[Federal Register Volume 70, Number 154 (Thursday, August 11, 2005)]
[Notices]
[Pages 46882-46884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-15904]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOMELAND SECURITY

Bureau of Customs and Border Protection


Clarification of the National Customs Automation Program Test 
Regarding Reconciliation; Latent Defects

AGENCY: Customs and Border Protection, Homeland Security.

ACTION: General notice.

-----------------------------------------------------------------------

SUMMARY: This document clarifies the Customs and Border Protection 
Automated Commercial System Reconciliation prototype test by setting 
forth that the issue of value allowances for alleged latent 
manufacturing defects

[[Page 46883]]

made pursuant to 19 CFR 158.12 or any other provision is not among the 
issues eligible for Reconciliation. Entry summaries cannot be flagged 
for Reconciliation to account for latent manufacturing defects 
discovered after importation. All other aspects of the test remain the 
same as set forth in previously published Federal Register notices.

DATES: The two-year testing period of this Reconciliation prototype 
commenced on October 1, 1998, and was extended indefinitely starting 
October 1, 2000. Applications to participate in the test will be 
accepted throughout the duration of the test.

ADDRESSES: Written inquiries regarding participation in the 
Reconciliation prototype test and/or applications to participate should 
be addressed to Mr. Richard Wallio or Ms. Marla Bianchetta, 
Reconciliation Team, Bureau of Customs and Border Protection, 1300 
Pennsylvania Ave. NW., Room 5.2A, Washington, DC 20229-0001. Inquiries 
regarding the test also may be made by e-mail: [email protected].

FOR FURTHER INFORMATION CONTACT: Mr. Richard Wallio at (202) 344-2556 
or Ms. Marla Bianchetta at (202) 344-2693.

SUPPLEMENTARY INFORMATION:

Background

    Initially, it is noted that on November 25, 2002, the President 
signed the Homeland Security Act of 2002, 6 U.S.C. 101 et seq., Public 
Law 107-296 (the HS Act), establishing the Department of Homeland 
Security and, under section 403(1) (6 U.S.C. 203(1)), transferring the 
U.S. Customs Service, including functions of the Secretary of the 
Treasury relating to the Customs Service, to the new department, 
effective on March 1, 2003. Also, under the HS Act and the 
Reorganization Plan Modification for the Department of Homeland 
Security that was signed on January 30, 2003, the U.S. Customs Service 
was renamed the Bureau of Customs and Border Protection (CBP). The 
agency will be referred to by that name in this document, unless 
reference to the Customs Service (or Customs) is appropriate in a given 
context.
    Reconciliation, a planned component of the National Customs 
Automation Program (NCAP), as provided for in Title VI (Subtitle B) of 
the North American Free Trade Agreement Implementation Act (Pub. L. 
103-182, 107 State. 2057 (December 8, 1993)), is currently being tested 
by CBP under the CBP Automated Commercial System (ACS) Prototype Test. 
Customs initially announced and explained the test in a general notice 
document published in the Federal Register (63 FR 6257) on February 6, 
1998. Clarifications and operational changes were announced in several 
subsequent Federal Register notices: 63 FR 44303, published on August 
18, 1998; 64 FR 39187, published on July 21, 1999; 64 FR 73121, 
published on December 29, 1999; 66 FR 14619, published on March 13, 
2001; 67 FR 61200, published on September 27, 2002; 67 FR 68238, 
published on November 8, 2002; 69 FR 73730, published on September 2, 
2004; and 70 FR 1730, published on January 10, 2005. A Federal Register 
(65 FR 55326) notice published on September 13, 2000, extended the 
prototype indefinitely.
    For application requirements, see the Federal Register notices 
published on February 6, 1998, and August 18, 1998. Additional 
information regarding the test can be found at http://www.customs.gov/xp/cgov/import/cargo_summary/reconciliation/.

Reconciliation Generally

    Reconciliation is the process that allows an importer, at the time 
an entry summary is filed, to identify undeterminable information 
(other than that affecting admissibility) to CBP and to provide that 
outstanding information at a later date. The importer identifies the 
outstanding information by means of an electronic ``flag'' which is 
placed on the entry summary at the time the entry summary is filed. 
Prior to this clarification, the issues for which an entry summary 
could be ``flagged'' (for the purpose of later reconciliation) were 
limited to: (1) Value issues; (2) classification issues, on a limited 
basis; (3) issues concerning value aspects of entries filed under 
heading 9802, Harmonized Tariff Schedule of the United States (HTSUS; 
9802 issues); and (4) post-entry claims under 19 U.S.C. 1520(d) for the 
benefits of the North American Free Trade Agreement (NAFTA) or the 
United States-Chile Free Trade Agreement (US-CFTA) for merchandise as 
to which such claims were not made at the time of entry.
    Under the test procedure, the flagged entry summary (the underlying 
entry summary) is liquidated for all aspects of the entry except those 
issues that were flagged. The means of providing the outstanding 
information at a later date relative to the flagged issues is through 
the filing of a Reconciliation entry. Thus, the flagging of an entry 
summary constitutes the importer's declaration of intent to file a 
Reconciliation entry. The flagged issues will be liquidated at the time 
the Reconciliation entry is liquidated. Any adjustments in duties, 
taxes, and/or fees owed will be made at that time. (The Reconciliation 
test procedure for making post-entry NAFTA claims is explained in the 
February 6, 1998, and December 29, 1999, Federal Register notices.)

