Customs Service: Passenger User Fee Needs to be Reevaluated (Letter
Report, 05/22/95, GAO/GGD-95-138).

Pursuant to a congressional request, GAO reviewed the passenger user
fees (PUF) that the Customs Service charges all passengers entering the
United States by sea or air, focusing on: (1) whether carriers have
collected and remitted PUF as required; (2) factors hampering the
collection of PUF; and (3) options for improving the collection and
remittance of PUF.

GAO found that: (1) air and sea carriers collected and remitted to
Customs $756.4 million in PUF between July 1986 and the end of fiscal
year 1993; (2) some carriers collected PUF but did not remit them, while
other carriers did not collect any PUF for certain periods of time; (3)
carriers owed about $45 million in PUF from July 1986 to December 1990;
(4) Customs' ability to collect PUF is hampered by inconsistencies in
collecting and remitting PUF, some carriers' misinterpretations of
passenger exemptions, and internal control weaknesses; (5) Customs'
ability to identify nonpayment of PUF through compliance audits has
limitations, since it can only audit three or four carriers annually and
its auditors frequently encounter obstacles while conducting audits; and
(6) Customs could require the collection and remittance of PUF at the
time and place of arrival, although the feasibility or costs of
implementing such an option has not been evaluated.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-138
     TITLE:  Customs Service: Passenger User Fee Needs to be Reevaluated
      DATE:  05/22/95
   SUBJECT:  Fees
             Customs administration
             Tariffs
             Use taxes
             International travel
             Air transportation operations
             Common carrier operations
             Water transportation operations
             Transportation industry
             Noncompliance
IDENTIFIER:  Canada
             Mexico
             
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Cover
================================================================ COVER


Report to the Committee on Finance, U.S.  Senate, and Subcommittee on
Trade, Committee on Ways and Means, House of Representatives

May 1995

CUSTOMS SERVICE - PASSENGER USER
FEE COLLECTION NEEDS TO BE
REEVALUATED

GAO/GGD-95-138

Passenger User Fees


Abbreviations
=============================================================== ABBREV

  ATA - Air Transport Association
  COBRA - Consolidated Omnibus Budget Reconciliation Act
  IATA - International Air Transport Association
  ICCL - International Council of Cruse Lines
  INS - Immigration and Naturalization Service
  NAFTA - North American Free Trade Agreement
  NFC - National Finance Center
  OIG - Office of Inspector General
  ORA - Office of Regulatory Audit
  PUF - Passenger User Fee

Letter
=============================================================== LETTER


B-260120

May 22, 1995

The Honorable Bob Packwood, Chairman
The Honorable Daniel Patrick Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Philip M.  Crane, Chairman
The Honorable Charles B.  Rangel
Ranking Minority Member
Subcommittee on Trade
Committee on Ways and Means
House of Representatives

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985\1
and the Tax Reform Act of 1986\2 authorized the U.S.  Customs Service
to charge user fees for processing passengers and conveyances, such
as commercial vessels and vehicles, entering the United States.\3 The
fee established by COBRA for processing international air and sea
passenger arrivals in the United States is called the passenger user
fee (PUF) and is $6.50 per passenger.  As agreed with the Committees,
our objectives were to (1) determine whether carriers have collected
and remitted PUFs; (2) assess any factors that may hamper the
collection of this fee, including statutory restrictions, internal
control weaknesses, and audit limitations; and (3) identify any
options that may improve the collection and remittance of the PUF. 

To address the objectives we reviewed (1) applicable legislation and
regulations and Customs' guidance and policies related to the PUF,
(2) Customs' compliance audits of air and sea carriers\4 and
Treasury's audit of the PUF for air passengers, (3) Customs'
passenger arrival data and carrier PUF payment records, and (4)
reports related to Customs' internal controls over the PUF done by
Treasury and by us. 

We conducted this review in Washington, D.C., and Los Angeles between
March 1994 and February 1995 in accordance with generally accepted
government auditing standards.  Appendix I contains a more detailed
discussion of our objectives, scope, and methodology. 


--------------------
\1 P.L.  99-272 (1986). 

\2 P.L.  99-514 (1986). 

\3 These public laws are codified at 19 U.S.C.  58c. 

\4 Sea carriers include cruise lines serving the United States. 
However, some freighter lines also carry passengers on cruises. 


   BACKGROUND
------------------------------------------------------------ Letter :1

COBRA of 1985 and the Tax Reform Act of 1986 authorized Customs to
charge fees for providing various inspectional services.  The fees
are to be deposited as offsetting receipts in the Customs User Fee
Account, a separate account within Treasury's general fund.  Use of
the fees is not subject to the annual congressional appropriation
process.  In fiscal year 1993, the latest year for which complete
data were available, Customs collected a total of $189.6 million in
COBRA user fees, of which $144.1 million were PUFs. 

COBRA user fee revenues were initially used to pay for Customs'
inspectional overtime and excess preclearance costs.\5 The Customs
and Trade Act of 1990\6 amended COBRA of 1985 to allow Customs to
hire inspectional personnel; purchase equipment; and fund related
items, such as computer software used to target passengers for
inspection, that enhance inspectional services, after overtime and
excess preclearance costs are funded.  Customs data for fiscal year
1993 showed that overtime costs and excess preclearance costs totaled
$103.9 million and $7.9 million, respectively.  For the same year,
costs for existing and new inspectional positions and equipment and
related items totaled $43.5 million.  Overall, the costs for
COBRA-funded items totaled $155.3 million in fiscal year 1993. 

The annual allocation of COBRA user fee revenues has generated
surpluses each fiscal year since 1987 because revenues have exceeded
reimbursable costs.  The annual surpluses have resulted in a
cumulative surplus of $189.5 million through fiscal year 1993.  The
surplus has been used to offset the federal budget deficit. 

The COBRA user fee statute and its implementing regulations\7 require
that air and sea carriers and other issuers of tickets and travel
documents--such as travel agents--collect the PUF when a ticket or
travel document is issued to a passenger.\8 Passengers who meet the
following criteria are exempt from paying the PUF:  (1) employees of
air and sea carriers traveling on official business; (2) diplomats
who are in the United States, or who have a diplomatic passport or
visa; (3) passengers precleared on Military Airlift Command flights;
(4) passengers arriving due to an emergency or forced landing; and
(5) passengers transiting the United States using an airport
in-transit facility. 

