U.S. Customs and Border Protection
1100 Raymond Boulevard
Newark, NJ 07102
Attn: Sonia Elmalis, Supervisory Drawback Specialist
RE: Application for Further Review of Protest No: 4601-11-101872 concerning a claim for drawback on merchandise destroyed in a warehouse fire.
Dear Port Director,
The above-referenced protest has been forwarded to our office for further review. We have considered the points raised by Sarmento Import and Export Inc., (“Sarmento”) regarding your denial of the drawback claim related to merchandise destroyed in a warehouse fire. We regret the delay in our response.
On June 6, 2009, a warehouse owned by Sarmento was destroyed by a fire. Prior to the fire, the warehouse had two distinct storage areas, which were separated by doors and a chain linked fence: a small area storing wine on which duty and taxes had not been paid (“bonded area”) and a larger area storing wine on which duty and taxes had been paid (“domestic area”). Although damaged in the fire, the wine stored in the bonded area was able to be identified visually and reconciled with entry documents and CBP witnessed the destruction of the wine at a local landfill. Therefore, Sarmento did not pay duty or taxes on these entries.
The domestic area of the warehouse was heavily damaged with water, smoke, and a partial ceiling collapse and it was impossible to identify any of the merchandise stored in the domestic area. At the time, CBP was informed by Sarmento that all records were destroyed in the fire and that it was unclear what was sold or what was still in the domestic area of the warehouse at the time of the fire. Sarmento stated that its inventory system was kept on a computer and in files, all contained in the warehouse, where it would create a new entry for each import and keep a running inventory on each entry’s balance. Although initially unable to indicate to CBP what was destroyed in the fire at the time of filing the drawback claim, through working with its broker, Sarmento attempted to reconstruct the inventory of destroyed merchandise to show what was present in the warehouse at the time of the fire. The documentation provided as part of its protest consisted of receipts regarding the Crapo Hill landfill, photographs of the contents of the warehouse after the fire, a spreadsheet, and multiple entry forms from the three years prior to the warehouse fire.
On September 2, 2010, CBP Form 7553, Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback, was filed. On January 31, 2011, Sarmento submitted its claim for drawback under 19 U.S.C. § 1313(j)(1). On October 5, 2011, the Drawback Office denied the drawback claim because Sarmento did not prove what was in the warehouse at the time of the fire. On November 11, 2011, Sarmento protested the decision to deny the drawback claim and requested further review. The Drawback Office argues that the protest should be denied because Sarmento did not prove what was in the warehouse at the time of the fire. The Drawback Office also noted that it was unknown what Sarmento had been reimbursed for as part of the payment it received from its insurance company.
While the protest was pending further review before this office, on January 13, 2013, Sarmento submitted a spreadsheet listing the items for which it is claiming drawback. On July 25, 2014, Sarmento provided CBP with a portion of its insurance documentation, arguing that it was not reimbursed for duties or taxes paid on the destroyed merchandise.
ISSUE: Whether Sarmento may claim drawback on merchandise that was destroyed in a fire.
LAW AND ANALYSIS:
We note initially that the refusal to pay a claim for drawback is a protestable issue and that the protest was timely filed, within 180 days from the date of denial. See 19 U.S.C. § 1514(a)(6) and 19 U.S.C. § 1514(c)(3)(B). Sarmento’s drawback claim was denied on October 5, 2011, and this protest was filed on November 11, 2011. Further, the protestant requests further review per 19 CFR § 174.24. CBP’s regulations provide for further review of a protest when, inter alia, the decision against which the protest was filed:
(b) Is alleged to involve questions of law or fact which have not been ruled upon by the Commissioner of Customs or his designee or by the Customs courts19 C.F.R. § 174.24(b).
Upon review of the application for further review, we find that these facts have not been the subject of a Headquarters ruling. See 19 CFR § 174.24(b) and 19 CFR § 174.26(b)(1)(iv). Accordingly, further review is warranted.
As consistently held by the courts, drawback is a statutory privilege expressly conditioned upon full compliance with customs rules and regulations. See, e.g., United States v. Lockheed Petroleum Services, Ltd., 709 F.2d 1472, 1474 (Fed. Cir. 1983); Swan & Finch Company v. United States, 190 U.S. 143, 23 Sup. Ct. 702 (1903). Under 19 U.S.C. § 1313(j)(1), drawback is authorized if imported merchandise, on which was paid any duty, tax, or fee imposed under Federal law upon entry, is, within three years of the date of importation, exported or destroyed under customs supervision and was not used in the United States before such exportation or destruction. "Customs supervision" does not require on-site observation of the destruction by CBP but does require the opportunity to observe the destruction. See C.S.D. 82-128, 16 Cust. Bull & Dec. 928, 929 (1982).
To ensure destruction under customs supervision, CBP regulations require a claimant to file CBP Form 7553, Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback, at least seven working days before the intended date of destruction. See 19 CFR § 191.71(a). This allows CBP to advise the filer of its determination to witness or not to witness the destruction. Id. If CBP attends the destruction, it must certify the “Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback.” Id. Thus, CBP must be able to verify what was destroyed if it attends the destruction. When CBP is given the proper advance notice and determines not to witness the destruction, the evidence submitted as proof of destruction, which is issued by a disinterested third party, must establish that the merchandise was, in fact, destroyed. See 19 CFR § 191.71(b).
