OT:RR:CTF:ER H289595 KF
U.S. Customs and Border Protection Port of Charlotte
1901 Cross Beam Drive Charlotte, NC 28217
Re: Protest No. 1503-17-100021; The Jay Group, Ltd.; 19 C.F.R. §§ 19.4, 19.6, 19.12;
presumption of correctness.
Dear Port Director:
This is in response to the application for further review of protest no. 1503-17-100021, received by our office on August 23, 2017. We have considered the points raised by your office and the protestant, The Jay Group, Ltd. (“Jay Group”). Our response follows.
FACTS:
In 2007, Jay Group established a bonded warehouse facility used for the storage of
footwear, apparel, and accessory items. Jay Group describes the footwear and apparel as low- priced, used, damaged, or surplus, and primarily exported to developing markets. Jay Group is the importer of record for all the footwear and apparel stored in its bonded warehouse. All merchandise is withdrawn from warehousing under bond pursuant to a Transportation &
Exportation (“T&E”) entry. In 2011, Jay Group relocated to the bonded warehouse facility at issue in this protest.
Jay Group states that U.S. Customs and Border Protection (“CBP”) officials conducted annual compliance reviews of its bonded facilities since 2007, with a supplementary review
conducted in 2012. Jay Group asserts that “[a]t no point during or after any of these reviews was the Company ever advised by CBP that its processes or procedures were inadequate or
deficient.” Jay Group admits that by 2015, however, it received notice of various deficiencies in its processes and procedures.
Summer 2015 Compliance Reviews
On May 4 and July 30, 2015, CBP Officers conducted on-site compliance reviews of Jay Group’s bonded warehouse. CBP observed that many storage locations lacked any identification with a specific entry, and that merchandise from distinct entries was commingled. At CBP’s
request, Jay Group’s Chief Financial Officer produced an inventory record demonstrating the
balance of merchandise at the warehouse. The record produced was incomplete, missing multiple entry numbers for merchandise, and demonstrated that merchandise classified under various
Harmonized Tariff Schedule of the United States (“HTSUS”) subheadings was commingled in storage. CBP Officers also discovered unaccounted-for merchandise, and merchandise inventoried at incorrect quantities.
On August 28, 2015, CBP issued a letter to Jay Group detailing the “multiple
violations… that were discovered during” the May and July compliance reviews. CBP identified the following ten regulatory violations that needed to be rectified in order to preserve the
facility’s bonded status:
Failure to provide a list of current employees. See 19 C.F.R. § 19.3(d).
Failure to adequately supervise warehouse activities, as demonstrated by the Warehouse Operation Manager’s inability to locate entry numbers on the bonded warehouse floor and admission that “she did not understand Customs regulations.” See 19
C.F.R. § 19.4(b)(1).
Failure to maintain adequate security of warehouse and merchandise, as demonstrated by a lack of separation between bonded and non-bonded merchandise. See 19 C.F.R.
§ 19.4(b)(6).
Failure to maintain warehouse and merchandise in safe and sanitary condition. See 19
C.F.R. §§ 19.4(b)(6)-(7).
Failure to properly store, mark, identify, and inventory merchandise. CBP Officers stressed that “entry numbers were not marked on all packages and bins” containing
bonded merchandise, “shipments arriving at the warehouse [we]re usually commingled,” and “packages from multiple entries [were] stored together.” See 19 C.F.R. § 19.4(b)(8).
Failure to report discrepancies, as demonstrated by CBP Officers’ inspection of entry
number ***-****328-8. The entry “contained a large amount of manifested merchandise and incorrect quantities.” When questioned by CBP Officers, employees admitted they could not identify shortages/overages in their inventory records and had not been
reporting shortages/overages to CBP. See 19 C.F.R. §§ 19.6(a)(1); 19.6(b)(1); 19.12(d)(3).
Failure to maintain adequate records of manipulations. CBP Officers determined that Jay Group “manipulates virtually every shipment and does not record the manipulations.”
