HQ 0222460 - Request for Internal Advice Regarding the Civil Aircraft Agreement; Diversion of Merchandise After Duty-Free Entry - United States International Trade Commision Rulings

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HQ 222460

November 8, 1990

ENT-6-01 CO:R:C:E 222460 C

CATEGORY: ENTRY LIQUIDATION

District Director of Customs
U.S. Customs Service
Savannah, Georgia

RE: Request for Internal Advice Regarding the Civil Aircraft Agreement; Diversion of Merchandise After Duty-Free Entry

Dear Sir:

This responds to the referenced request for internal advice, dated June 4, 1990 (CLA-1:SV:C:I:2:LEF).

The facts as we understand them are as follows: Gulfstream Aerospace Corporation (Gulfstream) imports merchandise under the duty-free provision of the Civil Aircraft Agreement (the Agreement), Title VI of the Trade Agreements Act of 1979 (the Act), {601. P.L. 96-39, 93 Stat. 144, 96th Cong., 1st Sess. 1979. Such {601 duty-free entries are contingent upon submission by the importer of a certification, certifying that merchandise 1) is imported for use in civil aircraft, 2) will be used in civil aircraft, and 3) has FAA approval as civil aircraft merchandise. (See General Note 3(c)(iv) of the Harmonized Tariff Schedule of the United States (HTSUS) and 19 CFR 10.183.) Despite the certification, Gulfstream, after duty-free entry, uses imported merchandise for both qualifying and non-qualifying purposes.

Your memorandum posed several questions, most of which are answered below. As noted hereafter, some questions have been referred to other Headquarters offices. These offices have been requested to respond to you directly.

1. Can Gulfstream import merchandise duty-free under {601 and then, subsequent to entry, divert that merchandise to a non-qualifying use without reporting the diversion to
Customs with payment of duty?

The Agreement provided for duty-free entry of qualifying merchandise but only upon the importer's submission of a certification pledging that such merchandise will be used in a qualifying manner. The Agreement does not contain explicit provisions for its enforcement; however, the legislative history is clear and unambiguous that Congress intended the Customs Service to take appropriate action where necessary to protect the revenue: "The Committee expects the Customs Service to monitor closely entries under the amendments under section 601 and, where necessary to protect the revenues, take appropriate action to insure the continuing validity of statements supplied to Customs under the certification requirements." Senate Rpt. No. 96-249, reprinted in 1979 U.S. Code Cong. and Ad. News, 574-75.

On the basis of the foregoing, Customs has interpreted the Agreement to require that an importer of {601 merchandise must maintain records adequate to demonstrate the after-entry continued validity of certifications, including, in this connection, proof of end use sufficient to establish that {601 merchandise was disposed of in a manner consistent with the certification's pledge. (See 222236, dated August 10, 1990, attached.) Section 10.183(e) of the Customs Regulations (19 CFR 10.183(e)) authorizes the district director to monitor and periodically audit these entries, and 19 U.S.C. 1508 generally requires that importers keep records pertaining to the importation of merchandise.

In T.D. 84-109, Customs dropped from proposed regulations a regulatory diversion report requirement (with payment of duty), explaining therein that there is no statutory authority for such a requirement. The Agreement would have to be amended in order for Customs to impose such a requirement. (For example, see 19 CFR 10.84(e) which is based on language in the Automotive Products Trade Act of 1965, Public Law 89-283, 79 Stat. 1016

Despite the removal from final regulations of the proposed diversion report regulation, Customs retained language in the regulations which requires an importer of {601 merchandise merely to notify the district director of any changes that would affect certifications. This language is contained in the recommended text of the blanket certification found in {10.183(d)(2), and it is an essential element of the certification, such that an importer could not choose to draft a certification statement without it. Certainly, the diversion of {601 merchandise to a non-qualifying use would affect the certification. Although the Agreement does not contain explicit language requiring such notice, such a requirement is again sustainable on the basis of Customs obligation to protect the revenue by appropriate action.

Furthermore, under 19 U.S.C. 1485(a)(4), an importer declares under oath that he will notify Customs of any incorrect statements made/submitted in furtherance of an entry of merchandise. (See 19 U.S.C.1485(a)(3)and (4).) This means that when an importer receives information, or becomes aware of the fact, that {601 merchandise will be or has been diverted to a non-qualifying use, he is obligated to report that fact to Customs.

