Importers face stiffer penalties as Customs adopts harder line on products classification
(Taken from the Journal of Commerce, May 1, 2006)
That nightmarish scenario happened recently to a chestnut importer that had been classifying its product as fresh chestnuts. Customs and Border Protection, however, said they should have been classified as prepared chestnuts. As a result, Customs said, the importer had been paying lower import duties than the required amount.
The chestnut importer was told "to reconstruct all the entries it had submitted over the last five years and tender the higher duties or this could be a negligence case," said Barbara Dawley, an attorney at the Fairfield, Conn. based firm Meeks & Shephard, which specializes in customs and international trade law. "We believe that this is totally abusive of Customs' authority," she told the Coalition of New England Companies for Trade at the group's annual Trade and Transportation Conference last month.
Dawley said an importer of ceiling fans received a similar notice because a Customs import specialist determined that lights attached to the fans should be classified as separate fixtures rather than as parts. "The reason we're so surprised," she said, is that Customs previously has not used the fraud statute - Section 19 of the U.S. Code 1592, but commonly known as 592 - in cases where there was a disagreement over classification.
Dawley declined to identify the importers, but said the notices were filed in different ports. Consequently, it was not certain whether this was a case of import specialists in a single port taking a more aggressive approach to enforcement or whether it was the result of a broad mandate from Customs headquarters.
"These are the only two examples we've seen at our firm, but that's not to say there aren't others out there," Dawley said. She added that the two cases have not yet been settled.
The normal pattern used by Customs when it determines that the importer has been using the wrong classification is for Customs to inform the importer of the correct classification and the amount of duty it should pay.
The importer would then be left with the choice of paying the amount demanded by Customs or filing a protest. In either case, that would be the end of it, according to Patrick Gill, an attorney with the New York based firm Rode & Qualey.
Differences as minute as the amount of stitching in a garment can affect a good's classifications - and therefore the amount of duty the importer owes.
But importers also can be penalized for improper classification even if it does not affect the amount of duty they pay or if the goods are duty-free. That's because product classification determines whether a product is subject to quota, which can vary from country to country. Customs also uses classifications for statistical purposes such as calculating trade balances.
The Customs Modernization Act of 1993 shifted the burden of classification from Customs to the importer. Under the standard of informed compliance, the importer must take reasonable care to ensure that it is using the proper classification, or description, of its merchandise.
If Customs has changed the way it defines informed compliance and reasonable care, it would have to make the trade community aware that it was re-interpreting those sections of customs law covering penalty actions, said Philip Spayd, a retired Customs official who is currently director of Global Trade Systems, a logistics and supply-chain consulting firm based in Boston.
"The key is whether it's just one or two wayward people or a new direction" for Customs, he said. "What would be somewhat remarkable about this is that these laws were never applied to differences in judgment."
Rather than making a distinct and immediate break with precedent, the new, more aggressive approach has been spreading gradually to different ports, Gill said. "It depends on the port of entry," he said. "In some of the sleepier ports where import specialists don't have a lot of work to do, they're more vigilant in this area and are more likely to send misclassification cases to the penalty office."
Gill said he did not know whether Customs headquarters is directing the field offices to take a more aggressive enforcement approach, but said there are Customs publications on reasonable care and informed compliance that would support such activity. "If you're a local import specialist and take it to heart, there's every reason to determine whether penalties should be imposed on top of additional duties," he said. "What Customs is really trying to do is to get importers away from dartboard classification and picking a classification that will give you the most favorable rate of duty."
Ports where such actions are likely to take place include New Orleans, Gulfport, Miss., Memphis, and Texas border ports such as Laredo, he said. Importers of writing materials, wearing apparel and steel products are among those that have been hit with negligence penalties, Gill said. "At the end of the day, you always settle because it's easier than litigating," he said.
Overall, importers who fail to comply with Customs regulations, including classification, are facing increased repercussions, said Suzanne Richer, executive director of Customs & Trade Solutions Inc., a Princeton, N.J.- based consulting firm.
Richer said she had one client who received a notice of action from Customs and complied with it for that particular shipment. But "for future shipments, they went back to the old classification. That's the best way to raise a red flag and invite Customs in for an audit," she said.
Dawley said the bottom line for importers is that Customs is still focused on its traditional commercial responsibilities even though its top priority now is security. "In this new environment, you can lose sight of that," she said. "You must be sure that you're compliant."
Commercial fraud and negligence penalties
The law governing commercial fraud and negligence by importers - 19 U.S. Code 1592 - sets three degrees of culpability for importers that do not use the proper classification:
• Negligence: Failure to exercise reasonable care and competence. Violations result in fines of twice the loss of duties or 20 percent of the value of the goods if they are not subject to quota or if the misclassifications does not affect the amount of duties paid.
• Gross Negligence: Acts done with actual knowledge or wanton disregard for the facts and with indifference or disregard for legal obligations. Violations result in fines of four times the loss of duties or 40 percent of the value of the goods if they are not subject to quota or if the misclassification does not affect the amount of duties paid.
• Fraud: Acts done deliberately with intent to defraud the amount of revenue or otherwise violate the law. Violations result in fines equaling eight times the loss of duties or 80 percent of the value of the goods if they are not subject to quota or if the misclassification does not affect the amount of duties paid.
In cases of prior disclosure, where the importer informs Customs of the violation, either before or without knowledge of the commencement of a formal investigation, substantially reduced penalties will apply. They are as follows:
• In the case of negligence or gross negligence violations, if there is an actual revenue loss (i.e., loss of duties, taxes or fees after Customs already has liquidated the entries as final); the reduced penalty is an amount equal to interest from the date of liquidation until the duties are paid.
• In the case of negligence or gross negligence violations, if there is a potential revenue loss (i.e., loss of duties, taxes or fees prior to Customs liquidation of the entries as final), the penalty is remitted in full.
• In the case of fraud violations, the reduced penalty always equals one times the actual and potential revenue loss (or 10 percent of the dutiable value, if the violation did not affect the assessment of duties).
There is no violation and consequently no penalty if the false or omitted information is solely because of clerical error or factual mistake, unless the error or mistake is part of a pattern of negligent conduct.