05-15904. Clarification of the National Customs Automation Program Test Regarding Reconciliation; Latent Defects

AGENCY:

Customs and Border Protection, Homeland Security.

ACTION:

General notice.

SUMMARY:

This document clarifies the Customs and Border Protection Automated Commercial System Reconciliation prototype test by setting forth that the issue of value allowances for alleged latent manufacturing defects made pursuant to 19 CFR 158.12 or any other provision is not among the issues eligible for Reconciliation. Entry summaries cannot be flagged for Reconciliation to account for latent manufacturing defects discovered after importation. All other aspects of the test remain the same as set forth in previously published Federal Register notices.

DATES:

The two-year testing period of this Reconciliation prototype commenced on October 1, 1998, and was extended indefinitely starting October 1, 2000. Applications to participate in the test will be accepted throughout the duration of the test.

ADDRESSES:

Written inquiries regarding participation in the Reconciliation prototype test and/or applications to participate should be addressed to Mr. Richard Wallio or Ms. Marla Bianchetta, Reconciliation Team, Bureau of Customs and Border Protection, 1300 Pennsylvania Ave. NW., Room 5.2A, Washington, DC 20229-0001. Inquiries regarding the test also may be made by e-mail: [e-mail].

FOR FURTHER INFORMATION CONTACT:

Mr. Richard Wallio at [phone] or Ms. Marla Bianchetta at [phone].

SUPPLEMENTARY INFORMATION:

Background

Initially, it is noted that on November 25, 2002, the President signed the Homeland Security Act of 2002, 6 U.S.C. 101 et seq., Public Law 107-296 (the HS Act), establishing the Department of Homeland Security and, under section 403(1) (6 U.S.C. 203(1)), transferring the U.S. Customs Service, including functions of the Secretary of the Treasury relating to the Customs Service, to the new department, effective on March 1, 2003. Also, under the HS Act and the Reorganization Plan Modification for the Department of Homeland Security that was signed on January 30, 2003, the U.S. Customs Service was renamed the Bureau of Customs and Border Protection (CBP). The agency will be referred to by that name in this document, unless reference to the Customs Service (or Customs) is appropriate in a given context.

Reconciliation, a planned component of the National Customs Automation Program (NCAP), as provided for in Title VI (Subtitle B) of the North American Free Trade Agreement Implementation Act (Pub. L. 103-182, 107 State. 2057 (December 8, 1993)), is currently being tested by CBP under the CBP Automated Commercial System (ACS) Prototype Test. Customs initially announced and explained the test in a general notice document published in the Federal Register (63 FR 6257) on February 6, 1998. Clarifications and operational changes were announced in several subsequent Federal Register notices: 63 FR 44303, published on August 18, 1998; 64 FR 39187, published on July 21, 1999; 64 FR 73121, published on December 29, 1999; 66 FR 14619, published on March 13, 2001; 67 FR 61200, published on September 27, 2002; 67 FR 68238, published on November 8, 2002; 69 FR 73730, published on September 2, 2004; and 70 FR 1730, published on January 10, 2005. A Federal Register (65 FR 55326) notice published on September 13, 2000, extended the prototype indefinitely.

For application requirements, see the Federal Register notices published on February 6, 1998, and August 18, 1998. Additional information regarding the test can be found at http://www.customs.gov/​xp/​cgov/​import/​cargo_​summary/​reconciliation/​.

Reconciliation Generally

Reconciliation is the process that allows an importer, at the time an entry summary is filed, to identify undeterminable information (other than that affecting admissibility) to CBP and to provide that outstanding information at a later date. The importer identifies the outstanding information by means of an electronic “flag” which is placed on the entry summary at the time the entry summary is filed. Prior to this clarification, the issues for which an entry summary could be “flagged” (for the purpose of later reconciliation) were limited to: (1) Value issues; (2) classification issues, on a limited basis; (3) issues concerning value aspects of entries filed under heading 9802, Harmonized Tariff Schedule of the United States (HTSUS; 9802 issues); and (4) post-entry claims under 19 U.S.C. 1520(d) for the benefits of the North American Free Trade Agreement (NAFTA) or the United States-Chile Free Trade Agreement (US-CFTA) for merchandise as to which such claims were not made at the time of entry.

