Importers wishing to take advantage of the U.S.-Israeli Free Trade Agreement (US-IFTA) in order to avoid paying “regular” duties and fees for the imported products should know that presentation of the Certificate of Origin may not be enough. Customs and Border Protection (CBP) can ask importers to substantiate with documentation the very claims made on the certificates of origin. Often, but not always, request of the CBP officer can be overly broad. An example of one CBP officer, using CBP Form 28, making such broad request states as follows:
You are hereby required to produce supporting documentation to substantiate your claim for United States-Israel Free Trade Area Implementation Act of 1985 preferential treatment, such as but not limited to, a certification of origin, cost data, as well as production and manufacturing records. State the country of origin of the goods incorporated into the goods being imported into the US, along with evidence to support this claim, including: bill of materials related to the manufacture of the goods, manufacturer purchase invoice related to the materials incorporated into the goods, and manufacture dates. Provide the name and address of the manufacturer of the goods being imported into the US. The manufacturer is the entity that actually produced the goods, not the company that sold the goods. Provide a sample, photographs, or production drawings of the imported items… Provide all information within 30 days of this notification.
The quotation above is not only broad, but is likely to be a blanket statement that CBP officer(s) may copy and past in a boilerplate manner, because the importer probably provided origin certificate with entry, making the statement repetitive. Further, providing samples for some products – e.g. articles of plastics – cannot conclusively establish that the product qualifies for US-IFTA. Whether the 30 day limit is sufficient time to respond to such broad request is a topic for a different article. So the importer scrambles the documents it could obtain within 30 days and submits them to CBP. CBP officer, upon document review, may use this as an opportunity to narrow down the scope of inquiry if the broad request resulted (reasonably) in a broad response. But, CBP reviewing officer is not required to engage in further fact finding and can return CBP Form 29 (Notice of Action) denying US-IFTA claim with the following statement:
The verification revealed that the good does not qualify for preferential tariff treatment. Specifically, there was insufficient information provided to substantiate your claim. Very limited production records were presented.
The stated reasons for denial – insufficient information & limited production records – begs the question of what constitutes sufficient information? What constitutes production records that are not limited? Where one can draw the line and what is the analytical framework for evaluation of US-IFTA eligibility is the focus of this article.
Analytical Framework
Since both CBP and importers are bound by the same laws, it is probably worthwhile to remind CBP officer that vague statements reproduced above may bring the agency action into the shadow of arbitrary and capricious acts, which are unlawful. Customs and Border Protection (“CBP”) is a federal agency with a mission of protecting our nation’s borders and “fostering our Nation’s economic security through lawful international trade.” As a federal agency, pursuant to 5 U.S.C § 701, CBP enforces laws and regulations of the Union and is bound by the laws of the Union. At the direction of Congress – 5 U.S.C. § 706 (2013) – CBP will be compelled by our Nation’s judiciary to exercise restraint if the agency’s action is, inter alia, “arbitrary and capricious.” Under arbitrary and capricious standard, CBP action will be unlawful if the agency “relied on factors which Congress had not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view of the product of agency expertise.” National Assn. of Home Builders v. Defenders of Wildlife, 551 U.S. 644, 645 (2007), citing Motor Vehicle Mfrs. Assn. v. State Farm, Mut., 463 U.S. 29, 43 (1983). Agency action must have a “rational connection between the facts found and the choice made.” Motor Vehicle Mfrs. Assn. at 43, citing Burlington Truck Lines, Inc. v. U.S., 371 U.S. 156, 168 (1962). Arbitrary and capricious standard, therefore, is the floor below which CBP may not subside in determining whether the United States – Israel Free Trade Area Implementation Act of 1985, as amended, (“US-IFTA”) applies to the imported goods.
Prohibition of the arbitrary and capricious standard application to US-IFTA claim assessment does not precisely answer the question with respect to the appropriate standard of the US-IFTA claim review, because it merely proscribes CBP from engaging in arbitrary and capricious acts. The United States Supreme Court recommends application of Chevron framework. Chevron v. Natural Res. Def. Council, 467 U.S. 837 (1984). Chevron standard recommends a two-step inquiry:
- Whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter, and CBP “must give effect to the unambiguously expressed intent of Congress.” Chevron 467 U.S. at 843.
- If Congress is silent or ambiguous (with respect to US-IFTA claim assessment), then agency (CBP) action must be reasonable and permissible under the statute. Chevron 467 U.S. at 843-845.
