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:	John M. Peterson Neville Peterson LLP
RE:	Court Orders Importer and Customer to Obtain Customs Headquarters Ruling on Valuation, Importer-of-Record Issues

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     In a decision which underscores the growing importance of Customs compliance in commercial settings, a Federal District Court has issued a mandatory injunction requiring an importer and its United States customer to jointly apply for a Customs Headquarters ruling concerning dutiable value and "importer of entry" rules. To our knowledge, this represents the first case in which a Court has ever ordered parties to seek a Customs ruling -- a procedure which is usually considered voluntary.

     In Subaru Distributors Corp. v. Subaru of America, Inc. 2001 U.S. Dist. LEXIS 22273 (January 28, 2002) an independent distributor of automobiles (SDC) brought suit against its supplier (SOA), which acted as importer of record for Japanese-origin motor vehicles. The dispute featured wide-ranging issues relating to a distributorship agreement. Included among these issues were SDC's grievances regarding Customs issues.

     In 1993, SOA had secured Customs Headquarters Ruling 224574, which described certain "three-tiered" sale transactions for imported vehicles. Customs held that the vehicles should be appraised for Customs purposes on the basis of "transaction value", according to the price at which Fuji Heavy Industries, Inc. the Japanese manufacturer, sold them to SOA, a related company. SOA, in turn, imported the vehicles at the Port of Boston, Massachusetts, and made them available to SDC.

     However, the structure of the purchase transactions had changed markedly since 1993. Among other things, SDC now took title to the vehicles before they were imported. This led to two issues:

(1) Did SOA have standing to act as importer of record for the vehicles under the new arrangement, or was SDC required to act as importer of record?; and

(2) Were the imported vehicles still subject to appraisement at the Fuji to SOA price?

     SDC engaged a Customs attorney to seek a Customs Headquarters ruling concerning whether the holding in Customs Headquarters Ruling 22454 was still valid. SOA opposed this move. Customs Headquarters declined to issue the ruling to SDC, stating that it could not properly evaluate a ruling obtained by one company on the basis of "updated" information provided by another company. However, Customs did invite SDC and SOA to make a joint application for a new ruling.

     SOA, meanwhile, the importer of record, sought oral advice from the Port Director of Customs in Boston, whose silence was taken as consent to continuation of the existing importing practices.

     Frustrated by the apparent deadlock, and concerned that it might have "reasonable care" obligations under the Customs laws, SDC asked the District Court to enter a mandatory junction, directing SOA to collaborate with it in obtain a Customs ruling on the points in question.

     District Court Judge Colleen McMahon granted SDC's request for the injunction. She noted that the current import transactions were based on circumstances that "are far different than those on which Ruling 224574 was based". She also found that SDC's concerns were "not insignificant" since, "if SDC, as owner of the vehicles at the time of entry, is determined the "importer of record" under Section 484 of the Tariff Act [19 U.S.C. Section 1484], then as far as the United States Government is concerned, it, not SOA, would be liable for the duties incurred during importation and for determining the correct classification and appraisement of the imported merchandise under 19 C.F.R. Section 141.1". The Court also noted SDC's concern that, if SDC were required to act as importer of record, then the dutiable "transaction value" of the merchandise might be determined on the basis of SOA's price to SDC, rather than the "materially lower price" charged by Fuji to SOA.

     The Court noted the Customs Informed Compliance and Modernization Act, which requires importers and other transacting Customs business to use "reasonable care" in dealing with Customs. In meeting this standard, the "Mod Act" indicates that importers should consider using one or more aids to establish evidence of proper compliance, including seeking guidance from Customs pursuant to the binding ruling program. The court concluded that SOA's refusal to join SDC in a joint application for a Customs ruling failed to meet the "reasonable care" standard of the Mod Act.

     In this regard, the court noted that SOA's contact with the Port Director of Customs in Boston did not satisfy the requirements for seeking a determination of transaction value in multi-tiered transactions, as set forth in Treasury Decision 96-87.

     Finally, the Court ruled that even though the parties had imported motor vehicles in the past, a Customs ruling would still affect "prospective" transactions, and would therefore be compliant with the Customs regulations.

Observations

     The Suburu Distributors Corp. decision is further evidence of the important and growing connection between Customs compliance issues and commercial relationships. That a court might resolve a commercial dispute by directing the parties to jointly seek a Customs ruling also is evidence of the seriousness that courts attach to the Customs "Mod Act" and companies' obligations thereunder. The decision also points out the importance of importers and vendors working collaboratively, wherever possible, to ensure compliance with Customs' requirements.

     Please contact our offices if you would like additional information regarding this decision or its implications.

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