In 1997, the U.S. Customs Service, which is responsible for the administration of most of the U.S. laws affecting imports and exports, continued its slow march toward the full implementation of the Customs Modernization Act ("Mod Act")1. The agency published several Notices of Proposed Rulemaking, ("NPRM"), and several drafts of proposed rules, but only two final rules were promulgated. The final rules published by Customs have little general applicability, dealing with a narrow area of the marking rules for country of origin2 and the rules governing duty-free stores.3 On the other hand, the subjects contained in the NPRMs, and the draft rules, involve significant issues. The Department of Commerce also published its final regulations implementing the Antidumping Code as enacted through the Uruguay Round Agreements Act.4
In the judicial arena, the U.S. Court of International Trade and the U.S. Court of Appeals for the Federal Circuit issued several important decisions concerning administrative protests, penalties, retroactivity and the constitutionality of the Harbor Maintenance Tax.
A. Record keeping
In April, Customs published proposed record keeping regulations,5 which are, arguably, the cornerstone to Customs Mod Act implementation efforts. These regulations emphasize that Customs' "paperless" entry processing environment does not relieve an importer or other designated record keepers from maintaining records for later review, and clearly shift this burden to the importer.
The proposed rules expand the definition of parties subject to Customs record keeping oversight to include anyone who files an entry or declaration, transports or stores merchandise carried or held under bond, causes the transportation or storage of bonded merchandise, files a drawback claim, or causes an importation.6 Additionally, both "entry records," commonly referred to as the "(a)(1)(A)" records,7 and other ordinary business records that may pertain to customs activities, must be maintained.8
Administrative penalties of between $10,000 and $100,000, per release of merchandise, may be assessed for the failure to produce records upon reasonable demand by Customs, within a reasonable time.9 Reasonableness is based on the number, type and age of the items requested; the regulations contain guidelines as to reasonable time periods for record production.10 If the demanded records relate to the eligibility of the importation for special duty treatment, Customs may liquidate or reliquidate the entry at the higher duty rate.11 The record-keeper may avoid penalties by showing that the requested records had already been presented to and retained by Customs,12 or by participation in the Customs-sanctioned Record keeping Compliance Program.13
Generally, records must be maintained in the format in which they are received.14 Alternative storage formats will be approved if the responsible party meets certain "minimum standards" including the designation a two record keeping officers, the preparation of written procedures, including an audit trail, for the transfer of the records, and the quarterly testing of the alternative formats. Original records must be maintained for one year after the transfer to alternative storage.15
B. Duty Drawback
Customs proposed changes to its duty drawback regulations in order to implement the Mod Act provisions, to increase the clarity of this regulatory section, to expedite filing and processing of drawback claims, and to ensure that Customs has the necessary enforcement information to maintain effective administrative oversight.16
Several general principles are enumerated in the proposed regulations. Acceptable accounting methods for the direct identification of merchandise, when required, are itemized and include: First-in, first-out (FIFO); last-in, first-out (LIFO); low-to-high; average; and inventory turn-over.17 The regulations also recognize the use of agents in the manufacturing process,18 and allow for the transfer of drawback rights to successor companies.19
The proposed regulations reflect the Mod Act's change from "same condition" to "unused merchandise" drawback,20 and the corresponding change from "fungibility" to "commercial interchangeability" as a standard for substitution under this provision.21 Customs did not define commercial interchangeability beyond what was included in the legislative history.22 The proposal defines "use" as the employment of the item to perform the function for which it was intended, excluding any operation performed upon the object not amounting to manufacture or production.23
The proposal also implements a drawback compliance program that may reduce potential penalty liability for its participants.24 A key part of the compliance program is the maintenance and production of records required to prove fulfillment of the various statutory elements of drawback. Drawback records are required to be kept until at least 3 years after the date of payment of the related claim.25 Customs urges exporters to keep their drawback records at least until the liquidation of the drawback claim becomes final.26
The proposal makes the Exporters Summary Procedure available to all claimants rather than granting it as a privilege. In addition, Customs has found that, under the current regulations, the waiver of prior notice of exportation with intent to claim drawback has created significant internal control weaknesses for the agency, so the proposal restricts this procedure to a single use privilege.27
The use of accelerated payment of drawback would also be restricted under this proposal. The application to participate in this program will require the claimant to provide significantly more information, and before approval, Customs will closely examine the applicant's record for any unresolved Customs claims, inaccuracies in past claims and prior instances of non-compliance.28
This year, Customs also issued a draft proposal for drawback penalty regulations.29 The draft follows the statute30 in assessing penalties up to three times the loss of customs revenue for fraudulent violations of the drawback laws. The penalties for negligent violations are graduated depending on the record of the claimant.31 Penalties for negligent violations are reduced for participants in the drawback compliance program.32 Additionally, Customs will only examine the prior three years to determine whether a compliance program participant has previously committed the same negligent violation. Such temporal limitation is not available for those who do not participate in the compliance program.
