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Apparel | Newsletter |
| Claiming Duty Allowances For Damaged Or Defective Merchandise |
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February 24, 2006 How to obtain post-entry relief for duties paid on defective merchandise is a question that comes up frequently, and a recent case, Saab Cars USA, Inc. v. U.S., No. 04-1268,-1416, decided January 17, 2006, by the Court of Appeals for the Federal Circuit provides helpful guidance in this area. Background Typically, imported goods are appraised on the basis of their "transaction value," which is defined as that total price paid or payable by the buyer to the seller for the exportation of the goods to the United States. (The goods will be subject to a different method of valuation if a sale is involved.) This presents a problem, however, if the goods are received in a damaged or defective state, as no one wants to pay duties and fees on defective merchandise based on the full contract value of the goods. One option might be to export the shipment and claim defective goods drawback. This does not, however, take advantage of an immediate reduction in value at the time of entry filing. A viable option to resolve this problem is presented by sections 158.11 and 158.12 of the Customs regulations, which permit importers to receive an allowance for merchandise found by the port director to be totally or partially damaged at the time of importation. Section 158.12(a) provides:
Although relief to importers is clearly provided by this regulation, there are several factors that affect whether Customs will allow a claim for defective merchandise. For example, what burden of proof does the importer bear when making such a claim? What specific evidence does Customs require to support the claim? Does it matter if the damage or defects were discovered immediately after entry at the port or at some later time and place? Is it significant whether or not the importer contracted for defect-free merchandise? Court Interpretation The recent decision in Saab helps to answer these questions. Saab imported cars from Sweden. It purchased cars that it believed were free of all defects. It turned out, however, that a number of the vehicles did have defects, some of which were discovered and repaired at the place of importation and others which were identified later and repaired at the premises of the U.S. dealer. Saab filed a claim asserting that under 19 C.F.R. §158.12, Customs should reduce the declared value to reflect the latent defects existing in the automobiles at the time they were imported. The documents Saab submitted in support of its claim included repair descriptions, repair dates, amounts paid, and documentation regarding the warranty agreement with the supplier. Nonetheless, Customs denied the claims and Saab filed an action in the U.S. Court of International Trade ("CIT"). The CIT allowed Saab's claims for the repairs made at the port immediately after importation on the basis that it was less likely that the problems were caused by "intervening circumstances" after the vehicles left the port for the dealer facilities. The Court reasoned that the immediacy of the repairs after entry reduced the level of detail required in the defect descriptions. However, as to the repairs that occurred later at the dealer facilities, the Court held that the Saab did not submit sufficient information to support the claim that the cars sustained damage prior to their entry into the U.S. Specifically, Saab failed to describe how the particular component was defective and what kind of repair was done. The descriptions provided were not detailed enough for Customs to ascertain whether the alleged defects existed at the time of importation or not. Citing earlier cases, the Court in Saab set forth three requirements for an importer successfully to claim an allowance under Section 158.12. Specifically, the importer must provide evidence:
Saab appealed the decision to the Federal Circuit and that Court affirmed the CIT's rulings, noting that the importer did not meet its burden of proving that the damage that was repaired at the dealer premises existed at the time and place of importation. Conclusion In view of the Saab decision, importers should be aware that if they import merchandise they believe is in perfect condition but later learn is defective, they may file claims and seek a reduction in value under the "defect allowance" provisions of section §158.11 or §158.12. Specific evidence to support the claim, however, will be required by Customs, and the level of documentation required will depend on where and when the damage occurred. The importer will need to show by a preponderance of evidence (more likely than not) that the damage was present at the time the articles were imported, and that is more difficult to do if the damage is not discovered immediately after importation. If the damage is discovered at a location away from the port and not immediately following entry, Customs may require specific and detailed information that the defects claimed were present at the time of importation.
If you have any questions with regard to this newsletter, please do not hesitate to contact George R. Tuttle, III at (415) 288-0428 or geo@tuttlelaw.com, or Gary L. Graff at (415) 986-8780 or glg@tuttlelaw.com. George R. Tuttle, III and Gary L. Graff are attorneys 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 as such. Copyright © 2006 by Tuttle Law Offices. All rights reserved. Information has been obtained from sources believed to be reliable. However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information. |
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