Volume 46, Issue 3 - April 2007

Under Investigation
$20 Million Found inUncollected Flooring Tariffs

When Steve Simonson’s online flooring store iFLOOR imports wood flooring from other parts of the world, he makes sure either the manufacturer or the third-party Customs broker through which his company is working knows how the product is to be classified.

But he also knows there are companies out there that aren’t classifying product correctly.

“The guys who make mistakes [in misclassifying product with zero tariffs applied to it], that’s life and you correct it, but the guys who do it as a system of how they import product, that’s just not right, and it hurts the flooring business. It gives the bad guys an unfair advantage,” Simonson says.

iFloor’s philosophy is “to do the right thing or it comes back to bite you,” Simonson says. And bite you (if you misclassify wood flooring imports), it can.

If you are an importer of record and misclassify product by putting it in a category which has insufficient tariffs applied to it and you are caught, you could pay penalties up to three times the domestic value of the product, and if you are found to have committed fraud, you could face civil and criminal penalties or even jail time. And distributors who are cosignees on shipments, can face the same consequences if it is proven that they were involved in the misclassification. 

A Problem Emerges
Three years ago, some members of The Wood Flooring Manufacturers’ Association (NOFMA) told the industry that there was a problem with wood flooring imports being misclassified. 

“Some members of ours suggested that this is a role NOFMA ought to play in representing the interests of U.S. manufacturers,” says Timm Locke, executive vice president, NOFMA: The Wood Flooring Manufacturers Association. That’s precisely what the association did. 

NOFMA is a member of a larger group called the Hardwood Federation. The Hardwood Federation represents hardwood organizations of all types. 

Locke says NOFMA went to the Hardwood Federation with the misclassification problem, and the federation tasked NOFMA with addressing the issue.

“We believe the majority of wood flooring coming into the country has been avoiding legitimate tariffs for quite a while,” Locke says. But he admits that it’s hard to say who is at fault.

Mistaken Identity
One cause of the misclassification problem may be the system itself. It’s set up so it’s fairly easy to mistakenly misclassify wood flooring.

“There’s a ten digit classification in the Harmonized Tariff Schedule that is called wood flooring, but when one goes into what the actual definition of what that is (products that don’t have an end-match on them, which means no tongue-and-groove on the end), we know that almost all wood flooring coming into the country has tongue-and-groove on the end which automatically kicks it into another category,” Locke says. “But because the system says wood flooring [for this inaccurately described product], it would be fairly easy to make that mistake.”

After NOFMA realized misclassification was a problem, it talked with representatives of the International Trade Commission (ITC) whose job it is to create the codes for classification. But the ITC doesn’t enforce misclassification.

“Although the ITC publishes and maintains the Harmonized Tariff Schedule of the United States (HTS) in its various forms, U.S. Customs and Border Protection (CBP) is the only agency that can provide legally binding advice or rulings on misclassification of imports,” says Fred Forstall, international trade analyst, ITC. “Likewise, CBP is responsible for ensuring that all U.S. imports are correctly classified.”

A Box of Surprises
Representatives from NOFMA then sat down with representatives from CBP, who decided CBP would begin to open shipments when boxes came into the United States. CBP asked NOFMA to supply them with a list of which companies were misclassifying products. While NOFMA didn’t have this, it gave a list of large foreign producers. About six months later, Customs reported back to NOFMA that it was, in fact, opening up containers called wood flooring and that it was finding instances of misclassification.

“That was not surprising to us,” Locke says. “They then reported that they were going to continue the investigation longer than they would normally do one because it was becoming apparent to them that it was becoming a pretty big problem.”

It was a big issue with a large sum of money tied to it.

“Customs reported to the Hardwood Federation that it had found $20 million in uncollected tariffs once it started this process,” Locke says.

When wood flooring is misclassified, “the importer of record is responsible,” says Vera Adams, executive director, commercial targeting and enforcement, U.S. Customs and Border Protection. “Consignees can also be held liable if it is proven that they were involved in the misclassification.”

The penalties for misclassifying wood flooring shipments depend on the level of culpability: negligence, gross negligence or fraud.

“Negligence or gross negligence penalties range from the domestic value to three times the domestic value. Fraud can be remedied with civil and criminal penalties and even imprisonment,” Adams says.

While CBP didn’t comment on specific situations, Locke says he knows of instances where CBP has gone to an importer of record and said, “This box is improperly classified, and you need to pay this much tariff on it.” 

Customs may also request to see an importer’s records. “It’s truly unlimited how far back they can go, but they’ve gone back about two years, and they look at old records,” Locke says. “Any old records that Customs finds that have similar material coming that is misclassified, it is retroactively charging the importer for those tariffs.”

In the Right Class
The surest way to determine the proper classification is to obtain an official ruling from CBP’s office of regulations and rulings. “We represent many importers of wood products, and we wrote [an article on importing wood products] because we recognize that Customs nationwide was targeting wood importers for misclassification, demanding payments of unpaid Customs duties along with late fees and penalties,” says Peter Quinter, chairperson, Customs and international trade department, Becker & Poliakoff, an import/export law firm. “We are working with our clients to either correct their entries so they do classify correctly for the future and to minimize any payments that may be owed to Customs for prior shipments.” 

