The intersection of customs and tax disciplines: which tail, which dog?

• Author: Neville, Mark, Jr.
• Position: PERSPECTIVE

In determining "which tail, which dog" controls the intersection of the customs and tax disciplines, we must first define what we mean by "tax." If we refer to tax in the broadest sense, to include all forms of tax levies, both direct and indirect, then there is no intersection at all, because customs duties, an indirect tax, are already subsumed within the general heading "tax." If that is your perspective, then my task is half completed before I start, because you already perceive customs duties as a tax and implicitly recognize that there are compliance obligations to shoulder and planning opportunities to consider.

But I have spent much of my career in a dialogue with tax professionals who do not share that view. Instead, these tax professionals have defined tax much more narrowly. For them, international tax means an income tax.

While we are on the subject, we might define "customs" as the process by which duties are assessed on imports, primarily based upon their tariff classification, valuation, and origin. We might define "trade" for these purposes generally as the system that sets forth the internationally accepted rules for those three criteria.

Importance of Customs and Trade

This discussion is meant to establish that customs duties may be important, even if many of the duties are set at free rates, due to free trade agreements and other substantive international trade agreements, or are low--averaging something like three percent ad valorem. First, duties can spike upward of thirty percent in certain product sectors. Then, too, even a three-percent duty imposed "above the line" can be a significant number. Finally, an astute advisor can assist a client who is intent on sourcing goods from outside the United States to eliminate or reduce duties. From a compliance perspective, we should know there is an emphasis on proving at post-entry audits that a claimed free rate is justified.

In much the same way that state and local taxes assumed great importance over the past twenty-five years, and sales and use tax planning even more recently, I am hoping that tax professionals will come to embrace customs and trade under this wider view. There are compelling reasons.

Duty Increases

As these lines are being written, both presidential candidates have staked out anti-free trade positions, and rollbacks/reforms of NAFTA and other free trade agreements are openly discussed as policy options.

A return to the levy of duty on imports previously...