Duest

There are a lot of practicing lawyers who secretly or not so secretly harbor desires throw in the legal towel and transition to a career that is their true passion. A third of them think they would be award-winning novelists if only they had time to write. Another third think they should be hedge fund managers, venture capitalists, or similar financial potentates. The remainder are an eclectic mix of future pastry chefs, bike shop owners (who are also excellent baristas), rock drummers, and other jobs where middle-aged hipsters with discretionary income will fit right in.

The rest of us actually like lawyering and sometimes get the opportunity to be creative at the same time. Such is the case in Flint Hills Resources v. United States, a not-so-recent decision of the U.S. Court of International Trade. The question was whether Customs and Border Protection properly denied refunds of Harbor Maintenance Tax ("HMT"), Merchandise Processing Fee ("MPF"), and Environmental Tax ("ET") for a group of petroleum drawback claims from the turn of the last century. Spoiler: it did but read on anyway.

The issue here is all about timing. Back in the day, meaning prior to 2004, the Court of Appeal for the Federal Circuit held that HMT was not subject to drawback because it was a non-discriminatory tax on harbor usage not sufficiently linked to importation. The same goes for ET. MPF, on the other hand, was held to be subject to drawback. Take a look at Texport Oil Co. v. United States. After the Federal Circuit held this to be the law (and after much consternation in the trade community), Congress amended the law to permit drawback of duties, taxes, and fees due upon importation.

The problem that quickly cropped up is whether people who had pending drawback claims at the time of the change in the law were entitled to drawback on HMT and ET. Many of those pending claims did not include a request that HMT and ET be refunded. After all, the law did not permit the refund, so why make the claim? It seems entirely prudent to have claimed a refund only of duty and MPF.

That is the situation facing the plaintiffs in Flint Hills. Customs processed the claims and did not refund the unclaimed HMT and ET. Why should it, there was no request that it do so? CBP is not obligated to hunt around for the maximum refund available to the claimant. It processes claims based on the documents presented. The claimants protested and argued that they are entitled to drawback on HMT and ET. CBP denied the protests, which then landed in the Court of International Trade.

Plaintiff had a number of very smart, lawyerly, and ultimately unsuccessful argument. First up is the scope of review. Customs’ basic argument for this entire case is that the drawback claims were not "complete" and, therefore, the protests were properly denied. The protests did not say they were denied for being incomplete. According to Plaintiffs, this means CBP accepted the claims as complete and cannot subsequently argue that they were incomplete. Clever.

Unfortunately, challenges to denied protests are not the kind of administrative review that depends on the legal determination CBP made in its decision. The protest is reviewed de novo, which means that the Court figures out what is right on its own. The Court did that here and, following several prior decisions of the Court of Appeals determined that a complete drawback claim states the full amount to be refunded. Having failed to include a claim for HMT and ET, the claimant was not entitled to their refund.

Related to this is an argument that the drawback claim can be complete while also incorrectly stating the amount to be refunded. For support, Plaintiff’s pointed to a Customs and Border Protection ruling that allowed a claim to be processed despite the claimant incorrectly seeking a 100% refund rather than the statutory 99%. Relying on that analysis, the Plaintiffs argued that an incorrect calculation does not constitute an incomplete claim.

Again, the Court was not persuaded. The Court pointed to several decisions defining a complete drawback claim as one that includes a correct calculation of the refund. A customs ruling was not enough to overcome that case law. The fact that the Federal Circuit qualified the leading decision by noting it was not aware of any authority to find otherwise, despite the CBP ruling being available, was not a big enough peg on which to hang that legal hat. [Note: I am conflating a couple arguments here, but they all relate to what constitutes a complete claim.]

Next, Plaintiffs argued that it did not need to make a complete claim within the three years it was originally entitled to make a claim. Under this theory, the claim for HMT and ET did not become available until 2004 when Congress amended the law. That would have given Plaintiffs additional time. Presumably the protest would have been a means to assert the additional claim within the three-year period. This is a good example of basic lawyering. When did the right to a claim accrue? When did the clock run out? Those are always important questions.

This did not work because the amendment said specifically that it applied to new claims and pending unliquidated claims. The Federal Circuit previously interpreted the statute as applying to pending claims that already included a complete claim for HMT and ET. These did not, so they were incomplete.

