ENT-6-01 CO:R:C:E 222460 C
District Director of Customs
U.S. Customs Service
Savannah, Georgia
RE: Request for Internal Advice Regarding the Civil Aircraft
Agreement; Diversion of Merchandise After Duty-Free Entry
Dear Sir:
This responds to the referenced request for internal advice,
dated June 4, 1990 (CLA-1:SV:C:I:2:LEF).
The facts as we understand them are as follows: Gulfstream
Aerospace Corporation (Gulfstream) imports merchandise under the
duty-free provision of the Civil Aircraft Agreement (the
Agreement), Title VI of the Trade Agreements Act of 1979 (the
Act), {601. P.L. 96-39, 93 Stat. 144, 96th Cong., 1st Sess.
1979. Such {601 duty-free entries are contingent upon submission
by the importer of a certification, certifying that merchandise
1) is imported for use in civil aircraft, 2) will be used in
civil aircraft, and 3) has FAA approval as civil aircraft
merchandise. (See General Note 3(c)(iv) of the Harmonized Tariff
Schedule of the United States (HTSUS) and 19 CFR 10.183.)
Despite the certification, Gulfstream, after duty-free entry,
uses imported merchandise for both qualifying and non-qualifying
purposes.
Your memorandum posed several questions, most of which are
answered below. As noted hereafter, some questions have been
referred to other Headquarters offices. These offices have been
requested to respond to you directly.
1. Can Gulfstream import merchandise
duty-free under {601 and then,
subsequent to entry, divert that
merchandise to a non-qualifying use
without reporting the diversion to
Customs with payment of duty?
The Agreement provided for duty-free entry of qualifying
merchandise but only upon the importer's submission of a
certification pledging that such merchandise will be used in a
qualifying manner. The Agreement does not contain explicit
provisions for its enforcement; however, the legislative history
is clear and unambiguous that Congress intended the Customs
Service to take appropriate action where necessary to protect the
revenue: "The Committee expects the Customs Service to monitor
closely entries under the amendments under section 601 and, where
necessary to protect the revenues, take appropriate action to
insure the continuing validity of statements supplied to Customs
under the certification requirements." Senate Rpt. No. 96-249,
reprinted in 1979 U.S. Code Cong. and Ad. News, 574-75.
On the basis of the foregoing, Customs has interpreted the
Agreement to require that an importer of {601 merchandise must
maintain records adequate to demonstrate the after-entry
continued validity of certifications, including, in this
connection, proof of end use sufficient to establish that {601
merchandise was disposed of in a manner consistent with the
certification's pledge. (See 222236, dated August 10, 1990,
attached.) Section 10.183(e) of the Customs Regulations (19 CFR
10.183(e)) authorizes the district director to monitor and
periodically audit these entries, and 19 U.S.C. 1508 generally
requires that importers keep records pertaining to the
importation of merchandise.
In T.D. 84-109, Customs dropped from proposed regulations a
regulatory diversion report requirement (with payment of duty),
explaining therein that there is no statutory authority for such
a requirement. The Agreement would have to be amended in order
for Customs to impose such a requirement. (For example, see 19
CFR 10.84(e) which is based on language in the Automotive
Products Trade Act of 1965, Public Law 89-283, 79 Stat. 1016
(1965).)
Despite the removal from final regulations of the proposed
diversion report regulation, Customs retained language in the
regulations which requires an importer of {601 merchandise merely
to notify the district director of any changes that would affect
certifications. This language is contained in the recommended
text of the blanket certification found in {10.183(d)(2), and it
is an essential element of the certification, such that an
importer could not choose to draft a certification statement
without it. Certainly, the diversion of {601 merchandise to a
non-qualifying use would affect the certification. Although the
Agreement does not contain explicit language requiring such
notice, such a requirement is again sustainable on the basis of
Customs obligation to protect the revenue by appropriate action.
Furthermore, under 19 U.S.C. 1485(a)(4), an importer
declares under oath that he will notify Customs of any incorrect
statements made/submitted in furtherance of an entry of
merchandise. (See 19 U.S.C.1485(a)(3)and (4).) This means that
when an importer receives information, or becomes aware of the
fact, that {601 merchandise will be or has been diverted to a
non-qualifying use, he is obligated to report that fact to
Customs.
