Internal Advice Request; Clarification on the Ability to Refund Duties and Fees on Possibly Adulterated Food under 19 U.S.C. § 1558, and Modification Request of HQ H240986 under 19 U.S.C. § 1625

HQ H282725 August 23, 2024 OT:RR:CTF:EPDR H282725 ABH David Shaw Assistant Center Director Agriculture and Prepared Products Center for Excellence and Expertise Re: Internal Advice Request; Clarification on the Ability to Refund Duties and Fees on Possibly Adulterated Food under 19 U.S.C. § 1558, and Modification Request of HQ H240986 under 19 U.S.C. § 1625 Dear Assistant Center Director: This is in response to the Port of JFK International Airport’s (“Port”) request for internal advice (“IA”), in which clarification was sought regarding whether U.S. Customs and Border Protection (“CBP”) may refund duties and fees imposed on potentially adulterated foods refused admission by the U.S. Food and Drug Administration (“FDA”). Our analysis and decision is below. FACTS: On December 24, 2015, an importer of frozen shrimp filed a post entry amendment (“PEA”) requesting a refund of antidumping duties (“ADD”) on the frozen shrimp it exported/destroyed under CBP supervision after being refused admission by the FDA, and as instructed in a Notice of Redelivery (“NOR”). The FDA initially refused admission of the entry because its analysis determined the product contained nitrofurans in violation of Sections 402(a)(2)(C)(i)-(ii) & 801(a)(3)) of the Federal Food, Drug & Cosmetic Act, as amended 21 U.S.C. § 301 et. seq. (“FDCA”). The NOR issued to the importer instructed that, [t]he merchandise described below is in violation of statute(s)/regulation(s) as indicated, and cannot be entered into the commerce of the United States until brought into conformity as noted below in Section II. If it is not brought into conformity, redelivered, exported, or destroyed under U.S. Customs and Border Protection supervision within 30 days from the date of this Notice or the time specified by another government agency having jurisdiction over the importation, liquidated damages and or criminal/civil penalties shall apply. The Port did not act on the PEA because of perceived contradictions between Headquarters Ruling Letter (“HQ”) H240986, dated January 8, 2014, and CBP Directive (“C.D.”) No. 5610-006A, dated June 10, 2011. Subsequently, on January 19, 2016, the Port filed this internal advice request, seeking guidance on the importer’s request for a refund. Specifically, the Port enumerated three issues. ISSUES: Whether duty refunds are permissible if a refused food item may not be “absolutely prohibited” entry, but “possibly” could be reconditioned to satisfy the FDA for admission into the United States. Whether CBP may deny a refund request based on an importer’s decision not to submit a reconditioning proposal to the FDA and to export or destroy the merchandise under CBP supervision. Whether there is a contradiction in requiring a determination that the merchandise constituted a prohibited article before approving a refund request in light of HQ H240986 and C.D. 5610-006A. LAW AND ANALYSIS: Whether duty refunds are permissible if a refused food item may not be “absolutely prohibited” entry, but “possibly” could be reconditioned to satisfy the FDA for admission into the United States. Generally, “[n]o remission, abatement, refund, or drawback of estimated or liquidated duty shall be allowed because of exportation or destruction of any merchandise after its release from the custody of the Government . . . .” 19 U.S.C. § 1558. Section 1558, however, provides for three exceptions to the general rule. Two of the exceptions relate to drawback and bonded articles. See 19 U.S.C. §§1558(a)(1) & (a)(3). The third exception states that a refund can be appropriate “[w]hen prohibited articles have been regularly entered in good faith and are subsequently exported or destroyed pursuant to a law of the United States and under such regulations as the Secretary of Treasury may prescribe.” 19 U.S.C. § 1558(a)(2). For starters, if, as the Port indicated, the merchandise at issue underlying this IA never left CBP custody, then 19 U.S.C. § 1558 and analysis of whether the merchandise constituted “prohibited articles” is irrelevant. The implementing regulations state that if merchandise does not leave the continuous custody of CBP, then any duties paid may be refunded. 19 C.F.R. § 158.45(a). Specifically, 19 C.F.R. § 158.45, “Exportation of merchandise,” states as follows: (a) From continuous Customs custody. Merchandise in Customs custody for which entry has not been completed and merchandise which has remained in continuous Customs custody that is covered by a liquidated or unliquidated consumption entry may be exported under Customs supervision in accordance with §§ 18.25 through 18.27 of this chapter, with refund of any duties that have been paid. (b) After release from Customs custody. Except as provided for in paragraphs (c) and (d) of this section, no refund or other allowance in duties shall be made because of the exportation of merchandise after its release from Customs custody unless a drawback of duties is expressly provided for by law (see part 191 of this chapter). (c) Prohibited