Finally, for our purposes, Plaintiffs argued that the amendment violated the separation of powers. This, again, is a creative bit of lawyering that was ultimately unsuccessful. The gist is that the Federal Circuit held that HMT was not subject to drawback and that decision was final. When Congress amended the law, it stated that the amendment was not intended to create a new right to drawback but to clarify that HMT was always subject to drawback. According to Plaintiffs, this shows that Congress simply rejected the decision of the judicial branch, overstepping into a judicial role.

This, however, was not a successful argument. Basically, Congress has the power to amend laws in light of judicial decisions with which it disagrees. When it does so, Congress is not ignoring or contravening a judicial decision. Rather, it is changing the law to affect what it considers to be the correct policy. Law is not static. Congress gets to re-write it so long as Congress stays in the lanes set by the Constitution. The Judiciary interprets the laws. Here, Congress wrote a new law and the fact that it effectively overruled a CAFC decision does not make it improper.

Tobacos de Wilson, Inc., et al. v. United States, et al. is an effort to force Customs to apply amended drawback law after the statutory deadline but before Treasury has completed the regulatory process. It is pretty in the weeds but is important to drawback claimants. In the bigger picture, it is a good example of using the Courts to ensure that administrative agencies are meeting congressional mandates for action.

The Trade Facilitation and Trade Enforcement Act of 2015 (known awkwardly as "TFTEA," which is pronounced "tiff-TEE-ah" in my office) made three important changes to the duty drawback law. Those changes, intended to make drawback less cumbersome, include: a change to the standard for substitution manufacturing drawback; a change to the test for commercial interchangeability for substitution unused merchandise drawback; and an expansion of the period for filing drawback claims.

Under the law, Treasury (remember, drawback is all about the money) had two years to pass regulations implementing TFTEA. That two-year period expired on February 24, 2018 without implementing regulations. Apparently, a draft Notice of Proposed Rule Making is been sent to Office of Management of Budget for review. Under the statute, starting February 24, 2018, drawback claimants can elect to proceed under the pre-amendment version or under the TFTEA.

On February 5, 2018, Customs and Border Protection published a Guidance Document (the link goes to Version 3)stating that it would not apply the TFTEA until the pending regulations are fully promulgated. That guidance also included restrictions on drawback not included in the TFTEA. Among those restrictions is the denial of accelerated disposition for TFTEA claims pending the new regulations.

The first question, as is always the case, is whether the Court of International Trade had jurisdiction to hear this challenge to CBP's Guidance Document. The Administrative Procedure Act, 5 USC 702, gives individuals a means to challenge a final agency action. But, it is not a jurisdictional statute. Some other statute must grant the court hearing the case the authority to do so. In this case, jurisdiction is based on 28 USC 1581(i)(4), which gives the Court of International Trade exclusive jurisdiction over "civil actions commenced against the United States, its agencies, or its officers, that arise out of any law of the United States providing for administration and enforcement with respect to, among other things import revenue collection. According to the Court, the Guidance Document, which is an operative statement of CBP policy and details how drawback claims are to be processed, is a final agency action subject to review. Consequently, this case is properly before the CIT.

Thus, under the APA, the question to be resolved is whether the policy stated in the Guidance Document is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law or is without observance of procedure required by law.

Plaintiffs' first and second counts relate the allegation that the Guidance Document illegally limits a claimant's rights to accelerated payment. Accelerated payment of drawback claims is a regulatory provision that does not depend on the drawback statute, either pre- or post-TFTEA. See 19 CFR 191.92. Under the Guidance Document, CBP would continue to grant accelerated payment for claims filed under the old law but would decline accelerated payment for claims filed under TFTEA. According to plaintiffs, this is inconsistent with the regulations, especially 19 CFR 191.0, which states generally that the regulations apply to all drawback claims. Plaintiffs' reading of that makes it applicable to TFTEA claims as well.

The Court of International Trade rejected that argument. According to the Court, TFTEA requires Treasury to determine the calculation methods to be applied to refunds. Those methods will be determined in the regulations. Thus, for claims filed under TFTEA, the law requires a determination as to methodology that has not yet occurred. The regulation, therefore, is inconsistent with the statute and is invalid when applied to a TFTEA claim.

