HQ 227631 - Internal Advice; Assessment of Interest on over-claimed drawback refunds; Novacar Chemicals Inc. v. US; 19 U.S.C. 1505(c) - United States International Trade Commision Rulings

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HQ 227631

June 30, 2000

LIQ-13-DRA-1-06
RR:CR:DR 227631 CK

U.S. Customs Service
610 South Canal Street, 9th Floor
Chicago, IL 60607
ATTN: Field Director
Regulatory Audit Division

RE: Internal Advice; Assessment of Interest on over-claimed drawback refunds; Novacar Chemicals Inc. v. US; 19 U.S.C. 1505(c)

Dear Sir:

This is in reply to your request for internal advice dated July 21, 1997. We have considered the issues and facts involved and our decision follows.

FACTS:

The Chicago Field Office of Regulatory Audit concluded a drawback compliance assessment fieldwork for Nichicon America Corporation (Nichicon). The company was granted accelerated payment privileges for its drawback entries from the Port of Chicago. The drawback compliance assessment covered 46 unliquidated claims filed by Nichicon between September 15, 1992 and July 2, 1996 with a total duty drawback refund of approximately 1.6 million.

Regulatory Audit found in the assessment that Nichicon over-claimed $24, 920 in drawback refund on 24 drawback entries as a result of erroneous calculation of duty paid. It also found that Nichicon claimed drawback fund of $341 for export products with were subsequently re-imported and declared as “U.S. Goods Returned” duty free imports under HTSUS subheading 9801. Finally, Regulatory Audit found that Nichicon’s internal controls were inadequate for Customs purposes.

Regulatory Audit found that in the calculation of drawback refund amount, Nichicon used a duty rate of 10% for Harmonized Tariff Schedule of the United States (HTSUS) number 8532, for imported capacitors during 1995, and 1996 when the actual rate of duty paid were 9.8% for 1995 and 9.6% for 1996. Regulatory Audit states that as a result, Nichicon over-claimed $24, 920 in drawback refund on 24 unliquidated drawback entries and was not in compliance with 19 U.S.C. 1313(f), which states the total drawback refund on the imported merchandise shall not exceed 99% of the duties and taxes paid. Regulatory Audit states that the miscalculations occurred due to the failure of Nichicon’s personnel to update the duty rate paid formula in their “duty calc” drawback compilation software package.

As to the issue of U.S. Goods Returned Merchandise, Regulatory Audit states that the company was not in compliance with Customs Regulation 10.3(a) regarding the refund of drawback duty. Regulatory Audit states that this activity occurred due to the lack of knowledge of Customs laws and regulations on the part of Nichicon’s personnel.

Regulatory Audit states that according to 19 U.S.C. 1505(b), interest should be assessed for any excess accelerated payments or overpayment of duty drawback refunds. Regulatory Audit states that, accordingly, interest should be calculated from the date of accelerated payment to the receipt of overpayment of the duty drawback refund.

The Chicago drawback liquidation office, in contrast, does not believe interest on the over-claimed drawback amount is owed. Nichicon has tendered the over-claimed duties, including interest.

ISSUE:

Is interest owed on over-claimed drawback amounts?

LAW AND ANALYSIS:

The interest provision is found at 19 U.S.C. 1505(c), which states in pertinent part, “Interest assessed due to an underpayment of duties, fees, or interest shall accrue, at a rate determined by the Secretary, from the date the importer of record is required to deposit estimated duties, fees, and interest to the date of liquidation or reliquidation of the applicable entry or reconciliation. Interest on excess moneys deposited shall accrue, at a rate determined by the Secretary, from the date the importer of record deposits estimated duties, fees, and interest or, in a case in which a claim is made under section 1520(d) of this title, from the date on which such claim is made, to the date of liquidation or reliquidation of the applicable entry or reconciliation.” (emphasis added)

Therefore, as a condition precedent to whether interest is owed is whether there has been an underpayment of duties, fees, or interest.

