The worst scenario of inadequate HS classification from a judicial example.
With this real example, you can see how HS misclassification is horrible and could lead to MULTI-MILLION DOLLAR LOSS.

The fact is that Thailand Supreme Court ordered the Japanese top car maker “Toyota” to pay $272.11 million due to the inadequate HS classification.

Source: Reuters

In the beginning, TOYOTA intended to export Automobiles to Thailand.
In this case, the tariff rate for Automobiles(HS:8703.23) is 80%(see the image)

The duty rate of 80% is very high and there is no FTA preferential treatment between Thailand and Japan for Automobiles(HS:8703.23).

On the other hand, FTA between Thailand and Japan, there is preferential treatment for “Automobile parts” (HS:8708) 60% to 30%.

Toyota came up with an idea that they disassemble the Automobiles, ship them to Thailand and declare them as “Automobile parts”, and after clearance, they reassemble them to complete the car in Thailand.

If Toyota had exported Automobiles to Thailand, the duty rate would be 80% but if they disassemble them into Automobile parts, the duty rate would be 30%, literally, they succeeded to reduce 50% of customs duty.

It seemed it works, so they continued this Tariff Engineering from 2010 to 2012 for more than 20,000 vehicles assembled at Toyota’s Gateway factory.

But this is a double-edged strategy.

After that, Thailand customs pointed out that they are not Automobile parts because after importing those items to Thailand, they can be reassembled to be a complete automobile.

It’s nothing other than “Completely Knocked Down”, Thailand customs thought.

To understand why Automobile parts are regarded as complete automobiles by customs, we need to refer to the “General Rules of Interpretation (GRIs)”

GRI 2(a) states below

2. (a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article.

It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this Rule), presented unassembled or disassembled.

It means an unassembled or disassembled product is regarded as a completed product.

That’s the reason why Automobile parts are regarded as complete automobiles by Thailand customs.

The argument between Thailand customs and Toyota had taken a long time and it was brought to Court.

Sept 15, 2022 – Thailand Supreme Court on Thursday upheld a lower court ruling that the local unit of Toyota Motor Corp owed the government 10 billion baht ($272.11 million) in extra taxes for importing components not subject to a reduced tariff.

Here is The link to Thailand Supreme Court judgment

Below is translated judgment.
(Sorry it’s hard to read due to machine translation.)

Today at 11:00 a.m., the Supreme Court of Justice Department of Tax Cases read the verdict.
The Supreme Court means transmitting images and sounds via electronic media to the Central Tax Court.

Cases between Toyota Motor Thailand Company Limited, the plaintiff, the Customs Department, the 1st defendant, and the Revenue Department
The 2nd defendant, a total of 10 cases, accounted for total assets of 10 million baht, In all ten cases, plaintiffs sued that between 2010 and 2012, the plaintiff imported the friend’s car parts used to produce Toyota Prius models by the notification of the Ministry of Finance Regarding the reduction of duty rates and the exemption of customs duties under Section 12 and Section 14 of the Royal Decree on Customs Tariffs B.E. between the Kingdom of Thailand and Japan For the Economic Partnership (JTEPA), the plaintiff asked.

revoke the assessment of the assessment and make an appeal decision of the Appeal Committee.

Both defendants testified that the assessment and The appeal ruling are lawful.

Central Tax Court adjudged to revoke the assessment and Appeal Court of Appeal The special judges returned.

to dismiss the plaintiff’s petition with permission from the Supreme Court
The Supreme Court’s Tax Litigation Division found that the plaintiff’s car parts are to be imported when assembled having a material nature It is important for the Toyota Prius model and can be assembled into Toyota cars.

Prius immediately, so it must be classified into the coordinate type of the complete part or for the successfully imported either disassembled or not assembled as a complete set of parts.

Tariff 8703.23.41 or 8703.23.51(according to the time of import) according to the tariff interpretation rules
Customs Clause 1, *Article 2 (a)  and Article 6 in Part 1 annexed to the Royal Decree on Customs Tariffs, B.E. 2530 (1987)

*Guess it means GRI 2(a)

Therefore, it is not exempt from duty and reduces the duty rate according to the notification of the Ministry of Finance issued to comply with
the JTEPA agreement and is not entitled to exemption from duty according to the Ministry of Finance’s notification regarding the reduction of duty rates and exemption of customs duties under Section 12 of the Royal Decree on Customs Tariffs, B.E. 2530
(No. 18) dated October 13, 2010, neither has the right to reduce the duty rate at the import duty rate of 30 percent.

under the Notification of the Ministry of Finance Re: Reduction of Duty Rates and Exemption of Customs Duty under Section 12
of the Royal Decree on Customs Tariffs, B.E. in the appellate decision to charge the rate 80% of the import duty was approved, while other issues were not accepted by the court, and the verdict was confirmed.

