| The Don'ts of Importing
By Margaret M. Gatti, Esq.
I've seen many articles that deal with what you should do in importing ("the do's in importing"), but I can't recall seeing any articles that deal with what you shouldn't do in importing ("the don'ts in importing"). I don't want to seem like a glass is half empty person, but as an international business lawyer whose practice is limited to international business transactions, I get many new clients because they've committed a "don't" in importing and because they need a lawyer to help them sort through the effects of the "don't" they've committed. In sorting through the effects of the "don'ts" that come to my attention, I often think how much time, trouble and expense could have been saved, had the importer done a little quality control in advance and avoided committing the "don't" altogether.
The purpose of this article is to tell you how you can quality control your import operations by reviewing some of the "don'ts" I've seen.
Don't assume that there are no US import controls relevant to your product or that the ones that are relevant at any one time will remain relevant forever. US import controls arise from concerns related to the U.S. economy, consumer health and the preservation of domestic plant and animal life. Consequently, as concern over these matters shifts, import controls will likely be subject to change. Import controls, which take the form of import prohibitions and import restrictions (quotas and licensing requirements), may be based on country of origin, product type, or product characteristics, such as products produced by convicts and counterfeit products. Imported products which contravene the US's import controls are generally refused entry at the border and may also be subject to seizure by US Customs.
Don't neglect to investigate whether the product you are importing is subject to any "special requirements". Special requirements are typically imposed by US Customs or by another US government agency and they generally fall into the following broad categories:
- Product specifications, product testing requirements or product certification requirements;
- Marking requirements;
- Labeling requirements;
- Packaging requirements; and
- Documentary requirements.
Imported products, which do not comply with the US government's "special requirements", may be refused entry, seized at the border, assessed a monetary penalty or subjected to a program of forced compliance.
Don't take a passive stance with regard to the classification of your products or randomly assign your product a harmonized code number. The U.S., like most other countries in the world, subscribes to the Harmonized Tariff Schedule (HTS) to classify products for duty purposes. Although the HTS achieves harmonization with regard to broad product categories, there is often some room to maneuver with regard to the applicable harmonized code for a specific product, i.e. there does not appear to be one absolutely correct product code for each product. Since the choice of a harmonized code impacts the duty rate to be applied against a product and since duty rates vary product by product, it does not make sense to accept or select one harmonized code over another, without also considering the applicable duty rates. To control the HTS code that is applied to your imports, you may wish to make the HTS number appear on all your import documents. You also may wish to ask the foreign exporter to use the HTS number you select in all export documents. Clearly, whatever number you select should be defensible with Customs. To be on the safe side, you might even want to obtain a binding ruling from Customs with regard to the harmonized number you select. At any rate, there is strong incentive to control the selection of an HTS number on your imported products, in that the HTS code selected will determine the duty rate that's applied against your import.
Don't be guided by "common sense" or "gut feelings" in representing the country of origin for your imported product. Country of origin is a technical term, which often means more than just from where a product came. The US has approximately 20 different definitions of origin when a product is not wholly the growth, product or manufacture of a single country. The default position deals primarily with substantial transformation, but this position is subject to review from time to time and may be revised at some point in the future. In addition to the default position, however, there are various other origin rules that are applied in the US. Some are applicable to certain product categories (rules of origin for apparel); others are applicable to imports from certain geographical regions (NAFTA origin rules, Caribbean Basin origin rules) or to imports from certain countries (Israel US Free Trade Agreement). Country of origin determination is important for many reasons: duty determination, import control management vis a vis embargoes and quotas, end user notification, statistical reporting, certificate of origin issuance and marking requirements. Imported products on which there has been an incorrect origin determination or a misrepresentation of origin may be refused entry, seized at the border or assessed a monetary penalty.
Don't ignore the possibility that you may be eligible to benefit from a preferential duty program available either under US Customs Law (American goods returned, American goods assembled abroad, Generalized System of Preferences) or under various trade agreements that the US has entered with specific countries (Israel) or with groups of countries (NAFTA or Caribbean Basin countries). Each of the US's preferential duty programs has specific requirements with which the benefiting importer must comply. Failure to take advantage of a preferential duty program to which an importer is entitled subjects the importer to the imposition of duties, which could have been legally avoided and makes the importer's import transaction unnecessarily more expensive.