Carriers and other ticket issuers are required to remit the PUFs
within 31 days after the end of the calendar quarter in which they
were collected.  For example, PUFs collected between January 1 and
March 31 are to be remitted by May 1.  If the PUF is not collected
when the ticket is issued to a passenger, the fee is to be collected
from the passenger at the time of departure by the departing carrier. 

Customs has contracted with a bank in Atlanta, Georgia, to process
PUF payments, and carriers are required to mail their quarterly
payments to this bank.  The bank processes the payments and then
wires the funds to the Federal Reserve Bank in New York City, which
posts the funds to the Customs subaccount in the Treasury account. 
The bank is also to send related documentation-- such as a detailed
transaction report, photocopies of checks, and a deposit slip--to
Customs' National Finance Center (NFC) in Indianapolis, Indiana.\9
NFC is to review the bank's documentation and record the payment
information in a database that tabulates this information and
generates a report of carrier payments by quarter. 

In December 1993, Congress enacted the North American Free Trade
Agreement (NAFTA) Implementation Act,\10 which amended the user fee
statute by (1) increasing the PUF from $5.00 to $6.50 through fiscal
year 1997; and (2) eliminating the exemptions from the fee for
passengers travelling to the United States from Canada, Mexico, U.S. 
territories and possessions, and adjacent islands\11 also through
fiscal year 1997.  The changes became effective in January 1994.\12
Customs estimated that about 18 million passengers traveled to the
United States from the exempted locations in fiscal year 1993, of
whom 14 million were air passengers and 4 million were sea
passengers.  Customs also estimated that the elimination of
exemptions, coupled with the PUF increase, should generate an
additional $156 million in revenues annually through fiscal year
1997. 

Customs performs compliance audits of air and sea carriers to
determine whether they collect and remit the proper amount of PUFs. 
Carriers are required to maintain necessary documentation for 2 years
to verify the accuracy of their PUF remittances and determine their
compliance with the user fee statute.  Audit staff from Customs'
seven regional offices conduct the compliance audits under the
direction of its Office of Regulatory Audit (ORA).\13 Such audits are
initiated on the basis of referrals from Customs field offices and
from NFC, which is responsible for monitoring carrier payments for
possible changes, such as large fluctuations in carrier payments over
time.  If such changes include significant declines in payments, NFC
may advise ORA to consider initiating a compliance audit.  Customs
cannot use COBRA user fees to fund carrier compliance audits, because
the cost of these audits is not included among those listed in the
statute as payable from fee revenues. 

The COBRA user fee statute contains no billing or other specific
provisions to assess damages or penalties or charge interest for
nonpayment of the PUF by carriers.  However, pursuant to regulation,
Customs can charge interest for PUF amounts that carriers should have
collected but did not, and that the carriers collected but did not
remit.  According to Customs, in order to charge interest, Customs
must determine a nonpayment amount.  This is usually determined on
the basis of an audit.  Customs must then establish a due date and
bill the carrier for the amount of nonpayment.  If the carrier fails
to remit payment by the due date, interest begins to accrue after
that date.  In accordance with regulation, Customs can also assess
damages in some cases, but Customs has no authority to assess
penalties in relation to the PUF. 


--------------------
\5 Preclearance is the process through which international air
passengers and their baggage are tentatively examined and inspected
by Customs for entry into the United States before departure from a
foreign location.  The nine preclearance stations are in Canada--six,
Bermuda--one, and the Bahamas--two.  Excess costs are the additional
costs Customs incurs when providing inspectional services in foreign
ports, as compared to examining and inspecting air passengers and
their baggage in the United States.  Such costs include housing and
moving costs for Customs personnel as well as excess management and
operational costs. 

\6 P.L.  101-382 (1990). 

\7 19 C.F.R.  24.22(g). 

\8 In our review, data were available only for air and sea carriers;
therefore, our discussion excludes other issuers of tickets and
travel documents. 

\9 NFC performs Customs' accounting operations.  Specifically, NFC is
responsible for (1) developing and implementing a Service-wide
financial management program; (2) developing and providing data
processing and internal control services related to revenue,
appropriations, and payroll systems; (3) maintaining central control
of all fiscal and accounting activities; and (4) preparing reports on
revenues collected and the use of appropriations. 

\10 P.L.  103-182 (1993). 

\11 U.S.  territories and possessions include American Samoa, Guam,
the Northern Mariana Islands, Puerto Rico, and the U.S.  Virgin
Islands.  Adjacent islands include all islands in the Caribbean Sea,
the Bahamas, Bermuda, St.  Pierre and Miquelon, and the Turks and
Caicos Islands. 

\12 Beginning with fiscal year 1998, the country exemptions for
Canada, Mexico, U.S.  territories and possessions, and adjacent
islands will be reinstated and the PUF will revert to $5. 

\13 ORA is the unit within Customs responsible for auditing private
sector entities that move merchandise across the borders of the
United States. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Air and sea carriers collected and remitted to Customs $756.4 million
in PUFs from the fee's inception in July 1986 through the end of
fiscal year 1993, the latest year for which complete data were
available.  However, compliance audits of air and sea carriers done
by Customs and by Treasury's Office of Inspector General (OIG) found
that some of these carriers had not paid the PUFs they owed.  The
audits estimated that the nonpayment\14 for the audited carriers
totaled about $15.3 million through November 1994.  In addition, the
audits found that some carriers had collected PUFs but had not
remitted them.  Other carriers had not collected any PUFs for certain
periods of time or from certain sources of ticket sales, such as
overseas offices of U.S.  air carriers. 

The actual amount of PUFs owed is unknown.  However, a Treasury OIG
report projected that air carriers had owed about $45 million in PUFs
from July 1986 to December 1990.  There were no estimates of amounts
owed by sea carriers. 

Several factors hamper Customs' ability to collect PUFs. 

