Money, Money, Who Owes the Money?
Originally published by the Journal of Commerce in November 2017
You receive an invoice from Customs and Border Protection (CBP) for additional duty assessed on an entry. When do you have to pay it? Presumably the answer is within thirty (30) days, but maybe not!
One of the members of the trade bar was recently advised by a CBP employee that CBP is now taking the position that once the duty bill is issued, it is due, and if the importer does not timely pay it, that importer will be put on the sanctions list and be penalized accordingly (more about this sanction later). At first blush, this makes perfect sense, except for the fact a protest had been filed and was still pending.
By way of background, an importer may, of course, file a protest against any of the actions taken by CBP in finalizing or liquidating an entry. Any but routine issues are typically the subject of an Application for Further Review (AFR), meaning the importer wants the protest decided by the attorneys at Regulations & Rulings (R&R). If an AFR is filed, the port is limited in its options.
1) It may grant the protest;
2) It may determine the requirements for an AFR have not been met, articulate its reasoning in the AFR denial issued to the importer, and thereafter decide the protest; or
3) It may review and grant the AFR, and then the Protest/AFR is forwarded to R&R for final determination.
The particulars about protests can be found at 19 U.S.C. 1514 and 19 C.F.R. 174.12 – 174.13 and regarding further review at 19 U.S.C. 1515 and 19 C.F.R. 174.23.
The challenge for CBP is the workload at R&R is so great that it can take literally years to get many claims decided. During that period, interest accrues. When a bill is issued for increased duties, pursuant to 19 U.S.C. 1505(c) and 19 C.F.R. 24.3a(b)(2), interest is charged from when the money should have been paid. Given the length of time it generally takes for AFR/Protests to be decided, that is typically many months. During that period, much can change. As such, CBP remains concerned about getting paid. Yes, an importer is required to have a bond, and the surety is liable to pay to the extent of the bond face amount, but the numbers can become staggering and so exceed the bond amount. The duty could also be due as the result of a penalty (which is also subject to an interest assessment). Either way, you have CBP concerned about getting paid, and the surety concerned about whether the importer will go out of business thereby forcing it to pay.
In a recent conversation with a surety official, the story was shared that one of the surety’s staff spoke with a customs broker who explained to an importer he had no choice, he had to get a bond. That importer called CBP and was told by a CBP official, so long as you pay the duty on time, you don’t need a bond! Obviously, that CBP official forgot about a whole section in the regulations dealing with bonds – 19 C.F.R. part 113. While experienced hands will chuckle that such a boneheaded comment was made, the reality is, with lots of new people at CBP, the same sort of uninformed comment about sanctions may be at play here, but if so, that still leaves the sureties’ position to consider.
The CBP official said he was relying on CSMS 17-000489 issued August 14, 2017 which reads:
This is a reminder that CBP bills for supplemental duties, taxes and fees, or vessel repair duties are due thirty (30) days from the date of the bill. Any bill not paid during this timeframe is delinquent. Please ensure that CBP has the correct address on file in order for you to receive your bill in a timely manner to prevent any delay in the payment of your bill.
If a bill remains unpaid, any balance will be considered delinquent and accrues interest until payment is made in full. All supplemental bills will reference the entry number used to import your goods.
Also, please note that CBP is changing its dunning letter timeframe from 181 days from the date of the bill to 61 days starting September 5, 2017. In addition, if you are scheduled to receive a refund and have a delinquent bill older than 60 days, CBP will divert your refund and apply it to the delinquent bill.
There is nothing in this message which is legally binding, nor for that matter does it address entries under protest. That law remains on the books, and so do the enabling regulations. Equally important, so does case law. In particular, this very issue about when duty increases under protest had to be paid was decided in 1981, see Heraeus-Amersil, Inc. V U.S., 1 C.I.T. 249, 515 F. Supp. 7th, 1981 Ct. Intl. Trade LEXIS 1606 (April 24, 1981). In that case, the importer was presented with six (6) bills and told they had to be paid right away. The company reviewed the entries and determined CBP was correct in regards to the change in value, but not classification. The importer then deposited $61,333.17 for the value change, leaving a balance of $12,250.58 owing. CBP applied the funds to cover the increases on all but one entry and when the importer failed to pay the remaining amount, sanctions action was taken. The importer then brought suit seeking an injunction. The court held:
[While the protest was on file], the increased duties resulting from the [classification change] were not required to be paid, since liquidation, which is the finalization of the entry process, could not be accomplished until the [classification] issue was determined.
Ibid, at 252.
The court went on to grant the injunction request because:
… [the increased] duties are not now due and owing and the importer is not in default. Hence, the application of this regulation is improper and should not be utilized insofar as any sums not paid when a protest has been filed.
Ibid, at 254. The referenced regulations were 19 C.F.R. 142.13(b)(now 142.13(a) and 142.14.
This remains the law today. Until the protest is decided, the liquidation is not final, so there is no legal basis for CBP to demand payment!
As noted, this should be the end of any future demands by CBP, especially given the sanction which can be imposed. 19 C.F.R. 142.26 provides that when amounts due to CBP are delinquent, the importer’s immediate delivery privileges are revoked. Without this sanction, the entry is filed, the goods are released and the entry summary and duty payment are made later. With this sanction, the entry paperwork and duty must be paid in advance and only then is the entry processed. In short, in this day and age of just in time inventory, a sanctioned importer is dead in the water, due to the length of time it takes CBP to process these types of entries and issue release authorization! So, the consequence is quite serious.
Nonetheless, sureties have their own concerns. All too often, once a protest is filed, the surety gets nervous as time passes if the importer will be able to pay when the bill comes due. Obviously it is possible the importer’s protest will be granted, in which case the bill is cancelled and nothing is due. It is also possible the protest is granted but the amount due is reduced, due to a different interpretation by R&R. Regardless, for risk management purposes, the surety only thinks in terms of if the protest is denied. Then the principal plus interest becomes due, and CBP does not generally negotiate when it comes to paying duty.
It is also worth mentioning that sometimes sureties demand collateral at time of bond renewal under a collateral agreement that allows them to apply the collateral to any amounts the surety must pay CBP. Great fun when you are in the middle of a legal dispute with CBP and trying to renew your bond.
What sureties often do when they are nervous about a company’s financial wherewithal is demand payment from the importer under threat of cancelling the bond. The importer is then left in an impossible position. On the one hand, he can pay the surety, but why do that? If you decide to pay, it makes more sense to pay CBP and cut off the interest being assessed. However, do you have to pay at all? The importer does have the option of pointing out to the surety that until the protest is decided, CBP has not exhausted the administration process so as to have finalized the amount due. Plus, thereafter the importer has the option to continue his challenge before the Court of International Trade, but that option does require payment of all sums due prior to filing. The sureties are typically not receptive to such reminders and so, the sad fact is, you could end up in litigation with your surety before a judge that knows nothing about import/export laws or procedures, unless some other resolution is found. Anyone have a suggestion as to what that might be?