Customs Law Advisory - The More Things Change... Anytime a US Customs Entry is Changed, Consider the Impact on BOTH Future AND Past Shipments

The vast majority of commercial entries of merchandise into the United States are, essentially, only preliminary when filed. That is, each entry is not final until many months later, at "liquidation" of the entry. Understandably, many importers would prefer to believe that, after arranging for correct data in all the import paperwork, supervising (and paying for) the preparation and filing of all documents by the customs broker, and confirming clearance and shipment to the final destination, import compliance is all over. But, in fact, entry filing usually is just the beginning of the process for US Customs and Border Protection (CBP) to examine the importer’s entry declaration. Because of this lag between entry and liquidation, an importer must be alert to any change in the treatment of an entry and consider whether that change needs to be applied -- not only to future entries of the same merchandise, but also to past entries, especially unliquidated entries. Any change in an importer's understanding of the correct entry treatment for its merchandise can create situations where the importer may be eligible for refunds of several months of previously overpaid duties or could be subject to additional duties and penalties for past shipments now understood to contain errors.

A recent decision from the Court of Appeals for the Federal Circuit (CAFC) in the case of Heartland By-Products, Inc. v. United States, serves as an excellent reminder of how new decisions or information can apply to past shipments. See http://www.cafc.uscourts.gov/opinions/08-1245.pdf. In 1995, CBP issued a ruling classifying the sugar syrup that Heartland By-Products (Heartland) planned to import as exempt from high Tariff Rate Quota (TRQ) duties on sugar. In 1999, CBP revoked that ruling and re-classified Heartland’s syrup as subject to TRQ duties. Before the revocation became effective, Heartland filed suit against CBP. The trial court held that CBP's planned revocation was unlawful and declared Heartland’s syrup to be exempt from the TRQ duties. Relying on the trial court decision, Heartland began making entries of syrup. CBP appealed to the CAFC. In 2001, the CAFC reversed the trial court decision and upheld CBP’s application of the TRQ duties.

In a 2009 decision revisiting these events, the CAFC explained its 2001 decision was retroactive. In other words, the court held that the TRQ rate could be applied to any entry for which liquidation had not become final, even if that entry was made in reliance on the trial court decision and before the CAFC’s decision existed. The CAFC noted that, during the period between the two decisions, CBP liquidated some entries at the TRQ rate in violation of the initial court decision. The CAFC ruled that the issue was moot because CBP agreed not to collect TRQ duties on these entries. However, the CAFC indicated that CBP’s failure to comply with the first decision pending appeal was not unlawful. The CAFC stated that, if Heartland really wanted to stop CBP from acting in a manner inconsistent with the first decision, Heartland should have sought an injunction while the appeal was pending.

This CAFC decision demonstrates unmistakably that in the absence of some additional factor (such as an injunction), CBP is fairly free to take action on entries that are already made, but not yet liquidated. This is important for importers to keep in mind and applies even in the absence of any pending court appeal. If an importer realizes that the way in which it has been declaring merchandise needs to be changed (classification, valuation, country of origin -- any aspect), that importer, of course, should take action to make sure entries are made correctly from then on. But, in addition, there may be many months worth of unliquidated, past entries that also were declared in this (now understood to be) incorrect way. Liquidation usually takes about ten months after entry and protests usually may be filed up to six months after liquidation. So if the change means that a lower duty amount should have applied, there may be sixteen months worth of shipments for which refunds may be claimed using a protest. CBP usually will not issue refunds to importers without a protest timely filed.

However, if the change means that additional duties should have been paid, local CBP officials may notice the change in the importer’s practice and apply it retroactively, at least, to all unliquidated entries. In addition, the realization of a past error could cause CBP to begin a penalty case and demand duties and penalties on the past five years of entries that contained the error. Importers can protect themselves from the penalties (but generally must pay the duties) by filing a prior disclosure as soon as the company realizes that it will be making a change in the way it has been declaring its merchandise.

An indication of the need to change how merchandise is declared at entry can arrive in many forms, including rulings and court decisions, as happened to Heartland. Alternatively, the information could be as simple as a notice from the local port personnel or a recommendation from the customs broker. News of a new CBP ruling or a new court decision, even issued to a different company, can suggest a change. Anytime an importer changes the way in which it declares imported merchandise, this means that the importer is essentially admitting that past entry declarations for the same merchandise were in some way incorrect (otherwise, there would be no need for the change). The importer should consider what this admission means for future, and past entries, rather than just making the change on one entry. Thinking about past and future application of a change in practice could lead to substantial duty refunds, or at least, an opportunity for the importer to protect itself from the unpleasant surprise of back duty bills and penalties.

If you have any questions on US Customs or import procedures, please contact: Greg McCue at gmccue@steptoe.com and 202.429.6421.  Special thanks to Chris Falcone for assistance in preparing this article.

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The Lacey Act: Implications for the Forest Products Industry Seminar

On November 13, 2009, Steptoe & Johnson's Greg McCue will present a seminar on “The Lacey Act: Implications for the Forest Products Industry" hosted by the Oregon Wood Innovation Center. This seminar will cover all aspects of compliance with the Lacey Act for wood products importers and traders and will include presentations by government officials and expert advisors. The seminar will be held in Portland, OR and will be accessible on-line. To learn more, click here. 

For Steptoe & Johnson's past advisories on the Lacey Act requirements for importers of wood products, please visit:
http://www.steptoe.com/publications-5608.html and http://www.steptoe.com/publications-5955.html .

For the latest on the Lacey Act requirements from USDA/APHIS, visit: http://www.aphis.usda.gov/plant_health/lacey_act/index.shtml .