INTERNATIONAL TRADE AND CUSTOMS LAW NEWSLETTER PREPARED FOR THE CLIENTS AND FRIENDS OF THE FIRM, FOR VIEWING ON THE WORLD WIDE WEB.

Volume XII, Number 5
November, 1998

SUPREME COURT TO
DEFINE JUDICIAL
POWER OVER CUSTOMS

The U.S. Supreme Court has agreed to determine the crucial issue of whether Courts must defer to Customs' legal interpretations. By granting certiorari in the case of Haggar Apparel Co. v. United States, the Justices have set the stage for a major decision regarding the role of Federal courts in regulating international trade.

In Haggar, the U.S. Court of International Trade (CIT) and the Court of Appeals for the Federal Circuit (CAFC) held that an "oven baking" perma-press operation, performed during the manufacture of slacks offshore, was "incidental to assembly" and did not disqualify the slacks from duty allowance benefits under HTS subheading 9802.00.80 (the "807 program"). Customs asserted that its regulations, which characterized such operations as disqualifying goods from HTS subheading 9802.00.80 benefits, should have been dispositive; but the CAFC ruled that Customs' view of the law was not entitled to any deference. The Supreme Court has agreed to decide whether Customs' view is entitled to deference, and whether Customs regulation is reasonable.

As a general rule, Federal Courts defer to the legal judgments of the agencies whose actions they review, setting them aside only if they are clearly unreasonable. For more than a century, however, Customs cases have been heard by specialized courts, which have conducted a non-deferential "de novo" review of Customs' actions. Should the Supreme Court decide that Customs' decisions should receive a "deferential" review, the ability of importers to challenge Customs decisions in Court will be greatly restricted.

Briefing in the Haggar case should be completed by year's end. The Supreme Court should hear oral arguments in February, and announce its decision before ending its current term in June. Additional information regarding the Haggar appeal is available from our offices [GTR #98-501].

HMT UPDATE:
CLASS ACTION
TOLLED LIMITATIONS,
SAYS CIT

Exporters are moving ahead with efforts to collect refunds of the Harbor Maintenance Tax (HMT), which the Supreme Court struck down earlier this year, as unconstitutional when applied to exports. More than 3,200 exporters have filed claims under the "early refund" procedure established by the U.S. Court of International Trade. The procedure directs Customs to grant exporters immediate refunds of HMTs paid within two years prior to the filing of a lawsuit.

The CIT has previously ruled that refunds of the export HMT should be paid with interest from the date the tax was paid until the date a refund is authorized. The issue of interest payments is currently before the CAFC in the case of International Business Machines Corp. v. United States. Other efforts to expand exporters' HMT recoveries are ongoing.

Recently, in Stone Container Corp. v. United States, Slip Op. 98-143 (October 5, 1998), the CIT ruled that the two year statute of limitations for exporters to file HMT challenges in the Court was "tolled" during the approximately 18-months that a motion to certify an export HMT class action was pending with the Court. This decision, which the government has appealed, should permit expanded HMT recoveries by exporters who filed their first actions between late 1994 (when the putative class action was filed) and May 7, 1998 (two years after the CIT declined to certify a class). The CIT rejected exporters' arguments that the HMT was void ab initio (which would mean that no statute of limitations could be enforced against refund actions), and also found that the U.S. Court of Federal Claims, which has a 6-year statute of limitations, has no jurisdiction over HMT challenges. Copies of the Stone Container decision are available from our offices [GTR #98-502].

CIT REJECTS PROTEST
JURISDICTION IN
HMT CASES

In a setback for exporters, the CIT also held recently that it cannot exercisets "protest" jurisdiction to hear exporters' challenges to HMT assessments. In Swisher International Inc. v. United States, Op. 98-153 (November 6, 1998), an exporter filed an administrative claim for refund of HMTs with Customs, in accordance with 19 C.F.R. Section 24.24(e)(5). When the refund application was turned down, the exporter filed a protest, which was denied. The exporter thereafter sought to invoke the CIT's 28 U.S.C. Section 1581(a) "protest" jurisdiction, to challenge Customs' refusal to refund the tax. Under this theory of jurisdiction, exporters would theoretically be able to recover all $1.3 billion in export HMTs assessed since the statute went into effect in 1987.

