The American economy is increasingly dependent upon the importation of merchandise, both raw materials and finished goods. Many of these imported goods are subject to duties imposed by U.S. Customs and Border Protection (“Customs”), known as “ordinary duties.” In some situations, supplemental duties such as antidumping and countervailing duties, and now the new duties on aluminum and steel imposed by Executive Order, are also assessed. In a growing number of cases, the combined effect of the amount of these duties and the manner in which they are imposed can be so detrimental as to require importers to seek bankruptcy protection.

These risks highlight the impact of bankruptcy upon many aspects of Customs duty claims as they affect importers as well as other parties. Customs and bankruptcy are governed by two separate statutory and regulatory schemes, each with its share of complexities and idiosyncrasies. The intersection between these two very different areas of law, each having separate histories and objectives, is not always clear or intuitive. There are also a limited number of reported decisions dealing with how Customs-related claims are treated in bankruptcy. This article explains how various Customs claims are imposed and highlights ways in which a bankruptcy filing can affect claims arising from Customs duties. In addition, the article explores the impact of a bankruptcy filing on procedures governing disputes with Customs.

Authors: John P. Donohue

Customs Duties Overview

Until the enactment of the Internal Revenue Act of 1914, except during the Civil War, the collection of Customs duties was the primary vehicle for generating revenue for the federal government. Since the Reciprocal Trade Agreements Act of 1934, rates of duty on imported goods have declined, but Customs duty revenues have generally increased in absolute terms. For example, in 1996 the United States collected $18.6 billion in Customs duties, and by 2015 that figure had nearly doubled to $36 billion.1 During that same period, however, the average rate of duty on merchandise imported into the United States fell from 2.56 percent to 1.64 percent. Yet, while the “average” rate of duty is comparatively low in the U.S., duty rates vary widely from a “free” rate, applicable to a large class of products, to 25 percent in the case of certain wearing apparel and trucks, with even higher rates applying to certain food products.

Two factors are attributed to the rise in Customs duty revenue in the face of declining rates of duty. The first, obviously, is the growth in the volume and value of imports into the United States. But the second factor, and the one particularly relevant to this analysis, is the increase in supplemental assessments, most notably those under the antidumping and countervailing duty laws.

Process of Assessing Duties—Liquidation and the Doctrine of the “Finality of Liquidation”

An assessment of ordinary duties is a simple arithmetic calculation. The value of the merchandise times the rate of duty equals the amount of duty owed. At the time of entry, an importer submits a declaration to Customs estimating the value of the merchandise and the applicable rate of duty. The importer calculates the duties owing and deposits them with Customs. A change by Customs in either the determination of the value of the goods or the applicable rate of duty will change the assessment.

An importer’s deposit of estimated duties, regardless of the good faith exercised in its calculation, confers no rights upon the importer. In the ordinary course, Customs withholds taking action to finalize, or “liquidate,” the assessment on an entry for 314 days. This period is designed to give other government agencies with jurisdiction over the imported goods time to review compliance with applicable laws. Once an entry is liquidated, then “all issues” are deemed finally resolved, unless challenged by the importer within 180 days from the date of liquidation or unless the entry is reliquidated by Customs within 90 days of the date of the original liquidation. The “liquidation” of the entry, therefore, is that process by which Customs finally determines, among other things, the value of the goods, the rate of duty to be applied, and their admissibility into the United States.2