CBP Officers also determined that “[e]mployees do not understand the difference
between manipulations and withdrawals.” To illustrate, “if women’s shoes were
separated from men’s shoes and placed in different boxes, warehouse employees would not consider that a manipulation and would not record it at all.” Instead, Jay Group would record the bulk quantity of women’s shoes as a withdrawal. See 19 C.F.R. § 19.11(d).
Failure to maintain an adequate inventory control and recordkeeping system, as
demonstrated by Jay Group’s decision to eschew entry numbers in its inventory and accounting records. In lieu of entry numbers, Jay Group recorded transactions with merchandise by using “internally-generated ‘item numbers.’” CBP Officers determined that multiple “[e]ntries filed on behalf of [] Jay Group by its customs broker d[id] not
correlate with the warehouse’s internal records.” See 19 C.F.R. § 19.12(c)-(d); 113.63(a)(3).
Failure to certify annual preparation of reconciliation report. See 19 C.F.R. § 19.12(h).
Improper destruction of merchandise in bond, as demonstrated by Jay Group dumping bonded merchandise in “open garbage dumpsters” with no record or procedures to account for the disposal. See 19 C.F.R. §§ 113.63(c)(3); 158.43.
On September 24, 2015, Jay Group responded to CBP’s letter and stated that it would refrain from any further importation or entry of merchandise into its bonded warehouse until these violations were rectified. Jay Group did not dispute any of CBP’s findings.
Fall 2015 Compliance Review
On September 29, 2015, CBP conducted another compliance review of Jay Group’s bonded warehouse. CBP Officers determined that none of the ten regulatory violations
discovered during the Summer 2015 compliance reviews had been rectified. CBP Officers stressed that Jay Group could not ensure proper accounting and classification for goods entered into the warehouse and could not provide an adequate audit trail for entered goods.
CBP Officers identified “a major disconnect between how goods [we]re entered… into the warehouse, the personnel responsible for pulling the goods for [withdrawals], how the
[inventory records were] updated as a result, and how the company communicates [] information to the broker.” Examples of this disconnect were evident during CBP’s examination of entry
number ***-****328-8. CBP Officers discovered 6,255 pairs of shoes misclassified under
subheading 6309.00.0020, HTSUS, a tariff for worn clothing and textile articles which excludes shoes. CBP officers additionally examined entry numbers ***-****011-1 and ***-****018-6, which evidenced that Jay Group was modifying the quantity of warehoused merchandise in its inventory records by hand. “Item numbers were added and quantities were adjusted on the
paperwork after” the merchandise arrived at the warehouse. CBP Officers concluded that Jay Group employed “guesswork” in reporting the quantities and classification of merchandise in its
entries and withdrawals and noted that Jay Group “admitted all of this during the compliance” review. Due to such pervasive and severe regulatory violations, CBP advised Jay Group to
voluntarily suspend its bonded warehouse operations until the violations could be rectified.
On October 5, 2015, Jay Group accepted CBP’s recommendation and agreed to
voluntarily suspend its bonded warehouse operations. Jay Group characterized its temporary suspension as an opportunity to “completely review [its] policies, processes, and procedures…
[in order] to address any procedural deficiencies” identified by CBP. In discussing its obligation to rectify “procedural deficiencies,” Jay Group noted that “the Customs Modernization Act
fundamentally modified the relationship between importers and CBP based on the principle of ‘Informed Compliance.’” Jay Group concluded this principle served to establish “a shared responsibility between CBP and the importing community, whereby CBP communicates its
requirements to the importer, and the importer, in turn, uses reasonable care to ensure that CBP is provided accurate and timely data pertaining to its importation.” Jay Group also acknowledged that “as the importer of record, it [was] ultimately responsible for ensuring that its import
operations, including those associated with the bonded warehouse, [we]re in full compliance with all applicable rules and regulations.”
