Ford Could Face $1.3 Billion in Penalties Over Alleged Duty Evasion Scheme

Trade Update • JUNE 8, 2021

The Ford Motor Co. could soon be facing customs penalties ranging from $652 million to $1.3 billion, according to a Securities and Exchange Commission filing made last week. The automaker reported that U.S. Customs and Border Protection has recently issued a pre-penalty notice, which includes a demand for additional duties of $181 million and “indicates that CBP is contemplating the issuance of a claim for a monetary penalty.”

The disclosure comes at the end of a decade-long battle over the classification of Ford’s Transit Connect vehicles, which if treated as passenger vans are dutiable at 2.5%, but as cargo vans are subject to 25% duty. The huge disparity in rates is the legacy of a 1960s trade war when the U.S. imposed a 25% duty on light trucks in response to tariffs placed by France and West Germany on imports of U.S. frozen chicken.

Ford’s “‘Chicken Tax’ Scheme”

The vans in question were imported from Turkey in 2011 and classified as a “motor vehicle principally designed for the transport of persons” under HTSUS Heading 8703. At the time of importation, the vans were equipped with a “cost-reduced” rear passenger seat.

However, a trade compliance review in 2012 revealed that immediately following customs clearance — in fact, while still within the port facility — the second-row seats and safety restraints were removed as part of Ford’s “post-importation processing” that also included removing unordered windows, covering the footwells, and installing a cargo mat over the exposed metal floor.

Based on this and other findings, customs determined that the condition of the vans when imported was little more than “a ruse to fool CBP into believing that the vehicles were ‘principally designed for the transport of persons.’” Therefore, it ruled that the vans should properly be classified as vehicles for the transport of goods under Heading 8704 and liquidated the goods as such at the 25% duty rate.

Tariff Engineering or “Improper Artifice”?

Ford protested the decision, claiming that it had been engaged in legitimate tariff engineering, the process of deliberately altering the sourcing or manufacturing of an imported product in such a way that a lower amount of duty is paid. The protest was denied because according to CBP, “Ford’s program constitutes a disguise or artifice by creating a fictitious product to obtain a lower duty rate.”

Eo Nomine vs. “Principal Use”

Ford appealed its case to the U.S. Court of International Trade, which in a 2017 decision, ruled in favour of the automaker. Here the argument centered on whether, as argued by Ford, 8703 is an eo nomine provision (i.e., a heading that specifically “names” something) and, therefore, not subject to any “principal use” requirement. The Court agreed and based on its analysis of the vans’ condition when imported, held that they should be properly classified under heading 8703 as passenger vehicles.

Federal Circuit Reversal

CBP appealed this decision to the U.S. Court of Appeals for the Federal Circuit and prevailed in June 2019. In reversing the prior decision, the appellate court said the CIT had erred by not considering “use” as the case “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.”

Moreover, the Federal Circuit determined that on balance the structural design features (most notably the cheap, discardable second-row seat) and “inherent use considerations” of the vans in question clearly establish them as not being principally designed for the transport of persons.

SCOTUS Petition Denied

Finally, in May 2020, Ford petitioned the Supreme Court of the United States to rehear the case.

In its petition, Ford once again argued that eo nomine tariff classifications should be applied to products in their condition at the time of importation without regard to subsequent modification or use. The company also contended that absent the adoption of a proposed bright-line rule in this respect, importers will be uncertain about the classification of their goods, causing dire consequences for the tariff system.

This sentiment was echoed in an amicus brief filed by the Customs and International Trade Bar Association, that decried a “disturbing trend” at the Federal Circuit whereby “tariff classification is increasingly unmoored from both the plain language of the statute and precedent.” The group contended that the resulting “lack of uniformity and certainty will have a significantly adverse economic impact on the importing community” and it urged the high court to review the “far reaching legal and practical effects” of the Federal Circuit’s decision.

Despite these pleas, Ford’s request was denied on June 29, 2020.

Future Implications

Of course, Ford is not alone in finding creative ways to get around the so-called “chicken tax,” including companies that import vans with temporary seats and windows to make them “passenger cars.” As reported by the Detroit Free Press, other automakers such as Mercedes-Benz and Fiat Chrysler could also potentially be on the hook for hundreds of millions of dollars in retroactive tariffs and penalties if, like Ford, their design decisions and post-importation activities are deemed to be part of an illegal duty evasion scheme.

Ford said that “in the event a penalty is ultimately imposed against us, the amount would be based on our level of culpability as determined by the courts” and vowed that it would “vigorously defend our actions and contest payment of any amounts set forth in the pre-penalty notice.” The automotive press has speculated that Ford may likely negotiate a lower fine in exchange for the promise to produce future models in North America, beginning next year.