revised draft guidelines are available from
our offices [GTR #97-508].
"AIR JORDAN"
SHOES HAVE "FOXING
LIKE BAND":
Michael Jordan may have led the Chicago Bulls to another NBA title, but his sneakers
were recently slam-dunked by Senior Judge James Watson
of the U.S. Court of International Trade (CIT). In Nissho-Iwai
American Corp. v. United States, (June 14, 1997), Judge
Watson dealt a setback to various models of the popular "Air
Jordan" sneakers, holding that they all feature a "foxing-like
band" -- that is, a band substantially encircling the
shoe at the area where the sole and the upper are joined. Rubber-soled
footwear featuring foxing-like bands are subject to extremely
high rates of duty. Judge Watson rejected the importer's
contention that "Air Jordan" sneakers simply featured
an improved form of outer sole construction. While acknowledging
that the design of the sneakers was unique, the Court, relying
upon legislative history, held that the sneakers featured "foxing-like
bands", as traditionally defined for tariff purposes.
Copies of the Nissho-Iwai
decision are available from our offices [GTR #97-509].
CLASSIFICATION:
"SIMPLE" TONER
CARTRIDGES ARE
"CHEMICALS"
Photocopier and printer toner
chemicals packaged in "simple" cartridges,
with no moving parts, are classifiable as photographic chemicals,
according to the U.S. Court of International Trade (CIT).
In the CIT's June 4, 1997 decision in Mita Copystar America,
Inc. v. United States Slip Op. 97-73 (June 4, 1997), an
importer of machine-dedicated toner cartridges, which featured
no moving parts, argued that the cartridges were properly entitled
to duty-free entry as "parts" of copiers and printers.
However, Judge Richard Goldberg agreed with the government's
claim that the cartridges were nothing more than mere containers
for the chemicals.
The Court reasoned that since the
Harmonized Tariff Schedule (HTS) heading 3707 provision for photographic
chemicals "put up in measured doses or packaged for retail
sale" did not limit the form of the packaging,
the toner cartridges were prima facie classifiable under
the HTS Heading 3707 photographic chemicals provisions. Paradoxically,
however, the Court also concluded that the cartridges clearly
dedicated the devices to use with specific types of copiers and
printers, rendering them prima facie classifiable as "parts"
of such articles. The Court failed to "break the tie"
by applying the HTS' Section and Chapter notes -- finding that
different notes directed classification under each of the competing
headings and effectively canceled each other out. Thus, the
Court treated the cartridges as "composite" articles
and, applying General Rule of Interpretation 3(b) to the tariff,
concluded that they derived their "essential character"
from their toner component.
The Mita Copystar decision
will likely be challenged on appeal or rehearing. The Court concluded
that the cartridges were classified in HTS heading 3707 "by
reason of" being put up in measured doses, or packaged for
retail sale. However, in a 1995 decision, also involving Mita
Copystar, the U.S. Court of Appeals for the Federal Circuit
ruled that the toners used in the cartridges would be classified
under HTS Heading 3707 even if imported in bulk. Thus, they were
not classified under HTS Heading 3707 "by reason of"
their method of packaging. Copies of the Mita Copystar
decision are available from our offices. [GTR #95-510].
CAFC: GROOVED
COPPER SHAPES ARE
"PIPE" OR TUBES
Cylindrical copper forms featuring
threaded grooves along their interior diameter are classifiable
as "pipes" or "tubes", rather than as "profiles
or other shapes", the U.S. Court of Appeals for the Federal
Circuit (CAFC) recently held. In Marubeni America Corp.
v. United States No. 96-1310 (May 20, 1997), the CAFC
reversed a U.S. Court of International Trade (CIT)
decision which held that the profiles did not meet the common
or tariff definition of "pipes" or "tubes".
The CIT had reasoned that "pipes" and "tubes"
were required to feature threads for structural joining,
and that Marubeni's tubes, which featured internal threading to
promote heat distribution, did not constitute "threads".
The CAFC held that the lower court's
definition of the term "threaded" was unduly narrow,
and was based on just a few dictionary definitions which did not
reflect common meaning. Copies of the Marubeni America
decision are available from our offices [GTR #97-511].
DRAWBACK:
CUSTOMS CHANGES
POSITION ON
CONTAINERS
Domestically-manufactured containers
which would otherwise qualify for duty drawback lose drawback
eligibility when filled with contents prior to exportation by
someone other than the container's manufacturer, the U.S.