  The COBRA user fee statute requires that the carrier issuing a
     ticket or travel document to a passenger collect and remit the
     PUF, rather than the carrier transporting the passenger to the
     United States.  Since carriers may transport passengers who have
     purchased tickets from other carriers, Customs cannot rely
     solely on passenger arrival data to determine a carrier's PUF
     liability.  Second, the statute does not require carriers and
     other ticket issuers to submit passenger-related supporting
     documentation when remitting PUFs.  Customs verifies remittances
     through audits of carriers. 

  The statute does not provide for specific sanctions for nonpayment. 
     Customs can assess damages for nonpayment, but only on carriers
     that collected PUFs but did not remit them.  Customs can charge
     interest for PUFs owed that were identified during audits of
     carriers but cannot charge interest on PUFs for the period
     between when a carrier collected the fees and when Customs
     billed the carrier.  Customs is developing legislative and
     regulatory proposals to assess penalties and charge interest
     earlier for the nonpayment of PUFs. 

  The statute's exemptions have been misinterpreted by carriers who
     have incorrectly considered some of their passengers exempt from
     the PUF.  For example, some air carriers did not collect PUFs
     from passengers obtaining tickets on the basis of frequent flyer
     mileage because they incorrectly assumed that such tickets were
     exempt from the fee. 

  Air and sea carriers' internal control weaknesses can also
     contribute to PUF nonpayment.  Customs' compliance audits have
     found that some carriers have not developed the necessary
     procedures and internal controls to collect and remit the PUFs. 

Customs' ability to identify nonpayment through its compliance audits
has limitations.  For example, Customs' audit staff resources limit
the number of air and sea carrier compliance audits.  As a result, at
current resource levels, Customs can audit only three or four
carriers a year.  Also, its auditors have encountered several
obstacles while conducting audits, such as restricted access to
records and incomplete and poor quality carrier data. 

In contrast to the collection and remittance of the PUF, remittance
of most of the other COBRA user fees, such as those for processing
commercial vessels, commercial vehicles, and barges, is required at
the time and place of arrival.  This may also be an option worth
considering for collecting and remitting the PUF, although we did not
evaluate the feasibility or costs of implementing such an option. 


--------------------
\14 For purposes of simplicity, the term "nonpayment" includes the
underpayment and nonpayment of the PUF. 


   SOME AIR AND SEA CARRIERS HAVE
   NOT PAID PASSENGER USER FEES
   OWED
------------------------------------------------------------ Letter :3

Customs compliance audits and a Treasury OIG report\15 found that
some air and sea carriers had not paid the PUFs they owed.  Customs
and Treasury estimated that the carriers owed about $15.3 million
through November 1994.  The audits also found that some carriers had
collected PUFs but had not paid them, while others had not collected
any PUFs for certain periods of time or from certain sources of
ticket sales.  The actual amount of PUFs owed is unknown.  However,
the Treasury OIG report projected that air carriers owed about $45
million in PUFs for the period July 1986 to December 1990.  Customs
officials expected that nonpayment of the PUF might increase because
some carriers may not be aware of changes to the fee made by an
amendment--included in NAFTA--to the user fee statute.  The amendment
eliminated the exemption, through fiscal year 1997, for certain
passengers not previously required to pay PUFs. 


--------------------
\15 Audit Report on the U.S.  Customs Service Air Passenger User Fees
(Office of Inspector General, Department of the Treasury, March 26,
1992). 


      COMPLIANCE AUDIT RESULTS
---------------------------------------------------------- Letter :3.1

Air and sea carriers remitted $756.4 million in PUFs they owed to
Customs from the fee's inception in July 1986 through the end of
fiscal year 1993.  As of November 1994, Customs had completed 64
compliance audits of 57 carriers.\16 The audits estimated that
through November 1994, 35 carriers had not paid a total of about
$13.8 million in PUFs to Customs.  Nonpayment was found in 38, or 59
percent, of the 64 audits.\17 The other 26 audits did not identify
any PUF nonpayment. 

Of the $13.8 million in PUFs identified as not having been paid, air
carriers owed about $11.9 million and sea carriers about $1.9
million.  As of November 1994, Customs had collected about $5.4
million of the amount owed, leaving outstanding PUF liabilities of
about $8.4 million.\18 About $7.9 million of the PUFs still
outstanding was owed by three air carriers that were in
bankruptcy--one of which owed $7.1 million--and a sea carrier that
disputed Customs' estimates of PUFs owed.  Two other carriers that
were billed for PUFs--and had made partial payments--still owed about
$0.2 million in fees. 

In addition to the Customs audits, the Treasury OIG audited three air
carriers to determine their compliance with PUF requirements and
found that one foreign air carrier had not paid Customs $1.5 million
in PUFs it owed.\19 As a result of this audit, the carrier remitted
the amount owed to Customs.  The other two carriers did not owe any
PUFs. 


--------------------
\16 Seven carriers were audited more than once. 

\17 The Customs audits found that carriers also owed about $10.7
million in inspection user fees--a fee similar to the PUF--to the
Immigration and Naturalization Service (INS) for its costs associated
with inspecting arriving passengers. 

\18 Customs considers about $0.3 million in PUFs owed by three air
carriers as uncollectible, and therefore it cancelled them as
outstanding liabilities.  A domestic air carrier had part of its
estimated PUF liability waived through a settlement with the Treasury
Department.  Treasury agreed with the carrier that Customs used an
erroneous methodology when estimating the PUF liability.  In
addition, Customs cancelled the PUF liability of two foreign air
carriers because of the low likelihood of collecting the fees. 

\19 The audit also found that the carrier had not paid about $1.3
million in inspection user fees to INS. 