The Court of Appeals for the Federal Circuit in Novacor Chemicals, Inc. v. United States, 171 F.3d 1376 (1999) held that “increased or additional duties are imposed only when the amount of duties at liquidation exceeds the estimated duties on entry and thus, the deposit of duties is insufficient to cover the final liability. In drawbacks, the amount of import duty assessed does not change; the entire duty, minus a 1% administrative fee, is refunded upon export of the imported goods (or export of a more finished article manufactured from the imported goods.)”

In Novacor, the Plaintiff imported shipments of styrene monomer and upon subsequent export of certain shipments of the styrene, filed drawback entries seeking to recover the import duties paid on these shipments pursuant to 19 U.S.C. 1313. Customs paid Plaintiff an accelerated payment of over $400,000. Customs subsequently liquidated these entries and denied Plaintiff’s claims for drawback of its duties. Customs then billed Plaintiff demanding that it pay “supplemental duties,” in the amount of the drawback Plaintiff had received. These bills expressly stated that interest would accrue to the government if Plaintiff did not promptly pay the amounts demanded, as provided in 19 U.S.C. 1505(c). Plaintiff promptly paid the amount sought, and filed timely administrative protests of the denial of the drawback.

Customs had denied Plaintiff’s drawback claims based on C.S.D. 87-6, 21 Cust. B. & Dec. 365, 366-67 (1987), where an importer was denied drawback on products that it did not own at the time of export. However, the C.S.D. was invalidated by the Court of International Trade in Central Soya Co. v. United States, 15 C.I.T. 105, 761 F. Supp. 133 (1991), aff’d, 953 F.2d 630 (Fed. Cir. 1992).

Pursuant to the affirmed judgement in Central Soya, on May 14, 1993, Customs granted Plaintiff’s protest, reliquidated the entries, allowed drawback, and paid Plaintiff the amount Customs had required Plaintiff to pay at the initial liquidation in 1988. Customs did not pay interest on the amount of drawback it paid Plaintiff, who in turn filed protests, which were denied. Plaintiff brought suit seeking interest in the Court of International Trade. The Court of International Trade granted Plaintiff’s motion for summary judgment and denied the government’s motion, which is the subject of the appeal to the Court of Appeals.

The court stated that the dispositive issue is whether Plaintiff is entitled to interest on duty drawback erroneously reclaimed and held by Customs for almost five years. The court stated that it agreed with the Court of International Trade’s reading of section 1505(c) and 1520(d) (1988) to provide unambiguously for interest on any refund upon reliquidation of the increased portion of any regular duties. However, the court did not agree with the Court of International Trade’s determination that duties once drawn back and then reclaimed upon liquidation by Customs constitutes “increase” in regular duties. The Court of International Trade based on this reading determined that Plaintiff was entitled to interest.

The government appealed the Court of International Trade’s decision arguing that section 1520(d) does not expressly provide for payment of interest on a duty drawback and there is no waiver of sovereign immunity for interest in this situation. Plaintiff cross-appealed from that judgment to the extent that the court rejected Plaintiff’s alternate theory of recovery that it was entitled to interest under the 1993 amendments to the Customs Act of 1930, 19 U.S.C. 1505(b) and (c), enacted by the Customs Modernization Act of 1993.

Plaintiff’s main argument against the government appeal was that the drawback, which Customs first granted but then required it to return only to refund it to Plaintiff qualifies as “increased or additional duties” as described in 19 U.S.C. 1520(d). The court stated that if the drawback so qualifies, then it agrees that Customs is required to pay interest. The court then looks to the definitions of “increased duties” and “additional duties”. Increased duties are defined as the difference between the estimated duties paid upon entry and any increase of regular duties in the liquidated duties as determined by the collector. Additional duties are defined as those, which are assessed in addition to the regular duties accruing under the law.

The court then stated that in 1988 Plaintiff filed for and received accelerated drawback treatment after it had paid the estimated duties on the entries. After liquidation Customs determined that the entries did not qualify for drawback. The bills sent by Customs to Plaintiff each had the heading “supple duty.” Supple duty, undisputed by the parties means, supplemental duty.

