Tariff engineering: Legal cost-saving or illegal tariff evasion?
Eric P. Weiss
by Eric P. Weiss
Introduction
Tariffs have long been used to regulate trade. Companies seek ways to reduce costs, including "tariff engineering"—modifying products to qualify for lower tariffs. While legal, improper execution can lead to severe penalties, as seen in Ford Motor Company’s recent case.
How Tariffs Work
Importers pay tariffs to U.S. Customs and Border Protection (CBP) upon entry. Tariffs are based on three factors:
Classification: The Harmonized Tariff Schedule (HTSUS) assigns tariff rates based on product type.
Country of Origin: Determined by where the product was made or substantially transformed.
Valuation: Used to calculate applicable duties and fees.
What Is Tariff Engineering?
Tariff engineering involves altering a product’s design to fit a classification with lower tariffs. This could mean modifying materials, assembly, or components. Courts have upheld that merchandise is classifiable "as imported," allowing legitimate tariff engineering. However, deceptive modifications meant solely to evade duties may be illegal.
Legal Basis
Since the 1892 case Merritt v. Welsh, courts have upheld that importers may modify products to secure lower duties, provided they do not engage in fraud. Subsequent rulings reaffirm that a product’s classification is based on its condition at importation, barring deception.
Ford Motor Company Case
Ford imported its Transit Connect vans with temporary rear seats to classify them as passenger vehicles (2.5% duty) rather than cargo vans (25% duty). CBP deemed this deceptive. The Court of International Trade sided with Ford, citing the principle of tariff engineering. However, the Court of Appeals reversed, focusing on the vehicle’s intended use. Ford ultimately settled for $365 million.
Key Takeaways
Tariff engineering is legal but must be transparent.
Courts classify goods based on their imported condition.
Deceptive modifications risk legal and financial penalties.
Importers should seek CBP rulings for compliance.
By understanding tariff laws and engineering strategies, companies can legally minimize costs while avoiding regulatory scrutiny.
Read the full version of the article here.
XLNC member firm Scali Rasmussen, PCLos Angeles, CA, USAT: +1 213 239 5622Legal, Corporate Finance
Eric Weiss is principal with Scali Rasmussen. His practice areas for the firm include automotive law, employment law, business law, toxic tort law, products liability law, and complex litigation. Contact Eric.
