Like love, taxes make people do the strangest things


Tariff engineering is the study of how to make small changes to a product in order to achieve a more favorable tariff classification. Here are some great moments in tariff engineering:

Converse sneakers have small pieces of felt on the sole in order to be classified as slippers rather than sneakers and enjoy a 3% tariff rather than 37.5% upon import into the United States.

Marvel successfully argued in the United States that X-Men action figures are non-human, which means that they are subject to a lower tariff than for dolls. Of course, this argument completely flies in the face of the entire story line of the X-Men, who struggle to be recognized as human!

In the U.K., Pringles unsuccessfully argued that their products are not potato chips. This is another case of a company taking a tariff position that contradicts their own product's principles.

Canadian pizza restaurant chain Pizza Pizza circumvented the high tariff on imported cheese by repackaging mozzarella as pizza topping kits, thereby allowing them to be classified as "food preparations" and enter the country duty-free. This loophole pit the Canadian Dairy Commission against the Canadian Restaurant and Foodservices Association, and the Canadian Dairy Commission won: The rule was changed so that fresh cheese is always taxed as cheese, even if packaged as part of something else.

If your Santa costume has a zipper, it is classified as clothing, taxed at around 30%. But if you replace the zipper with a Velcro-type fastener, then it's considered a festive article and is duty-free.

The automobile industry has come up with a variety of workarounds for the so-called chicken tax, which imposes a 25% tariff on commercial trucks and vans arriving in the United States. Dodge works around it by taking the finished product, disassembling it, shipping the parts to the United States, then reassembling it. Ford's solution is to produce a passenger car, and then on arrival in the United States, remove the seats and windows. (This may explain why you see paneled vans with window cutouts in the cargo area.) I remember when they came up with this solution because their press release was very proud of the fact that they were now sending the never-used seats and windows to a recycling center instead of just throwing them away like they had been before.

One of the longer sagas of tariff engineering (and in fact the case that introduced me to the concept) is the case of Heartland vs. The United States Beet Sugar Association, which I'll save for next time.

Comments (29)
  1. kantos says:

    My favorite example of the chicken tax was the Subaru BRAT which had carpeting and two rear-facing seats in the bed.

  2. pc says:

    Other fun tariff questions:

    When the supreme court had to rule on whether tomatoes are a vegetable or a fruit: https://www.npr.org/sections/money/2013/12/26/256586055/when-the-supreme-court-decided-tomatoes-were-vegetables

    Is the Pillow Pet a “pillow” or a “stuffed toy”? https://www.npr.org/templates/transcript/transcript.php?storyId=249278784

  3. Zak Larue-Buckley says:

    All great examples of getting the thing you are measuring, not the thing you want.

  4. French Guy says:

    Tariff classifications are weird.

  5. Ben says:

    “Mr. Nabarro asked the Chancellor of the Exchequer whether he is aware that, in view of the fact that a nutcracker is liable to Purchase Tax at 15 per cent. whereas a door knocker over 5 inches in length is free of tax, there is an increasing practice of supplying nutcrackers with screw holes so that they could theoretically be used as doorknockers, with the result that with such modification these nutcrackers become free of tax; and what instructions have been issued to Customs and Excise staff with regard to this matter.”

    “Now will my hon. and learned Friend apply himself to the Question that I have put to him? Why is there this invidious distinction between doorknocking nutcrackers and nutcracking doorknockers? Is he aware that this is a perfectly well-known device, practised by manufacturers?”

    * http://hansard.millbanksystems.com/commons/1958/feb/13/purchase-tax

  6. David-T says:

    Not quite an import tariff, but VAT in the UK has some interesting case law, for example are Jaffa Cakes biscuits or cakes? https://en.wikipedia.org/wiki/Jaffa_Cakes#Categorisation_as_cake_or_biscuit_for_VAT

  7. Rick C says:

    You would think Ford would send the seats back to whatever country the vans are assembled with.

    1. middings says:

      Ford does. One of the car enthusiast magazine web sites reported on the Transit Connect and said the removed parts are sent back to the country of origin, Turkey, for re-use.

  8. Márton says:

    Hungary recently imposed a higher tax on very salty snacks. All the snack makers reduced their salt amount.

    1. AP² says:

      Wasn’t that the point, though? Here in Portugal they’re talking about doing the same, but since it’s (supposedly) for health reasons, that outcome would be a mission accomplished.

  9. DWalker07 says:

    I read the link about the Dodge Sprinter, which is assembled in Germany, then disassembled, shipped to the US, and reassembled.