         SOME CARRIERS COLLECTED
         PUFS BUT DID NOT REMIT
         THEM
-------------------------------------------------------- Letter :3.1.1

Customs compliance audits found that some air and sea carriers
collected PUFs but did not remit them to Customs.  For example, an
audit found that a domestic charter air carrier collected $57,220 in
PUFs from a tour operator with whom it had contracted but failed to
remit the fees to Customs for 4 years.  During the audit, the air
carrier returned the PUFs to the tour operator, who then remitted
them to Customs.  In another example, a Customs audit found that a
foreign air carrier collected PUFs on ticket sales outside the United
States totaling $362,410 but did not remit them as required.  The
audit also found that the air carrier (1) erroneously collected PUFs
from passengers purchasing tickets in Canada, which at the time was
exempt from the PUF; (2) failed to collect PUFs from passengers
departing the United States who had not previously paid the PUFs when
the tickets were issued to them; and (3) collected but did not remit
fees, totaling $959,000, owed to other U.S.  government
organizations, such as INS and the Internal Revenue Service.  In a
third example, Customs identified two sea carriers that had collected
$797,855 in PUFs but had not remitted them as required.  As a result
of the audit, the carriers remitted all the PUFs owed. 


         SOME AIR AND SEA CARRIERS
         DID NOT COLLECT ANY PUFS
         FOR CERTAIN PERIODS OF
         TIME OR FROM CERTAIN
         SOURCES OF TICKET SALES
-------------------------------------------------------- Letter :3.1.2

Customs compliance audits also found that some other air and sea
carriers did not collect any PUFs for certain periods of time or from
certain sources of ticket sales.  For example, an audit estimated
that a domestic air carrier failed to collect and remit to Customs
about $7.1 million in PUFs between July 1986 and December 1991 from
ticket sale sources, such as international travel agencies and the
carrier's overseas offices.  According to a Customs official, Customs
submitted a claim against this carrier in bankruptcy court for $5.4
million for the period before the carrier's bankruptcy filing. 
Customs had not billed the carrier for the remaining $1.7 million
covering the period after the bankruptcy filing.  In another example,
a Customs audit found that a sea carrier failed to collect and remit
$36,050 in PUFs from 20 of its cruises over a 4-year period.  As a
result of the audit, the carrier remitted the amount owed. 


      ESTIMATED PUF NONPAYMENT
---------------------------------------------------------- Letter :3.2

Except for the amounts estimated during Customs compliance audits,
the actual amount of PUF nonpayment is unknown.  However, a 1992
report by Treasury's OIG on air passenger PUFs estimated the fee
nonpayment by air carriers at as much as $45 million, or $10 million
a year.  The estimate was for the period beginning with the inception
of the PUF in July 1986 and ending in December 1990.\20 There were no
estimates of nonpayment by sea carriers. 


--------------------
\20 International passengers also are required to pay a user fee to
INS when they enter the country.  The Justice Department OIG did an
audit on INS' collection of the fee.  In its April 1994 report,
titled Immigration and Naturalization Service, Collection of Carrier
Fees, the Justice OIG estimated that 22 air carriers that had not
remitted any fees had not paid as much as $15.8 million in fees from
January 1991 to December 1992.  One of these carriers owed $11.6
million of the total amount.  The report also estimated that overall
nonpayment for this period--by as many as 178 air carriers--could
total as much as $46.4 million, since those carriers that had
remitted fees did not always remit them accurately. 


      SOME CARRIERS MAY NOT BE
      AWARE OF THEIR PUF LIABILITY
      UNDER NAFTA
---------------------------------------------------------- Letter :3.3

According to Customs officials, the removal of the country exemptions
under the NAFTA implementing legislation will likely increase the
number of (1) passengers required to pay the PUF and (2) carriers
required to collect and remit it.  The Customs officials were
concerned that carriers selling tickets to and from the previously
exempt countries may not comply with the PUF requirements.  While
Customs officials expect that the air and sea carrier industry
associations will notify their members of the amendment's changes,
they believe that many air carriers that will be subject to the PUF
are not members of these associations and thus may be unaware of
their liability.  Because Customs does not know who these carriers
are, it cannot notify them of their responsibility to collect and
remit the PUF.  Customs officials told us that in addition, many of
the air carriers are small with limited automated resources and poor
internal controls that would hinder collecting and remitting PUFs. 
Customs officials were also concerned that these carriers' resource
and internal control limitations may result not only in nonpayment of
PUFs but also in an increased audit workload for Customs to identify
those additional carriers that may not have paid PUFs. 


   FACTORS THAT MAY CONTRIBUTE TO
   PUF COLLECTION AND REMITTANCE
   PROBLEMS
------------------------------------------------------------ Letter :4

Factors that may contribute to PUF collection and remittance problems
are (1) the collection and remittance system established in the COBRA
user fee statute, (2) air and sea carriers' internal control
weaknesses, and (3) limitations associated with Customs compliance
audits. 


      COBRA USER FEE STATUTE CAN
      CONTRIBUTE TO PROBLEMS WITH
      COLLECTION AND REMITTANCE OF
      THE PUF
---------------------------------------------------------- Letter :4.1

According to Customs officials and GAO and Treasury reports, sections
of the COBRA user fee statute can contribute to problems with the
collection and remittance of the PUF.  Specifically, since ticket
issuers are required to collect and remit PUFs, Customs' ability to
determine the PUF liability of these issuers or verify the accuracy
of their fee remittances is limited.  In addition, Customs can only
assess damages for nonpayment of PUFs owed by carriers that collected
but did not remit them, not on carriers that should have but did not
collect the fees.  Customs is developing a proposal for legislative
and regulatory changes to give it the authority to assess penalties
for nonpayment of the PUF.  Finally, carrier misinterpretation of the
statute in relation to the exemptions from the PUF can also
contribute to nonpayment of the fee.  The PUF differs from most of
the other COBRA user fees in that remittance of those fees is
required at the time and place of arrival. 


         STATUTE LIMITS CUSTOMS'
         ABILITY TO DETERMINE
         CARRIERS' PUF LIABILITY
-------------------------------------------------------- Letter :4.1.1

The user fee statute's PUF collection and remittance requirements
limit Customs' ability to determine air and sea carriers' liability
for the fee and can hamper its collection efforts.  As previously
discussed, the statute requires that the carrier issuing a ticket or
travel document to a passenger collect and remit the PUF, rather than
the carrier transporting the passenger.  In our August 1992
report,\21 we identified the collection and remittance requirement as
an impediment to collecting the PUF.  We concluded that since
carriers may transport passengers who have purchased tickets from
other carriers, Customs cannot rely solely on passenger arrival data
to determine a carrier's PUF liability. 