However, the CIT ruled that an administrative decision involving the HMT was not a protestable decision regarding a "charge or exaction" within the jurisdiction of the Secretary of the Treasury. The court equivocated, however, suggesting that the administrative procedure might lead to protestable decisions for non-constitutional export HMT claims. The CIT's confusing rationale in Swisher International will be the subject of an appeal. Copies of the Swisher decision are available from our offices [GTR #98-503].

Other HMT challenges are moving forward in the courts. These include cases alleging that the HMT is unconstitutional as applied to imports [Thomsen Consumer Electronics Inc. v. United States; Amoco, Inc. v. United States], and as applied to interstate movements of goods by water [Florida Sugar Marketing and Terminal Assn. v. United States], and a case alleging that the HMT cannot be assessed on goods at the time they are admitted to a foreign trade zone [BMW Manufacturing Corp. v. United States].

CUSTOMS PROPOSES
TO AMEND
PENALTY GUIDELINES

The U.S. Customs Service, which appears to be taking a more pro-enforcement stance under new Commissioner Raymond G. Kelly, is proposing revisions to its Guidelines regarding the disposition of 19 U.S.C. Section 1592 civil penalty claims. The proposed revisions would expand the situations in which civil penalties could be imposed to include violations involving the entry of merchandise into the United States in bond. The new guidelines would also encompass false claims, acts, or practices which do not have any impact on the admissibility of goods, or the amount of duties assessed thereon, but which impair the government's ability to collect accurate trade statistics, which involve country of origin determinations for goods, or which involve any of a wide range of vaguely-defined "unfair trade practices".

The proposed guideline amendments also cover Customs claims for withheld duties under 19 U.S.C. Section 1592(d), application of Section 592 to Customhouse brokers, and factors to be considered regarding the mitigation of penalty claims. The proposed guidelines also contain new definitions of many terms associated with civil penalty claims.

Customs is seeking public comments on the proposed guideline changes through December 28, 1998. Copies of the proposal are available from our offices [GTR #98-504].

ACS CONDITION
CRITICAL; FUNDING
OPTIONS UNCERTAIN

Customs' aging Automated Commercial System for processing commercial transactions is at risk of catastrophic failure, the Customs Service recently acknowledged, but the agency is insisting that importers accept increased user fees to pay for funding its replacement, the Automated Commercial Environment (ACE).

ACS, an 18-year old mainframe system using COBOL programming, is running out of capacity, and Customs is being forced to invest in purchasing new storage capacity every few months at a cost of $5 million per installation. Despite Customs' best efforts, there have recently been several national "brownouts" of ACS, during which Customs brokers could not log on to the system. And, to make matters worse, ACS is not yet Year 2000 compliant. Still, despite multimillion-dollar Federal budget surpluses, Customs continues to insist that importers should pay all or most of the cost of funding ACS's replacement by agreeing to a higher Merchandise Processing User Fee. Importers believe that Customs automation should be paid from general revenues, and are skeptical that Customs can deliver a new system in the time, or at the cost, promised.

Customs is threatening importers with delays in the processing of commercial entries if they decline to dig into their pockets to pay for automation funding. An article detailing the ACS funding crisis is available from our offices [GTR # 98-505].

