Request for Internal Advice; Examination of Merchandise; Overage

HQ W547978 December 11, 2001 RR:IT:VA 547978 DCC CATEGORY: VALUATION Field Director Regulatory Audit Division U.S. Customs Service Boston, MA 02222 RE: Request for Internal Advice; Examination of Merchandise; Overage Dear Director: This is in response to your memorandum (AUD-1:RA WBS), dated October 23, 2000, requesting internal advice regarding the determination of transaction value for unreported merchandise. This request originates from a Compliance Assessment conducted by your office of [                           ], or the “Importer,” located in [                                                  ], for the business year ended December 31, 1997. Business proprietary information furnished in connection with your request for internal advice will be accorded confidential treatment. Such information is designated by brackets, and will be redacted from the public version of this letter. FACTS: The present case involves the valuation of unreported merchandise that was discovered during the course of your Compliance Assessment. Your office discovered fives entries that failed to report accurately the quantity of entered merchandise. For each of the five entries, the Importer underreported the quantity of imported shoes. For example, in one entry the Importer declared a quantity 1,704 pairs of shoes. In fact, the quantity of merchandise was 1,728 pairs—a difference of 24 pairs. Apparently, the Importer ordered and paid for the reported quantity of shoes, 1,704 pairs. The underreporting error arose, however, when the seller included 24 extra pairs of shoes in the shipment. For the five entries, the quantity of unreported merchandise ranged from one pair to eighty pairs of shoes. There is no provision in the contract between the seller and the Importer defining which party is responsible for shortages and overages. In addition, according to the Importer, there was no post entry adjustment in the amount paid to the seller for the additional merchandise. ISSUES: Whether the unreported merchandise must be declared and formally classified and appraised; and If yes, what method should be used to appraise the unreported merchandise. LAW AND ANALYSIS: There is no dispute in this case that for unspecified reasons, the importer received a quantity of merchandise greater than the quantity ordered. Pursuant to 19 C.F.R. § 141.4, all merchandise imported into the United States must be entered unless specifically exempted by General Note 18 of the Harmonized Tariff Schedule of the United States (GN 18). Furthermore, 19 U.S.C. § 1499(a)(3) covers the situation in which a package contains articles not specified in the seller’s invoice or the entry. Specifically, if Customs determines that an importer fails to declare any article at the time of entry, and that such failure is not the result of fraudulent intent, Customs will add the value of the article to the entry. The provision states: (3) Unspecified articles If any package contains any article not specified in the invoice or entry and, in the opinion of the Customs Service, the article was omitted from the invoice or entry— * * * (B) without fraudulent intent, the value of the article shall be added to the entry and the duties, fees, and taxes thereon paid accordingly. Because the subject merchandise is not specifically exempted by GN 18, we determine that the unreported overage should have been subject to formal entry. We further determine, pursuant to 19 U.S.C. § 1499(a)(3), that in the absence of any fraudulent intent Customs should have added the value of the unreported merchandise to the entry. Valuation of Unreported Merchandise Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; codified at 19 U.S.C. § 1401a). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the imported merchandise when sold for exportation to the United States.” 19 U.S.C. § 1401a(b)(1). When imported merchandise cannot be appraised based on transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. See 19 U.S.C. § 1401a(c)-(f). The alternative methods of appraisement, in order of preference, are as follows: transaction value of identical or similar merchandise; deductive value; computed value; and the “fallback” method of appraisement. The second appraisement method in order of statutory preference is transaction value of identical and similar merchandise under section 1401a(c). Transaction value of identical or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as the merchandise being appraised. The Importer claims that Customs has no authority to determine the value of the overage by multiplying the quantity of excess merchandise by the per unit value of the merchandise as determined by the reported quantity and value in the entry summary. The Importer further states that under section 1401a, the value of the merchandise may not be determined according to theoretical values. The Importer does not state whether the unreported merchandise should be appraised, and if so, how. Because the quantity of merchandise shipped exceeded the amount the Importer ordered and paid for, there is no transaction value for the unreported merchandise. According to the valuation hierarchy, therefore, the unreported merchandise should be appraised on the basis of the transaction value of identical and similar merchandise. Based on evidence indicating that the unreported merchandise was part of a larger shipment we determine that there were sales of identical or similar merchandise exported to the United States at the same time the subject merchandise was exported. We further find, in accordance with the valuation hierarchy, that the transaction value of identical or similar merchandise is the most appropriate method for determining the value of the unreported merchandise. The information provided indicates that the excess merchandise was the same as the merchandise that was reported. Indeed, there is no indication that the unreported merchandise was distinguishable from the reported merchandise. HOLDING: The importer had an obligation to declare the additional merchandise, file the appropriate entry documents for the merchandise, and pay any duties due. Based upon the evidence presented, we find the transaction value of identical or similar merchandise is the most appropriate method for determining the value of the unreported merchandise. Therefore, the value of the unreported merchandise should be based on the transaction value of the sales of reported merchandise between the seller and the Importer. In cases where there is an unexpected overage or shortage, importers should notify Customs pursuant to 19 U.S.C. § 1499(a)(3) and 19 C.F.R. § 141.4. Furthermore, importers should use one of the available administrative remedies to correct errors in the quantity of merchandise reported at the time of entry. Within the typical 314-day liquidation cycle, Customs allows importers to make amendments to previously filed entry summaries through Supplementary Information Letters (SILs). Under the SIL procedure, all letters must be submitted immediately upon discovery of the error. Alternatively, importers may use the Post Entry Amendment (PEA) procedure. Like the SIL policy, the post entry amendment procedure allows importers to amend entry summaries prior to liquidation. Unlike the SIL procedure, however, the PEA procedure allows importers to report certain amendments on a quarterly basis. Both revenue related and non-revenue related errors may be reported through the PEA procedure. For more detailed information on the PEA procedure see Announcement of a General Program Test Regarding Post-Entry Amendment Processing, 65 Fed. Reg. 70,872 (Nov. 28, 2000). In addition, if appropriate under the circumstances, the prior disclosure procedure under 19 U.S.C. 1592(c)(4) (19 C.F.R. 162.74) is also available. 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, Virginia L. Brown Chief, Value Branch