merchandise. If merchandise has been regularly entered or withdrawn for consumption in good faith and is thereafter found to be prohibited entry under any law of the United States, it may be exported under Customs supervision in accordance with §§ 18.25 through 18.27 of this chapter, with refund of any duties that have been paid. In lieu of exportation, the merchandise may be destroyed in accordance with § 158.41. The regulations cited above state that if the merchandise is in “continuous Customs custody” and is then exported then duties can be refunded. Id. If, however, the merchandise leaves “continuous Customs custody,” duty refunds are not appropriate, 19 C.F.R. § 158.45(b), unless the merchandise was entered in good faith and thereafter found to be prohibited, 19 C.F.R. § 158.45(c). Thus, the plain language of the relevant statute and regulation dictate that the initial inquiry necessarily relates to custody. For purposes of clarity, we note that in the Automated Commercial Environment (“ACE”), importers can receive a “CBP Release” message. Pursuant to the ACE Cargo Release/PGA Message Set Glossary, the “CBP Release message indicates that CBP has determined that the merchandise may be released from CBP custody.” (emphasis added). The relevant inquiry for purposes of 19 U.S.C. § 1558 will be whether the merchandise has actually been released from CBP’s physical custody - whether or not the merchandise has received an ACE “CBP Release” message indicating that it “may” be released. To the extent merchandise leaves CBP’s custody, the 19 U.S.C. § 1558 inquiry of whether merchandise is “prohibited” can become relevant. If the merchandise has left CBP’s custody, the Port inquired about the means “to identify an ‘absolute’ prohibition versus a possibly prohibited food item.” The FDA, pursuant to § 801(b) of the FDCA, as amended, 21 U.S.C. § 381(b), provides that an importer may submit to the FDA a written application (Form FDA-766) requesting permission to bring into compliance an adulterated article. Under 21 C.F.R. §§ 1.95 and 1.96, the FDA will approve applications when it appears that the “action will be successful and result in an acceptable product.” FDA Regulatory Procedures Manual, Chapter 9, Import Operations and Actions, at p. 9-60, 59 (Dec. 2017), (https://www.fda.gov/iceci/compliancemanuals/regulatoryproceduresmanual/default.htm (Dec. 2017), last visited August 15, 2024). The FDA does not keep a list of what violations can be reconditioned or how such reconditioning can occur. The inquiry necessarily requires a case-by-case analysis. For example, in HQ H240986, dated January 8, 2014, imported shrimp were entered, released, and left CBP’s custody before the FDA determined that the shrimp were contaminated with salmonella. Accordingly, 19 U.S.C. § 1558 and 19 C.F.R. § 158.45(c) applied, which denied the refund of duties unless one of the three enumerated exceptions of 19 C.F.R. § 158.45 applied. It is this third exception which presents the “prohibited articles” language and under which HQ H240986 analyzed the term. See 19 U.S.C. § 1551(a)(2). In HQ H240986, CBP relied on the plain language of the § 1558(a)(2) exception to determine that the shrimp was not “prohibited,” and thus a refund of duties was impermissible, because the shrimp might have been lawfully entered into the United States if the importer had filed a successful reconditioning proposal with the FDA. CBP reasoned that “[b]ecause the importer could have taken steps to permit the shrimp to be lawfully entered, the shrimp [were] restricted goods and not prohibited goods.” HQ H240986. CBP relied on HQ W231396, dated February 5, 2007, and stated that “[p]rohibited merchandise is that which cannot be lawfully imported into the United States under any circumstances,” whereas “[r]estricted merchandise is that which may be altered to [come into] conform[ance] with U.S. requirements and then may be lawfully entered.” Id. The majority of the existing rulings analyzing § 1558(a)(2) address labelling issues, which is not at issue in the instant IA request, but the cases provide insight into the appropriate standard of analysis. For example, in A.N. Deringer, Inc. v. United States, 84 Cust. Ct. 196 (1980), which dealt directly with 19 U.S.C. § 1558(a)(2), the importer failed to properly label the merchandise as biscuits or cookies in accordance with FDA regulations. In that case, the Customs Court noted that the merchandise was “conditionally refused admission” and “[h]ad the party corrected the matters complained of by the [FDA], it would have been permitted entry.” A.N. Deringer, 84 Cust. Ct. at 199. Because the labeling could have been corrected, the Customs Court determined that the importer was not entitled to a refund of duties pursuant to § 1558(a)(2), because the merchandise was not “prohibited” as required by the statute. The Customs Court noted that prohibited merchandise was that which “cannot be corrected” and expressly noted examples such as “adulterated food or food unfit for human consumption, narcotics, or immoral articles, to name a few.” Id. In HQ 221669, dated September 3, 1991, CBP determined that an importer of peanut butter did not have a valid claim for a refund of