Sometimes I hear that “to reduce duty rate, disassemble the commodity into parts to import and reassemble them in the targeting country, Wow this is a smart way of Tariff Engineering”

But this is the inadequate solution for reducing the duty rate that most people easily come up with.

In short term, it might work I admit, but customs officers are not foolish in overlooking this behavior. Therefore it turned out to be a nightmare one day.

It does not mean disassembling the commodity into parts to import is not a bad way. Sometimes depending on the commodity, disassembling is required.

But please keep in mind that customs seek the possibility to adopt GRI 2(a) to disassembled commodity to reclassify to another HS code.
Don’t underestimate GRI 2(a), it is very important.

If there is a need for disassembling commodities, I recommend consulting customs that the HS code is appropriate in a wide range of views.

As a Japanese, I am personally proud of Toyota’s international business.
Hoping Toyota overcomes this incident and develops more.
This incident must be a great guideline for many traders worldwide.

This post is written based on translated judgment. If I misunderstand the content, please let me know.

Pool Lounger made of PVC and Textile classified as Textile product(HS:6307)or Plastic product(HS:3926)?

This article is regarding the CBP ruling of “HQ H298313”

Source:amazon.com ©AQUA-LEISURE INDUSTRIES, INC.

Item’s description

The 44-inch Monterey Pool Lounger is a “composite good” consisting of both PVC (which is a form of plastic) and polyester mesh textile fabric.
According to provided figures, the PVC represents 30% by weight and 16% by value while the polyester mesh makes up 70% by weight and 84% by value of the lounger. While the mesh fabric constitutes the most weight and value and provides the full-body support of the user giving the user the ability to sit or recline, we also have to consider that the PVC air chambers give the pool lounger the ability to float.

US Customs classified it as a Textile product(HS:6307) in Ruling NY N270096.

6307 Other made up articles, including dress patterns:
* * *
6307.90 Other:

Aqua Leisure Industries contends that it’s classifiable as a Plastic product(HS:3926)

3926 Other articles of plastics and articles of other materials of
headings 3901 to 3914:
* * *
3926.90 Other:

1.Customs’s opinion

The 44-inch Monterey Pool Lounger is a “composite good” consists of both PVC (which is a form of plastic) and polyester mesh textile fabric. According to the provided figures, the PVC represents 30% by weight and 16% by value while the polyester mesh makes up 70% by weight and 84% by value of the lounger. While the mesh fabric constitutes the most weight and value and provides the full-body support of the user giving the user the ability to sit or recline, we also have to consider that the PVC air chambers give the pool lounger the ability to float.
Without the inflatable PVC chambers, the lounger is not able to perform its main function as a pool or lake float. We thus find that the essential character of the overall product cannot clearly be ascribed to either single material.
General Rule of Interpretation GRI 3(c), directs that in such circumstances the classification will be the heading that appears last in numerical order among those which equally merit consideration. The competing headings here are 3926 (other articles of plastics) and 6307 (other made up textile articles). Heading 6307 appears last in the tariff.

2.Aqua Leisure Industries’s opinion

Aqua Leisure Industries contend that the Monterey pool lounger should be classified under heading 3926, HTSUS, because, it is the two plastic PVC air bladder components that impart the essential character of the overall pool lounger.

Aqua Leisure Industries base the argument on the decision in Swimways Corp. v. United States; wherein the Court of International Trade (“CIT”) classified various models of “Spring Floats” and “Baby Spring Floats” designed for the flotation of users in swimming pools, lakes and similar bodies of water in heading 3926, HTSUS, as an article of plastic.

Aqua Leisure Industries argue that the subject merchandise is substantially similar to the “Spring Floats” in the Swimways Corp. decision and that in light of the decision and legal analysis set forth by the CIT, CBP should reconsider its decision in NY N270096.

3.Court Opinion

In Swimways Corp., the “Spring Floats” consisted of an inflatable, polyvinyl chloride (“PVC”) bladder that when inflated with air, provided the floatation capacity for the article. The center of the “Spring Float” was a woven elastomer textile mesh that supported the user during floatation.

Swimways Corp., at 1317. In Swimways Corp. the CIT explained that although the merchandise consisted of component materials that were both significant, neither heading adequately described the article as a whole Swimways Corp., at 1321–1322. Accordingly, the CIT resolved to determine which component or material imparted the essential character of the “Spring Float” in accordance with GRI 3(b). Id., at 1322. The CIT noted that both the textile mesh and the PVC bladder contributed different significant functions; with the textile mesh providing support to its user and the PVC bladder providing the flotation characteristic. Id. Yet, the CIT concluded that the PVC bladder imparted the essential character of the article as a whole because the floatation function of the PVC bladder was essential to the functioning of the finished article. Id., at 1324. The CIT explained that because the PVC bladder enabled the article to float in water, it was the component material that allowed the “Spring Float” to perform its primary function, fundamental to its commercial identity as a “float.” Id. As such, the CIT determined that the “Spring Float” was classified in heading 3926 because it was the plastic component materials that imparted the essential character of the product.