TONER PRODUCTS
ARE "PARTS" OF
COPIERS: CAFC

Toner cartridges, which are specially shaped to fit particular models of photocopiers, but which contain no moving parts, are properly classifiable as "parts and accessories" of photocopiers, according to a recent decision of U.S. Court of Appeals for the Federal Circuit. In Mita Copystar America v. United States, No. 98-1203 (November 6, 1998), the CAFC rejected the government's argument that the cartridges were classifiable as "photographic chemicals" packed in uniquely shaped containers. Reversing a decision of the U.S. Court of International Trade, the CAFC held that Mita's imported cartridges were specially designed for use in particular models of copiers, and were essential to the copiers' function, thereby satisfying the legal requirements for classification as "parts and accessories". Under these circumstances, the legal notes to Chapter 90 of the HTS compelled their classification as "copier parts".

The CAFC also rejected the government's theory that the cartridges were classified as photographic chemicals under a legal note placing certain chemicals in HTS Chapter 37 "by reason of being put up in measured doses or packed for retail sale".The CAFC noted that, two years ago, it had ruled that the chemicals contained in Mita's cartridges, considered alone, were classifiable in the Chapter 37 "photographic chemicals" heading, and hence did not come to be classified in that heading solely by reason of being packaged in a given form or put up for retail sale.

The Mita Copystar decision may have a significant impact on the classification of "consumables" and other parts and accessories having a high consumption rate. Copies of the decision are available from our offices [GTR #98-506].

STATE TRADE
SANCTIONS
UNCONSTITUTIONAL,
COURT HOLDS

State laws imposing sanctions on foreign countries impermissibly intrude on Congress' power to regulate foreign commerce and are unconstitutional, a Massachusetts Federal Court recently held. In National Foreign Trade Council v. Baker, No. 98-10575 (November 4, 1998), the Court ruled that a Massachusetts State law prohibiting state purchases from anyone doing business with Burma (Myanmar) interfered with the ability of the Federal Government to regulate trade with foreign countries.

The 1996 Massachusetts law at the heart of the case authorized the State's Executive Office of Administration and Finance to develop a "restricted purchase list" of companies "doing business with Burma, and limited the circumstances in which the state could make purchases from such companies. Noting that the Massachusetts law was designed with the intent of influencing Burma's domestic policy, the District court held such action to be unconstitutional noting that "State interests, no matter how noble, do not trump the federal government's exclusive foreign affair power."

The decision was welcomed by U.S. business interest and by the European Union, which had filed an amicus brief supporting the plaintiffs. It could also trigger additional lawsuits by companies which have been barred from contracting with state and municipal governments on the basis of state "trade sanction" statutes.Copies of the National Foreign Trade Council decision are available from our offices [GTR #98-507].

U.S. THREATENS
SANCTIONS IN
EU BANANA DISPUTE

Angered at the European Union's refusal to open its market to banana imports, the United States Representatives (USTR) is soliciting comments regarding the possible imposition of 100% ad valorem punitive tariffs on a range of U.S. products. Among the items contemplated for possible retaliation are EU cheeses, wines, paper and paperboard products, wearing apparel (cashmere sweaters), household textiles, household appliances (food processors vacuums cleaners) toys, electric batteries, ball point pens, electric lights, windshield wipers, ovens and heaters, and Christmas ornaments. USTR is seeking public comments through November 30, 1998 regarding products to be targeted for final retaliation.

USTR expects to announce a final sanction by December 15, 1998. Punitive tariffs would go into force by February 1, 1999, unless the EU seeks arbitration in dispute, in which case the deadline for retaliation would be extended until March 2. The EU has threatened to retaliate if the United States imposes sanctions. Copies of USTR's list of products being considered for retaliation are available from our offices [GTR #98-508].

COURT REFUSES
TO JOIN IRS IN
PENALTY CASE

In a lawsuit that could be a harbinger of future Customs penalty litigation, the U.S. Court of International Trade has declined to join the Internal Revenue Service (IRS) to a lawsuit seeking civil penalties from an importer for alleged undervaluation of imported merchandise. In United States v. Shabahang Persian Carpets, Ltd. Slip Op. 98-149 (October 28, 1998), Customs alleged that a carpet importer had improperly undervalued imported merchandise, and brought an action seeking to recover withheld duties and penalties. The importer had previously settled IRS charges that it had underpaid income taxes by overvaluing its imported inventory. The IRS charges were based on Section 1059A of the Internal Revenue Code, which provides that, when a taxpayer receives imported property from a related foreign seller, its tax basis in the property should not be higher than the dutiable value declared to Customs. The importer was concerned that if higher dutiable values were determined for its goods, it would be saddled with higher duty payments, and the increased dutiable values would not be taken into account by the IRS.

