Buyer Beware: Trying to Avoid or Reduce Tariffs

As the typical tariffs on many goods from China have soared to at least 45 percent, some suppliers in China are offering U.S. purchasers a way of avoiding or reducing the tariffs. However, U.S. importers should carefully scrutinize such offers. Attempting to lower or avoid tariffs without the proper analysis and exercise of reasonable care could lead to enforcement actions by U.S. Customs and Border Protection (CBP) and significant monetary penalties.

The reported proposal: Some suppliers in China are suggesting to their U.S. customers that the supplier issue an invoice for the imported goods not including engineering, patent licensing, setup, or other overhead costs of manufacturing the goods in China. The suppliers would then invoice the U.S. purchasers separately for those costs. That second invoice would not be sent with the shipped goods.

In other words, the declared, dutiable value of the goods would be lower than the total price actually paid by the U.S. importer to the foreign seller. The amount of duties, which are applied as a percentage of the dutiable value, would thus be lowered.

The problem with such a proposal:

1. Under the U.S. Customs valuation rules, the dutiable value (usually the "transaction value") is generally the price paid or payable to the foreign seller.  If certain pre-import costs such as design or engineering are not included in the price of the goods, those costs must be added to the price of the goods to calculate the dutiable value. All payments made to the foreign seller are presumed to be part of the dutiable value, and the U.S. importer of record bears the burden of overcoming this presumption. Thus, failure to include such costs in the dutiable value generally would be a violation of CBP regulations.

2. The U.S. importer of record bears all the liability for underpayments of duties to CBP and for fines and penalties applied as a result of the violation.  Civil fines of an amount up to the domestic value of the imported merchandise can be imposed, and criminal penalties can also be imposed for knowing and willful violations. The foreign seller will have been paid by the U.S. purchaser and will not be responsible for what could be significant amounts owed to CBP.

3. Significant enforcement of tariff evasion on goods imported from China is anticipated, including initiation of False Claims Act cases by the Department of Justice. Furthermore, a presidential proclamation issued in February on additional steel and aluminum tariffs directs CBP to impose maximum penalties for misclassification of such products to evade tariffs. 

Given all of these circumstances, U.S. importers should exercise caution when considering any tariff avoidance or reduction proposals offered by suppliers in China.