C. Reasonable Care
Customs released a "checklist" to which importers should refer in determining whether their activities meet the reasonable care standard contained in the Mod Act.33 The checklist is broad and it is not expected that all questions will be applicable to all parties. Additionally, Customs intends that this checklist will be updated to suit the changing nature of international trade. The checklist acknowledges the role of experts in providing advice to importers and stresses that reasonable care must be used in selecting an expert. "Expert" is not further defined by Customs. In response to public comments, Customs stated that choosing a customs lawyer or licensed broker as an expert makes compliance easier, but the checklist, itself, does not stress this point.34
D. Weekly Entry Procedures for Foreign Trade Zones
Customs announced a proposal to allow weekly entries of merchandise withdrawn from non-manufacturing foreign trade zones ("FTZs")35. A similar provision has been in existence for manufacturing FTZs since 1986.36 As goods are often withdrawn from FTZs on a daily basis, this proposal could greatly reduce the number of entries filed. Additionally, as the merchandise processing fee is calculated and limited on a per entry basis, this proposal could result in significant savings for the FTZ operator. Participation in the program is subject to an application approval process.
E. Entry Data Reconciliation Prototype
Section 637 of the Mod Act amended section 484 of the Tariff Act of 1930 to establish a new subsection (b) entitled "reconciliation."37 In a September 30, 1997 notice Customs announced a prototype reconciliation system and stated that it will be the sole means for reconciling an entry with respect to: (1) value, (2) classification, (3) merchandise entered under Heading 9802 of the Harmonized Tariff Schedule of the United States (known generally as "American goods returned"), or (4) merchandise entered under the North American Free Trade Agreement. The prototype requires the importer to flag each entry at the time of filing and to indicate the issue for which a later reconciliation, providing data which was not fully available at the time of entry, will be filed. Customs may then liquidate the entry with respect to all issues not covered by the reconciliation. The prototype is scheduled to begin no earlier than October 1, 1998 and will run for approximately two years.
F. ITA Publication of Final Antidumping Regulations
On May 19, 1997 the International Trade Administration ("ITA") of the Department of Commerce published its final rules on antidumping ("AD") and countervailing duty ("CVD") proceedings to conform to the Uruguay Round Agreements Act ("URAA").38 The new rules do not alter the ITA's practice or vary considerably from the interim rules issued on May 11, 1995 considerably. Rather, they tend to codify elements of the practice that have become consistent over time. Certain changes, however, merit special note.
First, with regard to the revocation of outstanding anditdumping orders, ITA may revoke an order if a respondent can show an absence of dumping for three consecutive administrative review periods. In order to meet this criterion, the ITA requires that a review be conducted only in the first and third (or third and fifth) years, and that no dumping be found. ITA may revoke an order even if a review is not requested in the second (or fourth) year, provided the foreign producer sold the subject merchandise to the United States in "commercial quantities" during that intervening period. Under the previous regulations, the ITA would only revoke an order if a respondent were able to show that it did sell the subject merchandise at less than fair value in three consecutive reviews.39
Respondents may now defer a requested review for a year, absent any opposition, allowing the ITA to conduct two reviews simultaneously.40 A deferral would most likely take place on the first review, in light of a pending court case on an issue that would recur in an administrative review. Such deferral would spare a foreign producer the expense of a review, while preserving it the right to seek future revocation of an outstanding order. In addition, domestic parties may request an inquiry into whether the antidumping duty has been "absorbed" by the exporter, in the period falling between the first and second, or third and fourth anniversary of an AD order.41
With respect to the substantive issues of antidumping calculations, in determinations affecting "non-market economies" (which, in recent practice, has affected China predominantly) the ITA has codified a new method for calculating the labor rate portion of normal value that does not distinguish between "skilled" and "un-skilled" labor or rely on a single surrogate country's labor rates. Also, in developing the surrogate costs of production, the ITA will no longer rely on publicly available, published information ("PAPI"), but will look to any publicly available information to determine surrogate costs.