The CIT refused to join the IRS as a party to the penalty litigation, claiming that there was no independent basis for the CIT to exercise jurisdiction over the IRS in this type of action. The Court noted that there were procedural mechanisms available for both Customs and the importer which would allow both to gain "complete relief", and alleged that the importer was not in jeopardy of incurring "inconsistent liabilities". Copies of the Shabahang decision are available from our offices [GTR #98-508].

ATPA, ENTRY
PERIOD: CUSTOMS
ISSUES FINAL RULES

The U.S. Customs Service has issued its final regulations implementing the Andean Trade Preference Act (ATPA) . The ATPA provides duty-free entry for most goods imported from member states of the Andean Pact [Bolivia, Columbia, Ecuador, Peru], provided those goods are made in beneficiary countries and meet minimum local value added requirements. The new regulations, which merely codify Customs' task practice in administering ATPA, are effective October 26, 1998. Copies are available from our office [GTR #98-509].

Customs has also published final regulations which eliminate the "lay order" period for imported merchandise and require, in essence, that all goods be entered or placed in warehouse no later than 15 days after their date of arrival. Goods remaining unentered for 20 days after arrival are required to be transferred to general order storage. The new regulations, set out in Treasury Decision 98-74, provide a longer time to make entry than the previous "lay order" regulations, but effectively eliminates the discretion of Port Directors of Customs to authorize a longer delay between arrival and entry of goods. The regulations also impose stricter liability on bonded carriers and cartmen for liquidated damages and penalties when merchandise remaining unentered is not directed to general order. Copies of the new regulations, plus our firm's analysis thereof, are available from our offices [GTR #98-510].

CUSTOMS PROPOSES
DRAWBACK PENALTY
RULES

The Customs Service has also issued for public comment proposed regulations implementing the new civil penalty statute for false drawback claims, 19 U.S.C. Section 1593. The new regulations provide that drawback penalty claims will be handled in much the same way as claims for alleged false importation under 19 U.S.C. Section 1592 - through the issuance of prepenalty notices and penalty notices, and consideration of the drawback claimant's responses to each. The new regulations also note the maximum penalties allowed by law for false drawback claims resulting from negligent and intentional causes, and discusses the range of mitigation which Customs officers will be authorized to provide in such claims.

Customs is seeking comments on the proposed regulations through November 30, 1998. Copies of the regulations are available from our offices [GTR #98-511].

Neville Peterson LLP is pleased to announce that John A. (Jack) Detzner has joined the firm as counsel in the Washington, D.C. office. A graduate of Harvard University and Harvard Law School, Jack's practice is extensively concentrated in export regulation, with emphasis on Commerce and State Department export control laws; the Foreign Corrupt Practices Act; antiboycott matters; economic sanctions and embargoes administered by the Treasury Department; Buy American Act and Trade Agreements Act matters; Customs regulations and offshore planning matters. Fluent in Spanish, Jack also counsels companies on trade with Latin America, including sales, distribution, marketing agreements and joint ventures throughout the region. Jack has published extensively in both English and Spanish, on topics ranging from "Foreign Investment in Chile" to "NAFTA and the Environment". We hope all of our clients and friends will join us in welcoming Jack to the firm.

For additional information concerning the items discussed in the Global Trade Report, please call Martin Neville, John Peterson, or Maggie Polito at (212) 635-2730 or George Thompson, Mike Tomenga, Larry Bogard or Jack Detzner at (202) 861-2959.