March 23, 1998

March 31, 1998

Ms. Shari McCann
Reconciliation Team
U.S. Customs Service
1300 Pennsylvania Avenue, NW
Room 5.2A
Washington, D.C. 20229-0001

Re: ACS Reconciliation Prototype

Dear Ms. McCann:

The Joint Industry Group ("JIG") appreciates the opportunity to comment on the latest proposed Automated Commercial System (ACS) Reconciliation Prototype that was published in the Federal Register of February 6, 1998.

JIG is a coalition of more than 100 companies, trade associations, professionals and businesses actively involved in international trade. We both examine and reflect the concerns of the business community relative to current and proposed customs-related policies, actions, legislation and regulations, and undertake to improve them through dialogue with the Customs Service, other government agencies, and the Congress.

JIG is very pleased that this latest version of the prototype addresses many of the concerns expressed by our members and incorporates business-like procedures. Customs’ adoption of the blanket application and the aggregate reconciliation are major improvements. On the other hand, we continue to believe Customs' proposal to eliminate existing reconciliation-type proposals developed at the port level for periodic value adjustment reporting before testing the revised reconciliation prototype is a mistake. The prototype will commence no earlier than October 1, 1998, but no provision is made for existing reconciliation-type programs that are in use on the date the prototype commences. JIG requests that existing reconciliation-type reporting programs be permitted to continue until the close of the period that they cover. For example, if the prototype commences on October 1, 1998, importers who have been reporting on a calendar year basis must be permitted to complete their 1998 reporting under the existing program, before utilizing the ACS reconciliation prototype.

During the many meetings held on reconciliation, the trade expressed its overwhelming support for the acceptance of a value adjustment factor that would be applied at the time of entry. If this approach were adopted, the administrative burden of flagging entries and reporting of the value adjustment applicable to each entry within the 15-month reconciliation time period would be unnecessary. This much needed and desired procedure is not reflected in the discussion of the revised ACS reconciliation prototype. Although it may not truly be a part of reconciliation, it should be recognized as an integral part of the value-reporting program and included in any discussion of reconciliation.

As we noted in comments on previous reconciliation proposals, some of our members have pointed out that neither the reconciliation nor the prior disclosure provisions provide an adequate disclosure mechanism for importations that may have entered the U.S. in passenger baggage or by express consignment carrier. In such instances, when the company identifies various additions to the value of the merchandise that should be reported to Customs, the company cannot identify the specific entry document for the purpose of reconciliation. Also, companies are reluctant to submit prior disclosures because disclosures carry with them the admission of wrongdoing when that is generally not the case. The current proposal ignores this problem. We again urge you to modify the reconciliation prototype to address this situation.

Specific Comments

1. The Prototype should not be the exclusive reconciliation method. According to 19 U.S.C. 1484(b)(1), "A party may elect to file a reconciliation . . .." (Emphasis Supplied). Thus, methods other than reconciliation must be available to importers to provide post-entry information and adjustments. This is particularly true if Customs is going to allow all entries to liquidate by operation of law one year after entry. When the Mod Act was under consideration, Customs pointed out that "flagging" an entry for reconciliation would permit Customs to liquidate the underlying entries as to all issues other than the issues flagged. Importers, and we think Customs too, assumed that liquidation of the underlying entries would occur soon after entry, providing those who wanted it with early finality as to the classification, value, and other issues related to the merchandise that were not subject to reconciliation. The recent announcement of the 314-day liquidation cycle and possible one-year liquidation cycle changes the equation. Companies may have to reassess the wisdom of utilizing the reconciliation process if early liquidation of the underlying entries would not occur.

2. Reconciliation -- Menu Approach. Although JIG is pleased with Customs’ decision to adopt a menu approach that includes entry-by-entry reconciliation and aggregate reconciliation, our members are troubled by the restriction placed on aggregate reconciliation that every entry on the reconciliation must involve an absolute increase. Practically, this restriction is going to add enormous administrative costs to a company's reconciliation process. If, for example, a blanket application has been chosen because all entries are the subject of assists or additional payments, but there were currency fluctuations during the period as well, the duties on each entry will have to be calculated separately and those entitled to a refund placed on an entry-by-entry reconciliation, while the balance would go on an aggregate reconciliation. Once the duty has been calculated entry-by-entry, it would make little sense to file both types of reconciliation. JIG submits that netting should permitted to encourage the use of aggregate reconciliation.

Even if Customs does not alter its position on netting, JIG believes that an aggregate reconciliation should be permitted where the importer would be entitled to a refund but chooses not to make a claim for it. This scenario could arise where in a related party transaction, the transfer price of goods is estimated and the importer uses the reconciliation process to provide the adjusted price. Let us assume that in the first half of the year an upward adjustment is required, but in the second half of the year, a reduction in the claimed values must be reported. We assume that the importer is required to declare the correct values whether they result in additional duties or a refund. Of course, if the importer sought a refund, it would have to file an entry-by-entry reconciliation. It is unclear, however, whether the importer could file an aggregate reconciliation if it makes no claim for a refund. JIG submits that permitting the aggregate reconciliation in these circumstances is the only sensible result.

3. Reconciliation of classification and HTS heading 9802.

Classification. As we have expressed in the past, there should be no limitations on classification reconciliation. As proposed, classification issues will be eligible for reconciliation only if there is an outstanding request for an administrative ruling, protest, petition, or court action. This restriction would effectively eliminate classification reconciliation for most importers.