Consequently, we conclude that an importer must notify the
district director when {601 merchandise is used in a manner that
affects the validity of the certification, as would be the case
upon diversion of such merchandise to a non-qualifying use. The
district director then, within the means available to him, can
pursue the recovery of appropriate duties, resorting to the
application of 19 U.S.C. 1592(d) where appropriate. Where
evidence suggests that the importer should have known, at the
time of entry, that the certification was not valid with respect
to all or any of the merchandise, an action based on negligence
may be warranted. Where evidence shows that an importer knew
that the certification was not valid, as above, an action based
on fraud may be warranted. 19 U.S.C. 1592(a).
2.) Can an importer continue to enter merchandise
duty-free under {601 when he knows that at least a
portion of that merchandise will later be diverted
to a non-qualifying use?
The issue raised in this question pertains to the importer's
intent at the time of entry. The {601 certification includes the
following statements: 1) The merchandise is being imported for
use in civil aircraft, and 2) the merchandise will be so used.
This represents a statement of intent by the importer that
merchandise will be put to the qualifying use. If the importer
cannot make a good faith assertion of intent as to all
merchandise covered by a certification, then the certification is
invalid from the beginning. Note our prior comments on the
application of 19 U.S.C. 1592.
An importer who uses imported aircraft merchandise for both
qualifying and non-qualifying purposes could maintain two
separate inventories. In this way an importer can execute a good
faith, valid certification. Alternatively, an importer could
have a portion of his plant or place of business designated a
bonded warehouse for storage purposes. He could maintain an
inventory of aircraft merchandise for either non-qualifying or
both purposes, effecting the appropriate entry at the time the
merchandise is needed. Fairly accurate assessments could be made
as to the kinds and quantities of merchandise that are used for
non-qualifying purposes in the course of a year, and this
merchandise could be entered either duty-paid or for storage
under bond. Where an importer's good faith estimate as to the
quantities of merchandise intended for non-qualifying purposes
proves inaccurate, he can divert merchandise that was entered, in
good faith, duty-free to that non-qualifying use and simply
report those facts to Customs.
Either of the foregoing options would resolve the problem
that arises when DOD contracts are expected to be expeditiously
completed by use of merchandise already on hand. When
performance under a DOD contract is to commence, the merchandise
can be taken immediately from either duty-paid inventory or
bonded storage, or from both places. In any event, the use of
any merchandise entered duty-free under {601 in the fulfillment
of a DOD contract should be reported to Customs in accordance
with {10.183(d)(2). If aircraft merchandise is imported after a
DOD contract award, and that imported merchandise will be, or is
likely to be, used in the fulfillment of that contract, it cannot
be entered duty-free under the {601 provision.
Gulfstream's letter indicates that "it is not economically
feasible for a company the size of Gulfstream to maintain
discrete stores by program." (See p. 2 of Gulfstream's May 28,
1990 letter.) If this means that Gulfstream could not adopt
either of the suggested options, we are constrained to remark
that we know of no other alternative by which Gulfstream could
continue to import merchandise duty-free under {601. Without a
good faith intention, the certification would be invalid.
3.) Can Gulfstream support DOD spares and service
requirements with parts imported duty-free under
{601 without subsequent payment of duty?
See answer to question #2.
4.) When a used aircraft, formerly entered duty-
free under {601, is purchased by Gulfstream, must
it be reported to Customs as a diversion when
Gulfstream converts it to a non-qualifying use?
No. So long as the aircraft is a bona fide used aircraft,
and the transaction is in good faith and not designed to
circumvent the Customs laws or regulations, no report need be
made. This transaction would not affect the certification
because it is too remote from the importation transaction and the
related disposition of that imported merchandise under the
certification.
Your memorandum raised some questions that had to be
submitted to other Headquarters offices. The Office of Trade
Operations is considering the question pertaining to reporting
requirements - that is, presumedly, the specific procedures for
reporting changes that affect certifications, or for
implementing, where appropriate, procedures under 19 U.S.C. 1592
in cases of this kind. The General Classification Branch of ORR
is considering your question #5, pertaining to the statistical
note to Chapter 88 of the HTSUS. As stated, we have asked these
offices to respond to you directly.
Gulfstream's letter raised an issue pertaining to duty-free
entry certificates issued by the Defense Logistics Agency, DCASR
- NY, for emergency war materials. (See question #4, bottom,
p.2.) Since the matter in question does not involve such
merchandise, we did not address this issue.
Sincerely,
John Durant, Director
Commercial Rulings Division