Plaintiffs also challenged two limitations on TFTEA drawback claims: the "first-filed" and "mixed use" rules. The first-filed rule means that the first claim made relating to a line on an entry will dictate the type of drawback available to be applied to the remaining merchandise on the line. This can limit the drawback available to claimants if, for example, some of the merchandise was first claimed on the basis of direct identification. All subsequent claims for that entry line must also be based on the direct identification method. Under the mixed use rule, claimants must identify entry lines that are subject to both pre-TFTEA and TFTEA claims. Under the most recent Guidance Document, CBP will accept these claims, but not process them until the regulations are passed.

Because CBP will not be enforcing these rules until the regulations are in place, the Court found these claims to be moot.

Plaintiffs next argued that the deadline for implementing regulations was mandatory and that the government's failure to comply entitles Plaintiffs to relief. The Court agreed that the deadline in the statute s clear and mandatory. Plaintiffs and other claimants are being deprived of benefits Congress intended to be in place by now. This, according to the Court, is a violation of the law.

The question is what to do about that violation? The Court had already ruled that the plaintiffs do not have a right to accelerated payment under TFTEA. Consequently, it refused to order it. The Court also found that it was not yet necessary to order Treasury to complete the regulatory process by a date certain. Instead, the Court ordered that if the government did not complete the process by July 5, 2018, the Court would consider imposing a deadline. [Note, this opinion was issued on June 29, 2018.] On top of that, the Court noted its willingness, if necessary, to craft further relief to ensure that the benefits of TFTEA are not lost due to administrative delay.

ORIGINALLY POSTED MARCH 22, 2017.
UPDATED APRIL 4, 2017.


The customs implications of space travel have always interested me. NASA has confirmed, at least according to this article, that astronauts have to make customs declarations on returning to earth. It is not exactly clear to me whether that would be the case for an orbital flight that departs the U.S. and returns to the U.S. without an intervening stop at the International Space Station or elsewhere. In fact, the Apollo 11 customs entry seems to have been something of a joke, even if it was "official."

The future is certainly going to be filled with questions about this sort of thing. What will happen, from a customs-perspective, the first time someone starts a commercial asteroid mining operation? Will we need to expand the notion of "country of origin."

The obvious analogy is to ships at sea. Today, the law is clear with respect to fish caught in international waters. According to the Court of International Trade, in a case called Koru North America v. U.S.:

On the high seas, the country of origin of fish is determined by the flag of the catching vessel. Procter & Gamble Mfg. v. United States, 60 Treas. Dec. 356, T.D. 45099 (1931), aff'd, 19 CCPA 415, C.A. D. 3488, cert. denied, 287 U.S. 629, 53 S.Ct. 82, 77 L.Ed. 546 (1932). In international law, a ship on the high seas is considered foreign territory, functionally, "a floating island of the country to which [it] belongs." Thompson v. Lucas, 252 U.S. 358, 361, 40 S.Ct. 353, 64 L.Ed. 612 (1920). See also Robbins (Inc.) v. United States, 47 Treas. Dec. 261, T.D. 40728 (1925) (fish are characterized by their first taking).

That means an asteroid or portion thereof brought to the earth by a U.S.-registered space vessel will have a U.S. country of origin.

The folks who negotiated NAFTA thought this through. According to Article 415 of the Agreement, "goods taken from outer space, provided they are obtained by a Party or a person of a Party and not processed in a non Party" are considered to be "wholly obtained or produced" in North America. For you NAFTA nerds out there, that means they qualify as originating under Preference Criterion A.

What about going the other way? What if I import some fuel and send it out into orbit? Does that constitute exportation for purposes of drawback? That is the question presented in HQ H282698 (Feb. 24, 2017).

The law permits an importer receive drawback on duties, taxes, and fees paid on imported merchandise that it unused in the united stated and then exported or destroyed within five years of importation. There are lots of documentary requirements and procedures that need to be followed to secure drawback, so don't assume that I just explained all the ins and outs to you.

Merchandise is still unused if it has been repacked or subjected to other operations specified in the law. Again, don't try this at home without getting legal advice. In this case, about 66% of the fuel is loaded onto the satellite to power its thrusters in orbit. The remainder is exported from the U.S. According to CBP, transferring the unused propellant to a container for export is repacking and does not constitute use. It is, therefore, eligible for drawback.

