HQ 227217 - Application for Further Review of Protest No. 2704-96-10193; 19 U.S.C. ?1313(b); Liquidation of drawback entries; Denial of drawback; Verification of drawback claims; 19 U.S.C. ?1508(c)(3); 19 CFR 191.5; Equal protection; Fifth Amendment - United States International Trade Commision Rulings

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HQ 227217

April 7, 1997

DRA-1-06/DRA-2-01-RR:IT:EC 227217 IOR

CATEGORY: DRAWBACK

Port Director
U.S. Customs Service
300 South Ferry Street
Terminal Island CA 90731

Attn: Drawback Branch

RE: Application for Further Review of Protest No. 2704-96-10193; 19 U.S.C. ?1313(b); Liquidation of drawback entries; Denial of drawback; Verification of drawback claims; 19 U.S.C. ?1508(c)(3); 19 CFR 191.5; Equal protection; Fifth Amendment

Dear Sir or Madam:

The above-referenced protest was forwarded to this office for further review. We have considered the facts and issues raised, and our decision follows. The subject protest only raises the issues relating to the initiation of verification of drawback claims more than three years after payment of drawback, and does not challenge the findings of the audit. The protest review is limited to the issues raised by the protestant.

FACTS:

The protest involves 24 drawback entries (claims) filed under 19 U.S.C. ?1313(b), substitution manufacturing drawback. All but one of the claims were filed from October, 1986 to August, 1990, under the accelerated drawback payment procedure. The one remaining claim, entry no. 110-xxxx687-7, was filed on August 19, 1991, and was paid at liquidation which occurred on April 5, 1996. The Regulatory Audit Division, Pacific Field Office, conducted an audit beginning on May 17, 1994, of 55 unliquidated substitution manufacturing drawback claims involving dehydrated onions and garlic and raw garlic, and issued its report on July 19, 1995, recommending that the drawback liquidator disallow $1,258,815.48 of $3,057,825.36 claimed in drawback refunds.

From March 15, 1996 through May 10, 1996, the Customs Service liquidated all of the subject 24 entries at lesser amounts than claimed. Protestant timely filed a protest under 19 U.S.C. ?1514 on June 13, 1996, challenging the denial of $385,944.74 in drawback ( from the review of the file, there appears to be a $2521.42 discrepancy in protestant's figure of $383,423.32).

The audit report concluded that 1) a portion of the total drawback claims is ineligible because the exports were produced from materials that were not of the same kind and/ or quality as the designated imports, and 2) a portion of the total drawback claim is ineligible because the designated import was not used in production. In addition, according to the drawback claims, Customs found that 1) $250.82 of the subject claims is overstated due to an error in the computation of the duty rate per unit; 2) for $7695.17 of the subject claims, the exports were designated twice; 3) for $226.84 of the subject claims, the import was designated twice; 4) one claim was overstated by $2541.42 because the subject import entries were reliquidated for refunds; and 5) an additional $187.22 was overstated due to an error in the computation of the duty rate per unit found upon liquidation.

ISSUES:

Whether an audit by Customs and any subsequent denial of drawback occurring more than three years from the date of accelerated payment of a claim is illegal, null, and void as claimants are not required to maintain records beyond the three year period after payment of drawback?

LAW AND ANALYSIS:

Recordkeeping requirements for drawback are set forth in 19 U.S.C. ?1508(c)(3), as amended by sections 205(a)(2) and 614(2) of Public Law 103-82 of December 8, 1993, and provides that "records for any drawback claim shall be kept until the 3rd anniversary of the date of payment of the claim." Customs Regulations 191.5 (19 CFR 191.5) (incorrectly cited by protestant as 19 CFR 191.95), provide for the retention of records:

All records required to be kept by the manufacturer or producer under this part with respect to drawback claims, and records kept by others to complement the records of the manufacturer or producer..., shall be retained for at least 3 years after payment of such claims.

As stated in HQ 222038, dated April 22, 1991, the origins of 19 CFR 191.5 trace back to 1932 when it was suggested that the sworn statements required in drawback cases contain an agreement that manufacturers' records be made permanent and that they be held intact until authorization for their destruction had been obtained from the Secretary of the Treasury. It was decided that it would be desirable to include such a requirement, with modifications, in the sworn statements (Bureau Letter #113377 of December 22, 1932). However, it was modified so that instead of requiring that the records be retained permanently or until their destruction was authorized by the Secretary of the Treasury, it would be sufficient to prescribe a requirement in the sworn statement whereby it was agreed that the necessary records, together with their supporting documents, be maintained for a period of not less than three years from the date of payment of the drawback involved. Through the years this has remained the position of Customs under the current regulation, 19 CFR 191.5.

Prior to the amendment of 19 U.S.C. ?1508, which added the current language in (c)(3) providing for the retention of records, Customs has considered the question of whether drawback may be denied whenever records requested by Customs are not retained for three years after payment of a drawback claim.