The court then found the only place “supplemental duty” arises in the regulations is in 19 CFR 24.3, which states in parenthesis, additional duties assessed upon liquidation or reliquidation. The court agreed with Customs as to the meaning of the parenthetical, that is an illustrative example. The court concluded that no definition is provided by the parenthetical for the term supplemental duty. The court then states, “we must conclude that there exist ‘supplemental duties’ which are not ‘additional duties’ (e.g., the instant case) and, therefore, use of the term on the bills sent to Novacor can hardly entitled Novacor to interest. In any event, customs cannot multiply the classes of refunds for which Congress has authorized payment of interest.” Id at 1381.

The court then stated that the language of the statute authorizing payment of interest to imports says interest shall be allowed on any amount paid as “increased or additional duties’ and later refunded. The court stated that there is no specific reference to duty drawback found in the interest statute. The court disagreed with the Court of International Trade which found that nothing in the statute limits the term “increased duties,” when it granted interest to Plaintiff. The court instead stated that the test as to whether there has been a waiver of sovereign immunity was articulated by the Supreme Court in Lane v. Pena, 518 U.S. 187 (1996), which is “ ‘a waiver of the Federal Government’s sovereign immunity must be unequivocally expressed in statutory text and will not be implied.’” Id.

The court found that the express language of the interest statute covers only “any amount paid as an increased or additional duties.” The court also stated that the statutory text does not unequivocally provide for interest for refunds of reclaimed duty drawback, nor is drawback ever mentioned in the text. The court then concluded, “We must strictly construe the statute, for we may not imply a waiver. Therefore, we conclude that the term ‘increased or additional duties’ does not expressly cover duty drawback, there has been no waiver of sovereign immunity and the government is not liable for interest here.” Id at 1382.

Finally, the court found that the Modernization Act does not include a clause making it retroactive, and therefore it did not apply to the drawback at issue here.

Following the Court of Appeals’ analysis and decision in Novocar, drawback amounts, whether over-claimed or not, are not additional duties, nor are they duties at all. Therefore, as section 1505(c) calls for interest on the underpayment of duties, fees, or interest, the over-claiming of drawback does not fall within that statute since the court in Novocar found that drawback amounts are not duties.

Additionally, the Customs Regulations regarding the bond requirements for repayment of erroneous drawback payment are found in section 113.65. Section 113.65(b) contains the agreement in regards to accelerated payment, and states in pertinent part, “If the principal receives an accelerated payment of drawback based on the principal’s calculation of the drawback claim, the principal and surety, jointly and severally agree to refund on demand the full amount of any overpayment, as determined on liquidation of the drawback claim.”

Additionally, there are two Headquarters Rulings based on two protests which discuss the liability of an importer for the over-claiming of drawback. HQ 225601, dated August 7, 1995, and HQ 226585, dated June 25, 1997, both state, “Liquidation is the final determination by Customs whether drawback of duties are due on the basis of the drawback contract and the complete drawback claim. See 19 C.F.R. §191.71(d). Payment is either allowed or disallowed at this time. With the accelerated payment procedure, the claimant has use of the money up-front while Customs has the three year period to verify the claim. The ‘accelerated drawback program is not a guarantee that the government will not come back seeking a refund if, for example, an audit reveals that the company did not comply with the Customs regulations and statute.’ HQ 223235, dated June 19, 1992.”

It is important to note that section 113.65, nor the two Headquarters Rulings discuss, or even mention if interest is due based on the over-claiming of drawback.

The Court of Appeals in Novocar determined that drawback amounts are not duties, and therefore, interest is not provided for in section 1505(c), as that section allows for interest on the underpayment of duties, fees, and interest. Additionally, section 113.65(b) of the regulations regarding the liability of an importer and surety for the over-claiming and payment of drawback with accelerated payment is silent regarding the collection of interest. Therefore, there is no statutory or regulatory provision by which Customs may collect interest due to the over-claiming and payment of drawback.

HOLDING:

There is no statutory or regulatory provision by which Customs may collect interest due to the over-claiming and payment of drawback.

You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

John Durant, Director

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