The Treasury OIG report also concluded that "the enabling legislation
for the user fee statute, as written, is difficult for the airline
industry to follow and for Customs to accurately implement."


--------------------
\21 Financial Management:  Customs Needs to Establish Adequate
Accountability and Control Over its Resources (GAO/AFMD-92- 30, Aug. 
25, 1992). 


         CARRIERS NOT REQUIRED TO
         SUBMIT PASSENGER-RELATED
         INFORMATION
-------------------------------------------------------- Letter :4.1.2

As discussed earlier, the user fee statute requires carriers and
other ticket issuers to remit PUFs within 31 days after the end of
the calendar quarter in which they were collected.  However, the
statute does not require these carriers to submit passenger- related
information in support of the payments made.  Instead, the
implementing regulation requires that a carrier submit its name,
address, and tax identification number when remitting PUFs.  However,
according to the Treasury OIG report, some air carriers are not
submitting this information.  According to this report, important air
carrier passenger information that could be used to monitor PUF
payments would consist of (1) the number of passengers transported
into the United States and the number of passengers ticketed by one
air carrier but transported by another, (2) the number of passengers
exempted from the PUF, and (3) the number of passengers for whom PUFs
were not collected in a foreign country but were subsequently
collected upon departure from the United States.  The report
recommended that Customs amend its regulations to require the
submission of such information.  As of February 1995, Customs had not
taken action to implement this recommendation. 

Our August 1992 report also concluded that without information from
carriers on the number of passengers entering the United States,
Customs had no basis for knowing whether carriers had remitted the
proper amount of PUFs.  According to Customs, it must either rely on
the good faith of the carriers to collect and remit all the PUFs they
owe or audit such carriers to verify their remittances. 


         LIMITED SANCTIONS FOR
         PUFS OWED
-------------------------------------------------------- Letter :4.1.3

Customs is limited in the sanctions it can impose on carriers for
PUFs owed.  It can assess damages on carriers that collect but do not
remit the PUF to Customs in a timely manner, and it can charge
interest for PUF amounts billed as a result of an audit of carriers. 
Customs has no authority to assess penalties relating to PUFs.  This
limitation may contribute further to problems with the collection and
remittance of PUFs. 

Customs can assess damages for PUFs owed, but only on carriers that
collected PUFs but did not remit them, not on carriers that should
have but did not collect the fees.  This authority is based on
Customs' 1993 amendment to the international carrier bond
regulation.\22 The regulation was amended to provide for damages
against international carriers that collected PUFs but did not remit
them as required, i.e., within 31 days after the end of the calendar
quarter in which they were collected.  As explained by Customs'
Associate Chief Counsel, Tariffs, Trade, and Regulations, the PUF
amount owed must first be identified and Customs must then bill the
carrier for this amount.  If the carrier fails to remit the amount
billed, Customs can assess damages.  The Associate Chief Counsel
explained that the carrier would be liable for damages because it
would have breached a regulatory requirement that fees collected on
behalf of the government be remitted in a timely manner.\23

Customs can charge interest for PUF amounts that carriers should have
collected but did not, and that carriers collected and did not remit. 
The National Finance Center must first bill a carrier for the amount
owed.  If the carrier does not remit the amount billed, interest
begins to accrue from the date of the bill.  However, Customs cannot
charge interest on PUFs for the period between when a carrier
collected the fees and when Customs billed the carrier, essentially
providing the carrier interest-free use of the fees collected.  For
example, Customs did not charge interest for about $1.5 million in
PUFs owed--covering the period from July 1986 through December
1990--by a foreign air carrier.  In a 1992 memorandum, Customs'
Office of the Chief Counsel stated that since Customs did not bill
the air carrier for the PUFs owed, it therefore did not establish the
condition necessary--a due date for payment\24 --to charge and
collect interest.\25

According to Customs officials, its authority to only charge interest
or assess damages on air and sea carriers for PUFs owed, rather than
having the authority to also assess penalties, may contribute to
carriers owing additional PUFs.  These officials contend the fact
that carriers cannot be penalized either for not collecting any PUFs
or collecting but not remitting them may give carriers no incentive
to comply with PUF requirements.  According to other Customs
officials, the absence of penalties in the user fee statute
contributes to the loss of additional revenue for the government in
the form of penalties and interest that could be assessed on the PUF
amounts owed. 

Customs is developing a proposal to allow it to assess penalties and
charge additional interest and damages for PUFs owed.  The draft
proposal contains both statutory and regulatory changes.  The
statutory change would add a penalty provision for PUFs owed.  The
regulatory change would amend existing regulations to add a provision
under which a carrier could be charged interest for PUFs owed from
the date the fees were originally collected or should have been
collected, as opposed to when Customs billed the carrier.  In
addition, the current international carrier bond regulation would be
amended to provide Customs the authority to assess damages against a
carrier for PUFs owed but not collected and remitted.  The proposal,
however, is not intended to change the current procedures governing
the collection and remittance of the PUF. 


--------------------
\22 19 C.F.R.  113.64(a).  This regulation requires that all
international carriers post a bond to guarantee the payment of all
duties, taxes, and other charges. 

\23 The Customs and Trade Act of 1990 amended the user fee statute to
provide that all administrative and enforcement provisions of the
Customs laws and regulations apply to COBRA user fees, such as the
PUF. 

\24 As discussed earlier, Customs can establish the billing date only
on the basis of an audit. 

\25 This memorandum cited as support a 1987 memorandum from the
Office of Chief Counsel.  According to the memorandum, it would be
difficult under the statutory language of 19 U.S.C.  58(c) to
establish that an [air carrier] is legally obligated to pay a fee it
may not even have collected.  However, if Customs could establish
that an air carrier had collected fees, Customs would have a debt
upon which to base an interest charge. 