Reconciliation for all classification issues is essential in order to comply with the reasonable care standard. There are instances when, at the time of importation, the classification of merchandise is undetermined because not enough information is known about it, its use, materials, etc., by company personnel who are responsible for the customs clearance process. This information is available, but at the moment of entry (and potentially for some time thereafter) not to the pertinent company officials. Since reconciliation was designed as an integral part of the informed compliance process, and that process envisions giving importers the opportunity to obtain and submit complete, accurate information on each importation, Customs must permit classification reconciliation beyond the very limited circumstances described in the notice.

We do not agree with Customs that classification issues are, in most instances, closely linked to admissibility. In this day and age, very few types of merchandise may be excluded from entry. Rather, than use the butcher knife to eliminate all product classification from the reconciliation process, JIG suggests using the scalpel and only cutting out those few products where admissibility based on classification could truly be an issue. We also disagree that the Supplemental Information Letter process is an acceptable substitute for making post-entry classification adjustments. It leaves a company exposed to monetary penalties for not exercising reasonable care.

By proposing to limit classification reconciliations to those issues pending before Customs or a court, the ACS Reconciliation Prototype limits the statutory language of section 1401(s) to only those issues that are "undetermined" by the Government. In so doing, Customs arbitrarily and unnecessarily circumscribes the importer’s right to seek reconciliation of any undetermined fact or issue.

HTS heading 9802. Closely related to the classification issue is the limitation placed on 9802 reconciliations, which is limited to reconciling estimated to actual cost. This splitting of the 9802 issue between valuation and classification is unnecessary and contrary to how 9802 programs have been administered for years. During a 9802 adjustment reporting period, component suppliers may change and the country of origin of components may change. In the past, when a foreign-made component was substituted for a U.S.-made component, importers would report these changes to customs and pay duties at the end of the reporting period. If Customs prohibits importers from making these adjustments through the ACS reconciliation prototype, it will have unnecessarily limited the usefulness of the program and denied to importers the method for reporting these frequent adjustments, which was contemplated when the Mod Act was passed. JIG questions what Customs will gain by retaining this restriction, other than making the program needlessly complicated for the trade and Customs field officers.

Finally, prototypes are generally used by those engaged in research and development for the purpose of evaluation. By restricting classification and 9802 reconciliations, Customs has prejudged the issue. Instead of eliminating classification reconciliations, Customs should use the prototype to determine how often critical classification information is unavailable and whether the proposed system can accommodate classification reconciliations.

4. Protection from penalties. Even though reconciliation was added to the law four years ago, there is still no mechanism by which importers exercising reasonable care can indicate that information in an entry summary is undetermined and incomplete, and can insulate themselves from investigations and penalties. In Section 637 of the Senate Report 103-189, the Committee states:

However, it is the Committee’s intent that, in most cases, discrepancies and inaccuracies in information contained in entry summaries or import activity summary statements for which a reconciliation will be submitted should not be penalized under 592 for failure to exercise reasonable care since the importer, by noting its intent to submit a reconciliation, is indicating that the information in the entry summary or import activity statement relating to the reconciliation is incomplete.

We request that until a reconciliation program is implemented, an interim procedure be created in which an importer can gain protection from penalties by notifying Customs at the time of entry or within a reasonable period thereafter that information is undetermined and being gathered.

5. Importer electronically transmits the reconciliation via ABI. Under the prototype only 9,999 underlying entries may be covered by reconciliation. This limitation will adversely affect our members and create unnecessary work and could result in confusion. With respect to transmission of the Header file and the Association file, it appears that the data required does not contain a field that will link the two files together.

6. Interest Calculation. The restrictions contained in 19 U.S.C. 1505 on the method of determining the interest on underpayments or overpayments of interest still would apply to the reconciliation process, although Customs indicates that it is in the process of analyzing business-realistic options for interest calculation which are revenue neutral and do not link to every underlying entry. JIG submits that finding a simple, reasonable method for calculating interest is critical to the effective and efficient implementation of ACS reconciliation. This obstacle was overcome with respect to the new import activity summary statement concept. A similar, creative approach is required here. We look forward to commenting on the options for interest calculation that will be published in the Federal Register.

7. Overages and Shortages. JIG notes that the Customs Service has not included a component in the reconciliation prototype for overages and shortages. We understand that, in some instances, overages and shortages may be directly linked to the admissibility of merchandise. However, this is not true for the majority of imported goods. Nor do we believe that it is a valid reason for not including a component in the prototype for overages and shortages, since, even with respect to merchandise subject to admissibility concerns (e.g., quota-class merchandise), it is frequently the case that an overage or shortage will be discovered long after entry. Under these circumstances, the inclusion of an overages and shortages component will benefit both Customs and the importing community.

8. Ports Assigned to Process Reconciliations. The Customs Service has only assigned 11 ports to initially handle all reconciliations. Currently, most ports have procedures or agreements with companies on how reconciliation issues are handled. Importers and Customs at each port have built up close working relationships, based on the needs of individual importers and the resources available to Customs, which permit reconciliation issues to be discussed and settled easily and efficiently, with a minimum amount of debate.

Limiting the processing of reconciliations to only 11 ports will disrupt the close working relationships which most importers have already built up with the Customs officials with whom they currently interface, and will necessitate establishing totally new relationships with other Customs personnel to educate them concerning the peculiarities of each importer’s transactions. Accordingly, JIG requests that all ports be permitted to process reconciliations from the outset of the program, to preserve the working relationships which importers have established with local Customs officials over a very long period, and to insure that the prototype will be implemented efficiently.

Should you have any questions about our comments or wish to conduct further discussions about reconciliation or any other matter with our members, please contact me at (202) 296-3355.

Sincerely,

Richard H. Abbey
Chairman
Import Programs Committee