Customs Law Advisory - Is It Still A Candle If It Doesn't Have A Wick? Tariff Engineering, Domestic Party Petitions And The Complex Classification Issues Raised Even By Simple Objects

This content appeared as a Law360 column.

A recent Federal Register notice published by US Customs and Border Protection (“CBP”) illuminates a multi-layered controversy regarding the importation of wax shapes with holes drilled through their centers. The situation described in the notice raises several import compliance issues including (1) the proper classification analysis for even seemingly-simple imported goods, (2) an importer’s right under US law to modify its goods to receive lower import duty treatment, (3) a US firm’s right under US law to challenge the classification applied to competing imported goods, and (4) the unique relationship between the tariff classification of an item and the scope of an antidumping (“AD”) duty order. Studying this situation provides a series of insights for importers that seek smooth and compliant shipments and for US companies that may face import competition.

The Story

In 1986, the United States imposed AD duties on “scented or unscented petroleum wax candles with fiber or paper-cored wicks and shaped as tapers, spirals, columns, pillars, and other wax-filled containers” from China. The original AD order imposed a 54% AD duty on most such products, which has since been raised to 108%. The most recent notices from the US Department of Commerce (“DOC”) in the AD case state that the “products covered are currently classified under the Harmonized Tariff Schedule of the United States (“HTSUS”) subheading 3406.00.00.” As they do in all AD cases, the DOC also states that “[a]lthough the HTSUS subheading is provided for convenience purposes, the written description remains dispositive.” This language is used because the DOC’s definition of the products subject to the AD order may not always line up neatly with a HTSUS classification number. Often, the products subject to the AD order may be classified in multiple HTSUS numbers. Moreover, some items classified in those HTSUS numbers may not be subject to the AD order. Nonetheless, CBP officials (and importers) attempting to follow and enforce the AD order issued by the DOC often rely heavily on the HTSUS numbers.

Between 1999 and 2005, several companies requested and received more than a dozen rulings from CBP on the classification of wax items in various sizes and shapes (cylinders, blocks, etc). These wax items generally did not have wicks but did have a 1/4 inch hole drilled through the center from top to bottom. CBP’s rulings all unanimously found these items to be classified in subheading 9602.00.40, HTSUS, as “molded or carved articles of wax” rather than in heading 3406 as “[c]andles, tapers, and the like.”  

In December 2005, the National Candle Association (“NCA”), a trade association representing 150 American candle manufacturers comprising 90% of US candle production, requested that the DOC initiate an “anticircumvention inquiry.” The NCA argued that these wax items were essentially “wickless candles” which were assembled together with wicks after arrival in the United States. The NCA argued that these items should be considered just another type of “candle” and subject to the AD order. In a notice published in March 2007, the DOC agreed and announced that these products are subject to the AD order.

In January 2010, CBP published its Federal Register notice (http://edocket.access.gpo.gov/2010/pdf/E9-31352.pdf) stating that it received a “domestic interested party petition” from the NCA regarding the classification of these wax items. While the normal (non-AD) duty rate on both candles (3406) and articles of wax (9602) is “free,” the NCA argued to CBP that importers are using 9602 as a way of avoiding the AD duties that the DOC found to apply to these wax items. Accordingly, the NCA is requesting that CBP overturn its prior rulings and classify the items in heading 3406.