         MISINTERPRETATION OF PUF
         EXEMPTIONS CONTRIBUTES TO
         FEES BEING OWED
-------------------------------------------------------- Letter :4.1.4

Customs compliance audits found that some carriers owed PUFs because
they misinterpreted the fee exemptions contained in the user fee
statute.  For example, audits found that some air carriers did not
collect the PUFs as required from their employees, employees' family
members, and retired employees not traveling on official business. 
Other air carriers did not collect PUFs from frequent flyer ticket
purchasers because they assumed that such tickets were exempt from
the fee. 

In another example, a Customs audit found that a sea carrier
disagreed with Customs' interpretation of the exemptions to the PUF
and instead believed that passengers returning by air from cruises
ending in Mexico after traveling in a nonexempt area and passengers
on certain Caribbean cruises that docked at a nonexempt port--and
later docked at an exempt port--were exempt from the PUF. 

According to sea carrier industry association officials, exemptions
from the PUF were not clearly defined, thus leading to their
misinterpretation.  For example, sea carriers did not know how their
cruise itineraries, especially those with multiple ports of call
(including calls at more than one U.S.  port), were affected by these
exemptions because Customs had not provided any guidance about
exemptions.  Furthermore, the association officials were concerned
that Customs interpreted exemptions in ways that would generate
additional revenues.  These officials used the following hypothetical
example to illustrate their concern.  A cruise originates in Miami,
Florida; stops in San Juan, Puerto Rico; and proceeds to ports in the
Caribbean Sea before returning to Miami.  The officials claimed that
according to Customs, a passenger on this cruise can be assessed the
PUF when arriving in San Juan and again for returning ("arriving in")
to Miami.  However, the association officials believed that the PUF
should not apply to the arrival in San Juan because there was no
Customs inspection at that port. 

Customs officials responded that the issue of assessing the PUF more
than once is a matter of differing interpretations between the sea
carrier industry and Customs.  According to Customs' interpretation,
the user fee statute clearly states that the PUF shall be collected
for each arrival at a U.S.  port--in the above example, San Juan and
Miami.  Furthermore, such arrivals do involve some form of Customs
inspection, although such an inspection may not be readily apparent
to passengers.  According to the Customs officials, their December
1993 fact sheet about the changes to the PUF resulting from an
amendment to NAFTA, including clearly defined exemptions, was sent to
known air and sea carriers.  We have no information regarding the
impact of the Customs fact sheet on the carriers' ability to
determine their PUF liability. 


      CARRIER INTERNAL CONTROL
      WEAKNESSES CONTRIBUTED TO
      NONPAYMENT
---------------------------------------------------------- Letter :4.2

Customs compliance audits of air and sea carriers have attributed the
nonpayment of the PUF by some of these carriers to the inadequacy of
their internal controls.  According to Customs officials we spoke
with in one region, collecting and remitting the fee is not a high
priority for some of these carriers.  Consequently, carriers have not
developed the necessary procedures and internal controls to collect
and remit the PUFs.  For example, an audit attributed a domestic
charter air carrier's failure to remit PUFs it had collected to its
own inadequate internal controls as well as those of the tour
operators with whom it had contracted.  According to the audit, the
carrier and tour operators did not periodically review their flights
to ensure their compliance with PUF requirements, nor did they have a
system to ensure that the PUFs were collected and remitted.  In
another example, an audit found that inadequate internal controls
contributed to the failure of a foreign air carrier to remit the PUFs
and fees it had collected on behalf of other U.S.  government
organizations.  The audit found that the carrier's regional office in
the United States that was responsible for remitting the PUFs and
other U.S.  government agency fees did not have access to the
carrier's worldwide sales and fee collection data and did not
maintain passenger data.  Consequently, the regional office was
unable to compute the carrier's liability for PUFs collected outside
the United States. 

Another Customs audit attributed PUF nonpayment by a domestic air
carrier to the carrier's (1) lack of compliance with the PUF
requirement; (2) failure to comply with its own procedures; and (3)
inadequate internal controls to ensure the collection of PUFs from
various ticket sale sources, such as international and domestic
travel agencies.  Customs' audit found that while specific procedures
existed for collecting the PUFs, one of the carrier's policies
prevented any corrective action if the carrier's internal audits
found that PUFs had not been collected.  According to this policy, if
a corrective adjustment involved less than $25, the adjustment would
not be made.  Since the PUF was $5 at that time and thus below the
adjustment threshold, the policy nullified the effectiveness of the
carrier's own audits. 

Another Customs audit attributed the nonpayment of PUFs by a foreign
sea carrier to its lack of a system to account for the collection and
payment of the fee.  The carrier also lacked formalized
administrative procedures to ensure compliance with PUF requirements. 

A Customs audit found that weak internal controls over record-
keeping procedures resulted in a domestic air carrier not remitting
$229,674 in PUFs it owed Customs.  In addition, as a result of these
weaknesses, the carrier erroneously remitted to Customs about $6.3
million in inspection user fees that should have been remitted to
INS.  The audit concluded that the carrier did not have adequate
controls over documents and records to ensure proper recording of
fees or to perform independent checks of recorded amounts. 

The Treasury OIG audit of air carriers attributed an air carrier's
nonpayment of PUFs to a computer programming error.  Because of this
error, the carrier failed to remit PUFs collected in foreign
countries from the sale of tickets with a U.S.  destination. 


      LIMITATIONS ASSOCIATED WITH
      CUSTOMS CARRIER COMPLIANCE
      AUDITS
---------------------------------------------------------- Letter :4.3

Customs compliance audits of air and sea carriers were limited in
several ways.  Customs' audit staff resources limit the number of air
and sea carrier compliance audits it can perform.  Audits are funded
from Customs' salaries and expenses appropriation.  Customs cannot
use the COBRA user fees to fund carrier audits because the cost of
such audits is not included among those listed in the statute as
payable from fee revenues.  According to a Customs official, Customs
has about 9 auditors nationwide--from a total audit staff of about
300 auditors--conducting PUF audits.  However, since the nine
auditors are also responsible for auditing other entities, such as
importers and customhouse brokers, none of them work on carrier
audits full-time.  Consequently, according to a Customs official,
Customs can audit only three or four carriers a year.  As a result,
Customs has audited only 19 percent of carriers that have actually
remitted PUFs. 

