April 1, 2005
A common compliance problem for importers is how to treat non-U.S. origin goods that are returned by customers. This often occurs with respect to the return of components incorporated in equipment manufactured or assembled in the U.S., or when the U.S. company might have been the distributor of foreign-made goods.
The problem of course is one of identification and origin. The typical scenario involves the customer packing the goods up and returning them with a document or declaration that states "returned goods" or "defective goods returned". A Customs broker, seeing these designations may, without better information, treat these goods as U.S. Origin goods returned and classify them under HTS 9801.00.1000 (Products of the United States when returned after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad).
Classifying non-U.S. origin goods under a provision for U.S. origin goods returned is a violation of law and can pose a significant compliance problem. While some may consider this a "technicality" because the goods were originally entered and then exported, Customs and Regulatory Audit consider this a substantive violation of law.
The general rule under 19 CFR 141.2 is that merchandise of foreign origin imported and afterwards exported is liable for duty on each subsequent importation into the Customs territory of the United States, even though duty may have been paid on the first importation. While an exception to this rule exist, qualifying for this exemption is often more painful than paying the duty.
Subheading 9801.00.25 permits the duty free importation of foreign origin articles that have been previously imported and then exported. To receive preferential tariff treatment provided for under subheading 9801.00.25, each of the following requirements must be met:
- The foreign article must have been exported within three years of the previous importation,
- Reimported without having been advanced in value or improved in condition by any process of manufacture or other means while abroad,
- Reimported for the reason that the article does not conform to sample or specifications, and
- Reimported by or for the account of the person who originally imported them into, and then exported them from the United States.
Proving the existence of each of these conditions can be difficult. In addition, Customs requires that certain declarations be produced concerning the entry of articles under HTSUS subheading 9801.00.25, including:
- A declaration by the person abroad who received and is returning the merchandise to the United States that contains the following information and statements:
- A description of the merchandise and the name and address of the U.S. exporter from whom the merchandise was received;
- A statement that the merchandise has not been advanced in value or improved in condition by any process of manufacture or other means; and
- The name and address of the consignee in the United States to whom the merchandise is being returned because it does not conform to sample or specifications and the reasons why it does not conform to sample or specifications; and
- A declaration by the importer which contains the following information and statements:
- A description of the merchandise;
- A statement that the merchandise was previously imported into the United States and identifies the port, entry number, date of entry, name and address of the importer and that the duty was paid at that time;
- A statement that the merchandise was exported from the United States and identifies the port of exportation, the date of exportation, the name of the exporter and that the merchandise was exported without benefit of drawback;
- A statement that identifies who the articles are being reimported by or for the account of; and a statement that the attached declaration from the foreign shipper (which identifies the foreign shipper) is correct in every respect.
Qualification As A Non-conforming Article
The chief requirement for qualifying for duty free importation under 9801.00.25 is that the reason for the return is because the article does not conform to sample or specifications. Rulings by Customs have limited the application of this provision to articles that were delivered in a defective condition or did not otherwise meet the specifications of the product ordered. See HQ 558746, dated January 6, 1995, and HQ 562057, dated August 27, 2002. Customs will typically reject classification under 9801.00.25 of goods that have failed as a result of normal use or wear. Likewise, normal stock rotation of parts from offshore service facilities will be precluded from eligibility for duty free treatment under this provision. Similiary, returns related to product upgrades or product replacement programs will also be rejected. On the other hand, if the importer can establish to the satisfaction of the local port director that the exported articles had a latent defect, Customs may allow the return of components under 9801.00.25, provided the articles are returned during the warranty period.
Subheading 9801.00.25 provides relief for the payment of duties on foreign origin products that have been previously imported and then exported. Qualification under this provision, however, requires that the importer meet strict eligibility requirements, including that the articles are returned because they are defective and not because of normal use or wear. In addition, the importer must be able to document both the original importation and exportation of the articles in question.
While waiver of these requirements is possible, a waiver will only be granted if the port director is reasonably satisfied that, because of the nature of the articles or other evidence, the requirements of HTSUS subheading 9801.00.25 have been met. See 19 CFR 10.8a(c). As such, importers contemplating use of this provision are strongly encouraged to communicate with Customs at the port of entry and resolve any issues over the eligibility of such articles prior to importation.
If you have any questions on any of the issues raised in this newsletter, please contact George R. Tuttle, III at (415) 288-0428 or via email at firstname.lastname@example.org.
George R. Tuttle, III is an attorney with the Law Offices of George R. Tuttle in San Francisco. The information in this article is general in nature and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.
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