On September 21, 2016, Jay Group filed a request to permanently discontinue its bonded warehouse operations, pending withdrawal of all bonded merchandise remaining in its
warehouse.
Fall 2016 Compliance Reviews
On September 27 and 28, 2016, CBP Officers conducted additional compliance reviews of Jay Group’s bonded warehouse. The CBP Officers were joined by a Supervisory Import Specialist and Entry Supervisor with experience in textiles and footwear, an Import Specialist
from the Apparel, Footwear, and Textile Center, and an Entry Specialist with warehouse
experience. CBP highlighted that the regulatory violations identified during the Summer and Fall 2015 compliance reviews had not been rectified.
During the course of these additional reviews, Jay Group provided CBP with a warehouse map indicating in which locations merchandise associated with particular entries was being
stored. Two locations, D9 and D19, were marked as storing 3,596 pairs of shoes classified under subheading 6402.99.7990, HTSUS (“3,596 shoes”). Jay Group claimed these shoes were the sole merchandise remaining at the warehouse from warehouse entry number ***-****888-7
(“protested entry”).
When CBP Officers and personnel specializing in textile and footwear classification inspected locations D9 and D19, they did not find a single pair of shoes classifiable under
subheading 6402.99.7990, HTSUS. Instead, CBP found 1,225 pairs of shoes classifiable under subheading 6402.99.3115, HTSUS, and 963 pairs of soccer cleats classifiable under subheading 6402.19.1520, HTSUS. The shoes totaled 2,188 pairs that were unaccounted for in Jay Group’s inventory records. CBP Officers classified the shoes by physically removing samples from the
bins and conducting a visual inspection of the shoes from each location.
CBP Officers orally informed Jay Group of the ongoing inventory management and recordkeeping violations at its bonded warehouse. Because Jay Group was in the process of
withdrawing all warehoused merchandise to permanently discontinue its bonded operations, CBP instructed Jay Group to file withdrawals based on the actual physical inventory within a T&E
shipment and not based on its records. CBP explained that Jay Group could not rely on its inventory records to file withdrawals, because those records were unreliable and failed to correspond to Jay Group’s actual physical inventory.
On January 9, 2017, Jay Group filed a final withdrawal under T&E entry number
******931 (“final withdrawal”) for the 3,596 pairs of shoes classified under subheading
6402.99.7990, HTSUS. No reference was made to the 2,188 pairs of shoes found by CBP that were classified under subheadings 6402.19.1520 and 6402.99.3115, HTSUS.
On January 25, 2017, CBP issued a Notice of Action to Jay Group on CBP Form 29, specifying that additional duties would be owed on the 2,188 pairs of shoes. Because the final withdrawal did not address the shoes found in locations D9 or D19, CBP concluded that the merchandise was entered into the commerce of the United States and duty and fees were due. To account for these shoes, CBP added a line item for the shoes to the protested entry at issue. On February 10, 2017, CBP liquidated the entry and issued Jay Group a bill for the duties and fees owed as indicated on CBP Form 29.
On April 19, 2017, CBP approved Jay Group’s request to discontinue bonded warehouse operations because all bonded merchandise had been removed from the warehouse.
On August 3, 2017, Jay Group filed the present protest. Jay Group asserts that it owed no duties for the 2,188 shoes because all merchandise warehoused via the protested entry was
properly entered, inventoried, and withdrawn.Jay Group claims that it was not provided with information substantiating CBP’s discovery or classification of the 2,188 shoes. Jay Group
asserts that CBP made a mistake of fact as to the existence of the 2,188 shoes. In support of its argument, Jay Group produced an entry summary for the protested entry, the final withdrawal, and an internal inventory log marked as generated on September 28, 2015. The log states that
15,120 pairs of shoes were warehoused pursuant to the protested entry on February 12, 2012, and that after a series of withdrawals, 3,596 shoes remained in the warehouse.
