Many importers are faced with a common dilemma when choosing whether or not to file a prior disclosure.  Namely, sometimes it is unclear whether a violation of Customs law has occurred because the issue at stake has not been definitively decided by Customs, the Court of International Trade, or another authority (or the importer disagrees with the current authority). However, if an importer does not disclose a potential violation, Customs can seek penalties under 19 USC § 1592 based on their own determination.  Furthermore, if an importer tenders duties pursuant to a prior disclosure, there is no formal mechanism for recovering the overpaid duties.  Thus, importers confront the risk of overpaying duties they cannot recover, or paying fines and penalties, even where there is a reasonable disagreement between the importer and Customs on the issue.  Luckily, importers filing prior disclosures can request an informal and discretionary procedure, where Customs holds duties in dispute in a “suspense account.”  Under this procedure, Customs refunds overpaid duties should the issue be decided in the importer’s favor.

Protests, Refunds, and Prior Disclosures

19 USC § 1514 provides that any mistake adverse to the importer as to all charges or exactions within the jurisdiction of the Secretary of the Treasury shall be final and conclusive upon all persons unless a protest is filed, or a refund is authorized under §1520.

19 USC § 1520 provides that the Secretary of the Treasury is authorized to refund duties in the following cases:

  1. Excess deposits when it is ascertained on liquidation, or re-liquidation, that more money was deposited or paid than required by law;
  2. Fees, charges, and exactions when it is determined that they were erroneously or excessively collected;
  3. Fines, penalties, and forfeitures whenever money has been deposited in the Treasury on account of a fine, penalty, or forfeiture, which did not accrue, or accrued in an amount less than that deposited;
  4. Prior to liquidation, when an importer of record declares, or it is ascertained excess duties, fees, charges, or exaction were paid.

Case law on the issue supports the position that neither §1514 nor §1520 authorizes Customs to refund duties paid voluntarily that are deposited with the Treasury.  In Carlinsgwitch, Inc. v. United States, 500 F. Supp. 223 (Ct. Int’l Trade 1980), the Court of International Trade (CIT) dismissed a case for lack of jurisdiction where an importer sought to recover duties paid as a result of a prior disclosure.  The importer in the case had imported switches manufactured in Mexico with U.S. origin components.  Customs initiated a §1592 investigation against the importer for undervaluing the switches.  Prior to receiving any demand from Customs, the importer filed a prior disclosure and tendered a total of $91,992.35 to Customs.  After completing their investigation, Customs demanded $7,926,778 as forfeiture value partly on the basis of the undervaluation of the merchandise.  Customs later remitted the forfeiture in its entirety because the Statute of Limitations had run.  The importer then filed a protest to recover the $91,992.35 it had voluntarily paid to Customs.  The CIT determined that they lacked jurisdiction as there was not a cause of action to recover voluntary payments to Customs as the law only allows recovery of “exactions,” which are payments demanded by Customs.

Later case law, such as Brother International Corp., further clarified when a “charge” or “exaction” takes place, which can occur in the context of a prior disclosure, depending on the facts.  However, the general proposition remains that if an importer tenders payments to Customs voluntarily, there is no legal mechanism to protest overpayments or receive refunds.

One situation where this can be problematic for importers is when an importer has been importing merchandise under a classification that is the subject of a protest.  To avoid the possibility that Customs penalizes the importer in the case that the protest decision is unfavorable, an importer may assume their classification of the merchandise is incorrect for purposes of the prior disclosure, and tender duties under a less favorable classification (i.e., a classification subject to a higher duty rate).  However, if the protest final decision later affirms the importer’s original classification of the item, the importer would want to seek a refund of those voluntary payments from Customs. Although the law does not provide a remedy for importers in this circumstance, CBP has a discretionary and informal procedure to address the issue.

“Suspense Accounts”

It’s possible that Customs recognized the dilemma created by the Carlingswitch case, as Customs often engages in a practice that helps accommodate importers facing the situation described above.  Specifically, when an issue that affects the amount of payments due to CBP is in dispute (e.g., an item’s classification or valuation), and an importer seeks to make a prior disclosure on that item, Customs can set aside the payments associated with that item in a “suspense account” pending the resolution of that issue.  CBP avoids the application of §1514 and §1520, by not depositing the payment with the Treasury, and thus holding it separately.  Once the issue is resolved, Customs will either keep, or refund, the payments depending on the outcome of that issue.

In 2012, the Customs and International Trade Bar Association (CITBA), a bar association of lawyers practicing international trade matters, proposed legislation that would revise the Customs law to allow importers to protest and/or receive refunds for duties paid in relation to prior disclosures.  CITBA prepared the proposal in coordination with an ad hoc CIT advisory committee and sought to develop a consensus in support among various industry and government actors.  However, the proposed legislation was never introduced in Congress as Customs was unwilling to participate in the project.

Although CITBA has not yet achieved the codification of a mechanism to allow for refunds of payments that are voluntarily tendered to Customs, Customs maintains an informal mechanism for doing so.  The existence of suspense accounts is not well known or publicized, and continues to be a discretionary procedure.  Customs attorneys should consider requesting that Customs hold payments in a suspense account when an importer could benefit from a prior disclosure, but certain issues are unresolved because they are the subject matter of a protest. Although Customs has near total discretion to deny or accept the request, it is worth asking.