In HQ 222038, Customs stated that 19 CFR 191.5, requires that all records shall be retained for at least three years after payment of such claims. This office stated that if the records are destroyed or lost for whatever reason (i.e., fire, too burdensome to retain the records, etc.), Customs cannot deny drawback solely because these records could not be produced, "however, a basis for drawback must exist and it is the responsibility of the claimant to offer the necessary proof." HQ 222038 concerned drawback claims, for some of which the claimant refused to provide records for verification on the grounds that the claims had been paid for over three years. The audit report disclosed that the claims for which records were made available, were not substantiated by such records, and there was no evidence that more complete and adequate records had ever existed. Customs held that 19 CFR 191.5 does not automatically entitle a claimant to drawback just because the three year time period has passed, and where the auditors found no evidence of entitlement to drawback in any of the claims, the burden of proof shifted to the claimant to prove that he was entitled to drawback. Customs held that the Customs auditors' request, to see the claimant's existing and available records where the sample audit showed no evidence of entitlement to drawback, was reasonable even though the three year time period under 19 CFR 191.5 had expired.

In HQ 223235, dated June 19, 1992, Customs specifically stated that there is no time limit under the drawback statute or Customs regulations within which an audit of a drawback claim must take place, however, records verifying a manufacture are required to be retained for at least three years after payment of the drawback claims. In that case, 15 of 64 unliquidated claims were outside of the three year record retention requirement, and those 15 claims were not included in the audit. However, the audit results were applied to the drawback claims not included in the audit. Drawback was not denied because of a failure to maintain or provide records, but because representative samples of other claims showed non-compliance with the drawback law and regulations.

Customs position taken in HQ 222038 and 223235 has been stated again in HQ 222494, dated February 14, 1996. In addition, in HQ 222494, we set forth that when an examination of records made available to Customs reflects system-wide deficiencies in a claimant's drawback program, the burden of proof shifts to the claimant. In such a case, if records are not made available to Customs, even after the three year period has passed, Customs has no choice but to deny drawback.

The facts presented are similar to those in HQ 222038 and HQ 223235, in that according to the audit the drawback claims were not substantiated by the records made available. In HQ 222038 drawback was not denied because the claimant refused to provide records for claims that had been paid for over three years, but because the drawback claims for which records were made available were not substantiated by such records. In the instant case, audit of the records which were provided to Customs indicate that portions of the drawback claims should be disallowed.

The protestant takes the position that the amendment of 19 U.S.C. ?1508 to include the language in (c)(3), establishes that Congress did not authorize Customs to initiate verification of a drawback claim at a time exceeding three years from the date of payment, even though the records relating to such claims may be available, and that an audit and subsequent billing which occurred after three years from the date of accelerated payment of the claims is illegal, null and void. In support of its position, the protestant cites the legislative history of the amendment of section 1508 and 19 U.S.C. ?1313(r), as amended by section 632(a)(7) of P.L. 103-82, which provides:

(r) Filing drawback claims

(1) A drawback entry and all documents necessary to complete a drawback claim, including those issued by the Customs Service, shall be filed or applied for, as applicable, within 3 years after the date of exportation or destruction of the articles on which drawback is claimed, except that any landing certificate required by regulation shall be filed within the time limit prescribed in such regulation. Claims not completed within the 3-year period shall be considered abandoned. No extension will be granted unless it is established that the Customs Service was responsible for the untimely filing.

(2) A drawback entry for refund filed pursuant to any subsection of this section shall be deemed filed pursuant to any other subsection of this section should it be determined that drawback is not allowable under the entry as originally filed but is allowable under such other subsection.

We do not believe section 1313(r) is relevant to this analysis as it addresses only the filing requirements for drawback claims and does not address the recordkeeping requirements or any limitation on verification of a claim. While House Report 103-361, on section 632 of P.L. 103-82, does state that " by virtue of changes elsewhere in this subtitle (i.e., the recordkeeping provisions) the Committee understands that Customs would have 3 years from the date of payment of a claim to initiate verification of that claim", the statement is made "with respect to the filing period" and does not state a limitation of time on the verification of a claim. As the statement references the recordkeeping provisions, which require that records be kept for three years, it is reasonable that Customs has three years from the date of payment in which to initiate the verification of a drawback claim. However, nothing in the legislative history or statute precludes Customs from initiating a verification after three years after payment have passed. Further, we do not agree that the amendment of 19 U.S.C. ?1508 changed Customs position with regard to verification of drawback claims. The amendment served to codify what has been Customs longstanding position as reflected in 19 CFR 191.5, and prior Headquarters decisions. The legislative history contained in House Report 103-361, on section 614 of P.L. 103-82 is as follows:

These amendments will clarify the recordkeeping requirements for the importing community, close existing loopholes, and update the statute by bringing records made or retained by electronic means within the purview of the recordkeeping requirements.

