In 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.

What is a Prior Disclosure?

Section 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.

The 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.

To “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.

If 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. 

What happened In Brother?

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.

What the Court Did In Brother

Prior 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.]

After 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?

Provided 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.

Ever 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 for penalties. 

As 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.

If 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 geo@tuttlelaw.com.

George 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.