Correctly classifying merchandise or products for import involves a sea of rules that govern import classifications.
These rules are often confusing and unclear, and doing this incorrectly can come at a hefty price. Binding rulings help clear up any confusion by providing classification and duty rates in advance.
Customs can go back five years and retroactively assess the correct duty rate for all product shipments during that time. They can also charge interest on the duties owed and penalize an importer for incorrectly classifying the product.
Should Customs move beyond a CF-28 Request for Information to a full-blown audit, the resolution process can take six months to a year. During this time, importers may need to dedicate full-time resources to gather and submit the information Customs needs. Resources in finance, receiving, purchasing, and logistics may be tasked to help validate the product declaration’s accuracy.
A Customs audit may even prompt an inquiry into every product a company imports. Fortunately, when product classifications are in question, importers can ask Customs to determine the correct classification and duty rate in advance. These determinations are known as binding rulings. Once they are in place, they are binding at all U.S. ports.
The most common binding ruling requests are for tariff classification, but importers may also request rulings on proper Customs Valuation Methodology and Country of Origin determination and marking.
Binding Rulings can:
Importers must declare the accurate country of origin for their goods. Generally, this is the country in which a good is manufactured, produced, or grown. However, the rules of origin can be complex and differ, depending on the product in question. For example, country of origin may change if the original product is substantially transformed in another country.
In its purest form, substantial transformation occurs when additional production in another country creates an entirely new product. The classification and tariff code for the new product will differ from the tariff code on its original form or parts.
In some cases, country of origin is determined by the product’s essential character, not by how much value each country contributed to it. The question then becomes: what qualifies the product as final?
Let’s say a final product has a propeller on it. The propeller comes from China, but everything else is manufactured and assembled in Mexico. In this case, 60% of the value comes from Mexico, and 40% comes from the imported propeller. The country of origin appears to be Mexico. However, Customs could see the propeller as the essential character of the product, making China—not Mexico—the country of origin.
With questions concerning the country of origin, there is not a one-size-fits-all answer. Examples like the one above make obtaining a binding ruling a wise move. Customs may issue a CF-28 Request for Information to address compliance concerns when tariff classifications and country of origin are unclear. The resulting CF-28 may question a company’s Harmonized Tariff Schedule (HTS), which classifies and defines internationally traded goods.
A binding ruling removes subjectivity from classification, country of origin, and valuation determinations. It protects importers from Customs inquiries, which can cost far more than the price of a binding ruling.
Customs’ 19 CFR Part 177 states a binding ruling request can be “made by any person who, as an importer or exporter of merchandise, or otherwise, has a direct and demonstrable interest in the question or questions presented in the ruling request, or by the authorized agent of such person.” The document defines “such person” as an individual, corporation, partnership, association, or other entity or group.
When submitting a binding ruling request under Part 177, importers must:
Visit the Electronic Code of Federal Regulations for a complete list of rules for binding ruling requests.
Remember that misinformation or lack of information can lead to unfavorable outcomes. A Customs Broker can help importers supply correct information in the application process and limit adverse conclusions.
Customs responds to binding ruling requests within 30 days. Sometimes, the ruling is not in the importer’s favor. However, importers can appeal Customs’ decision. A Customs broker can draft an appeal and present a case for why the ruling is incorrect. The appeal request must provide supporting documentation for a new ruling. As the appeal process plays out, importers must follow the binding ruling, even if it is unfavorable. Failing to follow the ruling can lead to penalties.
Companies must be vigilant and periodically review their binding rulings, as they can become antiquated. Binding rulings shield importers from penalties if their product has not changed significantly. If it has, importers must show reasonable care and request a new binding ruling.
While importers often pay upfront fees for professional assistance to file a binding ruling, the determinations save money in the long run. Binding rulings give importers a strategic advantage by bringing predictability to a chaotic supply chain. These supply chains must be flexible and nimble. In today’s uncertain trade economy, the predictability brought to your shipping by a binding ruling is as good as gold.