Reconciliation and Defective Merchandise Claims--19 CFR 158.12

    Under Sec.  158.12 of the Customs and Border Protection (CBP) 
regulations (19 CFR 158.12), importers may request an allowance in 
value for merchandise found by the port director to be partially 
damaged at the time of importation. For example, if the port director 
finds that the imported merchandise contains defective zippers, an 
allowance in value may be granted to the extent of the defect. 
Reconciliation is an acceptable method of reporting the change in value 
if it is known at the time of importation that the merchandise at issue 
is defective but the extent of the defect is not known. Thus, as in the 
above example, if the importer does not have sufficient information to 
determine the extent of the known defect when the entry is filed (e.g. 
because it is not yet known whether the zippers can be repaired, and if 
so, the cost of such repairs), the entry can be flagged for 
Reconciliation. The importer can file a Reconciliation entry once the 
extent of the known defect is established.
    Some importers have requested an allowance in value under Sec.  
158.12 for imported merchandise that allegedly contains a latent 
manufacturing defect. A latent manufacturing defect is a defect that 
exists at the time of manufacture, and thus at the time of importation, 
but is invisible, hidden, or concealed. The defect is not discovered 
until some time later (in many cases, long after importation), usually 
when a consumer requests a repair under a consumer warranty pertaining 
to the imported article. The importer's claim for a defective 
merchandise allowance is generally based on the costs of the warranty 
repairs. Recently, some of these importers have flagged entry summaries 
for Reconciliation on the issue of latent manufacturing defects so that 
information may be submitted after any latent defects are revealed (for 
example, information regarding the nature of the latent defects, the 
identity of the defective merchandise, and the extent of the defects 
based on warranty repair costs or other data). Thus, the question has 
arisen as to whether these types of claims are value issues eligible 
for Reconciliation. The purpose of this notice is to clarify that CBP 
does not consider claims for latent defects value issues eligible for 
Reconciliation and will not accept Reconciliation entries based on such 
claims. Because the

[[Page 46884]]

importer does not know that a latent defect in the merchandise exists 
at the time of entry summary, the importer cannot flag the entry 
summary for later resolution through Reconciliation.
    CBP notes that the issue of whether these latent defect claims fall 
within the scope of Sec.  158.12, and if so, the evidence needed to 
support these claims, is still under review by the courts. There have 
been several preliminary court rulings on the subject, but several 
cases addressing these issues are still pending at the Court of 
International Trade and the Court of Appeals for the Federal Circuit 
(Volkswagen of America, Inc. v. United States, Court No. 96-01-00132, 
Court of International Trade; Saab Cars USA Inc. v. United States, 
Court Nos. 04-1268 and 04-1416, Court of Appeals for the Federal 
Circuit). Regardless of the final outcome of the court cases, the 
Reconciliation procedure cannot be used with regard to latent defect 
claims made pursuant to Sec.  158.12 or any other provision.

Test Clarification

    Reconciliation may not be used with respect to claims for value 
allowances made pursuant to Sec.  158.12 or any other provision based 
on alleged latent manufacturing defects. Thus, to clarify, the 
Reconciliation test covers the following issues: (1) Value issues other 
than claims based on latent manufacturing defects; (2) classification 
issues, on a limited basis; (3) issues concerning value aspects of 
entries filed under heading 9802, Harmonized Tariff Schedule of the 
United States (HTSUS; 9802 issues); and (4) post-entry claims under 19 
U.S.C. 1520(d) for the benefits of the North American Free Trade 
Agreement (NAFTA) or the United States-Chile Free Trade Agreement (US-
CFTA) for merchandise as to which such claims were not made at the time 
of entry. CBP considers this a clarification of the test procedure 
because CBP never contemplated latent defect claims to be value issues 
eligible for Reconciliation.

    Dated: August 3, 2005.
Denise Crawford,
Acting Assistant Commissioner, Office of Field Operations.
[FR Doc. 05-15904 Filed 8-10-05; 8:45 am]
BILLING CODE 4820-02-U