HQ 113979 - Setting bond amounts; continuous bonds; conditionally free merchandise; 19 CFR 113.13; Customs Directives 3510-004 and 3510-005. - United States International Trade Commision Rulings

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HQ 113979

July 2, 1997

BON-2-RR:IT:EC 113979 GG

CATEGORY: BONDS

Ms. Leticia Moran
Port Director
U.S. Customs Service
P.O. Box 3130
Laredo, TX 78044-3130

RE: Setting bond amounts; continuous bonds; conditionally free merchandise; 19 CFR 113.13; Customs Directives 3510-004 and 3510-005.

Dear Ms. Moran:

This is in response to a recent request from Mr. Paul Simoncini of your office for a ruling on issues pertaining to the calculation of continuous bond amounts. Please consider this letter to be internal advice furnished under section 177.11 of the Customs Regulations.

FACTS:

It is the policy of U.S. Customs in the Port of Laredo when setting the amount of Type 1 importer and broker continuous bonds, to take into account estimates of what the duty, taxes and fees would be on conditionally free or reduced duty goods if entered as an ordinary consumption entry. The reason for this is to ensure that the bond is sufficient to cover increased duty demands made on non-originating shipments for which NAFTA status was erroneously claimed at the time of entry. A broker operating in Laredo has challenged this method of arriving at the correct bond amount.

ISSUE:

Whether the bond amount for a Type 1 importer continuous bond should be based on the duties, taxes and fees that would normally accrue on goods when entered as an ordinary consumption entry, in situations where the bond principal routinely enters, or plans to enter, the merchandise on a conditionally free or reduced duty basis.

LAW AND ANALYSIS:

Title 19, United States Code, section 1623, gives the Customs Service broad authority to require a bond or other security. More specifically, 19 U.S.C. ?1499 mandates the posting of a bond prior to the release of merchandise from Customs custody. The bond amount is at the discretion of Customs. Guidelines for determining the appropriate amount of a bond are found in the Customs Regulations and in several Customs Directives (CD's).

The directives issued by Customs provide the most objective criteria by which port directors can set proper bond amounts. CD 099 3510-04,"Monetary Guidelines for Setting Bond Amounts", issued July 23, 1991, and CD 099 3510-005, "Bond Sufficiency", issued May 17, 1993, state, in pertinent part, that the liability limit for Activity Code 1 importer or broker continuous bonds

[S]hall be fixed in an amount the [port] director may deem necessary to accomplish the purpose for which the bond is given. The non-discretionary minimum bond amount is $50,000. To assist in fixing the limit of liability amount, the following formula shall be used:

None to $1,000,000 duties, taxes and fees - the bond limit of liability amount shall be fixed in multiples of $10,000 nearest to 10 percent of all duties, taxes and fees paid by the importer, or broker acting as importer of record, during the previous year but in no case shall be fixed in an amount less than $50,000.

Over $1,000,000 duties, taxes and fees - the bond limit of liability amount shall be fixed in multiples of $100,000 nearest to 10 percent of all duties, taxes and fees paid by an importer, or broker acting as importer of record, during the previous bond year.

... If no imports were made during the preceding calendar year, the bond limit of liability amount will be fixed based on the duties, taxes and fees which the applicant estimates will accrue on imports during the calendar year, provided that the [port] director is satisfied with the accuracy of the estimate. In no event shall the limit of liability amount of any continuous Activity Code 1 bond be less than $50,000.

... However, when little or no duties, taxes and fees are involved and the $50,000 bond minimum is not deemed sufficient, as an option, the bond limit of liability amount may be fixed at one-half of 1 percent of the value of importations made during the previous bond year.

Although port directors have some latitude in setting bond amounts, Customs in CD 099 3510-004 cautions that

The purpose of the bond is to protect the revenue and ensure compliance... However, it is not Customs' intent to require bond amounts which unnecessarily put an excessive burden on a person or firm, or place them in an impossible situation... To require excessive security where it serves no valid purpose places an unnecessary burden on international trade and commerce.

The exercise of judgement and restraint is thus expected in the calculation of bond amounts.

Section 113.13 of the Customs Regulations (19 CFR 113.13) lists criteria which, when read in conjunction with the directives, help Customs determine whether an estimate of future duties is realistic or whether the $50,000 bond minimum on low duty imports is sufficient. These are:

1) The prior record of the principal in timely payment of duties, taxes, and charges with respect to the transaction(s) involving such payments;
2) The prior record of the principal in complying with Customs demands for redelivery, the obligation to hold unexamined merchandise intact, and other requirements relating to enforcement and administration of Customs and other laws and regulations;
3) The value and nature of the merchandise involved in the transaction(s) be secured;
4) The degree and type of supervision that Customs will exercise over the transaction(s);
5) The prior record of the principal in honoring bond commitments, including the payment of liquidated damages; and
6) Any additional information contained in any application for a bond.

These factors make it clear that the prior record of the bond principal in meeting its obligations to Customs weighs heavily in setting bond amounts when established importers and brokers obtain new bonds. In situations involving bond applicants with no history of importing activity, the focus will necessarily be on the nature of the goods to be imported when determining the accuracy of estimated annual duties, taxes and fees.

In setting continuous bond amounts for established importers of conditionally free or reduced duty merchandise who pay little or no duties, it would be erroneous to base the liability limit on duties that would accrue on an ordinary consumption entry. If Customs has reservations about a particular importer because of their past inability to meet commitments to the agency, then the bond amount may be fixed at one-half of 1 percent of the value of importations made during the previous bond year, if this is greater than the $50,000 minimum. For bond applicants new to the business of importing, Customs must decide whether the estimate provided by the prospective importer is realistic. For example, if the estimate is predicated on the goods qualifying under NAFTA, but Customs has reason to believe that they will in fact be non-originating, then basing the bond amount on duties applicable to an ordinary consumption entry would be warranted. If, on the other hand, Customs agrees that the merchandise will be NAFTA eligible, and that duties due will be minimal, then the liability limit should be set according to the conditions described at the beginning of this paragraph. It would be reasonable for Customs to elect the one-half of 1 percent of the value option instead of the $50,000 bond minimum, because the trustworthiness of the importer is as yet untested. The bond amount could be adjusted downward at the time of renewal in the event of satisfactory performance over the previous year.

Finally, Customs always has the option of requiring additional security. When the amount of a continuous bond does not cover the duty on a particular shipment and concern exists that a greater risk to the government is involved, the port director can secure the deposit of the estimated duty due at the time of release, request a single entry bond for that shipment, or request that a new continuous bond in a higher amount be filed.

HOLDING:

The bond amount for continuous bonds used to secure shipments of conditionally free or reduced duty merchandise should be based on the guidelines established by regulation and directive. In ordinary circumstances, the liability limit for bonds covering these types of transactions do not take into account the duties that would have accrued had this merchandise been entered as a regular consumption entry.

Sincerely,

Jerry Laderberg
Acting Chief
Entry and Carrier Rulings Branch

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