DUTY DRAWBACK: CLAIMANTS MAY NEED TO “ROOT HURT”

The tight-knit group of drawback professionals serving American importers and exporters (sometimes referred to by Customs as “drawback vigilantes”) is watching with interest and not a little concern as an interesting case makes its way through the United States Court of International Trade. In Spirit Aerosystems Inc. v. United States, Court No. 20-00094, the question presented is whether the “article descriptions” contained in eight-digit “tariff rate” and ten-digit "statistical” descriptions in the Harmonized Tariff Schedule of the United States should be interpreted or expanded to include language in provisions of the tariff which does not appear in an enumerated line of the tariff schedule.

That’s enough to make one’s eyes cross. But this technical issue could have implications – good and bad – for companies pursuing tens of millions of dollars in claims for “substitution unused merchandise drawback”, 19 U.S.C. §1313(j)(2). To better understand the issue, it’s helpful to trace a little history.

A BRIEF HISTORY OF DRAWBACK SUBSTITUTION

Historically, drawback was a refund of duties paid on imported merchandise which was used to produce an article that was subsequently exported. Since the imported merchandise was not “consumed” in the United States, Congress saw fit to refund 99% of duties paid such merchandise, retaining the residual 1% to fund the costs of operating the drawback program. Over time, manufacturing drawback was expanded to grant refunds on duties where the exported goods were made with domestic or imported, duty-free goods which were “substitutable” with the duty-paid imports.

Drawback moved beyond the manufacturing realm in 1980, when Congress authorized what was known as “same condition drawback” [currently 19 U.S.C. §1313(j)(1)]. If goods were imported, and exported within a certain time in the “same condition” as when imported, without having been “used” in the United States, a drawback could be claimed. While simple in concept, the law was more difficult to apply. For example, if imported pharmaceuticals were exported without having been used in the United States, were they in the “same condition” as when imported, if they had aged past their expiration dates?

“Substitution same condition drawback” [now 19 U.S.C. §1313(j)(2)] entered the law in 1984. It provided that drawback could be claimed on imported, duty-paid goods if “fungible” goods were exported within a certain time. “Fungible” was defined as being “commercially interchangeable for all purposes”. Once again, simple in concept, difficult to apply. For example the Court of International Trade ruled that imported and exported jeans – physically identical in all respects – were not “fungible” because certain consumers had a subjective preference for jeans from one country over jeans from the other. Customs ruled that physically identical cans of peaches were not “fungible” because the imports were Kosher and the exports were not.

Back to the drawing board. In 1993, Congress re-christened “same condition” drawback as “unused merchandise” drawback, and replaced the “fungibility” test with a factors-based test of “commercial interchangeability”. Again, the test was vague. Courts invented the concept of a “hypothetical reasonable purchaser” to evaluate interchangeability. When your standard of proof it “hypothetical” anything, you’re in trouble. And this firm spent years litigating the exquisite issue of whether imported asparagus trimmed with a band saw was “commercially interchangeable” with asparagus trimmed with a hand tool. [Really: there’s only one genus and species of asparagus – it was all about the trimming. But we won].

Fast-forward to 2018, when the drawback provisions of the Trade Facilitation and Trade Enforcement Act of 2015 entered into force. They provided that imported and exported goods are substitutable for drawback purposes if they are classified under the same eight-digit tariff subheading. Unless that subheading started with the word “Other”. In that case, the drawback claimant looked to the ten-digit statistical subheading. But if the 10-digit statistical heading also began with the word “other”, no drawback would be paid. All that a drawback claimant had to fear was falling into a dreaded “Other: Other” provision. But seriously, how often would that happen, right? What could go wrong?

Enter Spirit Aerosystems

SPIRIT AEROSYSTEMS’ DILEMMA

Spirit Aerosystems, a company that services commercial aviation, exported and imported certain aircraft parts which were classified under HTS Subheading 8803.30.0030. Let’s put that provision in context:

8803.30.00 Other parts of airplanes or helicopters;

For use in civil aircraft:

8803.30.0015 For use by the Department of Defense or United States Coast Guard

8803.30.0030 Other

Spirit had fallen into one of the dreaded “Other: Other” categories. Further, Customs had undertaken a project to enumerate all of the “Other: Other” provisions in the tariff, and programmed its Automated Commercial Environment (ACE) drawback system to reject drawback claims invoking those tariff provisions. Spirit’s claim was rejected at first and ultimately denied. The company protested the denial and is now challenging it before the CIT.

WHAT IS AN “ARTICLE DESCRIPTION”?

Section 313(j)(5)(A) of the Tariff Act says directs Customs to look to the “article descriptions” associated with eight-digit tariff headings. It states that “merchandise may not be substituted for imported merchandise for drawback purposes based on the 8-digit HTS subheading number if the article description for the 8-digit HTS subheading number under which the imported merchandise is classified begins with the term “other”.

So we drop down to the 10-digit statistical heading. But 19 U.S.C. §1313(j)(5)(B) says the drawback claimant can claim based on 10-digit statistical subheadings, but only if “)the article description for that 10-digit HTS statistical reporting number does not begin with the term “other”.

Customs essentially placed a ruler parallel to the 8- and 10-digit provisions in the tariff. Both started with the word “other”, hence, Customs said, Spirit Aerosystems was out of luck for drawback.

But not so fast, Spirit Aerosystems is saying. What, exactly, is the “article description for the 8-and 10-digit provisions in question”? At the 10-digit level, should it not incorporate the non-enumerated superior language which says “For use in civil aircraft?” If you incorporate that language, the “article description” for the 10-digit statistical subheading does not begin with “other”, and drawback should be paid. If you look at the language of statistical subheading 8808.30.0030, it simply says “Other”. How is that a description of any article, one might ask?

Does it not need the context of the superior, unenumerated language, to make any sense? And that is the core of the argument Spirit is advancing in its lawsuit. Should not the non-enumerated language “For civil aircraft” be considered part of item’s 8808.30.0030’s “article description”, in which case the “article description” would not start with “other”? While we won’t burden our readers with a detailed description, Spirit’s arguments are grounded in various canons of statutory construction – which is interesting since the 10-digit statistical provisions of the tariff are not part of the statutory text of the document. But they are made relevant by the provisions of 19 U.S.C. §1313(j)(5).

“ROOT HURT”

The article title says drawback vigilantes may have to “root hurt”. New York baseball fans understand the phrase, which arises each summer when the Yankees and Mets play each 0ther, especially when both teams are in pennant races. One of Gotham’s teams is going to win the game, but at the expense of the other team. Ouch!

Perhaps Spirit Aerosystems will win its case. And good for them. But there are several other places in the tariff (provisions for wines, for example), where statistical provisions which name particular wines appear under the non-enumerated phrase “Other”. As noted above, the word “Other” is not an “article description” for anything.

Ideally, the CIT might be persuaded to employ a rule of lenity to interpret the concept of what is an “article description”. If the nonenumerated heading above an “Other” provision contains descriptive language (e.g., “For civil aircraft”), it should be taken into account. On the other hand, if the nonenumerated language is merely “Other”, it can be argued that perhaps this is not part of an “article description” and should be disregarded. A win-win for the drawback community, if it can be carried off.

In the meantime, drawback claimants are sweating it out.

If you have any questions regarding this issue (or are just a “drawback vigilante” looking for a sympathetic ear), please contact a Neville Peterson LLP professional.