Tariff engineering is a proven and legitimate way for importers to lower their duty liability, but a major settlement announced this week illustrates that this strategy is subject to close federal scrutiny.

U.S. Customs and Border Protection must levy duties on goods in their condition as imported. This has led importers in a variety of industries where high duties prevail to import products in unfinished or embellished forms to legally take advantage of classification provisions carrying a lower or free rate of duty. For instance, components imported separately may fall into an entirely different tariff provision than the finished product and may thus be excluded from a higher duty.

However, as a recent settlement in a long-running dispute illustrates, using this strategy is not without its risks.

According to a Department of Justice press release, a U.S. company has agreed to pay $365 million to resolve charges that for four years it violated U.S. customs laws importing cargo vans with “sham rear seats and other temporary features to make the vans appear to be passenger vehicles,” thus allowing the company to pay a duty rate of 2.5 percent instead of the 25 percent applicable to cargo vehicles. After the vans cleared customs they were “immediately stripped of [their] rear seats and returned to [their] original identity as a two-seat cargo van,” DOJ said. The company was also charged with under-declaring the value of the imported vehicles in various ways, including by double-counting U.S. goods assembled abroad (HTSUS 9802) components and using incorrect HTSUS 9802 values.

The DOJ alleged that the company’s actions were designed to “conceal from CBP at importation that the vehicles were ordered as, sold as, and intended to be used as cargo rather than passenger vehicles,” and a DOJ official asserted that the federal government “will not permit companies to evade duties by adding sham features to their products and then misclassifying them.”

The company denied these charges, claiming instead in a lawsuit filed at the Court of International Trade that CBP’s handling, processing, and treatment of the vehicles at issue constituted a prior treatment or an established and usual practice and that the agency’s reclassification of the vehicles was therefore itself a violation of U.S. customs laws. However, the company will drop that case as part of the settlement. The company also agreed that it will seek to avoid similar problems by requesting prospective classification rulings from CBP for new and significantly modified vehicles over the next five years.

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