Misclassification of Imported Goods
Classification of goods according to the Harmonized Tariff Schedule of the United States (HTSUS) is often crystal clear, but sometimes it is not. Rulings from Customs and Border Patrol can offer clarity. Where there is ambiguity, however, importers are not permitted to simply opt for the interpretation that suits them best.
To prevail in a False Claims Act case, the United States or the whistleblower acting on the government’s behalf must be able to show that a violation was “knowing” — actual knowledge that a statement or claim was false, or conduct in reckless disregard or deliberate ignorance of the truth or falsity of a claim or statement. To show that a company knew its HTSUS classification was false, it is often necessary to leverage the knowledge of a person familiar with a company’s decision making.
Some cases are identified below; all information comes from public sources. The summaries below contain some information that may be allegations only, as the settlements do not necessarily entail an admission of fault.
U.S. ex rel. Day v. Ellab, Inc. and Ellab A/S (2022)
Ellab, Inc., a Colorado-based company, and its Danish parent company, Ellab A/S, were alleged to have failed to pay customs duties on certain temperature tracking devices imported into the United States. The companies allegedly misclassified the devices to avoid paying required customs duties, thereby underreporting the value of imported goods and evading higher duties. This misclassification allowed the companies to reduce import costs and gain a competitive advantage.
U.S. ex rel. Kelley v. Agility Defense & Government Services, Inc. (2017)
Agility Defense & Government Services was alleged to have misclassified goods imported for military operations to evade customs duties. The complaint stated that the company used lower-duty classifications to reduce costs on goods supplied under federal contracts, thus impacting taxpayer funds. This case shed light on the risks of customs misclassification in military procurement and showed that even defense-related logistics companies can face FCA scrutiny for tariff-related violations.
U.S. ex rel. Customs Fraud Investigations, LLC v. Z Gallerie, LLC (2016)
Z Gallerie, a national home furnishings retailer, allegedly misclassified wooden bedroom furniture imported from China to evade antidumping duties. The complaint alleged that Z Gallerie labeled bedroom furniture as non-bedroom items, which carried lower duty rates. This misrepresentation, according to the whistleblower, allowed Z Gallerie to offer products at more competitive prices. The case highlighted the role of the FCA in enforcing compliance with antidumping duty regulations on specific imports.
U.S. ex rel. Customs Fraud Investigations, LLC v. Victaulic Company (2016)
Victaulic Company, a manufacturer of pipe fittings, allegedly failed to mark the country of origin on its imported pipe fittings and misclassified them to avoid higher customs duties. The whistleblower argued that these actions led to underpayment of duties owed to the U.S. government, allowing Victaulic to offer products at lower costs. This case underscored the potential for customs misrepresentation to fall under FCA liability, especially where marking and classification failures are used to evade tariffs.
U.S. ex rel. Reuter v. Sparks Imports, Inc. (2013)
Sparks Imports, Inc., an importer of luxury vehicles, was accused of misclassifying the tariff codes on imported vehicles to pay lower customs duties. The relator alleged that the company declared the vehicles under incorrect classifications, resulting in substantial underpayment of duties. This case highlighted the risk of FCA action when companies misrepresent product classification in a manner that impacts customs duties and reduces overall tax obligations.
U.S. ex rel. Perez v. Great American Seafood Imports Co. (2010)
Great American Seafood Imports Co. faced allegations of misclassifying seafood products to reduce import duties. The complaint claimed that the company declared seafood products under incorrect tariff codes, which applied lower duty rates than the proper classifications. This case illustrated how misclassification practices within the food import industry can lead to significant revenue losses for the government and emphasized customs accuracy under the FCA.