Quinter says he tells all importers, not just wood product importers, if there is any question about the classification of product, Customs can provide an advanced ruling. “You can submit a sample of the imported product along with a description of exactly what the product is and your legal argument of how you think it should be classified to U.S. Customs. Typically, these go to Customs headquarters in Washington, D.C., or Newark seaport, but you can also send it to your local Customs specialist group at different ports of entry around the country,” he says. “Within 30, sometimes 60 or 90, days after Customs receives your request, they will issue back to you a ruling—agreeing with your conclusion and telling you how this product should be classified according to the Harmonized Tariff Schedule and what the duty rate would be or they come up with their own different classification, again giving you confirmation on exactly how the product should be classified.”

This confirmation helps importers sleep at night. 

“That knowledge keeps companies out of trouble. They couldn’t be alleged to have committed fraud if they are following the classification provided by Customs,” Quinter adds.

A Confusing System
While CBP’s rulings are available and companies can request confirmation of how to classify products, the system is still confusing.

“Misclassification is really something that has been an ongoing issue for all flooring importers,” says Rob Banks, executive vice president of sales and cofounder of BuildDirect, an online building products wholesaler. “There are such a wide variety of products out there that it can be very difficult to get a consistent answer on which HTS code needs to be applied when importing a product into North America.”

Banks gives an example. “If we have been bringing a product in using one HTS code through a port on the East Coast, we may find that when we import the same product on the West Coast that a Customs agent has a different interpretation of which code needs to be applied,” he says. “I certainly can understand the difficulties that Customs officials have with this because it has become such a complex and complicated system. It’s really difficult for everyone on both sides.”

Error on the Side of Caution
With such a complicated classifying system, Banks says that BuildDirect always errors on the side of caution. “If we receive two different answers about what HS code we should be applying, we will ultimately use the code that results in a higher duty until we can get an official ruling,” he says.

Banks recommends that importers and distributors seek professional advice. Answers on these questions are not usually black and white.

“You really need to find a professional who is an expert in this field and make sure you show due care. Ultimately, this will help if you are burdened with an incorrect ruling,” he says.

iFLOOR also turns to outside help—its Customs broker or supplier.

“With a new product, it’s very common for our Customs broker to ask, ‘Hey give me a piece, so I can take it to Customs and get it classified,’” Simonson says. “There are times when we argue [with Customs] about it, but typically our Customs broker or supplier will help us facilitate that conversation.”

Even if companies outsource the job of classifying product, they still have to be careful.

“Because the system is so complicated and very few companies have the internal resources to focus on this key issue, outsourcing makes the most sense,” Banks says. “The challenge with outsourcing is that no one can remove the risk of misclassification for you. The importer is always ultimately responsible.” 

The Harmonized Tariff Schedule 
The Harmonized Tariff Schedule (HTS) is a classification system used to categorize every product that is imported to or exported from of the United States. It is the importer of record’s job to ensure the imported products are classified under the proper code. Make sure you are using the most current version of the HTS, which is the 2007 version that went into effect on February 3, 2007. For wood flooring turn to Chapter 44 in the HTS and enter into a process of elimination. 

Timm Locke, executive vice president of NOFMA: The Wood Flooring Manufacturers Association, recently outlined the codes that coincide with imported wood flooring. According to Locke, here are the codes that coincide with imported wood flooring: 
• Solid, unfinished hardwood flooring with end match: 4409.29.05.00 (3.2 percent tariff); 
• Solid unfinished hardwood flooring flush cut on the ends: 4409.29.25.xx (be sure to fill in the xx: .30 if it’s maple; .50 if it’s birch; and .60 if it’s any other species) (no tariff);
• Solid, factory finished hardwood or softwood flooring regardless of whether it’s end-matched: 4418.90.46.90 (3.2 percent tariff);
• Engineered wood flooring (hardwood or softwood) with a face ply greater than 4 millimeters but less than 6 millimeters: 4418.72.90.00 (8 percent tariff);
• Engineered wood flooring (hardwood or softwood) with a face ply greater than 6 millimeters: 4418.72.20.00 (3.2 percent tariff);
• Engineered wood flooring with a face ply less than 4 millimeters thick: somewhere under heading 4412 (likely an 8 percent tariff);

If you are still confused on how to classify a product, ask U.S. Customs for an official ruling.

An Official Ruling
If a company has a question about how to classify its imported material, the company should request an official ruling from the U.S. Customs Bureau.

Companies can also request an official ruling, which can be done electronically at http://www.cbp.gov/xp/cgov/toolbox/legal/Rulings/eRulingRequirements.xml.

There is an online searchable database of CBP rulings that can be retrieved at http://rulings.cbp.gov/

“Importers can develop internal controls to assist them in producing accurate entries,” says Vera Adams, executive director, commercial targeting and enforcement, U.S. Customs and Border Protection.

“CBP’s voluntary Importer Self-Assessment Program provides the opportunity for importers who have made a commitment of resources to assume responsibility for monitoring their own compliance in exchange for benefits.”

Companies can visit http://www.cbp.gov/xp/cgov/import/trade_initiatives/ importer_self_assessment/ for more information.


Shelter
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