The significance of Chevron standard with respect to US-IFTA is heightened because CBP did not promulgate regulations with respect to the US-IFTA verification claim, as CBP had done with other trade preferential laws. See e.g. 19 C.F.R. § 10.173(c) (regulating CBP conduct with respect to document verification under Generalized System of Preferences and African Growth and Opportunity Act); see also 19 C.F.R. § 10.198(c) (establishing document verification procedure for products from Caribbean Basin Initiative countries). Congress did state that “[t]he Secretary of the Treasury, after consultations with the United States Trade Representative, shall prescribe such regulations as may be necessary to carry out this note.” HTSUS GN 8(e), 19 U.S.C. § 1202. Regulatory silence with respect to US-IFTA claim verification indicates that the Secretary determined that such regulations are not necessary [CBP’s Office of Strategic Trade Regulatory Audit division has provided recommendations (“tips”) to members of trade community. See Focused Assessment Program Exhibit 5Q – Israel Free Trade Act (IFTA) – Technical Information for Pre-Assessment Survey (TIPS), CBP (2003). The primary purpose of the document, however, is to provide CBP Regulatory Auditors with the auditory framework, as required inter alia under 19 C.F.R. § 163.11 (2013), rather than to impose a regulatory mandate on the importer pursuant to HTSUS GN 8(e), 19 U.S.C. § 1202.]. Therefore, regulatory silence on US-IFTA document verification invites Chevron analysis.
Chevron’s reasonableness standard for US-IFTA was adopted by CBP Headquarters in HQ H013526 (2008). HQ H013526 involved the importer who challenged CBP’s origin verification claim with respect to unleaded gasoline imports. CBP requested documents, including “invoices and other payments” that would support US-IFTA claim. HQ H013526, 14 (2008). CBP used reasonableness clause – “it was reasonable for CBP to request … records supporting … assertion that the crude oil in question was in fact processed as described above in the Israeli refinery.” Id. (emphasis supplied). Further, CBP noted that such request was reasonable because “Israel is not known as a country that produces petroleum products beyond its own needs for the purposes of exporting it.” Id. Thus, CBP needs not only to request documents that are reasonable, but also to supplant rationale (whether internally or externally) as to why such request passes the muster of Chevron reasonableness standard.
Several years later, in HQ H167111 (2011), CBP Headquarters elaborated on the standard of denial for US-IFTA document verification. CBP Headquarters stated that the US-IFTA denial is warranted if “[i]t is not possible for CBP to follow the documentation and link one step to the next.” Id. The argument below establishes that US-IFTA document verification embodies Chevron standard for CBP inquiry.
Chevron Step One: Congress Explicitly Provided Requirements for Document Verification.
Under Chevron’s first step, it is necessary to establish whether Congress clearly and unambiguously spoke on the matter of US-IFTA document verification. Congress authorized the Executive branch to negotiate the trade agreement between Israel and the United States by enacting Trade and Tariff Act of 1984. Pub. L. 98-57., 98 Stat. 2948, 3013-3038 (Oct. 30, 1984); 19 U.S.C. § 2112. Trade and Tariff Act of 1984 permitted President to negotiate the trade agreement with Israel, which the President may otherwise be constitutionally prohibited from doing. U.S. Const. art. I § 1 (“All legislative Powers herein granted shall be vested in a Congress of the United States …”). Pursuant to the congressional authorization, the executive branch entered in the agreement with Israel, The United States-Israel Free Trade Area, which became effective on August 19, 1985. Congress approved the agreement under the United States – Israel Free Trade Area Implementation Act of 1985. 19 U.S.C. 2112 et seq. US-IFTA rules of origin, including documentary requirements, are prescribed under Annex 3 of the agreement.