    Why in the world doesn’t Daimler-Chrysler just send the parts to the US? Why go through the labor to assemble and then disassemble?

    The article says

    “On the surface, it may seem impractical to assemble Sprinters in Dusseldorf; disjoin the engine, transmission, axle and wheels; and send them as separate units to a factory in Ladson, SC, where the trucks are put back together again.

    “But it works, and it gets around the chicken tax,” says Mark Freymueller, Sprinter’s brand manager. “A 25% tariff added to the cost of a vehicle puts it at a real price disadvantage.”

    Seems it would be more efficient to partially assemble the vans, then ship the big sections to the U.S.

  10. Devin says:

    https://en.wikipedia.org/wiki/Nix_v._Hedden

    Nix v. Hedden, 149 U.S. 304 (1893), was a decision by the Supreme Court of the United States that, under U.S. customs regulations, the tomato should be classified as a vegetable rather than a fruit. The Court’s unanimous opinion held that the Tariff Act of 1883 used the ordinary meaning of the words “fruit” and “vegetable,” instead of the technical botanical meaning.

  11. Torkell says:

    A classic example in the UK is the Jaffa Cake – there was a court case to determine if Jaffa Cakes are cakes or biscuits, because chocolate cakes are VAT-exempt while chocolate biscuits aren’t. I think one of the criteria was “does it become hard or soft when it goes stale”.

  12. Sgtpanda says:

    Something similar happened in the UK with Jaffa Cakes (https://en.wikipedia.org/wiki/Jaffa_Cakes#Categorisation_as_cake_or_biscuit_for_VAT), allegedly they made a giant Jaffa Cake to prove their point.

  13. Petteri Aimonen says:

    There is also the 30 minute limit for video recording on many digital cameras, to avoid classifying them as video cameras that have higher import duty in the EU.

  14. Chris Crowther says:

    Jaffa Cakes in the UK, on the other hand, successfully argued that they were cakes and not biscuits, so were zero rated for VAT, instead of standard rated; biscuits and cakes are zero rated, but chocolate covered biscuits are taxed at the standard rate.

  15. smf says:

    There is the famous tomato case.

    “Nix v. Hedden, 149 U.S. 304 (1893), was a decision by the Supreme Court of the United States that, under U.S. customs regulations, the tomato should be classified as a vegetable rather than a fruit.”

    My argument is that a tomato is a fruit and a vegetable, because the two are from different classification systems.

    In the UK we had a similar case whether Jaffa cakes were a cake or a biscuit.

    The leading case on the borderline is that concerning Jaffa cakes: United Biscuits (LON/91/0160). Customs and Excise had accepted since the start of VAT that Jaffa cakes were zero-rated as cakes, but always had misgivings about whether this was correct. Following a review, the department reversed its view of the liability. Jaffa cakes were then ruled to be biscuits partly covered in chocolate and standard-rated: United Biscuits (as McVities, one of the largest manufacturers of Jaffa cakes) appealed against this decision. The Tribunal listed the factors it considered in coming to a decision as follows.

    The product’s name was a minor consideration.

    Ingredients: Cake can be made of widely differing ingredients, but Jaffa cakes were made of an egg, flour, and sugar mixture which was aerated on cooking and was the same as a traditional sponge cake. It was a thin batter rather than the thicker dough expected for a biscuit texture.

    Cake would be expected to be soft and friable; biscuit would be expected to be crisp and able to be snapped. Jaffa cakes had the texture of sponge cake.

    Size: Jaffa cakes were in size more like biscuits than cakes.

    Packaging: Jaffa cakes were sold in packages more similar to biscuits than cakes.

    Marketing: Jaffa cakes were generally displayed for sale with biscuits rather than cakes.
    On going stale, a Jaffa cake goes hard like a cake rather than soft like a biscuit.

    Jaffa cakes are presented as a snack, eaten with the fingers, whereas a cake may be more often expected to be eaten with a fork. They also appeal to children, who could eat one in a few mouthfuls rather like a sweet.

    The sponge part of a Jaffa cake is a substantial part of the product in terms of bulk and texture when eaten.

    Taking all these factors into account, Jaffa cakes had characteristics of both cakes and biscuits, but the tribunal thought they had enough characteristics of cakes to be accepted as such, and they were therefore zero-rated.

