Neville Peterson LLP: Customs and International Trade Law

M E M O R A N D U M
TO:	Clients and Friends of the Firm
FROM:	Neville Peterson LLP
RE:	Revocation of Customs' "Treatment" Accorded to "Transactions" New Court of International Trade Decision

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     An interesting new United States Court of International Trade decision could have an enormous impact on Customs' efforts to change the treatment previously accorded to import and duty-drawback transactions, and could provide importers with a powerful procedural defense to such changes.

The Precision Specialty Metals Decision

     In Precision Specialty Metals, Inc. v. United States, Slip Op. 01-148 (December 14, 2001)¹, a drawback claimant advised Customs that it would claim manufacturing drawback under Customs' "general drawback contract/ruling" for articles made using steel, Treasury Decision 81-74. The claimant described the products on which it would claim drawback as including "stainless steel coils, sheets and trim" of various chemistries. Customs approved the plaintiff's statement of intention to operate under this contract and, over the next few years, liquidated 69 of its drawback claims with full drawback.

     Several years later, Customs questioned the eligibility of the plaintiff's claims for drawback in respect of stainless steel "trim", concluding that this material was actually "valuable waste" and ineligible for drawback. Customs issued a Notice of Action to the claimant, indicating that 38 subsequent claims were being liquidated without drawback. After Customs denied the drawback claimant's subsequent protest, the lawsuit was commenced.

     Before the Court, the drawback claimant asserted that the denial of drawback on claims already filed was in violation of Section 625(c)(2) of the Tariff Act of 1930, as amended [19 U.S.C. Section 1625(c)(2)], which requires the publication of notice before Customs can modify a ruling or the treatment accorded previously to substantially identical transactions.² CIT Judge Evan Wallach ruled that Customs' denial of the drawback claimant's protest was a "ruling" which changed a "treatment" previously accorded by Customs to substantially identical transactions - the 69 claims which had previously been liquidated "with drawback".

     Once the drawback claimant demonstrated that the previously approved claims involving "trim" were "substantially identical" to the claims which had been denied, the Court ruled that since Customs had not provided prior notice and an opportunity for comment with respect to this change in "treatment", it had violated the requirements of 19 U.S.C. Section 1625(c)(2).

     Most importantly, the CIT ruled that the existence of a "treatment" could be established by Customs' act in granting the drawback claims, regardless of the agency's degree of knowledge or intent regarding the subject matter of those claims. Customs had argued that no "treatment" could arise unless Customs "knowingly" granted the prior claims for drawback. The court rejected this argument, holding that, under the Customs regulations [19 C.F.R. Section 177.9] the only requirement for establishing a "treatment" with respect to Customs' actions is a description of the transactions themselves; the agency's intent or degree of knowledge regarding the policy implications of its actions were irrelevant. As the Court noted:

The government has failed to point to anything in the language or legislative history of, or the regulatory scheme surrounding, Section 1625(c)(2) which persuades the Court that its earlier holding - that "[t] the term 'treatment' looks to the actions of Customs rather than its 'position or policy' -- is erroneous."

Implications of the Precision Specialty Metals Decision

     The CIT's holding that a "treatment" can be established by Customs' action in approving claims, (or, perhaps more importantly, in liquidating entries) has major implications for administration of the Customs laws. While Customs has generally followed 19 U.S.C. Section 1625(a)'s "notice on comment" procedures when revoking or modifying published rulings, the statute on its face clearly references "treatments", as distinct from "rulings". Customs itself has acknowledged its right to publish notice of a change in "treatment" under Section 1625. Furthermore, if the denial of a protest is viewed as a ruling which affects a change in such treatment, then it follows that the treatment may only be applied prospectively, after notice-and-comment procedures have been followed.

     Obviously, there will be many situations where Customs, as the result of an audit or other review, elects to change its position regarding the treatment of products, after having accorded a particular treatment to the goods for many years prior. The Precision Specialty Metals decision provides importers with a potential procedural defense to any retroactive changes in treatment (while leaving importers and drawback claimants free to exercise their protest rights to challenge past treatments that dare unfavorable).

     The Precision Specialty Metals decision is of course certain to be appealed by the Government. For the time being, however, it is the law. Companies filing protests against changes in treatment of their transactions should give serious considerations to raising procedural claims based on Customs' failure to follow 19 U.S.C. Section 1625(c).

     Copies of the Precision Specialty Metals decision are available on the CIT website.

     Please call if you have any questions concerning the Precision Specialty Metals decision or its implications for importers and drawback claimants.

Although a Confidential Version of this decision was issued on December 14, 2001, the public version of the decision was only recently released. Back
19 U.S.C. Section 1625 provides in pertinent part:
Section 1625. (a) Publication. Within 90 days after the date of issuance of any interpretative ruling (including any ruling letter, or internal advice memorandum) or protest review decision under this Act with respect to any Customs transaction, the Secretary shall have such ruling or decision published in the Customs Bulletin or shall otherwise make such ruling or decision available for public inspection

* * * (c) Modification and Revocation

A proposed interpretative ruling or decision which would -
shall be published in the Customs Bulletin. The Secretary shall give interested parties an opportunity to submit, during not less than the 30-day period after the date of such publication, comments on the correctness of the proposed ruling or decision. After consideration of any comments received, the Secretary shall publish a final ruling or decision in the Customs Bulletin within 30 days after the closing of the comment period. The final ruling or decision shall become effective 60 days after the date of its publication. Back

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