How A Handful of Bolts Cost A Billion Dollars

Last week, the Court of Appeals for the Federal Circuit forced Ford Motor Company to take, as a colleague aptly described it, a complete “U-Turn” in its strategy to not pay the so-called Chicken Tax on imported Transit Connect vehicles.  While this case has generated interest as an example of the lengths importers will go to avoid paying high tariffs, the point of this blog post is to highlight the importance of paying attention and respect to the facts and details of importing goods – about how a handful of bolts could determine whether or not Ford has to pay a billion dollars in order to do its business of selling cars and trucks.

The Chicken Tax, a 25% tariff on imported trucks and other cargo carrying vehicles, is a vestige of a trade war between the USA and Germany back in the 1960’s.  This hefty tax on trucks contrasts sharply with the tariff on passenger cars which is only 2.50%.  The Ford Transit Connect is a dual use vehicle produced in two configurations:  as a passenger wagon and a cargo van.  The challenge for Ford was to import Transit Connects that could be sold in the configuration chosen by the customer: wagon or van, but pay only the lower 2.50% passenger car tariff.

Ford’s strategy was to “ship and import cars; convert to cargo van after cleared by Customs”.  To execute this duty savings strategy, Ford shipped all Transit Connect vehicles from its plant in Turkey into several US ports in a passenger car configuration: two rows of seats and seat belts for four or five passengers, sliding side-door access to the 2nd row seats, side window glass, and a foot well in front of the 2nd row seats for passenger comfort.  Ford declared all of these vehicles to U.S. Customs as passenger cars and paid the 2.50% duty rate. 

After Customs clearance, most, but not all, of the vehicles were converted to cargo van configuration.  The 2nd row of seats were removed, side-door glass was replaced with metal panels, and the footwell was filled in with a metal insert to level the floor.  Ford marketed and sold those Transit Connects as cargo-carrying delivery or work vans.

The legal issue in the case was which tariff provision should be applied to Ford’s Transit Connects? Tariff schedules are compilations of brief descriptions of things designed to capture anything and everything that can be imported from another country.  Each description is assigned a code number and each code number is assigned a tariff rate (%) applied to the imported goods.  In Ford’s case, the choice was between vehicles “designed principally for carrying passengers”, tariff code 8703 at 2.50% tariff rate or vehicles with the “principal purpose of carrying cargo”, tariff code 8704 at 25%, the Chicken Tax.

Tariff classification, the process of determining which tariff provision should be applied to imported goods is notoriously subjective; it is far more an art than a science.  For the Transit Connects, the Court had to decide whether the car provision, 8703, should be read, as Ford contended, as one that describes the physical nature:  structure, features, etc. of the vehicle or as Customs argued, one that depended on the ultimate use of the vehicle and the importer’s (Ford’s) intentions for the vehicles, more or less regardless of what was actually imported.  The Federal Circuit chose intended use over actual physical condition; although explaining the opinion’s rationale and logic in how it came to that conclusion requires words with Greek and Latin roots, like “exegesis” and “evolution”, and maybe “judicial activism”.

The Federal Circuit’s opinion is fatally flawed because it rests on a critical misapprehension about the permanence of the 2nd row seat.  Notes to heading 8703 state that “passenger vehicles must have permanent seats with safety equipment … for each person or … permanent anchor points and fittings for installing seats and safety equipment in the rear area …”.  Customs contended that because the Transit Connect 2nd row seats were removed by one person using a battery powered hand tool in less than a minute, they could not possibly be considered permanent.  The Court agreed.  The Court found that the mere removal of the 2nd row meant the seat was designed to be temporary and, therefore, the converted Transit Connects had not been designed as passenger cars, ergo they were trucks.

The factual record in this case, on which the Federal Circuit relied, establishes that the 2nd row seats in the converted Transit Connects were secured to the vehicle floor in exactly the same way as the 2nd row seats in the passenger Transit Connects, which Customs agrees are passenger cars:  they were bolted to the anchor points in the vehicle floor.   Bolting permanently secures the seats to the vehicle.  Bolting is the way the automotive industry universally installs seats in motor vehicles. 

Permanence in this aspect of motor vehicle assembly has to be understood in context of protecting the vehicle’s passengers.  Do all seats and safety restraints have sufficient structural integrity, strength and overall crashworthiness to protect the occupants of a vehicle to applicable safety standards?  The court found that prior to conversion, the Transit Connects at issue were “street legal”, meaning that they could be driven on streets and highways just as safely as the passenger Transit Connects or any other passenger vehicle.

Thus, the Federal Circuit’s entire decision hinges on the clearly erroneous factual conclusion that the 2nd row seats in the converted Transit Connects were designed to be temporary, not permanent, because, and only because, they were ‘easily’ removed by a hand tool.  But, in the design and assembly of a machine, that isn’t what permanence means.  All parts of motor vehicles can be removed; that characteristic doesn’t make any of those parts temporary or not permanent.  A key event in the Industrial Revolution was the invention of interchangeable parts . The ability to remove a part for repair, maintenance, or replacement is a feature of almost every manufactured product.  But for the finding that the removal of the 2nd row seats meant that the converted Transit Connects were not designed to have permanent 2nd row seating, the Federal Circuit’s decision has no foundation. 

Like those of us who have gotten lost while driving in unfamiliar territory, having made one U-Turn and heading in the wrong direction, it is for the Federal Circuit in reconsideration or for the Supreme Court to correct this error by making another U-Turn and heading Ford in the right direction. 

Even if Ford is unsuccessful in further appeal, this issue won’t go away.  FCA’s Chrysler has been importing the Ram ProMaster City for more than five years now and doing exactly the same post-importation conversion that Ford has done for exactly the same reason: to avoid the 25% Chicken Tax on cargo vehicles.  The 2nd row seats in ProMaster City are undoubtedly secured to the vehicle floor by bolts.  Now will Chrysler’s plan come unbolted too?