Celebrity-Worn Haute Couture Dresses Can’t Avoid Customs Duties

US Customs recently decided that no specialty provisions existed to avoid the payment of customs duties, or severely reduce them, on haute couture garments imported by Christian Dior Couture® (CDC).  

According to US Customs, a determination was sought acknowledging that the garments could either qualify

(a) for duty free treatment enter under an A.T.A. carnet as samples

(b) under a Temporary Importation Bond (TIB) as articles not for sale or sale on approval to be repaired, altered or processed, or

(c) for unused merchandise drawback.

Each of these types of treatment would have resulted in preferred duty treatment.

The facts presented with respect to the use of the garments were as follows:

“Christian Dior Couture imports haute couture garments so that they may be furnished to celebrities at no cost to wear at high-profile events, such as the Academy Awards ceremony. The garments serve an important form of advertising for the company because they allow the company to increase its brand awareness and showcase the latest fashions and increase sales.  Once entered into the United States, each piece is fitted to the particular person wearing the haute couture piece so that it may properly display the intended design. Such fittings include hemming, shortening, and/or otherwise altering for the measurements of the person displaying the piece. Only one of each piece will be imported. After exhibition at the event for which the piece was imported, the piece is returned to the company’s U.S. office, and shipped back to the company’s office in Paris, France. During this time, the company does not sell the garments, but retains ownership. The haute couture pieces generally spend no more than a week in the United States.”[1]

Despite these details, Customs claimed that while it did meet the test of being for purposes of soliciting orders, it also served to provide a celebrity with a garment to use to a high-profile event, which is precisely the environment that they are meant to be worn in and in the manner intended.  These therefore, constituted a normal use of the garment, and when you factored in the reality that there was no intention of soliciting orders for the item while being worn, the haute couture did not qualify for entry under an A.T.A. Carnet.

As for qualifying under a TIB, CDC needed the garments to qualify as articles being repaired, altered or processed here in the US and for which would be exported within 1 year from the date of importation.  From CDC’s description of the use of the garments however, it was clear to Customs that the main purpose for importation was something other than for an alteration, repair or processing, and for this reason, it didn’t qualify under a TIB.

Regarding drawback, to qualify for this the garments needed to be exported in the same condition as imported within 3 years from the date of importation, having not been used in the US.  Customs reasoned however, that since the pieces of haute couture were furnished to celebrities for use at a high profile event, that the garments were in fact “used,” and therefore not eligible for duty drawback either.  This is because Customs description of “use” turns on the article being “employed for the purpose for which it was built, which in this case, include[d] celebrities wearing and exhibiting the haute couture pieces at events.” [2]

While there is a special provision does allow women’s wearing apparel to enter duty free for purposes of soliciting orders, it cannot be removed from the importer's establishment for reproducing, copying, painting, sketching, or for any other use by others, nor be used in the importer's establishment for such purposes except by the importer or his employees.

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[1] Customs ruling HQ H251771, 12/16/2014.

[2] Id. Citing HQ h240038 (6/16/14).

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How Many Times Do I Have to Pay Duties?

The first time you import merchandise into the U.S., you would expect to pay customs duties, and under the Harmonized Tariff Schedule of the U.S. (HTSUS), unless the goods are exempted from such payment, that money will have to be paid.

But what about if the merchandise had

a. Already been imported,

b. Duties Paid,

c. Subsequently Exported, and

d. Now being reimported again?

 Is paying again required?

Well, depending on the circumstances, there can be ways of either recouping some of the initial duty payment, or qualifying for an exception to avoid paying the duty such as the exemption where articles exported from the U.S. are

1. Returned within 45 days of such exportation,

2. Were “undeliverable”, and

3. Which had not left the custody of the carrier or foreign customs service.

As a general rule however, 19 CFR 141.2 of the Customs regulations provides that dutiable merchandise imported and afterwards exported, even though the duty had been paid on the first importation, is liable for duty payment on every subsequent importation into the Customs territory of the US (unless exempt by law).

This rule does not however, apply to imports of:

(a) Personal and household effects taken abroad by a resident of the United States and brought back on his return to this country (see §148.31);

(b) Professional books, implements, instruments, and tools of trade, occupation, or employment taken abroad by an individual and brought back on his return to this country (see §148.53);

(c) Automobiles and other vehicles taken abroad for noncommercial use (see §148.32);

(d) Metal boxes, casks, barrels, carboys, bags, quicksilver flasks or bottles, metal drums, or other substantial outer containers exported from the United States empty and returned as usual containers or coverings of merchandise, or exported filled with products of the United States and returned empty or as the usual containers or coverings of merchandise (see §10.7(b), (c), (d), and (e));

(e) Articles exported from the United States for repairs or alterations, which may be returned upon the payment of duty on the value of repairs or alterations at the rate or rates which would otherwise apply to the articles in their repaired or altered conditions (see §10.8);

(f) Articles exported for exhibition under certain conditions (see §§10.66 and 10.67);

(g) Domestic animals taken abroad for temporary pasturage purposes and returned within 8 months (see §10.74);

(h) Articles exported under lease to a foreign manufacturer (see §10.108); or

(i) Any other reimported articles for which free entry is specifically provided.

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How to Classify a Composite Good - Key Chain Case Study

I was admiring key chains recently that were sold separately from their corresponding designer handbags.  Noting that the ring was of metal but the decorative part was of leather, I found myself wondering if it was considered a composite good under the tariff, i.e., the Harmonized Tariff Schedule of the U.S. (HTSUS).

A “composite good” is one composed of more than one material which can be either a mixture of materials in one (1) article, an article made up of different components (as in the case of this key chain), or even goods put up in a set for retail sale (which is a term of art by the way in customs-ease and may not mean what you might think it does – so ask someone if that question arises).

