New Directive on the Deductibility of Freight

April 2000

In a recent Treasury Decision, Customs raised the reasonable care bar with respect to the importers' obligation to report accurate freight and insurance costs on shipments where the invoice price includes these amounts. In T.D. 00-20, Customs has stated that an importer must deduct the actual costs of insurance and freight, or inform Customs that these amounts are unknown at the time of entry.

This T.D. represents a change from Customs previous statements on this issue. In the past, it was understood that an importer could only deduct the actual costs - deductions from dutiable value must not be based on estimations of the insurance and freight costs - but it was also understood that the importer could abstain from deducting these amounts if it was unable to substantiate the deduction. Under this notice, however, Customs has stated that reasonable care requires the importer to deduct the actual amount of freight and insurance, as substantiated, or affirmatively state that these charges can not be determined. According to the T.D., an importer of record

must deduct the actual costs of freight, insurance and other costs incident to international shipment, if they are included in the price actually paid or payable or referred to in the terms of sale. If the importer of record does not know the actual costs for these charges, it must declare the entire value without a deduction for freight, insurance and other costs incident to international shipment and advise Customs that the entered value includes an unknown amount . . . [I]f the actual amount becomes available the importer of record must inform Customs.

In the T.D., Customs extends the importer's reasonable care obligation by stating that "to demonstrate its exercise of reasonable care, [the importer] must submit supplemental information about known actual costs when discovered or a statement that the actual costs can not be discovered post entry." Reconciliation may be used to fulfill this reporting requirement. Customs sites letters of credit, checks, bank statements or commercial documents to or from the service provider as examples of documents that may be used to support the deductibility of the freight and insurance charges, but states that "the acceptability of other documentary evidence is at the discretion of the appropriate Customs official."

Customs excepts from this rule the costs of foreign inland freight and post-importation transportation costs. These costs "may or may not be deducted depending on how the transaction is structured and identified on the Customs entry documentation." Additionally, while deductions for foreign inland freight must be based on the actual charges, "an exclusion for post importation transportation will be based on any reasonable cost or charge."

While this notice is "effective immediately," Customs has not directed the importing public or the ports on how this T.D. is to be implemented. Many entries are designated "paperless" by Customs. On these entries it may be impossible to "advise Customs that the entered value includes an unknown amount" without submitting a copy of the entry to the Port. Furthermore, under the Ocean Shipping Reform Act of 1999, shipping rates are often confidential, making it impossible for the importer to determine the actual amount of freight paid on the shipment.