Don't forget that an import's transaction value (entry value) is based on the FOB value of the imported product plus various add-ons, such as various royalties and license fees, the cost of assists, etc. An imported product's transaction value is generally based on the invoice value (the price paid or payable by the importer), except in the case of transactions between related parties, which are subject to greater scrutiny. The transaction value in a related party transaction must be an arm's length value. Additionally, it should be comparable to the value used for income tax purposes. An importer's use of an incorrect transaction value subjects the importer to monetary penalties and possible seizure of the imported product.
- Don't make any misrepresentations on your entry documents. Importers are responsible for accurate entry documents and should routinely check their import documents and entry summaries (Customs form 7501) for correctness and consistency.
- Don't misrepresent transaction values on your imported products in order to avoid or to reduce tariffs.
- Don't misrepresent place of origin on your imported products in order to gain access to a preferential duty program to which you are not legitimately entitled.
- Don't misrepresent the nature of the product you are importing to avoid product quotas, product licensing requirements or product tariffs.
These activities violate US import laws and expose a US importer to civil and or criminal penalties and possible seizure of the imported product.
Don't neglect to evaluate the reputation of your foreign seller with regard to performance in selecting the proper payment method for your import transactions. Foreign sellers who are unknown with regard to their performance capabilities or who do not have good reputations for performance capabilities warrant the use of a payment method, which will protect the importer against exporter non-performance. Importers who issue payment to a foreign seller without having investigated the seller's performance capabilities run the risk that their payment will not be rewarded with the receipt of any goods or with the receipt of the goods that were ordered. Payment, once made, is difficult and costly to retrieve.
Don't confuse INCOTERMS with other sales terms formulations, i.e. the Revised American Foreign Trade Definitions, the Uniform Commercial Code or the Warsaw Terms. Although all formulations of sales terms are similar, they differ from one another in that each has its own definition of each individual term. Consequently, it is important to specify which sales terms formulation applies to your transaction. Additionally, it is important to insure that you don't misuse the specific INCOTERM selected and that you understand the costs, responsibilities, rights and obligations that accompany the use of a specific INCOTERM. The misuse of a selected INCOTERM can lead to over or underpayment of costs and to over or under assumption of responsibilities, rights and obligations.
Don't forget to analyze the adequacy of insurance coverage on your import transactions, given the transfer points for title and risk of loss and given the payment method selected. Determine the type, extent and tenure of insurance coverage required and assign responsibility for insurance policy procurement and premium payment. Importers who ignore insurance issues never comprehend the risk they've undertaken until the risk becomes actual and they abruptly (and most unexpectedly) discover that they are either uninsured or underinsured.
Don't think that your use of a letter of credit is a substitute for a valid, enforceable purchase contract. A letter of credit deals only with payment and the documents that the exporter is required to present to obtain payment. It does not deal with many other equally important issues, such as product acceptance, product warranties or dispute resolution procedures. These issues are typically dealt with in a purchase contract. A purchase contract should prescribe and incorporate the selected payment method and deal with any issue deemed significant by the importer and the exporter. Importers who undertake an import transaction without having entered into a purchase contract are exposed to significant transaction risk over which they are unable to exercise much control.
Don't neglect to give a letter of instruction to your customs house broker and to make sure that your customs house broker carries errors and omission insurance. Importers who fail to provide written instructions to their brokers leave too much to fate and often find themselves without recourse when they discover that their broker has made a costly error against the importers' interests. This discovery is further exacerbated when a "guilty" broker doesn't carry errors and omissions insurance and can't or won't make good on the expense that the broker's action has forced upon an importer.
Don't forget to insure consistency in your import transactions. By reviewing your selection of payment terms, sales terms and insurance provisions against the terms of your purchase contract and the instruction letter given to your broker, you insure your import transactions against problems that result from contradictory, overlapping information. Importers that fail to perform a consistency check expose themselves to unnecessary problems that quickly and effortlessly unravel even the most soundly structured transaction.
Don't neglect your responsibility to comply with the record keeping requirements of US Customs Law. Importers must maintain copies of all documents relating to their importations for a period of five years. Customs has the right to inspect such records, on reasonable advance notice, to determine whether or not an importer has complied with US Customs laws. Importers that fail to comply with the record keeping requirements of US Customs Law expose themselves to monetary penalties.
Don't forget to check out the applicability of a US government sponsored cost savings program available to US importers, i.e., duty drawback.
Duty drawback offers US importers the opportunity to obtain a 99% duty refund on products that they import and subsequently export.
Margaret M. Gatti, Esq.
(Article appeared in the 1996 Custom House Guide)
(Revised May 2002)
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