The Lessons

First, for all importers that work through the steps necessary to properly classify their products, it is well worth examining the NCA’s argument. The NCA argued to CBP that the Explanatory Notes (“ENs”) to the harmonized system (used by most countries, including the United States, as the basis for the national tariff code) state that while heading 9602 covers “articles which have been moulded to a shape appropriate to their intended use,” the ENs for heading 9602 exclude “blocks, cubes, plates, bars, sticks, etc., whether or not impressed during moulding.” The NCA goes on to argue that in light of these ENs to heading 9602, these items instead, are either “unfinished candles,” “blanks that have the essential character of a candle,” or “unassembled candles.” Lastly, the NCA argues that heading 3406 (“candles”) is a more specific provision than 9602 (“articles of wax”), and thus, should apply. We cannot know yet whether CBP will accept the NCA’s arguments. However, the NCA is quite right in arguing that all of these principles are fundamental to a proper tariff classification analysis. Importers (and CBP) working through a complete classification always should consider the ENs, the notes to the HTSUS, past CBP rulings, and alternative classification concepts such as unfinished or unassembled goods, and more specific headings, even if only to confirm that these sources or concepts do not apply to the product under consideration. These guideposts must be considered step-by-step in the proper order to build a defendable classification result. Even then, it may be useful to request a ruling from CBP to confirm the analysis and protect the importer from penalties if the analysis changes, as the NCA is requesting that CBP do here. Regardless of whether the NCA succeeds, its argument demonstrates a useful checklist for the points that must be considered and analyzed, even for classification of items that seem highly simple.

Second, it should be noted that the importers in this case engaged in a well-established practice usually called “tariff engineering.” US law has long recognized that a product may be designed so that at the time of importation, it fits the conditions of a classification provision with an advantageous duty rate. Nearly a century ago, the Supreme Court stated that “when [an] article imported is not the article described as dutiable at a specified rate, it does not become dutiable under the description because it has been manufactured or prepared for the express purpose of being imported at a lower rate.” Accordingly, tariff engineering remains a vibrant strategy for importers when they can change the characteristics of the item in a way that properly fits the definition of an advantageous HTSUS classification. Here, the importers apparently attempted to design a product that was not within the scope of the AD order. The importers even secured a ruling from CBP which seemed to confirm the analysis.  For most (non-AD) importers, this would have been an excellent strategy. However, DOC, not CBP, controls the scope of AD orders, regardless of the HTSUS number that applies (see below). These importers requested rulings from the wrong agency. 

Third, many importers (and US firms) may not be aware that US law provides a procedure for US manufacturers and workers to challenge the tariff classification of imports. Depending on the circumstances, US companies or workers may challenge the tariff classification used by CBP, the country of origin accepted, and even the application of certain duty reduction programs such as the Generalized System of Preferences. Thus, in situations where there are questions regarding the correct tariff classification, importers should keep in mind that even if their conclusion is accepted by CBP, it may be challenged by domestic parties. This is one more reason why importers should make sure to have complete back-up documentation supporting a chosen classification and should review with an expert whether to request a CBP ruling.

Finally, this case demonstrates the complex relationship between (1) the HTSUS classification, controlled by CBP and (2) the scope of AD orders, controlled by the DOC. Importers of these wax items made their declaration consistent with CBP classification requirements because they followed the long line of CBP rulings that found heading 9602 to apply. However, even though the DOC listed only heading 3406 in its description of the AD order, the written scope wording from the DOC controls the AD order, not the HTSUS number listed by the DOC “for convenience purposes.”  Before the DOC’s anticircumvention decision, importers may have reasonably believed that the nature of these goods meant that they were properly classified in 9602 and meant that they were not “candles” as defined by the AD order. However, after the anticircumvention decision, the importers should have known that the AD order applied, even though the HTSUS number from CBP did not match the number listed by the DOC. Indeed, regardless of the DOC’s anticircumvention decision, CBP still may conclude that it believes its classification to be correct in 9602. In that case, the reasonable care standard in US law would require importers of these items to recognize that this situation requires a declaration at import of both classification in 9602 and the applicable AD duties. Based on the petition, the NCA apparently believes (probably correctly) that despite the separate roles of the DOC and CBP, importers (and local CBP port officials) rely heavily on the HTSUS number listed by the DOC and that as long as the correct CBP classification does not match the number listed by the DOC, there will continue to be confusion and unpaid duties at the border. Even in such confusion, US law places the burden on the importer to exercise reasonable care and declare merchandise in a way that best meets the requirements of all relevant agencies.

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If you have any questions on US Customs or import procedures, please contact:

Greg McCue at gmccue@steptoe.com and 202.429.6421.

Special thanks to Charles Morris for assistance with this advisory.