duties paid because the importer could have brought the goods into conformity by relabeling the peanut butter. CBP determined that “only prohibited merchandise qualifies the importer for a refund of duties collected” and the subject merchandise was only restricted because “[p]rohibited status does not accrue until it has been shown that the merchandise cannot be brought into conformity through any reasonable means.” HQ 221669. Thus, if merchandise can be brought into conformity through “reasonable means” then it is not “prohibited” merchandise for purposes of 19 U.S.C. § 1558. Accordingly, as discussed above, these cases and rulings highlight that the determination as to whether adulterated food is “prohibited” will necessarily be a case-by-case analysis as to whether the merchandise can be brought into conformity through “reasonable means.” The importer that must prove by a preponderance of the evidence that the merchandise constituted a prohibited article. Glazers Wholesale Drug Co., Inc. v. United States, 51 Cust. Ct. 39, 41 (1963); see also HQ H240986 (Jan. 8, 2014); HQ H239257 (July 25, 2013); HQ 225115 (Mar. 17, 1995). Thus, the onus is on the importer seeking a duty refund to prove that the merchandise, removed from customs custody and subsequently determined by the FDA to violate consumptive safety regulations, had been regularly entered in good faith, was prohibited, and was properly exported or destroyed. Whether CBP may deny a refund request based on an importer’s decision not to submit a reconditioning proposal to the FDA and to export or destroy the merchandise under CBP supervision in light of 19 C.F.R. § 159.55 and CBP’s Notice of Redelivery instructions. The Port also inquired as to whether 19 C.F.R. § 159.55 and the Notice of Redelivery instructions are in conflict with CBP’s denial of a refund request pursuant to 19 U.S.C. § 1558. A plain reading of regulatory provision, 19 C.F.R. § 159.55, is congruent with the notion that duty refunds are no longer permissible for exported/destroyed goods once they leave the custody of CBP unless the § 1558(a)(2) exception applies. Part 159 relates to the liquidation of duties and Subpart E (§§ 159.51-159.58) relates to suspension of liquidation. Section 159.55, “Possible prohibited food, drugs, or other articles,” states in subsection (a), “[s]uspension of liquidation” that “[t]he liquidation of each entry covering merchandise [that is the subject of FDA regulatory requirements] shall be suspended until it is determined whether admission of the merchandise into the United States is permitted under the law.” Subsection (b), “Allowance for exportation or destruction,” states that: [i]n any case where the admission of such merchandise into the United States is refused and the merchandise is exported under Customs supervision in accordance with § 158.45(b) of this chapter, or destroyed under Customs supervision in accordance with § 158.41 of this chapter, the merchandise is exempt from duty and any duties collected thereon shall be refunded. This language appears to suggest that the duties deposited or paid on “prohibited foods, drugs, or other articles” can be refunded if admission is refused without reference to whether the merchandise was released from CBP’s custody. The mention of subsection 158.45(b), however, relates to merchandise “after release from Customs custody” and states that no refund is allowed “unless a drawback of duties is expressly provided for by law.” Accordingly, the reference to subsection 158.45(b) maintains the integrity of the statutory mandate that CBP custody is required in order to refund duties on merchandise, such as adulterated food, that is not “prohibited” pursuant to 19 U.S.C. § 1558. Additionally, the NOR instructions do not conflict with the statutory requirements of 19 U.S.C. § 1558. As discussed above, the NOR instructions state that the importer must bring the goods into conformity, redeliver, export, or destroy the merchandise under CBP supervision within 30 days. These instructions are not at odds with a potential denial of a refund request if the importer chooses to export or destroy adulterated merchandise that was not considered to be prohibited. Accordingly, the NOR instructions and 19 C.F.R. § 159.55 do not conflict with CBP’s statutory authority to deny a refund request based on an importer’s decision not to submit a reconditioning proposal to the FDA and to export or destroy the merchandise under CBP supervision when the importer has not proven by a preponderance of the evidence that the merchandise constituted a prohibited article. Whether there is a contradiction in requiring a determination that the merchandise constituted a prohibited article before approving a refund request in light of Customs Directive 5610-006A and HQ H240986. The Port raised concerns that Customs Directive 5610-006A and HQ H240968 contradict the refund eligibility requirement that an importer must prove by a preponderance of the evidence that merchandise released from Customs custody constituted a prohibited article. Specifically, the Port raised concerns that the C.D. 5610-006A omits any requirement of determining merchandise to be prohibited in order to qualify for