By Gail Cole.
Although bare shelves have become a common sight during the pandemic, American supermarkets still offer an incredible array of choices when it comes to food. There are over 100 commonly eaten breakfast cereals and entire warehouses devoted to wine.
Many of us have preferences. One of my kids eats peanut butter with chunks while the other has to have cream. I only eat wild caught canned fish and never notice if the canned fish is chopped or in large chunks, but US Customs and Border Protection does.
Each category of products that may be imported into the United States, whether edible or not, is described in the Harmonized Tariff Schedule of the United States (HTSUS) and is assigned a Harmonized System (HS) code – a universal classification code used to distinguish products from one another. For example, a 100% cotton T-shirt has one HS code, a 50% cotton T-shirt has another, and a 51% cotton T-shirt another.
The HTSUS is not a fixed list of products; identifying every product under the sun would be an impossible task. Rather, it categorizes millions of products that regularly cross international borders. The HTSUS is over 4,300 pages, with 22 general sections, 99 chapters, although chapter 77 is not used. (The International HS comprises over 1,200 headings grouped into 21 sections and 96 chapters.)
The importer of record is responsible for deciding which HS code is best suited (i.e. classifying the ownership of the products). Customs is responsible for monitoring imports and enforcing the rules. HS codes correspond to tariff rates, so a misclassified product may be subject to a higher or lower tariff than it should have.
Disputes sometimes arise. While it’s hard to argue that a 100% cotton t-shirt is anything but that, many products aren’t so easily categorized. Given the variability of products and the enormity of the HTSUS, it’s easy to imagine an importer hesitating between two or three codes before landing on one. All other things being equal, you can see why an importer would opt for an HS code with a low rate of duty rather than an HS code with a high rate of duty. But of course, all things are not always equal.
This brings us back to canned fish.
Prices depend on how you cut and pack the fish
There is a global company importing two tuna salad products, one albacore, one light bite. Both are coming to the United States as ready-to-eat packets or on-the-go lunch kits. The end products are not the same, but the production processes are substantially similar, at least for HS classification purposes.
Customs classifies both products under HTSUS subheading 1604.14.10. The item description for 1604 is “prepared or preserved fish; caviar and caviar substitutes prepared from fish eggs; fish, whole or in pieces but not chopped.” 1604.14.10 further specifies “Tuna and skipjack: in airtight containers: in oil.” This is subject to a general duty rate of 35%. [Emphasis mine.]
The company protested Custom’s assessment, arguing that its products are not “unchopped” and not “in oil.”
It claimed that the products should be classified under 1604.20.05: “products containing meat of crustaceans, molluscs or other aquatic invertebrates; ready meals. This one has a general rate of 10%.*
Alternatively, the company has proposed a classification under 1604.14.22, which covers ‘unminced’ and ‘not in oil’ tuna and has a duty rate of 6%. Or HS code 1604.14.30, which has a 12.5% tariff and broadly covers “other”.
You can’t blame them for trying, considering the difference between a 35% rate and a 12.5%, 10%, or 6% rate. Still, customs denied the protests. The case first landed in the United States Court of International Trade (CIT). What happened there is described here.
Not chopped or not not chopped? Customs classified prepared fish as “unminced”. The company claims that its products are not “unchopped”.
The HTSUS does not define the term “chopped”, so the CIT first analyzed different factors to interpret its meaning.
To qualify as “chopped”, the CIT has decided that a product must be “small pieces of a chopped cut [that] are the product of a deliberate process that involves cutting or chopping. He determined that the products in question were “not chopped”. During preparation, the tuna is coarsely chopped and then folded by hand with additional ingredients. Although this translates to “a few very small pieces and a few chunks”, the CIT said that the fact that “some pieces of tuna” were “equivalent in size to chopped tuna…is purely incidental”.
In oil or not in oil? As to whether products should be classified as “in oil” or “not in oil”, the company claimed that oil must be added at the “packaging stage” for products to tuna are graded “in oil” under Chapter 16 of the HTSUS. It adds the soybean oil to its products during the preparation phase, he explained, so the products must be classified as “not in oil”.
The CIT decided that the products were correctly classified as “in oil” because the oil was added after the fish was cooked but before it was packaged. He supported this interpretation by citing US Supplemental Note 1 to HTSUS Chapter 16, which reads: “For purposes of this Chapter, the term ‘in oil’ means packed in oil or fat, or in added oil or fat and other substances, whether this oil or fat was introduced at or before the time of packaging.” [Emphasis mine.]
Ultimately, CIT determined that Customs was correct in classifying the products under 1604.14.10, which has a 35% tariff. The company appealed.
Federal Circuit Court Upholds CIT Judgment
In the Notice of Appeal, the Federal Circuit Court explained that “the proper classification of goods under the HTSUS is a two-step process”:
- Check the meaning of the specific terms in the tariff provision a. Rely on the “common and commercial meaning” of the terms if necessary
- Determine if the goods fit the description of these terms
He agreed with the CIT’s interpretation of the term “ground” and that Customs correctly classified tuna salad products as “unground”.
The Federal Circuit Court also agreed with the CIT that the products were “in oil”, citing HTSUS Chapter 16 Supplemental Note 1: “For purposes of this chapter, the term ‘in oil’ means packaged in oil or fat, or in added oil or fat and other substances, whether such oil or fat has been introduced at or before the time of packing.” [Emphasis theirs.]
Getting the right HS codes is important
Assigning HS codes to products can be a daunting task. There are millions of codes and, as noted above, more than one could apply to a product. However, each product can only be assigned one HS code.
Customs checks that products are correctly classified and incorrectly classified products may be held up at the border. Otherwise, they may be allowed through and, at some point, the importer could be held liable for undercharged tariffs. That’s what happened in this scenario.
Companies that do business across borders benefit from getting HS codes upfront. Avarala’s tariff code classification can help you.
* When the goods in question were released, the general tariff rate for 1604.20.05 was 10%. The rate for 1604.20.05 then fell to 7% and is now 5%, as reported in the HTSUS Revision 4 (2022).
Gail Cole is a sales tax expert for Avalara with a penchant for digging into the depths of BOE sites and uncovering and reporting rate changes across the country.