It is the Committee's intent that Custom's recordkeeping requirement and examination authority is limited to those records which are referenced in the statute. The Committee emphasizes that Customs is not authorized to exceed its statutory authority in making "fishing expeditions" when requiring importers to maintain records and produce them for audit or inspection. It is the Committee's belief that the stipulation in section 615 of those records required to be produced for Customs upon request should restrict significantly potential for abuse.

The foregoing, by referring to "fishing expeditions," appears to address the type of records to be examined by Customs, as opposed to the time in which Customs may examine the records. In reading the legislative history, its meaning should be examined in the context of the statute section to which it relates. The statute, section 1508, describes the records that must be made, kept and rendered for examination, and the length of time for which they must be kept. In no way does the subject statute section impose any time limitation on Customs verification of such records, and such limitation cannot be "read into" the legislative history. On this basis we also conclude that the amended statute does not "overrule" HQ 223235.

The protestant takes the position that "the assessment of duties on entries which are the subject of audit on which payment has been made, and for which a demand for additional duties has been issued on liquidation of the entries after three years from the date of payment contravenes the Equal protection Clause of the U.S. Constitution." First of all, the protestant is misstating the facts. The protestant has not been assessed any duties, but has been refused a refund of duties. The distinction is in the applicable statute and regulations. Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (Chrysler Motors Corp. v. United States, 14 CIT 807, 816, 755 F. Supp. 388, aff'd, 945 F.2d 1187 (Fed. Cir. 1991), in which the Court stated: "The Supreme Court held in Swan & Finch Co. v. United States, 190 U.S. 143, 146 (1903) that the right to drawback is a privilege granted by the government and any doubt as to the construction of the statute must be resolved in favor of the government. ... Over the years, the courts have held that the allowance of drawback is a privilege and compliance with the regulations is a prerequisite to securing it where the regulations are authorized and reasonable"; see also, United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675 (1976); Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) "We are dealing [in discussing drawback] instead with an exemption from duty, a statutory privilege due only when the enumerated conditions are met").

The protestant believes that refusal to pay drawback based upon an audit which occurred beyond the three year period after the date of accelerated payment results in two classes of importers: those who maintain the records for audits initiated after the three year period, and those who have disposed of their records for which no "demand for duties" can be made under 19 CFR 191.5 and 19 U.S.C. ?1508(c)(3). It is not clear, but apparently the protestant is of the belief that the class of persons who maintain records after the three year period risk denial of drawback if a claim is not supported by retained records, and the class of persons who dispose of their records will not be denied drawback. Thus, "similarly situated" parties will receive different treatment. The protestant's argument fails at this point, even without addressing the equal protection issue raised. In the event no records were maintained after the three year period, Customs would not allow drawback simply because the three year period had passed, but would require some basis upon which to allow drawback. This is clear from Customs decision in HQ 222038, in which we stated that 19 CFR 191.5 does not automatically entitle a claimant to drawback just because the three year period has passed. Therefore, there are no separate classes.

The equal protection component of the Due Process Clause of the Fifth Amendment of the U.S. Constitution provides:

No person shall ...be deprived of life, liberty, or property without due process of law....

In Cook v. Babbitt, 819 F.Supp. 1, 11 (D. DC 1993), cited by the protestant, the court stated that "[i]n essence, the guarantee of equal protection of the laws' requires that similarly situated persons be treated similarly", citing City of Cleburne v. Cleburne Living Center, Inc., 473 U.S. 432, 439, 105 S.Ct. 3249, 87 L.Ed.2d 313 (1985). The court in Cook, went on to state that "legislative and regulatory classifications enjoy a strong presumption of validity" and to rebut the presumption, "a challenger must demonstrate that the classification does not have any conceivable "rational relationship' to a legitimate state end'." In this case, the protestant has failed to allege or demonstrate anything to rebut the presumption. We do not find that the protestant has substantiated its argument based on the Fifth Amendment.

Based on the foregoing the protest should be denied in full. Notwithstanding the foregoing, the subject protest should be denied in full with respect to entry no. 110-xxxx687-7, as it was paid at liquidation, on April 5, 1996. Therefore no grounds for protest have even been stated with respect to that entry, as it was paid after the Customs verification of records took place, and the three year time limit argument cannot be made. Similarly, the protest would also be denied in full with respect to the $10,901.47 of drawback denied due to discrepancies evident from the claims themselves, and not based on verification of company records.

HOLDING:

In the facts presented in this case, an audit by Customs and subsequent denial of drawback, both occurring more than three years from the date of accelerated payment of a claim is a valid action on the part of Customs, and is not rendered void because the audit took place more than three years after the date of accelerated payment.

Consistent with the decision set forth above, you are hereby directed to deny the subject protest. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

Director,

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