Why Classification Interpretation Matters: What Importers Can Learn from a BTI Dispute

When you are importing goods which can be classified in multiple ways, a small oversight can unknowingly build into a significant financial liability. 

On the 13th of June 2024, the Court of Justice of the European Union (CJEU) delivered a verdict on a BTI dispute regarding outdoor animal shelters. The decision provides valuable insight into why it’s recommended to obtain Binding Tariff Information (BTI), and how you might not get the decision you were expecting. 

Contents:

• A summary of the BTI dispute
• The ruling and its potential impact on the importer
• The key lessons for procurement and supply chain officers
• Avoid risk with Customs Support Group

A Summary of the Dispute

A German Importer sought Binding Tariff Information for their outdoor calf hutches.

These calf hutches consist of a shell made from polyethylene and include a metal frame inside the structure. There is another metal frame for the door to be attached to, although this is not included with the unit. The metal components make up 12% to 21% of the units.

Additionally, there are multiple sizes to consider. The smallest model for an individual is 147cm x 109cm x 117cm, and the largest group model is 220cm x 273cm x 183cm.

Due to the nature and size of these units, the Importer determined they were prefabricated buildings of other materials under HS code 9406 00. This carries a relatively low duty rate of 2.7%, and they applied for their BTI on this basis.

Hauptzollamt B – a customs office in Germany – determined that this goods classification was incorrect. They advised that they should be imported under 3926 90 97 for “other articles of plastics”. This carries a duty rate of 6.5%.

The justification for this classification was that the lack of a door means that the calf hutches do not form an enclosed space, which is essential for a building. The plastic shell forms the main character of the units, so they are articles of plastic.

Although the court notes do not present this as a justification from Hauptzollamt B, the ruling indicates that the interpretation of Chapter 94’s explanatory notes also contributed to the decision. The scope under the heading states that industrialised buildings can have a range of uses, ‘such as housing, worksite accommodation, offices, schools, shops, sheds, garages and greenhouses’ – all of which are human purposes.

On receiving their BTI decision, the Importer appealed to the Bundesfinanzhof, Germany’s Federal Fiscal Court, which referred the matter to the CJEU for clarification.

The BTI Dispute Ruling and Its Impact on the Importer

During the court case, there were two key questions which were asked to determine whether the hutches could be classified as buildings:

• Must a prefabricated building be enclosed on all sides?
• Does it need to be large enough for a person of average height to enter and move around in whilst standing upright?

For the latter, note that this could result in a split classification for models of the same nature, but different sizes.

The CJEU ruled that both qualities must apply to classify a prefabricated building under Chapter 94, so both the size and the function play a role.

Therefore, Hauptzollamt B’s classification of 3926 90 97 is upheld as correct.

How This Can Affect the Importer

The ruling does not indicate whether the Importer had already brought goods in, so there is no confirmation whether back-payment of duties was demanded or not. However, this is a common consequence of misclassification.

Let’s explore how the change in duty rate can have an impact on a year’s worth of trade, assuming a single container of 50 calf hutches imported under the CIF incoterm every month at of €600 per unit.

As you can see, the real cost over the course of a year makes a real difference to a company’s finances. The short-term impact on cash flow is also significant because of the increase in VAT.

Bear in mind that the volume could be much higher and back-payment of duty can apply to years of trading, so the exposure of a misclassification is serious.

The Key Lessons Procurement and Supply Chain Officers Can Learn from This BTI Dispute

This court case highlights how important a correct customs classification is, and how a simple misinterpretation can have large consequences if it isn’t caught.

Here’s how procurement and supply chain officers can also avoid these issues:

Obtain Binding Tariff Information

As you can see, the importer in this case was able to avoid a costly mistake because they applied for confirmation of their goods classification from customs.

Never Make Assumptions Based on Composition

In this case, the metal frame was not enough to be considered in the classification decision despite being between 12% and 21% of the product.

This is also important when looking at preferential origin, where the percentage of a product may need to meet a threshold in order for a lower duty rate to be applicable.

Purpose and Footnotes are Important

The first rule of classification is that the chapters and headings are for ease of reference, but the description and notes are what count. In this case, a building was not considered a building by customs because it did not meet the requirements for classification as one.

Avoid Risk with Customs Support Group

CSG’s classification experts provide commodity mapping for goods around the globe, helping businesses understand the nuances that different countries can present for the same product.

You can rely on us for:

• Global Classification: Gain clarity on how your commodity code changes as you move goods through multiple territories and customs procedures.
• Duty Assessment: Understand which countries you can claim preference in, and how your landed costs or obligations are affected by changing suppliers.
• Procurement Vetting: Verify that sourcing goods from a prospective supplier won’t leave you exposed by working with our experts’ six-eye principle.
• Duty Management: Gain a commercial advantage or improve your cash flow by leveraging special procedures, where possible, that lower or suspend your duty.
• BTI Applications: Streamline the process of getting Binding Tariff Information from the authorities by prequalifying products with our experts.
• Misclassification Support: Assess the implications of your misclassification and effectively collaborate with the authorities to mitigate the impact.

Contact us today to get started.

This article references a publicly available judgment from the Court of Justice of the European Union (C.J.U.E.) dated 13th June 2024 – ECLI:EU:C:2024:504 – Case C-104/23