With respect to normal price comparisons in regular market economy cases, the ITA deviated from the position taken in its interim rules with respect to level of trade adjustments, codifying the practice of the previous year and a half. The final rule applies a two-prong test, requiring that a respondent who claims that an adjustment should be made for different levels of trade between home market and U.S. price comparisons must show (i) different "marketing stages (or their equivalent)" and (ii) substantial differences in selling activities, in order to justify the level of trade adjustment.42
The ITA also codified its practice with respect to the allocation of expenses in claiming adjustments to price. The URAA did not affect the law or the ITA's practice in this area, but the ITA has acknowledged that regulatory guidance is necessary to effectuate greater certainty and predictability. Under this new rule, a foreign producer must first establish that it would not be "feasible" to report an expense or a price adjustment on a transaction-specific basis. The ITA recognizes that a party could attempt to alter its bookkeeping practices in a way that would render impossible the tying of certain expenses or adjustments to particular sales. "Feasibility" will turn on a party's ability to demonstrate that its accounting systems, the accounting practices of the industry, and "the manner in which the expenses or price adjustments are incurred or granted" make transaction-specific reporting impossible. A party can anticipate that the ITA will want to see copies of historical accounting records, which may pre-date the period being reviewed, or look into computer-generated account records that provide more detail than simple managerial and financial reports. A party then must show that the allocation method used does not result in any "distortions or inaccuracies,"43 i.e., provide a sufficiently detailed explanation of the allocation method used. Although acceptable methods are not enumerated in the final rules, ITA did provide examples in the preamble; a method will be considered distortive where the expenses or adjustments affect merchandise not within the scope of the investigation disproportionately.44
G. AD and CVD Sunset Reviews
Under the URAA, antidumping and countervailing duty orders must be revoked after five years of application unless the revocation would likely lead to the continuation or recurrence of dumping or a countervailable subsidy (as the case may be), and the continuation or recurrence of material injury.45 There are special rules for the implementation of this provision with respect to orders that were in effect when the WTO Agreement became effective in the United States (January 1, 1995), ("transition orders").46 The ITA has until July 1, 1998 to begin the review of these orders, and all reviews must be initiated for all transition orders by January 1, 2000.
On October 9th the ITA published a proposed schedule for review of transition orders.47 Under this schedule, reviews for similar commodities will be initiated together regardless of the initial effective date of the dumping order. As a result, some sunset reviews are scheduled to begin earlier than they may have otherwise, and some reviews have been postponed. The substantive standards for sunset reviews will be more clearly established as these reviews are conducted.
II. JUDICIAL DEVELOPMENTS
A. The Harbor Maintenance Tax
In June, the Court of Appeals for the Federal Circuit ("CAFC") affirmed the 1995 decision of the Court of International Trade ("CIT") and held that the Harbor Maintenance Tax, ("HMT"),48 as applied to exports, violates the export clause of the U.S. Constitution.49 The CAFC found that the HMT was a tax rather than a fee, because the amount collected from exporters does not a fairly approximate the value of the services provided (i.e., dredging, construction, and other expenses of maintaining the harbors for commercial traffic).50 Additionally, since the HMT is calculated on the value of goods as they are loaded onto vessels or delivered to carriers, it specifically applies to exports.51 The saga of the HMT is not over as the United States Supreme Court granted certiorari on October 31, 1997.52
There was also activity on the HMT as applied to imports. In Sarne Corporation v. United States,53 the plaintiff argued that the surplus of funds in the HMT trust fund violated Congressional intent and, therefore, frustrated plaintiff's expectations as a taxpayer. The Court held, however, that the plaintiff had not articulated a direct harm caused by an identifiable violation of the statute and dismissed the case.54
This was an active year for court cases involving civil penalties. In United States v. Hitachi America, Ltd.,55 the CIT distinguished the various levels of culpability under section 592,56 and applied the "aiding or abetting" provision of that statute to the negligent acts of another. Although the opinion is dominated by facts that are more likely to appear in a John Grisham novel than a customs case57 -- including the destruction of potentially exculpatory evidence by Customs officials -- it contained several instructive points.
The case arose out of an agreement between the Metropolitan Atlanta Rapid Transit Authority ("MARTA") and Hitachi Japan ("HJ") for the purchase of subway cars. HJ produced and sold the cars to C.Itoh Japan ("CIJ") who, acting as a trading company, would export them to Hitachi America, ("HA"). HA, the importer of record, and its joint venture partner, C.Itoh America ("CIA"), the banker, would then sell the cars to MARTA. MARTA paid CIA in dollars; CIA paid CIJ in Japanese yen; and CIJ paid HJ in yen. Both HJ and HA were defendants in this case.
The case specifically concerned the reporting and customs dutiability of two contractual price adjustments: the Economic Price Adjustment, ("EPA"), which required MARTA to pay for any inflation in labor and materials; and the Monetary Value Adjustment, ("MVA") which required MARTA to assume the risks associated with currency fluctuations by paying a fixed amount of yen for foreign materials.