In response, your office produced photographs of the 2,188 shoes discovered by CBP Officers during the Fall 2016 compliance reviews. Your office also produced notes from the
CBP Officers who conducted the Fall 2016 compliance reviews, stating that they were unable to locate a single pair of the 3,596 shoes allegedly classified under subheading 6402.99.7990, HTSUS. These photographs and notes, as discussed above, describe the visual inspection process of the CBP Officers who discovered and classified the 2,188 commingled shoes under
subheadings 6402.19.1520 and 6402.99.3115, HTSUS.
ISSUE:
Whether CBP properly liquidated the protested entry with additional duties and fees owed for 2,188 shoes that were not accounted for in Jay Group’s final warehouse withdrawal.
LAW AND ANALYSIS:
As an initial matter, we find that pursuant to 19 U.S.C. § 1514(c)(3)(B), this protest was timely filed on August 3, 2017, within 180 days of the decision by your office, on February 10, 2017. We also find that this protest meets the criteria for further review. Pursuant to 19 U.S.C.
§ 1514, a protestable issue was raised by claiming that CBP made a mistake of fact as to the “amount of duties chargeable” upon liquidation of the protested entry. Pursuant to 19 C.F.R.
§ 174.24(b), this protest qualifies for further review because it alleges a question of fact which has not previously been ruled upon.
Liability for duties owed on imported merchandise attaches upon importation and is a personal debt due from the importer to the United States which can be discharged only by
payment in full. 19 C.F.R. § 141.1(b)(1). Entry into a bonded warehouse generally allows an importer to delay duty payment until merchandise is withdrawn from warehouse for
consumption. 19 U.S.C. § 1557(a)(1). Upon withdrawal from warehouse, CBP fixes the amount of duties to be paid on that merchandise and determines any increased or additional duties, taxes, or fees due. 19 U.S.C. §§ 1500(c)-(d).
Generally, importers of record are bound by the terms of the basic importation and entry bond required to secure release of merchandise from customs custody. See 19 C.F.R. §§ 142.4(a) & 113.62. The conditions contained in the basic importation bond state that when merchandised is entered into a bonded warehouse, the importer has an “obligation to pay duties, taxes, and
charges on the merchandise [regardless of] whether it the merchandise is properly withdrawn.” 19 C.F.R. § 113.62(a)(2)(ii). Thus, the importer is liable for duties on any merchandise that has been entered into warehouse and cannot be accounted for upon liquidation. Id. It is of note that bonded warehouse operators are also bound by the terms and conditions of a bond – the basic custodial bond – that is required to operate any bonded facility. 19 C.F.R. §§ 19.2(c), 113.63.
Failure to satisfy the requirements of the basic custodial bond results in a default of the custodial bond conditions, thereby authorizing CBP to impose liquidated damages “based upon the
quantity and value of the merchandise as determined by CBP.” 19 C.F.R. § 113.63(j)(2).
By statute, an agency’s decision is presumed correct. 28 U.S.C. § 2639(a)(1). “[T]he law presumes that Customs officials properly perform their duties” and “official acts of Customs
personnel . . . are presumed correct and the burden of proving otherwise rests upon [the party challenging the decision].” St. Paul Fire & Marine Ins. Co. v. United States, 6 F.3d 763, 767 (Fed. Cir. 1993) (citing 28 U.S.C. § 2639(a)(1)); Home Depot, U.S.A., Inc. v. United States, 30
C.I.T. 445, 456 (2006) (“An agency's decision is presumed to be correct, and the burden of proving otherwise shall rest upon the party challenging such decision.”). This presumption extends to CBP’s classification of merchandise. Rollerblade, Inc. v. United States, 282 F.3d
1349, 1352 (Fed. Cir. 2002) (“A classification of merchandise by Customs is presumed to be correct . . . [so] the burden of proof is upon the party challenging the classification.”). “The presumption applies to every subsidiary fact necessary to support classification, including the
methods of weighing, measuring, and testing merchandise used by customs officers and the results obtained therefrom.” Libas, Ltd. v. United States, 118 F. Supp. 2d 1233, 1234 (C.I.T. 2000).
