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US Customs Denies Importer’s Duty-Free Claim Under NAFTA Rules

In recent crackdown on apparel importers, U.S. Customs & Border Protection has ruled on another case involving duty-free eligibility.

Apparel importer SGS Sports, which uses a Canadian company to warehouse goods until a U.S. customer is found, was unable to show sufficient proof of the two companies being separate entities, and CBP said the merchandise is “not exported pursuant to a lease or similar use agreement,” which makes it ineligible for duty-free status upon re-entry into the U.S., despite the duty-free benefits afforded by the North American Free Trade Agreement.

According to CBP ruling, the warehouse company, 147483 Canada, and SGS have different owners, but the two companies had one shareholder in common, who happened to be the president of each company and the only shareholder of the warehousing company. Another individual was found to hold the same title for both entities: Warehouse Manager, SGS Sports and Warehouse Manager for 147483 Canada Inc.

CBP made the recent ruling after an Application for Further Review was filed. According to the CBP filing, SGS buys “merchandise from unrelated foreign manufacturers and imports the merchandise into the U.S. as a consumption entry, pays duties based upon the sales transactions between it and the foreign manufacturers, and then exports the merchandise to Canada for warehousing until SGS has a customer in the U.S. who wishes to purchase the merchandise.”

Under certain conditions, law allows for duty-free treatment for re-imported goods on which duty was already paid after having been exported under a lease or similar use agreements, known as bailment, CBP said.

However, CBP explained, “In order to have a valid bailment, SGS must have delivered the imported goods to the custody and control of someone else. In this case, they claim they did and that 147483 Canada is that other entity.” But, CBP added, “a fundamental requirement of a bailment is to place the merchandise within the custody of another” and “we cannot ignore the factual elements before us that point to these companies being one and the same.”

As CBP explained, “SGS holds title to the apparel inventory, along with the warehouse fixtures (furniture, furnishings, etc.).  Counsel asserts that 147483 Canada is ‘an inventory management firm, a third-party logistics (3PL) service provider which manages the inventory for SGS.’ As such, 147483 Canada was contracted to perform inventory management services for SGS under the duty deferral program by means of the warehousing agreement, and that such agreement constitutes a bailment of the merchandise to 147483 Canada.”

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The merchandise, therefore, isn’t entitled to the duty-free treatment because, as CBP said, “We do not believe that SGS has a valid bailment agreement as it does not entrust the merchandise into the custody of another party.”