According to Customs officials, Customs auditors have encountered
several obstacles while conducting audits of carriers that limit the
audits' effectiveness.  The obstacles include (1) restricted access
to carrier records, especially foreign air and sea carrier ticket
sales and accounting records; (2) incomplete and poor quality carrier
data, such as accounting records; and (3) delayed carrier responses
to information requests.  According to Customs officials, these
obstacles limited the effectiveness of audits because they
contributed to making such audits very difficult, time-consuming, and
incomplete.  For example, during a Customs audit, a domestic air
carrier did not allow access to its automated systems and did not
provide documents in a timely manner.  Further, the carrier purged
some data, preventing Customs auditors from using them.  As a result,
completion of the audit was delayed.  Another domestic air carrier
did not maintain adequate accounting records, which made tracing and
verifying remittances difficult.  In other examples, foreign air
carriers have refused access to records kept in their home countries,
citing sovereignty issues--i.e., records of a foreign-owned
corporation not being subject to review by another foreign
government's agency--and the high cost of transporting such records
to the United States.  According to a Customs official, the inability
to access all of a carrier's records may render estimates of
nonpayment incomplete.  Of particular importance is access to sales
records, because the PUF is collected upon the sale of a ticket. 
Because of their inability to access records located in foreign
countries, Customs auditors have been unable to adequately verify the
accuracy of certain air carriers' ticket sales, and hence the
accuracy of their remittances.  Consequently, these auditors have had
to qualify their estimates of PUF nonpayment. 

Further, Customs has not identified all the carriers required to
collect and remit PUFs; thus, it cannot target and audit all the
carriers that have not remitted the PUFs they owe.  The March 1992
Treasury OIG report identified 63 air carriers subject to PUFs that
Customs had not previously identified.  The Treasury OIG reviewed 15
of these carriers and estimated that they may have owed Customs a
total of $356,150 in PUFs in 1989.  In addition, the report concluded
that without a complete list of air carriers required to collect and
remit PUFs, Customs could not ensure that all air carriers were
collecting and remitting PUFs.  The report recommended that Customs
identify all carriers required to collect and remit the PUF.  Our
August 1992 report also found that Customs did not have a complete
and accurate list of carriers subject to PUFs and concluded that such
a list was a basic control to identify those carriers that were not
remitting the fees.  Customs is in the process of obtaining air
passenger arrival data from the Department of Transportation.  The
data are intended to assist Customs in targeting carriers for audit
and in identifying carriers that transport passengers to the United
States. 


   OPTIONS THAT MAY ENHANCE
   COLLECTION AND REMITTANCE OF
   THE PUF
------------------------------------------------------------ Letter :5

Options that may enhance the collection and remittance of the PUF
include (1) requiring remittance of the fee at the time and place of
arrival like other COBRA user fees, such as that for processing
commercial vessels; and (2) billing air and sea carriers for the fees
they owe on the basis of passenger data submitted at arrival.  We
discussed these options with officials from Customs and air and sea
carrier industry associations.  According to association officials,
many of their members would probably oppose options such as billing
carriers because of increased administrative burdens and costs.  We
did not evaluate the feasibility or determine the costs of
implementing the options discussed. 


      REQUIRING REMITTANCE OF PUF
      AT TIME AND PLACE OF ARRIVAL
---------------------------------------------------------- Letter :5.1

In contrast to the PUF, remittance of most of the other COBRA user
fees, such as those for processing commercial vessels and vehicles,
is required at the time and place of arrival.  For example, in the
case of a commercial vessel of 100 tons or more, the COBRA user fee
statute requires the payment upon arrival of a processing fee of $397
for inspectional services provided.\26 Payment of this fee is a
condition for entering the United States.  The commercial vessel fee
is to be collected at each port of arrival, regardless of the number
of arrivals in the course of a single voyage.\27

According to some Customs officials, air and sea carriers could remit
the PUF at the time and place of arrival as part of submitting their
manifests\28 for each arriving flight or cruise.  While requiring
remittance of the PUF by carriers at the time and place of arrival
could enhance fee revenues and reduce the need for compliance audits,
it could also require additional Customs personnel at ports of entry
to process the remittances.  In addition, carriers would still have
to collect the PUF from passengers, relying on internal controls that
some audits have shown to be inadequate.  Furthermore, carriers could
be liable for fees they did not collect or fees they could not
collect from passengers who traveled using other carriers' tickets. 


--------------------
\26 "Arrival" means arrival at a port of entry in the customs
territory of the United States, or any place served by a port of
entry. 

\27 Payment of the commercial vessel fee is not to exceed $5,955 per
year.  This amount equals 15 arrivals per vessel. 

\28 A manifest includes data such as the carrier's name, flight--or
cruise--number, origin and destination, and number of crew and
passengers. 


      BILLING AIR AND SEA CARRIERS
      FOR PUFS OWED
---------------------------------------------------------- Letter :5.2

According to some Customs officials, Customs could bill air and sea
carriers for the PUFs they owe.  A carrier's PUF liability could be
determined on the basis of passenger arrival data submitted by
carriers upon arrival.  A billing system could enhance PUF revenues,
eliminate the need for audits, and allow Customs to use data it
already collects from carriers' manifests to determine fee liability. 
In addition, by billing carriers, Customs could establish due dates
for PUF remittances and be able to charge interest for amounts not
remitted by the due date. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Customs' and Treasury OIG's compliance audits of air and sea carriers
estimated that some of these carriers had not paid about $15.3
million in PUFs they owed.  The Treasury OIG also estimated that
carriers owed $45 million in PUFs for the period July 1986 to
December 1990.  The PUF collection and remittance system established
in the COBRA user fee statute--including the requirement to collect
the fee when tickets are issued to passengers--and air and sea
carriers' internal control weaknesses can contribute to problems in
collecting PUFs. 

Customs has relied on compliance audits of air and sea carriers to
determine whether they collect and remit the proper amount of PUFs. 
However, these audits were limited in several ways, including audit
staff resources and restricted access to carrier ticket sale and
accounting records.  The limitations have resulted in Customs
auditing 19 percent of carriers that have actually remitted PUFs and
producing incomplete estimates of nonpayment. 