The presumption of correctness, however, “does not add evidentiary weight; it simply
places the burden of proof on the challenger.” Anhydrides & Chems., Inc. v. United States, 130 F.3d 1481, 1486 (Fed. Cir. 1997). “An importer may rebut the presumption of correctness by showing that the customs service’s methods or results are erroneous.” Libas, Ltd., 188 F. Supp.
2d at 1234. “If a prima facie case is made out, the presumption is destroyed and the government has the burden of going forward with the evidence.” Id. We have previously determined that “[i]n the context of the presumption of correctness of CBP’s decision under 28 U.S.C.
§ 2639(a)(1), an importer can establish a prima facie case and overcome the presumption by
presenting evidence “an importer derived from an independent source or test that is sufficient to sustain the importer’s claimed classification.” HQ H034575 (May 10, 2010) (finding that an importer who did not produce documentary evidence substantiating their protest claims failed to make a prima facie case against the presumption of correctness accorded to physical and visual inspections conducted by CBP).
In this case, CBP Officials specializing in textiles and footwear quantified and classified 2,188 pairs of shoes that were unaccounted for by Jay Group during the final Fall 2016
Compliance Review. CBP conducted the inspection and determined the classification by visually inspecting samples from each location. The CBP personnel conducting the inspection included a Supervisory Import Specialist and Entry Supervisor with experience in textiles and footwear, an import specialist from the Apparel, Footwear, and Textile Center, and an Entry Specialist with warehouse experience. During that review, Jay Group provided CBP with a warehouse map indicating two locations (D9 and D19) as the sole merchandise remaining at the warehouse from the protested entry. Jay Group stated that 3,596 pairs of shoes were stored in those two locations and were classified under subheading 6402.99.7990, HTSUS. When the CBP Officers and
personnel inspected locations D9 and D19, they did not find a single pair of shoes classifiable under subheading 6402.99.7990, HTSUS. Instead, as discussed above, CBP found 963 pairs of soccer cleats classifiable under subheading 6402.19.1520, HTSUS, and 1,225 pairs of
commingled shoes. Per 19 C.F.R. § 152.13, CBP classified the commingled shoes under subheading 6402.99.3115, HTSUS, which was the highest rate of duty.
CBP classified the 2,188 shoes it discovered during the Fall 2016 Compliance Reviews by physically picking up shoe samples directly from the marked container and visually
inspecting them. CBP’s discovery is documented in the photographs and contemporaneous notes taken by CBP Officers during the Compliance Review. We note that the Food, Textiles and Marking Branch in our office has reviewed the photographs and notes taken by CBP during the Fall 2016 Compliance Reviews. Due to a lack of physical samples and insufficient image quality, our office cannot verify the classification of the 2,188 shoes detailed in the photographs and
notes. The Food, Textiles and Marking Branch did verify, however, that the process utilized to classify the 2,188 shoes is consistent with CBP’s process for classifying footwear under Chapter 64 of the HTSUS. See e.g., NY N015562 (Aug. 17, 2007) (determining the constituent materials of footwear from visual inspection of samples); NY F89903 (July 31, 2000) (determining the
external surface area upper material of footwear classifiable under Chapter 64, HTSUS, based on “visual measurements”).
Jay Group has not rebutted the presumption of correctness afforded CBP’s quantification and classification of the 2,188 pairs of shoes that were ultimately unaccounted for in Jay Group’s inventory records. Rather, Jay Group asserts that CBP made a mistake of fact as to the existence of the 2,188 shoes and provides three documents to substantiate this assertion: the entry
summary for the protested entry (number ***-****888-7); the final withdrawal (T&E entry
number ******931); and an internal inventory log marked as generated on September 28, 2015. As discussed above, the log states that 15,120 pairs of shoes were warehoused on February 12, 2012, pursuant to the protested entry. The log documents a series of withdrawals and concludes that 3,596 shoes classified under subheading 6402.99.7990, HTSUS, remained in the warehouse prior to the final withdrawal. Jay Group characterizes these three documents as proof of the
quantity and final accounting for all merchandise within the warehouse. These documents do not overcome the presumption of correctness of CBP’s quantification and classification of the 2,188 pairs of shoes at issue because they are not derived from an independent source and they are not reliable. We address four circumstances from the factual record of this protest to highlight the unreliable nature of these three documents.
