U.S. Customs Service Misclassifies Tobacco Imports

In response to interest generated by increases in the volume of imported tobacco, a study was made of the U.S. Customs Service's classification of tobacco imports.

GAO found that tobacco, which has been processed into strips for use in the manufacture of cigars and cigarettes, was incorrectly classified by Customs as scrap tobacco rather than stemmed cigar or cigarette filler. Since these classifications carry higher duty rates than scrap tobacco, as much as $188 million in import duties may have been lost in the 10 years preceeding November 1979. GAO established that the term scrap tobacco was devised to classify the small particles broken from the leaves in handling, manufacturing cigars, or removing the stem from the leaves, and was not intended for tobacco in an advanced stage of completion for use in the manufacture of cigars and cigarettes. The hand-stemming process in use at the time the tobacco tariff schedules originated usually yielded two half-leaves free of stems as the principal product and scrap as a byproduct. Machine-stemming processes yield strips of tobacco much smaller than the pieces of stemmed leaf yielded by the hand-stemming process. Customs did not change its classification approach over the years, despite changes in industry practices. Since tobacco duties are designed to reflect the stage in the manufacturing process that tobacco products have reached at the time they enter the country, processing tobacco so as to place it in a more usable form should not reduce the duties to be paid. GAO determined that the problem was with Customs' interpretation of the Tariff Schedules rather than the schedules themselves, but suggested legislation as the quickest way of settling the matter.