Consequently, we conclude that an importer must notify the district director when {601 merchandise is used in a manner that affects the validity of the certification, as would be the case upon diversion of such merchandise to a non-qualifying use. The district director then, within the means available to him, can pursue the recovery of appropriate duties, resorting to the application of 19 U.S.C. 1592(d) where appropriate. Where evidence suggests that the importer should have known, at the time of entry, that the certification was not valid with respect to all or any of the merchandise, an action based on negligence may be warranted. Where evidence shows that an importer knew that the certification was not valid, as above, an action based on fraud may be warranted. 19 U.S.C. 1592(a).

2.) Can an importer continue to enter merchandise duty-free under {601 when he knows that at least a portion of that merchandise will later be diverted to a non-qualifying use?

The issue raised in this question pertains to the importer's intent at the time of entry. The {601 certification includes the following statements: 1) The merchandise is being imported for use in civil aircraft, and 2) the merchandise will be so used. This represents a statement of intent by the importer that merchandise will be put to the qualifying use. If the importer cannot make a good faith assertion of intent as to all merchandise covered by a certification, then the certification is invalid from the beginning. Note our prior comments on the application of 19 U.S.C. 1592.

An importer who uses imported aircraft merchandise for both qualifying and non-qualifying purposes could maintain two separate inventories. In this way an importer can execute a good faith, valid certification. Alternatively, an importer could have a portion of his plant or place of business designated a bonded warehouse for storage purposes. He could maintain an inventory of aircraft merchandise for either non-qualifying or both purposes, effecting the appropriate entry at the time the merchandise is needed. Fairly accurate assessments could be made as to the kinds and quantities of merchandise that are used for non-qualifying purposes in the course of a year, and this merchandise could be entered either duty-paid or for storage under bond. Where an importer's good faith estimate as to the quantities of merchandise intended for non-qualifying purposes proves inaccurate, he can divert merchandise that was entered, in good faith, duty-free to that non-qualifying use and simply report those facts to Customs.

Either of the foregoing options would resolve the problem that arises when DOD contracts are expected to be expeditiously completed by use of merchandise already on hand. When performance under a DOD contract is to commence, the merchandise can be taken immediately from either duty-paid inventory or bonded storage, or from both places. In any event, the use of any merchandise entered duty-free under {601 in the fulfillment of a DOD contract should be reported to Customs in accordance with {10.183(d)(2). If aircraft merchandise is imported after a DOD contract award, and that imported merchandise will be, or is likely to be, used in the fulfillment of that contract, it cannot be entered duty-free under the {601 provision.

Gulfstream's letter indicates that "it is not economically feasible for a company the size of Gulfstream to maintain discrete stores by program." (See p. 2 of Gulfstream's May 28, 1990 letter.) If this means that Gulfstream could not adopt either of the suggested options, we are constrained to remark that we know of no other alternative by which Gulfstream could continue to import merchandise duty-free under {601. Without a good faith intention, the certification would be invalid.

3.) Can Gulfstream support DOD spares and service requirements with parts imported duty-free under {601 without subsequent payment of duty?

See answer to question #2.

4.) When a used aircraft, formerly entered duty- free under {601, is purchased by Gulfstream, must it be reported to Customs as a diversion when Gulfstream converts it to a non-qualifying use?

No. So long as the aircraft is a bona fide used aircraft, and the transaction is in good faith and not designed to circumvent the Customs laws or regulations, no report need be made. This transaction would not affect the certification because it is too remote from the importation transaction and the related disposition of that imported merchandise under the certification.

Your memorandum raised some questions that had to be submitted to other Headquarters offices. The Office of Trade Operations is considering the question pertaining to reporting requirements - that is, presumedly, the specific procedures for reporting changes that affect certifications, or for implementing, where appropriate, procedures under 19 U.S.C. 1592 in cases of this kind. The General Classification Branch of ORR is considering your question #5, pertaining to the statistical note to Chapter 88 of the HTSUS. As stated, we have asked these offices to respond to you directly.

Gulfstream's letter raised an issue pertaining to duty-free entry certificates issued by the Defense Logistics Agency, DCASR - NY, for emergency war materials. (See question #4, bottom, p.2.) Since the matter in question does not involve such merchandise, we did not address this issue.

Sincerely,

John Durant, Director

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