Neville Peterson LLP: Customs and International Trade Law

August 2, 1999
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: Substitution Unused Merchandise Drawback: Important New Federal Circuit Decision
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INTRODUCTION
     On July 27, 1999, the U.S. Court of Appeals for the Federal Circuit issued its much-awaited decision in Texport Oil Company v. United States, No. 98-1352. Texport is the first Federal Circuit decision to define the new "commercial interchangeability" standard applied under the substitution unused merchandise drawback law [19 U.S.C. Section 1313(j)(2)], and as such, will have an important impact on unused merchandise drawback claimants throughout the United States.

     Happily for drawback claimants, the Texport decision enunciates a "commercial interchangeability" standard which is reasonable and flexible.

     The Texport court also held that 19 U.S.C. Section 1313(j)(2) drawback claimants may recover drawback of merchandise processing fees (MPFs) paid in respect of the imports designated as the basis of drawback, but may not recover drawback of Harbor Maintenance Taxes (HMTs) assessed on such imports.

     This memorandum analyzes Texport decision, and its potential impact on future claims for substitution unused merchandise drawback.

BACKGROUND
     In Texport, the plaintiff sought to recover substitution unused merchandise drawback in respect of several export shipments of refined petroleum products. The plaintiff alleged that the exported goods were "commercially interchangeable" with the imports designated for drawback, in that they complied with the same recognized industry (ASTM) standard, were classified under the same tariff heading, and had close relative values. Customs denied the claims, largely on the ground that the claimant did not perform the full range of ASTM tests on the exported goods, and thus, according to Customs, could prove neither conformity with industry standards nor "commercial interchangeability.

     The plaintiff asserted that complete testing was not necessary, and that it could prove entitlement to drawback on the basis of "commercial acceptance", and according to the descriptions of the merchandise contained in invoices and other commercial documents.

     The CIT rejected the government's assertion that full testing was required, holding that where complete test results were not available, "commercial interchangeability" could nonetheless be proven they if the goods met a two-part test

The imported and exported goods must be commercially accepted; and
The description of the imported and exported goods must match on the sales invoice or contract.

The CIT also held that MPFs and HMTs were taxes or charges imposed under Federal law on goods by reason of their importation, and were eligible for 19 U.S.C. Section 1313(j)(2) drawback.

     On appeal, the Federal Circuit vacated the CIT's determination as to "commercial interchangeability", sustained the lower court's determination regarding the payment of drawback on MPFs, and reversed the CIT's conclusion regarding the drawback eligibility of HMTs.

THE FEDERAL CIRCUIT'S TEXPORT DECISION
     1. "Commercial Interchangeability"

     Like the CIT, the Federal Circuit rejected the government's assertion that, in the absence of full testing showing complete conformity with industry or government standards, commercial interchangeability cannot not be demonstrated.

      However, while the Federal Circuit acknowledged that the CIT had sought to consider the commercial realities of drawback transactions, it found the lower court's two-part test too subjective, and potentially subject to manipulation. It then issued its own interpretation of the "commercial interchangeability" standard.

     First, the Federal Circuit noted that, in switching from the old standard of "fungibility" to the more liberal standard of "commercial interchangeability", Congress intended to "[rule] out any construction of Ôcommercially interchangeable' that requires the imports and exports to be identical (or even very nearly identical)". This Congressional directive, the Federal Circuit held, "precludes our acceptance of Customs' interpretative position", as it "would require not Ôcommercial interchangeability', but Ôidentity'." The correct test, the Federal Circuit held, must be defined with respect to objective criteria:

Therefore, "commercially interchangeable" must be determined objectively from the perspective of a hypothetical reasonable competitor; if a reasonable competitor would accept either the imported or exported goods for its primary commercial purposes, then the goods are "commercially interchangeable" according to 19 U.S.C. Section 1313(j)(2).

In making commercial interchangeability determinations, therefore, courts should consider the factors identified in the legislative history to 19 U.S.C. Section 1313(j)(2), government and recognized industry standards, part numbers, tariff classifications and relative values, according to the Federal Circuit. Courts may also consider:

. . . evidence of arms-length negotiations between commercial actors, the description of the goods on bills of sale or invoices. . . as well as other factual evidence presented by the parties that the Court of International Trade considers relevant.

Thus, the Federal Circuit has announced an objective yet flexible test of "commercial interchangeability".

     2. Merchandise Processing Fee

     The Federal Circuit affirmed the CIT's decision that the 0.21% ad valorem, MPF is a charge upon imported merchandise imposed by reason of importation, and is eligible for unused merchandise drawback under 19 U.S.C. Section 1313(j). The Court held that "the MPF is clearly a fee assessed under Federal Law, and is explicitly linked to import activities, thus, it is well within the scope of Section 1313(j)(2)'s grant of drawback".

     What the Federal Circuit did not address is the practical question of how claims for drawback on MPFs should be calculated. Although assessed at a rate of 0.21% ad valorem, the MPF is "capped" at a maximum of $485 per entry. The logical solution would be to pay drawback based on the 0.21% ad valorem rate on exported goods, until the $485 limit in the import entry has been reached. There seems no reasonable basis to attempt to allocate the MPF over the total imports covered by an entry, particularly since a single entry may contain different types of merchandise, and it is impossible to say that the MPF was or was not assessed on particular goods in the entry, when the $485 per entry "cap" is invoked.

     3. Drawback on HMTs

     The Federal Circuit reversed the CIT's determination that Harbor Maintenance Taxes (HMTs) assessed on imported goods were eligible for 19 U.S.C. Section 1313(j) drawback. The appellate court held that while the HMT was in fact a tax imposed under Federal law, it was not assessed on imported merchandise "by reason of its importation". In this regard, the Court noted that the import HMT is assessed upon the unlading of goods at U.S. ports, regardless of whether the goods are imported, or are the subject of coastwise transportation. Thus, there was no causal connection between importation and the imposition of the HMT.

CONCLUSION
     The Texport decision is an important milestone in the interpretation and administration of the substitution unused merchandise drawback law, 19 U.S.C. Section 1313(j)(2). While stopping short of announcing a "bright line" test for "commercial interchangeability, the Texport decision does announce an objective, fact-based test, and makes it clear that the "commercially interchangeable" standard is more liberal and flexible than the test of "fungibility".

     The decision is also important for its holding that the MPF is eligible for unused merchandise drawback, while the import HMT is not. The Federal Circuit left undisturbed the Court of International Trade's holding that claimants who had sought 19 U.S.C. Section 1313(j) duty drawbacks have also, automatically, applied for MPF drawbacks. This means that firms with pending drawback claims should automatically receive drawbacks of MPFs paid on designated imports - although, as noted above, the precise method for calculating MPF drawbacks remains to be resolved.

     To the extent drawback claimants have received "unused merchandise" duty drawbacks under 19 U.S.C. Section 1313(j), but have not received drawback on MPFs, it should be possible for the claimant to file a lawsuit in the United States Court of International Trade, seeking MPF drawbacks. Such suits would need to be filed within two (2) years after liquidation of the drawback claim in question.

     Our firm stands ready to furnish any additional information or assistance which companies may require concerning the impact of the Texport decision on unused merchandise drawback claims.

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