a landmark decision issued January 2, 2003, the Court of International
Trade, in Brother International Corp. v. United States,
CIT Slip Op. 2003-01, said importers can contest in court the
amount of duties found owing by Customs following a submission
of a prior disclosure. This decision may also have broader implications
for monetary amounts demanded by Customs in connection with Customs
audits, as well.
is a Prior Disclosure?
1592 of Title 19 of the U.S. Code authorizes Customs to assess
civil penalties against importers and others who omit important
information, or submit false or misleading information to Customs
in connection with the filing of a Customs entry. In the case
of negligent or grossly negligent acts, penalties can range from
two to four times the loss of revenue; and extend up to the domestic
value of the merchandise in the case of an intentional violation.
Even violations that don’t involve a loss of revenue can
have a penalty of 20 to 40 % of the value of the merchandise.
provision, however, also includes a provision for self-disclosure.
Under Section 1592, a “prior disclosure” occurs when
a person (or corporation) discloses (usually in writing) to Customs
the circumstances of a violation that occurred as a result of
the false or misleading statements, or omissions, either before,
or without the knowledge of, the commencement of a formal investigation
by Customs. In such cases, the law provides that the merchandise
will not be seized and the monetary penalty will be limited to
either: (a) the interest due on the unpaid duties, in the case
of a negligent or grossly negligent violation; or, (b) one times
the loss of revenue in the case of an intentional violation.
“perfect” the prior disclosure, however, the law requires
that the importer either (a) tender the unpaid amount of duties
based on its own calculation, or (b) tender the unpaid amount
of duties following notice or a demand from Customs of the amount
of any unpaid duties owing.
the importer fails to tender the amount determined owing by Customs,
the prior disclosure is deemed invalid (remember, payment of the
amount is a condition of the disclosure) and Customs is free to
assess penalties in the full amount authorized by the statute.
happened In Brother?
imported rolls of "PET" film, which it sold as refills
for printing cartridges in printers and fax machines. Brother
classified the PET film under three different HTSUS subheadings
with various duty rates. Customs subsequently clarified the classification
of PET film in a letter ruling. As a result of the prior classifications
under three different subheadings and different duty rates, Brother
both overpaid and underpaid duties. To rectify these entries,
Brother sought prior disclosure treatment and requested that Customs
allow it to offset the underpayments against the overpayments,
and voluntarily tendered $29,125.14, which represented the difference
between the amount underpaid and the amount overpaid. Customs
denied the request to offset the underpaid amount with the overpaid
amount and stated that Brother had to tender the remaining amount
of $172,558.79. If Brother did not comply, Customs threatened
to commence an action to recover the remaining amount, plus a
penalty. Brother tendered the remaining amount, but protested
the payment of $172,558.79 under 19 U.S.C. § 1514(a).
Customs rejected the protest on the basis that there was no "protestable
act." Brother filed an action in the Court of International
Trade requesting a refund of its overpayment in duties. Customs
filed a motion to dismiss Brother’s case for lack of jurisdiction.
the Court Did In Brother
to the court’s decision in Brother, the generally
accepted view has been that prior disclosures were voluntary tenders
of unpaid duties by importers to Customs, and as such, were not
reviewable by the court because when a penalty remains only a
possibility, it cannot be considered a charge or exaction. But,
in Brother, the court made a careful examination of the
case law and found that it provided no support for the proposition
that, in the circumstances of a prior disclosure, a charge or
exaction does not exist when the plaintiff pays Customs a specific
amount requested or demanded by Customs. With respect to
the voluntariness of the payments, the court said:
[W]here the circumstances of the payment indicated
a lack of voluntariness, either due to Customs making the request
"under color of official authority" or an imposition
of liability, and where the amount paid is not the product of
a settlement process, the cases support the proposition that the
demand or request may constitute a charge or exaction. [Slip
Op. 2003-01, at page 14.]
examining Customs' letter, the court concluded that it constituted
a "charge" or "exaction" pursuant to 19
U.S.C. § 1514, because it stated, "demand is hereby made
for the balance of the actual loss of revenue . . .." The
letter further threatened that "if the duties requested are
not received within 30 days . . . Customs will initiate action
to recover the duties and full penalties...." Based on Customs’
letter, the court concluded that there was nothing voluntary about
the payment that Customs was demanding, and concluded that Customs'
letter amounted to a "demand for payment under color of official
authority." By categorizing the demand as a "charge
or extraction," it became subject to an administrative protest
under 19 U.S.C. §1514(a)(3). Because Customs’ subsequently
denied the protest, Brother was able to seek judicial review on
the merits of the case before the CIT. It is important to note
that the court did not rule on the merits of Brother’s claim
that it was entitled to offset the underpaid duties with the overpaid
duties. It held only that there was a basis for the court to
hear Brother’s arguments.
Where Does Brother Take Us?
the Court’s decision in Brother International Corp. v.
United States, CIT Slip Op. 2003-01, withstands an appeal,
the decision rebalances the playing field that has been steadily
favoring the Customs Service.
since the passage of the Customs Modernization Act, Customs has
relied heavily on post-import audits to review mistakes made in
the entry and liquidation process, and has collected tens of millions
of dollars in additional revenue as a result of importers "voluntarily"
tendering amounts found owing by Customs Auditors, or through
prior disclosures done in anticipation of an audit. Since the
audits occur months after liquidation has become final, the importer
is cut off from its right to protest the findings or decision.
In short, the traditional rule that liquidation is final and binding
on both importer and government is not true. In actuality, it
is only binding on the importer, and Customs can calculate and
collect additional revenue on the entries under review. Under
Brother International Corp., this game of high-stakes chicken
may be over. If the importer disagrees with the amount of revenue
demanded by Customs during an audit or prior disclosure
proceeding, it can pay the contested amount, and file a protest
under 19 U.S.C. §1514, explaining why the amount demanded by Customs
is incorrect. If Customs denies the protest, the importer can
seek judicial review of the matter without fear that Customs will
attempt to disallow the prior disclosure and include a demand
Customs moves forward in modernizing its approach to revenue collection,
Brother International Corp. promises to be an equalizing
force between importers and Customs. Importers are cautioned,
however, that the court's jurisdiction in Brother is premised
on the finding that Customs demanded additional duties
over and above what the importer calculated it owed, and that
this finding is fact-specific. If the importer makes a truly
"voluntary" payment to Customs, or does not avail itself
of the opportunity to let Customs request or demand the amount
owing (as the statute permits), then the importer might be precluding
itself from judicial review over the matter.
you have any questions or need additional information about Brother
International Corp. v. United States, CIT Slip Op. 2003-01,
prior disclosures or other Customs related matters, please contact
George R. Tuttle, III at (415) 288-0428 or at firstname.lastname@example.org.
R. Tuttle, III, is an attorney with the Law Offices of George
R. Tuttle in San Francisco. The information in this article is
general in nature and is not intended to constitute legal advice
or to create an attorney-client relationship with respect to any
event or occurrence, and may not be considered such.