6 min reading time

A guest post by Bob Hartwig, formerly a Stratos Product Development Project Manager.

Import duties and fees getting killing your budget? Don’t let the daunting complexity of import get you down!

Today’s laws regarding importing merchandise into the USA have shifted the legal responsibility to the importer. The importer must declare the classification, value and rate of duty applicable to the merchandise they are trying to bring into the country. But navigating the rules and regulations for importing merchandise into the USA is daunting. The goal, of course, is to meet the rules and regulations and to pay a fair share of duties and fees. But, if you do not know what you are doing, your goods may be stalled in U.S. Customs, and you may pay far more duty and fees than you need to. So, how does one ensure efficient and fair Customs processing?

A common mistake is to assume all merchandise is treated the same when classifying. For instance, it can lead to excessive duties and fees if the merchandise are prototype parts or assemblies. One will find merchandise classification in the Code of Federal Regulations Title 19 (19 CFR) US Customs and Border Protection by searching by description. Googling “HTS Search” will point one to the Harmonized Tariff Schedule query page. This process for determining the classification is daunting and is best performed by a logistics professional. If you’re feeling ambitious, you might also check this description of HS versus HTS codes.

For importing prototype parts and assemblies, the first step is generating a detailed description of the merchandise. The description is up to you – what is the merchandise? Plastic parts, stamped metal, molded rubber, etc. Be verbose. Describe what it is and how it will be used as if you were telling someone unfamiliar with your project, because that is exactly who will be evaluating the import document. Next you must assign a value to the merchandise. A reasonable valuation starts with the value of the merchandise from the quote from the supplier. In addition to duty, insurance, shipping and tax, other fees may be charged. A Merchandise Processing Fee (MPF) for merchandise exceeding $2,500 in value may be assessed at 0.3464 percent (19 CFR 24.23 (c)). The MPF is a processing fee to monitor customs and trade compliance. The MPF is assessed and paid at the time of entry, and the fee is based on the value of the merchandise being imported (not including duty, shipping, insurance and tax charges). The minimum MPF is $25 and the maximum MPF is $485. Merchandise that originate in a NAFTA territory and that qualify to be marked as Canadian merchandise are exempt from the MPF. Lastly, you must assign a Harmonized Tariff Code.

I told you this was daunting.

Real Life Situation
Let’s see a real story when one tries to interpret 19 CFR with good intent but little experience.

The total value for the merchandise on the commercial invoice was $51,675. The price of the merchandise (polycarbonate parts) was $2,300. The cost of the tooling was $49,375 (soft tooling). The merchandise was entered under HTUS 3920.61.00 at a duty rate of 5.8%. Total duty and fees were $2,976.14. Ouch! More than the parts!

Assessment
So, what happened? The underlying problem was the description of the merchandise. The merchandise was described as polycarbonate parts because they were polycarbonate parts. But the description did not include an intended use statement so US Customs assumed they were finished merchandise for sale. Hence a standard duty rate based on the chosen HTS. But, because the polycarbonate merchandise was molded parts, there was a surprise hidden in the CFR. This is the notion of Assists.

19 U.S.C. 1401a(b)(1) states:
The transaction value of imported merchandise is the price actually paid or payable for the merchandise . . . plus amounts equal to . . . the value, apportioned as appropriate, of any Assist . . . Shipments to the U.S. that include Assists are dutiable charges on imports, declared to U.S. Customs as part of the dutiable value of the imported merchandise.

Assists are defined (19 U.S.C. 1401a(h)) as:
(i) Materials, components, parts, and similar items incorporated in the imported merchandise.
(ii) Tools, dies, molds, and similar items used in the production of the imported merchandise.
(iii) Items consumed in the production of the imported merchandise.
(iv) Engineering, development, artwork, design work, plans and sketches that are undertaken elsewhere than in the United States and are necessary to produce the imported merchandise.

For more enlightenment about Assists, see the US Customs Valuation Encyclopedia, pages 15- 59.

Assists are dutiable at the same rate of duty of the imported merchandise.

There are two ways to declare Assist values:
1) You can declare the total value of the Assists on the first entry filed for the item.
2) You can divide the value of the Assist by the number of items produced and include it as part of the unit price for the merchandise, thereby declaring the Assist value per shipment.

Getting a background
Wait, let’s start over.

The Product Development and Testing Act of 2000 (PDTA) was enacted on November 9, 2000, as part of the Tariff Suspension and Trade Act of 2000 (Act) (Pub. L. 106-476). The purpose of the PDTA is to promote product development and testing in the United States by allowing the importation on a duty-free basis of merchandise commonly referred to as “prototypes”. Until the enactment of the PDTA, prototypes had generally been subject to customs duty when imported, unless they were eligible for duty-free treatment under a special trade program, such as the North American Free Trade Agreement (NAFTA), or unless they were entered under a temporary importation bond (TIB).

Prototype parts and assemblies are eligible for duty free entry under HTSUS 9817.85.01, provided certain qualifications are met (19 CFR Part 10 (A) Section 10.91)).

Merchandise classified as prototypes under HTUS 9817.85.01 are originals or models of articles that are:
1. In either the preproduction, production, or postproduction stage.
2. To be used exclusively for development, testing, product evaluation, or quality control purposes.
3. Associated with a design change from current production (including a refinement, advancement. improvement, development, or quality control in either the product itself or the means for producing the product).
4. Imported only in limited noncommercial quantities in accordance with industry practice. (Customs has not defined “limited quantities” for each industry).
5. Not to be sold after importation into the United States or be incorporated into other products that are sold.
6. Not subject to licensing requirements, laws, rules, or regulations administered by agencies other than United States Customs.

To claim HTS 9817.85.01, entry documents must meet the following three criteria:
1. Must have “Prototype” and/or “9817.85.01” on the entry documents.
2. Must have description of the material and process of fabrication.
3. Must indicate the intended end-use (i.e. to be used exclusively for development, testing, product evaluation or quality control purposes). Be verbose, do not expect the Customs official to be familiar with the merchandise and your project. State “not for sale”; it is only used in engineering evaluation. It will be discarded at the end of the evaluation.

Using HTS 9817.85.01 removes the MPF fee, but you still must declare the value of the Assist. You would not pay duty and MPF on the merchandise, unless you do not provide an adequate and convincing description of the intended use and disposition of the prototype.

It is very important that your company keep detailed records on all your Customs transactions on file for a period of five years to meet your recordkeeping requirements. These are the Regulations for Recordkeeping per 19 CFR. US Customs can conduct a 5-year entry review of your entries and request any of these documents to support the entries filed on your behalf, or they can visit your facility and conduct an audit of your files. They will normally give you a notice of when they are coming and which entries, in particular, they will be looking at.

If your brokers are filing compliant entries on your behalf, and you are reviewing your entries for accuracy (and bringing forth any errors to be disputed with US Customs, including entry amendments that result in no change in duty, but only a change in information), and you are keeping complete records of all your imports and exports, you should pass either an entry review or an on-site audit without any problems.

Further assistance
There are several rational ways to navigate through the rules and regulations of US Customs. First, if you work for a large company doing business internationally, you probably have a logistics professional on staff. This person is knowledgeable about the rules and regulations and you are in good hands. But, if you do not have the support of a logistics professional, then what do you do? Use a shipping broker. Many shipping companies like FedEx and DHL offer a brokerage service. There are also many third-party specialists that offer brokerage services. These specialists will offer services to a specific country or region, so you must find one that specializes in shipping to and from the country you need. When in doubt about importing prototypes, reference the information provided herein, refer to 19 CFR and always ask your shipper and supplier questions. Good Luck!