First, throughout the Compliance Reviews CBP determined that Jay Group consistently failed to properly store, mark, identify, and inventory merchandise. CBP Officers determined
that “‘entry numbers were not marked on all packages and bins’ containing bonded merchandise, shipments arriving at the warehouse [we]re usually commingled,’ and ‘packages from multiple
entries [were] stored together.’”
Second, CBP also determined that Jay Group failed to report discrepancies at its facility, such that its employees were incapable of identifying any shortages or overages of merchandise despite CBP Officers finding “a large amount of manifested merchandise a[t] incorrect quantities.”
Third, CBP Officers determined that Jay Group “manipulates virtually every shipment and does not record the manipulations.” CBP Officers highlighted that Jay Group “manipulates virtually every shipment and does not record the manipulations,” nor do “[e]mployees . . .
understand the difference between manipulations and withdrawals.” This failure was exemplified by “women’s shoes [being] separated from men’s shoes and placed in different boxes, [but]
employees would not consider that a manipulation and would not record it.” Instead, Jay Group would record a bulk withdrawal of women’s shoes.
Finally, during the Fall 2015 Compliance Reviews, CBP Officers determined Jay Group had modified the quantity of warehoused merchandise in its inventory records by hand. “Item
numbers were added and quantities were adjusted on the paperwork after” the merchandise arrived at the warehouse. CBP Officers concluded that Jay Group employed “guesswork” in reporting the quantities and classification of merchandise in its entries and withdrawals, and
noted that Jay Group “admitted all of this during the compliance” review. During the Fall 2016 Compliance Reviews, Jay Group was in the process of withdrawing all warehoused merchandise to permanently discontinue its bonded operations. CBP Officers instructed Jay Group to file
withdrawals based only on the actual physical inventory within a shipment because Jay Group’s inventory control and recordkeeping system was unreliable.
Throughout all the compliance reviews, CBP determined that Jay Group failed to satisfy and failed to rectify numerous violations of the requirements concerning recordkeeping and
handling of bonded merchandise under Customs Regulations. Accordingly, the three documents provided by Jay Group as evidence of the “mistake of fact” as to the quantity and classification of the 2,188 pairs of shoes discovered by CBP, do not constitute prima facie evidence sufficient to rebut CBP’s presumption of correctness. We find that Jay Group has not rebutted the
presumption of correctness accorded to CBP’s quantification and classification of the 2,188 pairs of shoes that remained unaccounted for in Jay Group’s final withdrawal.
Jay Group, as the importer of record in this case, is thus liable to pay duties, taxes, and fees on all merchandise it imported and entered into its bonded warehouse, including
merchandise that was improperly withdrawn or unaccounted for at liquidation. Consequently,
Jay Group is liable for any duties, taxes, and fees on the 2,188 shoes not accounted for in the
final withdrawal from its bonded warehouse. CBP properly liquidated the protested entry with duties and fees owed on 963 pairs of shoes classifiable under subheading 6402.19.1520, HTSUS, and 1,225 shoes classifiable under subheading 6402.99.3115, HTSUS.
HOLDING:
Based on the above, we find that warehouse entry no. ***-****888-7 was properly liquidated with additional duties and fees owed for the 2,188 unaccounted for shoes discovered by CBP and protest no. 1503-17-100021 is hereby DENIED IN FULL.
Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
Craig T. Clark, Director
Commercial & Trade Facilitation Division