Since the key chain is a composite good, we look at the HTSUS’ General Rules of Interpretation (GRI) for guidance on how to classify it.  GRI 3(b) states that when goods are prima facie (i.e., appear to be) classifiable under two (2) or more tariff headings, classification shall be determined as if they consisted of the material or component that gives them their “essential character,” insofar as this criterion is applicable.

Endnote (IX) to GRI 3(b) explains that “a composite good made up of different components shall be taken to mean not only those in which the components are attached to each other to form a practically inseparable whole, but also those with separable components, provided these components are adapted to one another, are mutually complementary, and that together they form a whole which would not normally be offered for sale in separate parts.”

Customs has consistently held that, when a key chain has both a functional and non-functional component, it is the functional component which provides the article’s essential character.  (HRL 950636) Therefore, the ring component makes up the utilitarian part of the key chain with the leather portion deemed as being merely decorative.

Provided the metal key ring was of steel, the whole key chain would therefore be classifiable under HTSUS heading 7326.

Questions/comments?  Post below or email me at clark.deanna@gmail.com

When is a Tote Bag a Wallet?

Never obviously, at least not under the Harmonized Tariff Schedule of the United States (HSTUS).

But what about when you have a make-up bag that could double as a wallet or snack bag? When does size matter when it comes to an HTSUS classification determination?

What about when you have a lunch bag that is made out of a textile? Will the classification turn on it being coated in a plastic coating? What about a rubber/plastic combo?

While I will pass on answering the question about when “size matters,” I can tell you that a duty rate can significantly jump when an article is considered to be coated with an outer surface of plastic versus that of a textile.

Take HTSUS subheading 4202.32 which classifies articles of a kind normally carried in the pocket or in the handbag. The rate of duty on this type of product, such as a make-up bag, when it has an outer surface of cotton is 6.3%.

Contrast this to the same article with an outer surface of a reinforced or laminated plastic, such as a resusable lunch bag. Now an importer is looking at paying a compound rate of duty of 12.1¢ per kilogram, along with an additional 4.6% on top of that.

The rate of duty on most products is typically an ad valorem rate, i.e., a percentage, of the invoice total. On occasion, a product will have a "compound" rate of duty which represents a per unit or per measure (e.g. 10¢/kg) price PLUS an additional ad valorem rate of duty for duty calculation purposes.

Moreover, where the same article is coated in a sheeting of plastic that is neither of reinforced or a laminated plastic, now that same article will have a 20% rate of duty, all because of the outer material of the product.

Nuances like these are rife throughout the tariff. I would recommend that importers take a periodic review of its imports to confirm that its use of HTSUS classifications are correct in order to identify any errors – as the HTSUS changes throughout the year – as well as to avoid future penalties due to stopped shipments or customs audits where inadvertent classifications may be discovered and outstanding duties across multiple entries may be sought.

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Import Restraints and Their Economic Impact

Today the U.S. International Trade Commission (USITC) released its Publication #4253 entitled, “The Economic Effects of Significant U.S. Import Restraints.”

The USITC is self-described as “an independent, quasi-judicial Federal agency with broad investigative responsibilities on matters of trade. The agency investigates the effects of dumped and subsidized imports on domestic industries and conducts global safeguard investigations. The Commission also adjudicates cases involving imports that allegedly infringe intellectual property rights. Through such proceedings, the agency facilitates a rules-based international trading system. The Commission also serves as a Federal resource where trade data and other trade policy-related information are gathered and analyzed. The information and analysis are provided to the President, the Office of the United States Trade Representative (USTR), and Congress to facilitate the development of sound and informed U.S. trade policy.”

In this publication, USITC shares its findings regarding the economic effect on sectors subject to weighty restraints, such as, not surprisingly, that of textiles and apparel, canned tuna, and, to my surprise (call me naïve), ethanol.

Here are some of its findings:

Textiles and apparel
The Commission estimates that liberalizing import restraints in textiles and apparel would increase welfare by $514 million. Liberalization would reduce output and employment in this sector by 9–10 percent, which would magnify the already substantial declines projected to occur without liberalization. Import liberalization would also eliminate exports of U.S. goods that are stimulated by preferential rules of origin. This change would lead to large declines in exports of U.S. products such as thread, yarn, fabric, and cut pieces of fabric to be sewn into clothing.

Canned tuna
Ending import restraints in canned tuna would increase welfare by $16 million. Imports of canned tuna would increase by 20 percent, and output would decline by 8 percent. Employment in the broader canned fish industry would fall by 7 percent.

Ethanol (ethyl alcohol)
Because of rapidly increasing quantities of ethanol mandated by the U.S. Renewable Fuel Standard, both U.S. ethanol production and U.S. imports of ethanol are projected to rise markedly by 2015. The projected higher import quantities and the continued moderate restrictiveness of ethanol restraints combine to make these restraints the most costly (in welfare terms) among all sectors considered. The Commission estimates that liberalizing ethanol import restraints would increase welfare by $1.5 billion and increase imports by 45 percent in 2015. Although liberalization would reduce the domestic industry’s output and employment from their projected 2015 levels by 4–5 percent, these changes are minor considering that the ethanol industry employment and output are both projected to more than double between 2005 and 2015, with or without liberalization.

The USITC report goes on to discuss U.S. and global supply chains, and more specifically about how the global restructuring of production has led to faster growth in trade, new benefits from trade, and new patterns of trade.

It further gives an in-depth analysis of the key elements of global supply chains, together with the major economic forces driving their development, which include improved international logistics, lower trade and transport costs, technological change, and international cost differences.

For a copy of the publication, click here.

Questions/comments? Post below or email me at clark.deanna@gmail.com