Tariff Engineering Still Allowed, but Could See More Limits, After CAFC Overturns Trade Court on Ford

Tariff engineering is still a legitimate option in the wake of the U.S. Court of Appeals for the Federal Circuit’s June 7 decision on Ford Transit vans, but the practice may be more uncertain in the increasingly frequent circumstances wherein “use” is deemed a consideration in tariff classification, said trade lawyers contacted after the decision was issued.

“The decision appears to be very limited in that it turns on the question of how to interpret the relevant tariff headings and whether the post-importation use of the vehicle is relevant,” said Larry Friedman of Barnes Richardson. ”The decision does not call into question the continuing validity of tariff engineering as a means of managing supply chain costs. It just reiterates how complex the legal analysis can become,” he said

In the ruling, the Federal Circuit overturned a 2017 decision from the Court of International Trade that found vans imported by Ford are classifiable as passenger vans and dutiable at 2.5%, even though the stripped-down rear seats included in the vans were removed right after clearing customs (see 1708170032). CBP had classified them as cargo vans, dutiable at 25%, and the government had argued the addition of the rear seats was mere “artifice” and not legitimate tariff engineering.

“What's interesting is that the Court resolved the issue on a straightforward classification analysis, instead of deciding that the inclusion of the barebones back seat was an ‘artifice,’” said John Peterson of Neville Peterson. “The Federal Circuit found it unnecessary to go there in this case.”

According to the Federal Circuit, the trade court’s error was that it did not consider use when deciding where Ford’s vans should be classified. A recent string of cases from the appeals court has found “use” can be a consideration in “eo nomine” provisions that describe an article by name (see 14080420), particularly when the terms of a tariff subheading imply that use or design is a defining characteristic (see 1904100037).

In Ford’s case, the relevant subheading, 8703.2300, covers “motor vehicles principally designed for the transport of persons.” That language “suggests that classification is necessarily intertwined with whether an imported vehicle is chiefly intended to be used to transport persons,” CAFC said.

The “auxiliary design features” of the vans “and inherent use considerations establish that the subject merchandise is not classifiable under HTSUS Heading 8703,” CAFC said. The second-row seats installed by Ford prior to the vans’ exportation from Turkey did not have headrests, certain comfort wires or a tumble lock mechanism. They were covered in a reduced-cost fabric that was different from the fabric in similar Transit passenger vans imported by Ford. And Ford left the painted metal floor of the cargo area exposed so the vans were ready to transport cargo after the seats were taken out.

“There is a fundamental reason behind these design decisions,” the Federal Circuit said. “Ford employed the [cheaper rear seats] to reduce costs, while facilitating post-importation processing of converting the Transit Connect 6/7s into cargo vans by using sham rear seats that would be stripped from the vehicles,” it said.

Even if the rear seats were capable of functioning as passenger seats in their condition as imported, “the proper inquiry is what the auxiliary design features tell us about the ‘intended purpose’ of the vehicle,” the Federal Circuit said. “Ford’s pre-importation design goals were that the subject merchandise could be constructed in such a way that 'only minor interior changes were necessary to meet the design criteria of transporting cargo.'”

Use considerations relevant to heading 8703 also support classification as cargo vans, the Federal Circuit said. The vans were made to order, and delivered to customers as two-seat cargo vans, without rear seats and seatbelts, it said. Brochures marketed the vans as cargo vans.

The Federal Circuit itself was careful to note that its decision is not a wholesale rejection of tariff engineering. “We conclude this appeal presents one of the very limited circumstances where the relevant heading, HTSUS Heading 8703, is an eo nomine provision for which consideration of use is appropriate because HTSUS Heading 8703 inherently suggests looking to intended use,” it said.

The holding “does not controvert” the rule that goods are to be classified in their condition as imported, because “this rule does not stand for the proposition that pre-importation activities can never be relevant,” the Federal Circuit said. “Because the 'principally designed for' language of HTSUS Heading 8703 inherently requires considerations of intended use, consideration of pre-importation design goals is relevant here,” it said.

But the increasing creep of “use” into the classification of “eo nomine” provisions throughout the tariff schedule means Ford’s limited outcome could rear its head again. “I think [we] will see more cases where ‘eo nomine’ tariff provisions are increasingly studied to see if they have a ‘use’ component,” Peterson said. “This will mean that the classification of a good will not be determined solely based on its ‘condition as imported.’”

(Ford Motor Company v. U.S., Fed. Cir. 18-1018, dated 06/07/19, Judges Dyk, Wallach and Hughes)

(Attorneys: Peter Keisler of Sidley Austin for plaintiff-appellee Ford Motor Company; Michael Shih for defendant-appellant U.S. government)