| M E M O R A N D U M | |
| TO: | Clients and Friends of the Firm |
| FROM: | John M. Peterson Neville, Peterson, LLP |
| RE: | Court of International Trade Rules that 19 U.S.C. Section 1592(d) “Withheld Duty” Demands Are Protestable “Exactions” |
In a major victory for importers, the United States Court of International Trade (CIT) has ruled that Customs Service demands for “withheld duties”, made pursuant to the Customs civil penalty statute [19 U.S.C. Section 1592], are “exactions”, which may be protested by the importer. The new decision provides importers with an important new weapon to use in challenging Customs’ post-importation duty assessments.
Background
In Brother International Inc. v. United States, Slip Op. 03-01 (January 2, 2003), an importer determined that it had misclassified certain imported polyethylene terephthalate film. As a result, the importer had underpaid duties on certain entries, and overpaid duties on others. To limit its exposure for possible civil penalties under Section 592 of the Tariff Act of 1930, as amended [19 U.S.C. Section 1592], the importer made a “prior disclosure” to Customs, and tendered “withheld duties” in the amount of $29,125.14. The tendered amount was calculated by offsetting duty overpayments against underpayments, and tendering to Customs the net underpayment.
In response, Customs took the position that no “offset” was permissible. Customs sent a letter to the importer, demanding payment of additional “withheld duties” in the amount of $172,558.79, and indicating that if this amount was not paid, “Customs will initiate an action to recover the duties and full penalties under 19 U.S.C. Section 1592". Brother paid the duties demanded, in order to perfect its “prior disclosure”, and then filed a protest against Customs’ demand. Customs declined to entertain the protest, and following protest denial, Brother filed a lawsuit in the Court of International Trade pursuant to 28 U.S.C. Section 1581(a), contesting the denial of its protest, and seeking refund of the additional duties paid. 1
Before the CIT, Customs asserted that Brother International’s payment had been “voluntary”, and therefore was not protestable. The government moved to dismiss Brother’s lawsuit for lack of jurisdiction.
The Court’s Decision
In denying the government’s motion to dismiss the action, the Court, per Judge Judith Barzilay, held that Customs’ letter demanding additional 19 U.S.C. Section 1592(d) duties constituted a protestable “exaction”.
The Court began by distinguishing several earlier decisions in which importers’ payments, made during the course of Customs audits or penalty investigations, were held not to be protestable “exactions”. In these cases, the Court held, the importer’s payment had been made without any “legal obligation or compulsion”, had been made as an “act of good faith” in the course of an administrative investigation, or was paid in voluntary mitigation of a claim. The Court concluded that:
…where the circumstances of payment indicate[] a lack of voluntariness, either due to Customs making the request “under color of official authority” or an imposition of liability, and where the amount paid is not the product of a settlement process, the cases support the proposition that the demand or request may constitute a charge or exaction.
The Court found that Customs’ demand that Brother make payment of additional 19 U.S.C. Section 1592(d) “withheld duties” was an exaction, and that Brother’s payment was not voluntary. Reviewing a scenario which is all-too-common in modern Customs practice, the Court held that Customs’ letter not only demanded the payment of additional duties, but:
…further threatened that “[i]f the duties requested are not received within 30 days from the date of this letter, Customs will initiate an action to recover duties and full penalties under 19 U.S.C. Section 1592.” If Brother had not complied, it would have been faced with fines well beyond the amount of duties owed. The record clearly indicates that Brother did not believe it owed the amount requested by Customs. Brother had made an initial payment for an amount it deemed proper. That offer was rejected by Customs as insufficient, and Customs demanded additional money. Customs never offered to settle this amount for anything less than the full duties it contended were owed.
The Court concluded that “if Customs’ demand for the money was improper, and Brother paid with only the additional liability of a penalty suit as a possible avenue of relief, such a payment was an exaction.”
The CIT’s Brother International decision represents a major step in recognizing the changes that have taken place in recent years in the way Customs collects duties. While the CIT’s jurisdictional statutes contemplate that importers will seek duty refunds by protesting the liquidation of import entries, Customs increasingly has used post-liquidation duty assessments – for example, in the context of audits and penalty claims – to seek recovery of contested duty amounts. The Court stated:
For two centuries the standard liquidation and protest method characterized Customs practice. Under that system goods were evaluated by a Customs officer prior to release into the stream of commerce. * * * In the last twenty years, Customs has moved away from this labor intensive method towards one of “automatic bypass” where goods are liquidated “as entered” by the importer. Customs now relies heavily on post-import audits top reconcile mistakes made in the liquidation process. However, these audits occur months after liquidation has become final and after the time to protest has elapsed for the importer. In essence, the traditional rule that liquidation is final and binding on both the importer and the government is no longer true. Now, in practice, it is only binding on the importer.
In addition, where advance information is not timely and accurately submitted, Customs may deny a permit to unlade either to all of the cargo on an arriving vessel, or deny such a permit to that cargo which has not been properly reported.
Impact of Brother International Decision on Customs Practice
It is likely that the government will appeal the Brother International decision to the Federal Circuit. In our judgment, however, the CIT’s decision is legally correct and likely will be upheld.
As a precautionary matter, importers faced with Customs demands for 19 U.S.C. Section 1592(d) “withheld duties” – whether made in the context of Customs audits or penalty investigations – should file protests against those demands. In order to be timely, such protests must be filed within 90 days after the Customs demand is made. However, pending final resolution of the Brother International case, importers may wish to postpone paying duties demanded by Customs, even though they may protest the demand.
Once a protest is denied, the importer must file a challenge in the CIT within 180 days. The payment of contested duties, taxes and charges is required as a jurisdictional prerequisite before such a lawsuit is filed.
Where importers have received a Customs demand for post-liquidation duty payments, but have not protested within 90 days, there are still ways for the importer to challenge Customs’ demand. One possibility is to await the filing of a Customs lawsuit to collect the duties, and any associated penalties, and defend such lawsuit. In addition, the Brother decision suggests that it may be possible for importers to bring lawsuits to challenge such determinations pursuant to the CIT’s 28 U.S.C. Section 1581(i) “residual” jurisdiction. Importers should consult with counsel on the appropriate way to proceed in each individual case.
The Brother International decision may substantially expand importers’ rights to obtain administrative and judicial review of post-liquidation Customs demands. Importers should review the applicability of the case to their particular situations with counsel.
A copy of the Brother International decision is available on the CIT’s website, http://www.cit.uscourts.gov/slip_op/slip-op.html .
Please feel free to contact our firm if you have any questions concerning the Brother International decision or its possible implications.
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