a duty refund. The language of C.D. 5610-006A does appear, on its face, to contain language that contradicts 19 U.S.C. § 1558. The language of the Directive, however, is necessarily clarified by its stated source, which is not in conflict with the statutory or regulatory language. C.D. No. 5610-006A, “Entry Deletion and Entry or Entry Summary Cancellation,” states at Section 6.3.7: Refund of duties, fees, and taxes on a cancelled entry summary: If CBP approves the cancellation request and the filer has transmitted payment of duties, fees, and taxes, CBP may issue a refund. . . . Examples of when a duty refund is appropriate are as follows: 6.3.7.1 Merchandise denied entry by a participating government agency after release from CBP custody, which is destroyed under government supervision or exported under CBP supervision, is exempt from duty. Duties, fees, and taxes collected are eligible for an administrative refund (19 CFR 142.18, 158.41). All other cases whereby merchandise has been released from CBP custody and then exported or destroyed are not eligible for a refund of duties, taxes, and fees via an entry summary cancellation. A refund in these cases must be requested via a drawback claim. While the plain language of the above-cited directive is at odds with 19 U.S.C. § 1558 because it allows a duty refund after release from CBP custody without mention of entry in good faith or a prohibition on the merchandise, the regulatory reference within the sentence directly identifies provisions addressing “prohibited” merchandise. For example, pursuant to 19 C.F.R. § 142.18(a), “Exportation or destruction of prohibited merchandise,” “[i]f merchandise released at time of entry is later found to be prohibited, an authorized CBP official shall demand its return to Customs custody . . . and an entry summary and the deposit of estimated duties, if any, shall not be required . . . .” Thus, by its plain language, § 142.18(a) requires that the merchandise be “prohibited” before such a refund by CBP is permissible. The plain language of § 158.41 also addresses destruction of “prohibited” merchandise. Pursuant to 19 C.F.R. § 158.41, “Destruction of prohibited merchandise,” [m]erchandise regularly entered or withdrawn for consumption in good faith and denied admission into the United States by any Government agency after its release from Customs custody . . . may be destroyed under Government supervision. In such a case, the destroyed merchandise is exempt from duty and any duties collected thereon shall be refunded. In lieu of destruction, the merchandise may be exported under Customs supervision . . . . Accordingly, the discussion in C.D. No. 5610-006A regarding an allowance of a refund after release from CBP’s custody refers to merchandise deemed to be prohibited. The following sentence stating that “all other cases” are not eligible for a refund provides further support for the distinction between merchandise determined to be prohibited and that which is not. Thus, while the language of C.D. No. 5610-006A appears to be contradictory to 19 U.S.C. § 1558 because its language is not fulsome, the supporting regulatory citations given within the offending sentence clarifies that it is addressing prohibited merchandise that is released from CBP’s custody. With regard to HQ H240986, and as discussed above, the imported shrimp contaminated with salmonella were released and left CBP’s custody. Thus, 19 U.S.C. § 1558 and 19 C.F.R. § 158.45(c) applied, which denied the refund of duties unless the shrimp was deemed to be prohibited. In that case, it was determined that the importer could have filed a successful reconditioning proposal with the FDA. Therefore, the shrimp were not “prohibited,” and a refund of duties was not appropriate. Accordingly, the HQ H240986 decision upholds, rather than contradicts, the prohibition requirement before a refund request can be approved. HOLDING: In sum, we find as follows: If adulterated food that has left Customs custody is subsequently refused admission by the FDA, and is timely exported or destroyed under CBP supervision, a duty refund is not appropriate unless the merchandise was entered in good faith and thereafter found to be prohibited. The determination of whether adulterated food is “prohibited” is necessarily a case-by-case analysis and the burden is on the importer to prove by a preponderance of the evidence that the merchandise was unable to be brought into conformity through reasonable means. Neither CBP’s NOR instructions nor 19 C.F.R. § 159.55 conflict with CBP’s denial of a refund request based on an importer’s decision not to submit a reconditioning proposal to the FDA and to export or destroy the merchandise under CBP supervision without providing proof that the merchandise is prohibited. Neither HQ H240986 nor C.D. 5610-006A conflict with CBP’s denial of a refund request based on an importer’s decision not to submit a reconditioning proposal to the FDA and to export or destroy the merchandise under CBP supervision without providing proof that the merchandise is prohibited. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution. Sincerely, Yuliya A. Gulis, DirectorCommercial and Trade Facilitation Division