Customs Service recently held. Revoking a 1995 ruling, Customs
held that such filling constitutes a prohibited "use"
of the container prior to exportation. Ironically, however, Customs'
view is that where the containers are filled prior to exportation
by their manufacturer, that is simply an extension of
the manufacturing process, and not a drawback-defeating "use".
Concerned about the possible negative
impact of Customs' decision on drawback claims, exporters are
preparing legislation to reverse the agency's ruling. Copies
of Customs' ruling are available from our offices [GTR #97-512].
"ENZYME WASHING"
ALLOWED UNDER
HTS SUBHEADING
9802.00.80
"Enzyme washing" of
textile components abroad
is a "minor operation" which is "incidental
to the assembly process", and hence allowable under the
HTS subheading 9802.00.80 "offshore assembly" program,
the U.S. Court of International Trade has ruled. In Levi
Strauss & Co. v. United States, Slip Op. 97-79 (June
19, 1997), the plaintiff cut blue jean components in the U.S.
and exported them to Guatemala for assembly. Following assembly,
the blue jeans were "enzyme washed" (a process also
known as "stonewashing") before being returned to
the U.S. Customs denied the importer's claim for a duty allowance
under the HTS subheading 9802.00.80 program (also known as
the "807" program), claiming that the enzyme washing
was a significant operation which exceeded the permissible
"assembly" operations permitted under the statute.
CIT Judge R. Kenton Musgrave
rejected Customs' position, holding that the enzyme washing operation
was a "minor" one which was "incidental to assembly",
and logically performed during the assembly process. The Court
found that the cost of the enzyme washing was minor relative
to the total cost of the affected components, and that the time
required to perform the enzyme washing operation was minor relative
to the total time required to produce the jeans. While the
Court found the operation was not "necessary" to
the assembly process, it found that it was "logically
performed at the situs of the assembly operation", and
that HTS subheading 9802.00.80 treatment was permissible.
Finally, the CIT rejected the government's
broad-based policy argument that HTS subheading 9802.00.80
should be interpreted narrowly, to protect U.S. jobs. Calling
the argument "misplaced", the Court refused to
"wade into these turbulent policy waters", noting that
one of the statute's purposes is to promote the use of U.S. -made
components in offshore assembly. Copies of the Levi Strauss
decision are available from our offices [GTR # 97-513].
CUSTOMS PUBLISHES
PENALTY POLICY FOR
SMALL BUSINESSES
Customs will waive the issuance
of penalty notices to small business entities under
certain circumstances, according to a recently-published agency
policy. Treasury Decision 97-46 implements Customs'
obligations under the Small Business Regulatory Enforcement
Fairness Act of 1996, and indicates that Customs will
waive the issuance of civil penalty notices to small business
entities under Section 592 of the Tariff Act of 1930 under
certain circumstances. To qualify for this treatment, a business
must assert in its response to a prepenalty notice that it
is a small business entity, as defined by statute, and that:
(1) the small entity has taken corrective action within a reasonable
correction period including the payment of all duties, taxes and
fees owed, (2) the small entity has not been subject to other
Customs enforcement action, (3) the violation did not involve
criminal or willful conduct or fraud, (4) the violation did not
pose a serious health, safety or environmental threat, and (5)
the violation occurred despite the entity's good faith attempt
to comply with the law.
Copies of Treasury Decision
97-46 are available from our offices [GTR # 97-514].
U.S., E.U. INK
PACT ON STANDARDS
The U.S. and the European
Union have negotiated an agreement aimed at eliminating
duplicative testing and certification requirements for a wide
range of products, ranging from telecommunications goods to
pharmaceuticals. The agreement consists of a series of "mutual
recognition agreements", or "MRAs", which would
ease standards barriers for transatlantic trade valued at $40
billion annually, by harmonizing testing procedures for electronics,
medical devices, recreational watercraft, and electromagnetic
compatibility. U.S. officials stressed, however, that the
pact would not affect the ability of the Food & Drug Administration
to monitor imports to protect public health and safety.
The U.S. and the EU are expected
to embark on negotiation of new MRAs covering standards applicable
to industrial fasteners, accounting services, and veterinary
medicines.
For additional information concerning the matters discussed
in Global Trade Report, please call Martin Neville, John
Peterson, Maggie Polito or Arthur Purcell at (212) 635-2730
or George Thompson at (202) 861-2959.
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