Customs Overviews

Customs and Border Protection (“CBP”) has published a Notice of Proposed Rule Making to amend the regulations to provide further guidance for the use of sampling methods in audits and prior disclosure cases. 74 Fed. Reg. 53964 (October 21, 2009).

Generally, the proposed amendments concern the use of statistical sampling methods and the offsetting of overpayments of duties and fees against underpayments under certain prescribed circumstances. The proposed changes regarding offsetting reflect the amendments made to Section 509(b) of the Tariff Act of 1930 pertaining to audit procedures.

In performing audits, CBP frequently encounters a transaction universe that is too large to review on an entry-by-entry basis. Thus, to accomplish the purpose of the audit, CBP employs statistical sampling to review the transactions efficiently and to produce accurate results. In addition, in some circumstances, CBP may authorize importers undergoing audits to conduct reviews to test their entries and transactions using sampling techniques. The importer’s review and duty loss calculation, including the time period and scope of the review, the sampling plan and the sampling plan’s execution are subject to CBP review and approval. CBP has sole discretion in determining whether to employ statistical sampling in any given case.

Further, CBP acknowledges that the use of sampling techniques can be useful in a prior disclosure situation. The importer may employ sampling in a prior disclosure review and use the sampling to calculate the additional duties due.

The proposed regulation also deals with offsetting of overpayments against underpayments as determined in an audit whether by entry-by-entry review or by sampling. It is important to keep in mind that any offset must be based on transactions that are within the time period and scope of the audit as defined by CBP. Offsetting can only occur when the overpayments are identified by CBP during an audit. Overpayments identified through a process other than an audit, for example, a process conducted by an import specialist will not result in a refund unless the protest procedure is available.

The notice emphasizes that for offsetting purposes, where sampling is employed,


identification of underpayments and overpayments is limited to the entry/transactions actually examined by the auditors. Further, offsets will not be allowed for duties paid on goods for which a duty allowance or preference was not filed or established at the time of entry or within the time allowed after entry. Also, when the offsetting results in a net overpayment of duties, CBP will not issue a refund unless, with respect to any given overpayment, a refund is otherwise authorized.
Where sampling is employed in an audit and involves offsetting, identified overpayments will be extrapolated from the smaller number of entries over the larger unit of entries encompassed within the time period and scope of the audit in the same manner as underpayments are extrapolated. But if the importer identifies overpayments in the universe but outside the sample, the additional overpayment will not be used in the extrapolation.

Amendments to the prior disclosure regulations are proposed to allow an importer to use sampling to calculate the duty and fees due. The proposed regulation makes it clear that the sampling method is subject to CBP approval and if the method is rejected, the prior disclosure will not be approved.

Comments on the proposed regulations are due on or before December 21, 2009.

USA-ITA will file comments if there is sufficient member interest or concern with the proposed regulations as outlined above.

HQ 8057716 (June 30, 2009) addresses the question of discounts. Under transaction value, discounts are recognized as long as the basis for the discount was an agreement entered into prior to importation.The importer had negotiated the blanket discount with a foreign distributor. The discount was a specified percentage lower than the distributor’s standard prices. The merchandise was entered at a discounted value. At liquidation, CBP disallowed the discount and liquidated the entry with a duty increase based on the undiscounted prices.

As noted above, discounts to be effective must be agreed to prior to importation. CBP has enumerated three criteria in determining whether a discount or price adjustment will be accepted as representing transaction value. First, the discount or price adjustment must be agreed to prior to importation of the merchandise. The second criterion is that the importer must be able to provide sufficient documentary evidence to support the existence of the discount and establish that it was agreed to prior to the importation. Finally, the discount or price adjustment must be unconditional, or if conditional, all of the conditions must have been met prior to importation.

Here, while there is no written agreement between the importer and the distributor regarding the unconditional discount, the importer claimed that the agreement was negotiated sometime in 2003. In a letter dated in 2008, after the date of importation, the distributor confirmed that it had granted the importer a discount which was not subject to a minimum purchase requirement or other condition. Most importantly, the discounted price was reflected on the invoice from the distributor to the importer and on the entry documentation. Basically, CBP concluded that the entry documentation and invoices reflecting the discount was sufficient documentary evidence. The fact that the discount was not conditional was confirmed by the correspondence from the distributor, which was accepted by CBP even though it was dated after the importation.

Basically, this ruling indicates that even though there is no formal written agreement, entry documentation showing a discount generally will be accepted as establishing transaction value at the discounted price.









In This Customs Overview

1. Revocations Withdrawn
2. Proposition 65 Settlements
3. Royalty Ruling
4. HTS Modifications