The PUF collection system established in the COBRA user fee statute
hampers the fee's collection efforts.  Options exist for changing the
structure of the PUF collection and remittance system.  For example,
if the PUF were collected directly from carriers at the time and
place of arrival, as is the case with most other COBRA user fees, or
if carriers were billed for PUFs on the basis of passenger arrival
data, Customs would not have to rely on carrier internal controls to
collect the fee from passengers.  Customs would also not have to rely
on its audits to ensure and verify compliance.  If such options were
made available to Customs, it could develop procedures to oversee the
timely collection of the fee and reduce nonpayment problems.  We did
not evaluate any of the options discussed; thus, we do not know all
of the costs or benefits of implementing any of these options. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :7

Congress may want to consider requiring Customs to (1) evaluate the
feasibility of various options to increase collection of the PUF,
such as changing the fee collection and remittance system to one
similar to other COBRA user fee systems, or billing carriers for the
fee; and (2) recommend legislative changes that would be necessary to
implement options that are considered feasible and cost-beneficial. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We provided a draft of our report to Customs and requested that
cognizant Customs officials provide us with oral comments on the
report's contents, conclusions, and matter for consideration.  On
February 24, 1995, we met with Customs officials, including the
Budget Division's Financial Program Advisor, to discuss their
comments on the report.  Under Customs' ongoing reorganization, the
Budget Division is responsible for the user fees, including the PUF;
thus, it commented on the report on behalf of Customs.  The officials
agreed with the report's contents and its conclusions and matter for
consideration. 


---------------------------------------------------------- Letter :8.1

As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days from the date of this letter.  At that time, we will
send copies to interested parties and make copies available to others
upon request. 

Major contributors to this report are listed in appendix II.  If you
have any questions or need additional information on the contents of
this report, please contact me at (202) 512-8777. 

Laurie E.  Ekstrand
Associate Director, Administration
 of Justice Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

House Conference Report No.  213,\1 accompanying the Omnibus Budget
Reconciliation Act of 1993,\2 required GAO to report to the Senate
Committee on Finance and the House Committee on Ways and Means on the
efficiency, effectiveness, and fairness of Customs' user fees.  As
agreed with the Committees, our objectives were to (1) determine
whether air and sea carriers have collected and remitted Customs'
passenger user fee (PUF); (2) assess the factors hampering any
nonpayment of this fee, including statutory restrictions, internal
controls, and audit limitations; and (3) identify any options that
may improve the collection and remittance of the PUF. 

To address our first objective, we interviewed officials from
Customs' User Fee Task Force, Office of Regulatory Audit (ORA),
Office of Chief Counsel, and National Finance Center (NFC).  We also
reviewed relevant documents about the user fees established by the
Consolidated Omnibus Budget Reconciliation Act of 1985 in general,
and the PUF in particular, including legislation, implementing
regulations, and policies and guidance.  In addition, we reviewed (1)
completed Customs and Treasury audits of air and sea carriers, (2)
air and sea carrier PUF payment records maintained by NFC and
international passenger arrival data maintained by Customs, and (3) a
draft Customs proposal to establish interest and penalty provisions
for nonpayment of PUFs.  Finally, we discussed the nonpayment of PUFs
with officials from the Air Transport Association (ATA), the
International Air Transport Association (IATA), and the International
Council of Cruise Lines (ICCL) to obtain their perspectives on this
issue.\3

To address our second objective, we reviewed a 1992 Treasury Office
of Inspector General report that assessed Customs' internal controls. 
We discussed Customs' responses to the report's findings and
recommendations with cognizant Customs officials.  In addition, we
reviewed our applicable standards and guidance related to internal
controls and our audits of Customs, including our 1992 report on
Customs' financial management and our 1994 report on Customs' fiscal
year 1993 financial statements,\4 which tested and evaluated Customs'
internal controls.  We also discussed Customs' internal controls and
their effectiveness, and possible improvements, with relevant Customs
officials. 

To address our third objective, we identified options to collect and
remit the PUF and discussed these options with officials from Customs
and ATA, IATA, and ICCL.  We did not evaluate the feasibility or
determine the costs and benefits of implementing any of the options
discussed. 

We did our work at Customs headquarters in Washington, D.C.; at
Customs' Pacific Region headquarters in Long Beach, California; at
the Los Angeles airport; and at the Washington, D.C., headquarters of
ATA, IATA, and ICCL.  We did not verify the accuracy of the
information provided.  We also did not conduct independent audits of
air and sea carriers to determine their compliance with PUF
requirements.  Further, we did not assess the validity of the audit
methodologies.  We did not test the internal controls we reviewed,
but we relied on our completed audits of Customs. 

We obtained oral comments on a draft of this report on February 24,
1995, from Customs officials.  These comments are discussed on page
18.  We did our work between March 1994 and February 1995 in
accordance with generally accepted government auditing standards. 


--------------------
\1 H.R.  Conf.  Rep.  No.  213, 103rd Cong., 1st Session at 922
(1993). 

\2 P.L.  103-66 (1993). 

\3 ATA represents 22 air carriers in the United States, Canada, and
the Netherlands and serves as the link between these carriers and
various government and private sector organizations.  IATA serves a
similar function representing about 215 air carriers worldwide,
including 75 foreign carriers that serve the U.S.  market.  ICCL
represents 22 cruise lines in the United States and other countries
on legislative and regulatory issues that affect cruise line
operations. 

\4 Financial Audit:  Examination of Customs' Fiscal Year 1993
Financial Statements (GAO/AIMD-94-119, June 15, 1994). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

James M.  Blume, Assistant Director, Administration of Justice
 Issues
Seto J.  Bagdoyan, Evaluator-in-Charge
David P.  Alexander, Senior Social Science Analyst

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Ann H.  Finley, Senior Attorney

GENERAL GOVERNMENT DIVISION, LOS
ANGELES

Darryl W.  Dutton, Assistant Director, Administration of Justice
 Issues

LOS ANGELES FIELD OFFICE

Walter L.  Raheb, Assignment Manager
