United States Customs and Border Protection has enormous penalty powers. Customs can impose monetary penalties against an importer for just about any indiscretion. Customs can penalize for not properly assigning the correct tariff classification to the imported product; for not paying the correct duty amount; for undervaluing merchandise; for claiming a duty preference that does not apply; for not properly marking merchandise with its country of origin or with its correct country of origin; for not reporting currency when brought into the country if it exceeds a certain amount; for not maintaining proper records; for the late filing of entries; for aiding and abetting another with an improper importation; and the list goes on and on. More frequent than not, penalties are costly and time-consuming. However, penalties are just one way that Customs can take action against importers for real or perceived indiscretions. This article will focus on some of the other bad things that can happen to importers when Customs believes there is something amiss, and ways in which importers can avoid bad things from happening.
Assume a company imports the same product month after month, or year after year paying a duty rate of 5%. Immediately after importation the product is sold to customers at what the company believes is a reasonable profit. After a few months, or even a few years, Customs determines that the classification assigned to the product by the importer was wrong. The duty rate really should have been 15%. If Customs has not closed out the entries (i.e., "liquidated" the entries), then Customs can go back to the entries and simply assess the higher duty. Even if the entries have been liquidated and less than 90 days have passed, Customs can reopen the entries and assess the higher duties. If too much time has passed since the liquidation of the entries, and the wrong duty rate was a result of the importer's carelessness, or negligence, Customs can still go back in time and demand the payment of the higher duty. What the importer had thought were profitable transactions suddenly turn into enormous losses. The importer's business can be devastated, and in the case of a small business, it may not be able to withstand the loss. All of this happens before Customs has even considered assessing a penalty.
Assume that a company's business is seasonal, or that it has contracts for delivery of a product by a certain date. The product is imported, but for whatever reason, Customs has questions as to some aspect of the legality of the entry. Customs decides to detain the imported product. The detention cannot be easily resolved. Suddenly, the importer cannot honor its obligations to its customers. So much time passes that the product becomes of no value, and cannot be sold, even if Customs later releases the entry. The importer's business is devastated, and again, without a penalty assessment.
Finally, assume a company is importing a product, which Customs finds is not properly marked to satisfy country of origin marking requirements. Some product has already entered the United States, and more product that has not been shipped remains in the foreign country in packaging that does not comply with Customs' marking requirements. Customs demands that product already entered have the marking changed to correctly reflect the country of origin, and no more product be imported until the marking on the packaging is correct. To make matters worse, the packaging cannot be easily changed to show the proper country of origin marking. Again, this could become a situation where the importer cannot honor its obligations to its customers in the United States, the importer is irreparably harmed, and Customs has not even yet assessed a penalty.
The list of the many ways that an importer can find itself in trouble with Customs and the bad things that can happen goes on and on. In the situations described above, it is likely that Customs would also assess penalties, only making matters worse. Also, consider what if Customs' position was wrong in each case. It could require months, or even years to address the issue and have either Customs or the court confirm that the importer was right in the first instance. While all of this occurs the importer must follow what it has been told by Customs is the proper practice, adding expense to the price of its goods, and potentially damaging its business. Customs' power is enormous. Customs does not have to exercise its penalty powers to make its inherent power felt.
Importing is a heavily regulated activity. Companies that import should take whatever steps they can to protect against the unexpected. Many importers do not realize that the things discussed above can happen to them, until they happen. Then it is too late.
There are ways to try to avoid these types of problems. The most obvious is to plan and know what one is doing. No business would enter into a complicated tax transaction without planning and thinking through the ramifications, but when importing, companies often enter into complicated Customs' transactions without considering or learning of the potential consequences. One obvious way to try to protect against adverse consequences is to obtain advance rulings from Customs about contemplated transactions. Importers, their attorneys, or their brokers can write to Customs and obtain advance rulings on how Customs views a transaction and how Customs believes it should be handled. Customs will issue rulings to importers on classification, valuation, marking, country of origin, and virtually all aspects of an importation or other Customs' transaction. Once Customs issues a ruling to an importer, it cannot be changed without notice to the importer to whom it was issued. In other words, Customs cannot suddenly change the rules as to the importer who received the ruling.
Whether an importer has obtained a ruling or not, the importer should consult with a good Customs broker or Customs attorney who can properly advise on importing. As anyone involved in importing can attest, it is not a simple activity. It is complicated and filled with concepts such as assists and related party transactions that might affect value, buying commissions and selling commissions, another value consideration, a complicated tariff schedule with rules that sometimes are counter-intuitive, and many other twists and turns. Importing is not an activity that should be entered into lightly by any company. Plan, investigate, and do homework, just as is done in all other activities of a business. Know what can go wrong, and take steps to avoid problems from happening. It is easier to avoid a problem than it is to correct the problem after it happens.