Under the test procedure, the flagged entry summary (the underlying entry summary) is liquidated for all aspects of the entry except those issues that were flagged. The means of providing the outstanding information at a later date relative to the flagged issues is through the filing of a Reconciliation entry. Thus, the flagging of an entry summary constitutes the importer's declaration of intent to file a Reconciliation entry. The flagged issues will be liquidated at the time the Reconciliation entry is liquidated. Any adjustments in duties, taxes, and/or fees owed will be made at that time. (The Reconciliation test procedure for making post-entry NAFTA claims is explained in the February 6, 1998, and December 29, 1999, Federal Register notices.)

Reconciliation and Defective Merchandise Claims—19 CFR 158.12

Under § 158.12 of the Customs and Border Protection (CBP) regulations (19 CFR 158.12), importers may request an allowance in value for merchandise found by the port director to be partially damaged at the time of importation. For example, if the port director finds that the imported merchandise contains defective zippers, an allowance in value may be granted to the extent of the defect. Reconciliation is an acceptable method of reporting the change in value if it is known at the time of importation that the merchandise at issue is defective but the extent of the defect is not known. Thus, as in the above example, if the importer does not have sufficient information to determine the extent of the known defect when the entry is filed (e.g. because it is not yet known whether the zippers can be repaired, and if so, the cost of such repairs), the entry can be flagged for Reconciliation. The importer can file a Reconciliation entry once the extent of the known defect is established.

Some importers have requested an allowance in value under § 158.12 for imported merchandise that allegedly contains a latent manufacturing defect. A latent manufacturing defect is a defect that exists at the time of manufacture, and thus at the time of importation, but is invisible, hidden, or concealed. The defect is not discovered until some time later (in many cases, long after importation), usually when a consumer requests a repair under a consumer warranty pertaining to the imported article. The importer's claim for a defective merchandise allowance is generally based on the costs of the warranty repairs. Recently, some of these importers have flagged entry summaries for Reconciliation on the issue of latent manufacturing defects so that information may be submitted after any latent defects are revealed (for example, information regarding the nature of the latent defects, the identity of the defective merchandise, and the extent of the defects based on warranty repair costs or other data). Thus, the question has arisen as to whether these types of claims are value issues eligible for Reconciliation. The purpose of this notice is to clarify that CBP does not consider claims for latent defects value issues eligible for Reconciliation and will not accept Reconciliation entries based on such claims. Because the importer does not know that a latent defect in the merchandise exists at the time of entry summary, the importer cannot flag the entry summary for later resolution through Reconciliation.

CBP notes that the issue of whether these latent defect claims fall within the scope of § 158.12, and if so, the evidence needed to support these claims, is still under review by the courts. There have been several preliminary court rulings on the subject, but several cases addressing these issues are still pending at the Court of International Trade and the Court of Appeals for the Federal Circuit (Volkswagen of America, Inc. v. United States, Court No. 96-01-00132, Court of International Trade; Saab Cars USA Inc. v. United States, Court Nos. 04-1268 and 04-1416, Court of Appeals for the Federal Circuit). Regardless of the final outcome of the court cases, the Reconciliation procedure cannot be used with regard to latent defect claims made pursuant to § 158.12 or any other provision.

Test Clarification

Reconciliation may not be used with respect to claims for value allowances made pursuant to § 158.12 or any other provision based on alleged latent manufacturing defects. Thus, to clarify, the Reconciliation test covers the following issues: (1) Value issues other than claims based on latent manufacturing defects; (2) classification issues, on a limited basis; (3) issues concerning value aspects of entries filed under heading 9802, Harmonized Tariff Schedule of the United States (HTSUS; 9802 issues); and (4) post-entry claims under 19 U.S.C. 1520(d) for the benefits of the North American Free Trade Agreement (NAFTA) or the United States-Chile Free Trade Agreement (US-CFTA) for merchandise as to which such claims were not made at the time of entry. CBP considers this a clarification of the test procedure because CBP never contemplated latent defect claims to be value issues eligible for Reconciliation.

Dated: August 3, 2005.

Denise Crawford,

Acting Assistant Commissioner, Office of Field Operations.