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CIT Orders Importer to Pay Duties on Misclassified Imports; Negligence Penalty Still Possible

Thursday, August 06, 2015
Sandler, Travis & Rosenberg Trade Report

The Court of International Trade recently awarded U.S. Customs and Border Protection unpaid duties and pre-judgment interest in a case involving misclassified imports but said more information is needed to determine whether a negligence penalty is due as well.

This case involves various types of plywood that was entered or attempted to be entered under inapplicable duty-free tariff subheadings. The majority of this plywood was properly classified under HTSUS 4412.14.31 (2006) or HTSUS 4412.32.31 (2007), with the remainder correctly classified under HTSUS 4412.13.40 (2006) or 4412.31.40 (2007). All of these subheadings carry an eight percent duty rate.

CBP ultimately liquidated 21 of the entries at a higher duty rate and the remaining 43 entries at the duty-free rate. CBP then issued a penalty notice demanding payment of $120,254 in outstanding duties relating to the latter entries as well as a penalty of $324,540 for negligence. CBP eventually recovered $50,000 from the importer’s surety, leaving $70,254 in duties still owed. After rejecting the importer’s request to mitigate the penalty because it did not have the means to pay, CBP filed this case to recover the outstanding amounts.

The importer concedes that it misclassified the entries at issue and is therefore liable for the unpaid duties. The CIT ordered the importer to pay this amount as well as pre-judgment interest.

However, the court denied CBP’s motion for summary judgment on the negligence penalty because there is a genuine factual issue as to whether the importer exercised reasonable care, citing an assertion by the importer’s co-owner that it used a customs broker to file the entries at issue. CBP responded that there is not “a shred of documentary evidence to demonstrate that [the importer] actually consulted with its broker in a good faith effort to ascertain the correct classification” and argued that the only communications between the two that are evidenced in the record are faxes in which the importer instructed the broker to use one of the inapplicable classifications. The CIT agreed that the faxes do appear to indicate such a request with respect to at least a portion of the entries but said it is unclear why the broker went ahead with the incorrect classifications. There thus remains a genuine issue as to whether the responsibility for the erroneous entries lies solely with the importer or is shared by the broker.

In the event that CBP prevails on the negligence issue at trial, the court states that the penalty should not be waived under the Small Business Regulatory Enforcement Fairness Act because the importer did not pay the duties owed, one of the five conditions a small entity must satisfy to obtain such a waiver. However, the issue of whether the penalty should be mitigated will be decided later, as it will depend on factual findings (e.g., whether the importer exercised reasonable care) that the court cannot make within the summary judgment context.

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