Congress directed CBP, under Annex 3 ¶ 9, to accept two (2) types of documents to fulfill US-IFTA claim. First document is the Certificate of Origin, which is to be completed and signed by the exporter and to be presented CBP “in accordance with its internal regulations.” US-IFTA Annex 3 ¶ 9. While CBP did not promulgate regulations with respect to US-IFTA under Administrative Procedures Act, 5 U.S.C. § 553 et. seq., the agency is fully aware of congressionally mandated Certificate of Origin requirement. T.D. 94-47 (May 17, 1994) (“Customs response: Unlike the GSP and CBI, the U.S. Israel Free Trade Area [FTA] Agreement specifically provides in Annex 3 for the submission of a Certificate of Origin when the claim for duty-free or reduced-duty treatment is made”). The second requirement listed in US-IFTA Annex 3 ¶ 9 concerns exporter’s declaration. Unlike US-IFTA Certificate of Origin, the Congress agreed not to require the exporter to execute a declaration for each US-IFTA product being imported, but merely be prepared to submit a declaration. Id. (“[t]he exporter or person signing the certificate of origin shall be prepared to submit a declaration * * * upon request by a Party”) (emphasis supplied). For all prospective declarations, Congress requires declarants to set “forth all pertinent details, concerning the production or manufacture of the articles, which were used to prepare the certificate of origin.” Id. Congress further restricted CBP’s exercise of discretion with respect to declaration documentary requirements to two situations only:
- When a Party has reason to question the accuracy of the statements on a certificate of origin. Id.
- When a Party randomly verifies certificates of origin. Id.
Congressional command that limits CBP’s discretion for declaration requests to only two aforementioned situations stands sharply in contrast with Congress’ position favoring the grant of US-IFTA preferential treatment even if the importer claiming the preference is not able to provide the required documents. Congress permitted CBP to “waive production of the certificate.” Id. Congress recommended CBP to apply waiver “on case by case basis” and subject to CBP’s satisfaction “that the imported articles comply with the country of origin requirements.” Annex 3 conditions of the waiver are broader than conditions of denial. “Case by case basis” is applicable to many scenarios and CBP’s US-IFTA favorable exercise of discretion (satisfaction) is not limited to any number of circumstances. Congressional recommendations to CBP calling for favorable treatment of US-IFTA goods notwithstanding documentary deficiencies are further reflected in the laws that CBP is required to administer:
The Congress finds that barriers to (and other distortions of) international trade are reducing the growth of foreign markets for the products of United States agriculture, industry, mining, and commerce, diminishing the intended mutual benefits of reciprocal trade concessions, adversely affecting the United States economy, preventing fair and equitable access to supplies, and preventing the development of open and nondiscriminatory trade among nations. The President is urged to take all appropriate and feasible steps within his power (including the full exercise of the rights of the United States under international agreements) to harmonize, reduce, or eliminate such barriers to (and other distortions of) international trade. The President is further urged to utilize the authority granted by subsection (b) of this section to negotiate trade agreements with other countries and instrumentalities providing on a basis of mutuality for the harmonization, reduction, or elimination of such barriers to (and other distortions of) international trade. 19 U.S.C. § 2112(a).
Congressional pronouncements coupled with Presidential accord heavily tilt in favor of admissibility of US-IFTA products notwithstanding the documentary deficiencies. For the foregoing reasons, it is not necessary to engage in the second step of the Chevron analysis. Congress (and the President) have directly spoken to the precise question at issue – US-IFTA Annex 3 is the operative document binding on CBP and importer. If the intent of Congress is clear, that is the end of the matter, and CBP “must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 843. Congress prescribed the standard in the Annex 3, which if followed, would be sufficient to qualify the product for US-IFTA.
Congress requires the exporter to submit declaration with details “concerning the production or manufacture of the articles, which were used to prepare the certificate of origin.” Id. The declaration is to include the following:
- “A description of the article, quantity, numbers and marks of packages, invoice numbers, and bills of lading.”
- “A description of the operations performed in the production of the article in a Party and identification of the direct costs of processing operations.”
- “A description of any materials used in production of the article which are wholly the growth, product, or manufacture of either Party, or a statement as to the cost or value of such materials.”
- “A description of the operations performed on, and a statement as to the origin and cost or value of, any foreign materials used in the article which are claimed to have been sufficiently processed in a Party [Israel] so as to be materials produced in that Party [Israel].”
- “A description of the origin and cost or value of any foreign materials used in the article which have not been substantially transformed in a Party [Israel].”
That’s it! Clear and precise! Documents must reasonably indicate the US-IFTA applicability within the legal boundaries of Chevron and HQ H013526. The documents must enable CBP “to follow the documentation and link one step to the next.” HQ H167111. The purpose of verification is to “verify the accuracy and completeness of submitted factual information.” Max Fortune Industrial Co. Ltd. v. U.S., Slip Op. 13-52, Court No. 11-00340 (CIT, 2013) citing 19 C.F.R. § 351.307(d) (2012). The accuracy and completeness of factual information related to US-IFTA claim must meet the congressional command in Annex 3.