CONCLUSION

Customs reconsider the decision that absents the performance of the plastic PVC air bladders, the pool lounger could not perform its fundamental function, which is to float.

Accordingly, Customs find that the plastic PVC air bladders impart the essential character of the product as a whole. Thus, the Monterey pool loungers are classified according to the plastic component material of which the PVC air bladders are made.

By application of GRI 3(b), Customs find that the pool lounger is provided for in heading 3926

Source: CUSTOMS BULLETIN AND DECISIONS

Author’s Opinion

This product is made of PVC 30% by weight and 16% by value while the polyester mesh makes up 70% by weight and 84% by value of the lounger. it seems GRI3(b)(Ⅷ) should be applied to classify in 6307 or GRI3(c).

GRI3(b)(VIII) The factor which determines essential character will vary as between
different kinds of goods. It may, for example, be determined by the nature of
the material or component, its bulk, quantity, weight or value, or by the role
of a constituent material in relation to the use of the goods.

But this idea is overturned by Aqua Leisure Industries’s persuasive opinion with court precedent.
I agree with the opinion that absent the performance of the plastic PVC air bladders, the product sink to the bottom of the pool, but absent the textile part, it’s nothing other than just a Float.

In this example, floating material is considered more important than textile material which gives a user to feel relaxing.
But I guess opinions could be varied depending on the Country.
Some countries may adopt GRI3(b)(Ⅷ) or GRI3(c) without thinking about essential character.

And here are other examples of German Customs rulings.

Some Pool Loungers are classified in 9503.
There is a possibility that they are considered as a toy?

Hockey pants classified as “Garment”(HS:6211.33) or “Sports equipment”(HS:9506.99)?

This article is regarding the court case of classification of Hockey pants.
The issue is about Mutually exclusive exclusionary notes.

Source:thehockeyshop.com

US Customs classified it as “Garment”(HS:6211.33)

6211
Track suits, ski-suits and swimwear; other garments:

* * *
6211.33.00
Of man-made fibers.

Bauer contends that it’s classifiable as “Sports equipment”(HS:9506.99)

9506
Articles and equipment for general physical exercise, gymnastics, athletics, other sports
(including table-tennis) or outdoor games, not specified or included elsewhere in this chapter;
swimming pools and wading pools; parts and accessories thereof

* * *
9506.99
Other

1.Customs’s opinion

Note 1(e) to Chapter 95 exclude items classified in Chapter 95.
1.- This Chapter does not cover :
(e) … sports clothing and special articles of apparel of textiles, of Chapter 61 or 62, whether or not incorporating incidentally protective components such as pads or padding in the elbow, knee or groin areas (for example, fencing clothing or soccer goalkeeper jerseys);
Source: WCO

Therefore it can not be classified in 9506

2.Plaintiff’s opinion

Note 1(t) to Section XI exclude items classified in Chapter 95.
1.- This Section does not cover :
(t)Articles of Chapter 95 (for example, toys, games, sports requisites and nets);
Source: WCO

Therefore it can not be classified in 6211

3.Court Opinion

Assuming the subject merchandise is prima facie classifiable under both Chapters 62 and 95, each chapter has associated with it an exclusionary note that would ordinarily preclude classification of the subject merchandise under the competing chapter.

See Note 1(t) to Section XI (excluding from this section, including Chapter 62, articles of Chapter 95); Note 1(e) to Chapter 95 (excluding “sports clothing . . . of textiles, of chapter 61 or 62”).

Under such circumstances, we must evaluate which heading, and if necessary, subheading, provides the more specific description of the merchandise before we examine the exclusionary notes associated with the applicable classification.

See Sharp Microelectronics Tech., Inc. v. United States, 122 F.3d 1446, 1450-51 (Fed. Cir. 1997) (noting that exclusionary notes play a complementary role to the rule of relative specificity and finding it improper to rely on an exclusionary section note before applying the rule of relative specificity between competing headings).

Resorting to the exclusionary note before applying the rule of specificity, as Customs did in its classification ruling, would yield the somewhat arbitrary result that the subject merchandise could be classified under different chapters based solely on which chapter the analysis began.

For instance, if Customs had started with Chapter 95 instead of 62 and properly concluded that the merchandise is classifiable as sports equipment, it would have arrived at a conclusion opposite to that reached in its original ruling, and found the hockey pants classifiable only under Chapter 95.

CONCLUSION

For the foregoing reasons, we reverse the decision of the Court of International Trade affirming Customs’ classification and hold that Bauer’s subject merchandise must be classified under subheading 9506.99.25.

It’s called “Mutually exclusive exclusionary notes”
Under such circumstances, we can not decide which exclusionary notes should be applied.
In this case, the court applied the relative specificity analysis under GRI 3(a) to resolve this classification dispute.

Source:casetext

A similar case is stated in WCO’s Compendium of Classification Opinion