With respect to the dutiability of the MVA, the Court noted that the invoice submitted with the entry indicated a dollar amount due between HA and CIJ, but CIA paid CIJ in yen. Under Customs' internal guidelines, a contract invoiced in dollars but payable in yen, at a fixed rate, is yen-denominated. Therefore, the Court found that the contract was yen-denominated and that the MVA was non-dutiable. In reporting otherwise, however, HA had negligently and consistently understated the payment to the foreign seller.
The issue with respect to the EPA was whether HA was required to notify Customs of this adjustment at the time of entry. Customs argued that HA was under an obligation to either (1) have the entries held open for correction and liquidation at the end of the contract or (2) deposit estimated duties, including the EPA, at the time of entry and to seek a refund at the end of the contract.58 HA, citing a single customs ruling,59 claimed that it was permissible to delay disclosure until the full amount could be determined. The Court found that HA had no definitive notice as to the proper procedure, and therefore a penalty would violate HA's right to due process.
Customs persuaded the Court, however, that HA was negligent in its failure to report the EPA as it was received.60 While Customs' informants breached their obligations to their employer and delayed HA's making a disclosure and tender, HA's failure to heed the advice of its compliance officer and in-house counsel, as well as its delay in seeking expert advice, supported a finding of negligence.
The Court found that HA's disclosure of the contract on the entries, discussions with Customs regarding the contract, and allocation of funds for the payment of duties assessed on the value of the EPA, supported a dismissal of the fraud claim.61 Customs had ample opportunity to request the contract and there was no other evidence that HA intended to deprive the government of revenue.62 Also, the questionable dutiability of the MVA, and the fact that CIA, and not HA, was knowledgeable about the payments to Japan, made fraud with respect to the MVA unlikely.63
The court also declined to find that the defendants acted with gross negligence64 with respect to the MVA as even the government believed the contract to be dollar denominated. With respect to the EPA, Customs did not prove the commonality of declaring EPA payments, so as to show recklessness on the part of HA.65
The Court found that the statutory provision covering aiding or abetting requires a finding that the party charged assist or support the negligence of another, by substantially assisting in the conduct and failing to exercise reasonable care to determine whether the conduct was negligent.66 Under this standard, HJ provided a "tremendous amount of assistance" to HA's importing activity.67 HJ failed to exercise reasonable care when it did not undertake a legal review of the issues, failed to inquire of CIA how payments were being sent to Japan and otherwise failed to ensure that duties were being paid properly.
In United States v. Ziegler Bolt and Parts Co.,68 the CAFC affirmed a CIT decision holding that personal jurisdiction can not be established by service on the defendant's outside counsel. Under CIT Rule 4(c)(1)(C)(ii), service of a corporate defendant may be made on an officer, managing or general agent or any other agent authorized to receive service. In this case, the Court found no indication that the lawyer had express or implied authority to accept service, and that the mere relationship between attorney and client does not confer authority to accept service. Further, the CAFC affirmed that the timely assertion of an affirmative defense based on the invalid service was not waived by active defense of the case.
In Pentax Corp. v. Robinson,69 the CAFC considered the interplay between the penalty and prior disclosure statutes, and special duties imposed by Customs for the failure to mark a product with its country of origin.70 Pentax had imported improperly marked goods and made a prior disclosure to Customs of that fact, without the deposit of the liquidated penalty amount.71 Customs regulations state that the party making the disclosure must also tender the "actual loss of duties,"72 and define this loss, in part, as "the duties of which the Government has been deprived by reason of the violation . . ."73 In reversing the CIT, the CAFC reasoned that, unlike marking duties, "lawful duties" are those duties which the government would have received but for the violation. As the government would not collect marking duties, but for the violation, they need not be tendered in order to perfect a prior disclosure.
Administrative protests were also an active area of litigation this year. In Castelazo & Assocs. v. United States,74 the plaintiff protested the imposition of antidumping duties, but did protest the separately billed interest assessment. Customs partially approved the protests,75 and reliquidated the entries with recalculated interest due. The importer then protested the interest assessed on reliquidation. While Customs admitted that the interest was incorrectly assessed, the protest was denied as untimely.76
The CAFC, reversing the CIT, was unpersuaded by the plaintiff's argument that the interest protest was timely because the liquidation was not "final" until the initial protest was decided. The Court found that neither the regulations nor the statute differentiate between "final" and "preliminary" liquidation.77 Additionally, the Court found that since the amount of interest claimed was not at issue, the importer did not need to wait until reliquidation to protest the charge. Since the protest was not timely filed, the Court lacked jurisdiction to remedy the (admittedly) wrongly assessed interest.