The propellant loaded into the satellite is a different story. According to CBP, it is "used at the moment of its injection into a satellite thruster system." It is, therefore, not eligible of "unused merchandise" drawback.

Customs, however, provides a helpful alternative. It is also possible to secure drawback on imported materials used to manufacture goods in the U.S. CBP has previously applied that to parts of a satellite manufactured in the U.S. and exported to China for launch. That export to China was the relevant export for drawback purposes, not the launch into space. But, other rulings had determined that "merchandise assembled into a communications satellite sent into permanent orbit in outer space" is exported for drawback purposes. In this recent ruling, CBP reaffirmed that decision and held that launch to permanent orbit is an exportation for drawback purposes.


UPDATE:

Yesterday was the brokers exam. I had an opportunity to review the questions and I realized this post might be viewed by some as incomplete. So, let me say that I am aware that 19 U.S.C. § 1484a exempts certain items returned from space from entry requirements.

If you took the test, I am referring to Question 39 about whether goods brought into the customs territory of the United States by NASA from space or from a foreign country require an entry. As I read that provision, it applies to items previously launched into space from the customs territory of the United States and which remain in the control of United States persons on United States owned vessels. It does not exempt items obtained in space and brought into the customs territory of the United States nor does it apply to goods that were launched into space from a foreign country and then brought from space to the U.S. I think the question is a bit of a mess. If the goods were obtained in space or launched into space from a foreign country, I think a formal entry is required; probably a type 52 government entry (but I have not checked that). If the goods were launched from the U.S., and the other requirements of the statute are met, no entry would be required.

What happens when an importer pays duties, taxes and fees on imported merchandise which is subsequently destroyed in a fire? Unfortunately, nothing good.

Duty drawback is a statutory mechanism by which 99% of the duties, taxes, and fees paid on entry may be refunded if, within three years of importation, the merchandise is exported or destroyed under Customs' supervision. The merchandise must not have been "used" in the U.S. and the claimant must satisfy the regulatory requirements. See generally 19 USC § 1313(j)(i). As an aside, there are other kinds of drawback for special circumstances including petroleum products, substituted goods, and rejected merchandise.

In HQ H219828 (Aug. 27, 2014), a company called Sarmento Import and Export, Inc., sought drawback on bottles of wine lost in a warehouse fire. To give CBP the opportunity to observe destruction, the regulations require that the claimant submit a Form 7553 at least seven working days prior to the intended destruction date. This gives CBP the opportunity to verify what merchandise was destroyed. CBP need not always do so, but it must be given the opportunity. Of course, there was no prior knowledge that the fire would occur and no intended date of destruction.

The fire occurred on June 6, 2009. In an effort to recoup the duties, taxes, and fees paid on the lost inventory, Sarmento filed a CBP Form 7553 on September 2, 2010, more than a year after the wine was destroyed. As further backup, Sarmento submitted inventory receipts, post-fire photographs, a spreadsheet, and prior customs entries. Most of the company's records were destroyed in the fire.

Sarmento asked CBP to verify the destruction after the fire occurred. Unfortunately, CBP was unable to verify what merchandise had been destroyed. Consequently, CBP could not certify on the 7553 that it had verified the destruction of previously entered merchandise. Sarmento, therefore, was not entitled to drawback.

This is a sad story, but there are a few lessons to be learned.

First, drawback is technical and has detailed requirements. Be careful when making claims to satisfy the statutory and regulatory requirements. There is always the possibility that CBP has over stepped its regulatory authority by mandating some detailed information or other procedural requirement not intended by Congress. But, no one should want to be the claimant who has to fight that fight.

Second, detailed inventory records showing customs entries and the corresponding receipts of merchandise and warehouse location should be maintained and backed up separate from the inventory itself. While there is no way for Sarmento to have filed a timely 7553, Notice of Intent to Destroy, having better records might have given CBP more confidence in the claim. That would not have guaranteed a successful claim, but it would have helped.

Third, think about whether your insurance covers duties, taxes, and fees as well as part of the insured value of your inventory.

I'll look for better news to pass on.