CBP has a prior ruling regarding customs supervision and the destruction of merchandise for purposes of drawback. In HQ 227859, dated August 11, 1998, CBP denied a protest because the protestant failed to comply with the statutory requirement that the merchandise be destroyed under CBP supervision. In that case, the merchandise was unmerchantable on the basis of unapproved bottle size and improper label designation. Because it was unmerchantable, the protestant attempted to destroy the merchandise through a process involving fermentation and distillation. However, this destruction did not take place under customs supervision. CBP stated that “[d]ue to protestant’s failure to comply with the statutory requirement that the merchandise be destroyed under Customs supervision, and by denying Customs the opportunity to observe the destruction, the protestant is not entitled to drawback.” Moreover, CBP noted that method of destruction was insufficient because it did not prove that destruction, for purposes of the customs laws, took place because the protestant did not provide an explanation as to what happened to the alcohol recovered from the process. Therefore, to obtain drawback, claimants must be in full compliance with the relevant requirements regarding drawback, including the requirement that merchandise be destroyed under customs supervision or that CBP be provided the opportunity to observe the destruction, and that the evidence of destruction be sufficient to establish that the merchandise was, in fact, destroyed.
In this case, Sarmento requested CBP verify destruction after the fire occurred on June 6, 2009. However, CBP could not identify any of the merchandise in the domestic area due to the severity of the damage. Further, Sarmento stated that all records were destroyed in the fire and that it was unknown what was sold or what was still in the domestic area of the warehouse. Thus, Sarmento could not even be certain of what merchandise was destroyed. Because of this, it was impossible for CBP to know what it was observing when it was viewing the damage caused by the fire. Thus, CBP did not witness the destruction and could not certify the “Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback,” as required under 19 CFR 191.71(a). Further, because the merchandise was destroyed in the fire on June 6, 2009, CBP was not provided with the required seven days advance notice prior to destruction, as is also required under 19 CFR 191.71(a). Therefore, based on its failure to comply with the above cited requirements, Sarmento is not entitled to drawback.
Sarmento argues that, even if CBP did not observe the destruction, it has provided documentation that is sufficient to prove what was destroyed in the warehouse fire and as such, it is eligible for drawback. As stated above, 19 CFR § 191.71(b) allows the claimant to submit evidence of destruction, and requires that the evidence submitted, which must be issued by a disinterested third party, must establish that the merchandise was, in fact, destroyed. We note that submitting evidence of destruction in accordance with 19 CFR § 191.71(b) is only available when CBP determines not to witness the destruction after being provided the seven days advance notice prior to destruction required under 19 CFR § 191.71(a). As discussed above, CBP was not provided the required seven days advance notice prior to the destruction of the merchandise in the fire, which occurred on June 6, 2009. Therefore, submitting evidence of destruction under 19 CFR § 191.71(b) is not an option and Sarmento is not entitled to drawback.
Even though Sarmento’s claim fails under 19 CFR § 191.71(a) and submitting evidence of destruction under 19 CFR § 191.71(b) is not an option, we will address the deficiencies in its alleged evidence of destruction. The documentation provided includes receipts regarding the Crapo Hill landfill, photographs of the contents of the warehouse after the fire, a spreadsheet allegedly showing the inventory at the time of the fire, and multiple entry forms from the three years prior to the warehouse fire. In attempting to prove that the merchandise was destroyed, Sarmento provided landfill receipts and photographs of the warehouse after the fire. While issued by a third party, the landfill receipts merely indicate the date and time that some tonnage of something was moved to the Crapo Hill landfill on behalf of Sarmento. Rather than indicating the type and volume of wine taken to the landfill, as would be a basic requirement in this case, the receipts do not indicate what merchandise was transported to the landfill. Further, rather than providing photographic evidence that could be used to indicate what cases or bottles of wine were destroyed in the fire, the photographs provided merely support CBP’s statement regarding the contents of the domestic area of the warehouse being unidentifiable. As such, these two pieces of evidence are insufficient to establish what merchandise was destroyed.
In addition to the evidence discussed above alleging destruction, Sarmento has attempted to recreate its inventory at the time of the fire. Sarmento states that its inventory system was kept on a computer and in files, which were destroyed in the fire. In that inventory system, it would create a new entry for each import and keep a running inventory on each entry’s balance reflecting sales of the merchandise. In place of this, Sarmento submits a spreadsheet listing its imports over the last three years. The inventory spreadsheet merely provides information relating to the merchandise being entered into the United States, i.e., entry number, port code, import date, HTSUS number, description, quantity and unit of measure, entered value, duty per liter, internal revenue tax per liter, and 99% of the duty and tax paid. The inventory spreadsheet contains no indication of how many cases or bottles from each entry were sold, on what date the cases or bottles were sold, or how many cases or bottles remained in the warehouse at the time of the fire. As such, not only is this evidence inconsistent with how Sarmento described its running inventory system, the evidence provides no indication regarding what merchandise was in the warehouse at the time of the fire. Similarly, the CBP 7501 forms simply establish that Sarmento made multiple entries during the three years prior to the fire. As such, this evidence is insufficient to establish what merchandise was in the warehouse at the time of the fire.
Although it is unfortunate that the warehouse and its contents were destroyed in the fire, the drawback laws were not drafted with the purpose of covering every instance where imported, duty-paid merchandise is destroyed. Thus, the notice requirement to CBP and ensuring the destroyed merchandise can be identified are essential to the claim. For these reasons, we will deny the claim for drawback and do not reach the issue of whether the insurance payments covered some of the merchandise on which drawback was claimed.
HOLDING: Based on the information submitted, we find that Sarmento may not claim drawback on merchandise that was destroyed in the fire. Accordingly, Protest No. 4601-11-101872 should be DENIED for the reasons set forth in this decision.
In accordance with the Protest/Petition Processing Handbook, you are to mail this decision, together with the CBP Form 19, to the Protestant no later than 60 days from the date of this letter. Sixty days from the date of the decision Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Myles B. Harmon, Director
Commercial and Trade Facilitation Division