    An earlier case, that of Adams Foods Ltd (MAN/83/0062) which concerned Chocolate Dundees, a traditional type of shortcake with a chocolate base and individually wrapped for sale, came to the opposite conclusion. The decision contains a useful, if technical, table of comparative differences between cakes and biscuits, provided by an expert witness, and the tribunal was unable to see any factors supporting a view of the product as cake. It was ruled to be a biscuit partly covered in chocolate and accordingly standard-rated.

    The complication here for US readers it that your biscuit is more like a british scone or a cobbler, which are very cake like. What we call biscuits you would call a cracker, or potentially a cookie. Although we have cookies too, which I believe are similar to yours but again more like a cake (but I believe would still be taxed like a biscuit in the UK).

    Talking of US naming, the last time I was in the US and asked for a pain au chocolate & the guy didn’t know what I was talking about. So I pointed to it and he said, oh that is a chocolate croissant. Even though they aren’t croissant (cresent) shaped.

  16. Isaac Lin says:

    Another example: digital cameras limit the length of their video files to 29 minutes, 59 seconds, to avoid triggering an EU tariff on video cameras. Newer cameras will now seamless end the current file and start a new one when this time limit is reached.

  17. Reinhold Remscheid says:

    In Germany, you are asked if you want your food to take away in some fast food restaurants (i. e. McDonald’s) because the VAT for food is 7% but the tax for food served in a restaurant is 19%. The price you pay is the same either way, but the restaurant has to pay more taxes. So if you eat your meal in the restaurant, they will get less money, although they give you more service.

    1. JDG says:

      So, wait, does the restaurant just always charge you the 19% and then they pocket the difference if you choose to take it out? I guess complicating matters is that unlike North America, in Europe vendors have to advertise the final price, rather than show you what the tax is being added to, is that right?

  18. Tilmann Krueger says:

    In germany, SUV’s are taxed higher, because being bad for the environment and all.

    But if you weld some heavy iron plates to the bottom of the vehicle and it consequently exceeds a certain weight limit, they are classified as agricultural utility vehicles and you get a much cheaper tariff, despite them consuming even more fuel.

    It’s sure one crazy world we live in.

  19. Simon says:

    This kind of thing is why, in New Zealand, sales tax is a flat 15% on *everything* – no exceptions. The idea of removing tax from certain goods – usually fresh vegetables and the like – is raised from time to time, but it always gets shot down on the basis of simplicity… no loopholes, no lawyers, no arguments over whether a particular product falls into an exempt category or not.

    1. Ian Yates says:

      We aimed for, and missed, the same thing across the ditch in Australia.
      10% GST here.
      But we had the case of a chicken being bought from the supermarket – being bought hot attracted GST, but being bought cold / frozen attracted no GST.
      There’s a frequently recurring debate around GST not applying to condoms but it does apply to tampons.
      Then there was the famous birthday cake question that sunk the original proposition for a GST at our 1993 federal election. It turns out it even has its own Wikipedia page!! https://en.wikipedia.org/wiki/Birthday_cake_interview

  20. Neil says:

    In the U.K., Pringles would have been arguing that their products are not potato crisps. (Wikipedia claims that they were labelled as such, although I can only find them described as a savoury snack, perhaps as a result.)

    1. And indeed the linked article says that Pringles were successful, not unsuccessful, in their argument.

      1. middings says:

        IIRC, Pringles were first sold in the USA as potato chips but makers of the older sort of potato chips objected. Maybe the Federal Trade Commission ruled on it. Anyway, as a result of the dispute Pringles became potato crisps.

  21. Ben Hutchings says:

    Sony included (or planned to?) a BASIC interpreter with the Playstation 2 in the EU, in an attempt to have it classified as a computer so it would attract a lower tariff rate.

  22. Brian says:

    Under the GST in Canada (GST == Goods and Services Tax – much like a VAT), food is generally 0%-rated, but snack-food and “single serving” food is taxed.

    When the tax was first introduced, the rule for “flavoured milk” products (like Chocolate Milk) was that anything 500 ml or less was “single serving”. The response was predictable; the milk producers changed their packaging; where it used to say “500 ml” as the volume, they suddenly started printing 501 ml on the package (they didn’t change the quantity or the package itself, just the printing; the slop in the spec allowed it).

    The rule changed soon after. Now anything 600 ml or more is food, anything under 600 is single-serving.

  23. Darron says:

    Cubicles are more expensive than putting in office walls. The are, however, classified as “office supplies” in the US for tax purposes, and can be depreciated much more quickly than walls (a capital expense).

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