In United States v. Cherry Hill Textiles, Inc.,78 Customs liquidated an entry as dutiable more than 13 months after the importer made entry on a duty-free basis. When the importer refused to pay the liquidated duties, and did not timely protest the liquidation, the government filed an enforcement action seeking the recovery of the assessed duties. The surety, relying on United States v. Sherman & Sons Co.,79 argued that a protest is only necessary when the importer wishes to challenge a liquidation, in court, for the recovery of excess duties, but does not apply to government enforcement actions. The Federal Circuit, however, found Sherman to be limited to cases in which the government alleges fraud after the date of liquidation.80 Further, the legislative history to the current law, as well as a long line of cases81 under the predecessor statute,82 indicate a congressional intent that parties exhaust administrative remedies in enforcement actions. Lastly, the Court found that the defendant's reading of the statute would encourage importers to refuse to pay the duties until the government brings suit, and then collaterally challenge the liquidation.
All was not lost, however. The Court found that the entry had been liquidated by operation of law a year after the date of entry;83 the liquidation in the thirteenth month was of no consequence. While a number of cases have held that an importer must protest an incorrect liquidation to challenge it,84 the Court refused to require the importer to protest this "reliquidation" when Customs had not asserted any statutory basis for the reliquidation.
In Koike Aronson, Inc. v. United States,85 the CIT considered whether a protest was sufficiently detailed to be jurisdictionally sound. The protest objected to the classification Customs assigned the merchandise but did not provide an alternative classification or detail the nature of the objection. Senior Judge Watson held that a protest must be "reasonably calculated to direct the mind of Customs to the full nature of a specific claim."86 This protest did not meet that standard as it did not provide a preferred rate of duty or a preferred classification.
D. Miscellaneous Cases
This year, the CIT examined whether the incorrect designation of foreign trade zone ("FTZ") status was a mistake of fact correctable under 19 U.S.C. 1520(c).87 Ford Motor Company imported parts into its foreign trade subzone, for the production of both trucks and automobiles. Parts entered prior to zone admittance were dutiable at a rate of 3.3%, and would be designated with privileged domestic ("PD") status. Alternatively, parts admitted into the FTZ under non-privileged foreign ("NPF") status would be subject to the 2.6% ad. val. duty rate if incorporated into automobiles, and 25% ad. val. if incorporated into trucks.88 Ford claimed that it intended to admit the parts for automobiles under NPF status and the parts for trucks under PD status, but accidentally admitted all parts under NPF status. Consequently, Customs liquidated the entries for parts incorporated into trucks at 25% ad val., resulting in an excess of $5,000,000 in duty.89
The Court refused to apply section 1520(c) in this situation, as Ford had not established a fact for which it was mistaken. There was no evidence that Ford intended to enter the truck parts under PD status; the company had not paid the duties prior to zone admittance. Additionally, Ford had not established the inventory and record keeping procedures required for maintaining goods in two different statuses within the subzone. The court noted that the Ford personnel responsible for declaring the good's zone status were required to exercise more discretion than is required of a clerk.
Ford also argued that, since it had not received notices suspending liquidation, these entries had been deemed liquidated at the rate and amount of duty asserted that the time of entry.90 The Court found, however, that Ford's record keeping procedures were insufficient to overcome the presumption of regularity and delivery associated with the government's preparation and mailing of these notices.91
Finally, this year the CAFC determined whether that the application of the interest provision of 19 U.S.C. 150592 to goods entered before, but liquidated after, the provision's effective date would constitute retroactive application of the law.93 The CAFC found that the interest charge was triggered by the liquidation of the entries, and not the initial payment of estimated duties. Therefore, the application of this statute, while requiring reference to antecedent events, would not constitute a retroactive application of the law.
1. Title VI of the North American Free Trade Agreement Implementation Act (Pub. L. No. 103-182), December 8, 1993.
2. 62 Fed. Reg. 44,211 (1997).
3. 62 Fed. Reg. 15,831 (1997).
4. Pub. L. No. 103-465, December 8, 1994.
5. Record keeping Requirements, 62 Fed. Reg. 19, 704 (1997) (proposed April 23, 1997).
6. Id. at 19, 710 (proposed to be codified at 19 C.F.R. 163.2).
7. (a)(1)(A)" refers to the statutory provision which requires that the applicable party shall keep, and render for examination, records which "pertain to any such activity, or to the information contained in the records required by this chapter in connection with any such activity." 19 U.S.C. 1508(a)(1)(A) (1997). A list of (a)(1)(A) records is included in the appendix to the proposed rules.
8. See 19 U.S.C. 1