Toyota Motor Sales v. United States, Slip Op. 11-113

• Decision Date: 08 September 2011
• Docket Number: Slip Op. 11-113,Court No. 04-00643
• Parties: TOYOTA MOTOR SALES, U.S.A., INC. Plaintiff, v. UNITED STATES, Defendant,
• Court: U.S. Court of International Trade

TOYOTA MOTOR SALES, U.S.A., INC. Plaintiff,

v.UNITED STATES, Defendant,

Slip Op. 11-113

Court No. 04-00643

UNITED STATES COURT OF INTERNATIONAL TRADE

Dated: September 8, 2011

Before: Richard K. Eaton, Judge

OPINION and JUDGMENT

[Plaintiff's motion for summary judgment denied. Defendant's motion for summary judgment granted.]

Page Fura, P.O. (Jeremy Page and Shannon Fura), for plaintiff Toyota Motor Sales, U.S.A., Inc.

Tony West, Assistant Attorney General; Barbara S. Williams, Attorney in Charge, International Trade Field Office, Commercial Litigation Branch, Civil Division, United States Department of Justice (Saul Davis); Office of Assistant Chief Counsel, International Trade Litigation, United States Customs and Border Protection (Yelena Slepak), of counsel, for defendant.

Eaton, Judge:

Plaintiff Toyota Motor Sales, U.S.A., Inc. ("Toyota" or "plaintiff") commenced this action to challenge Customs and Border Protection's ("Customs" or "CBP") denial of Toyota's claims for duty drawbacks on entries of automobile service parts imported into the United States and later exported to Canada.¹ Now before the court are Toyota's and defendant theUnited States' cross-motions for summary judgment pursuant to USCIT R. 56. The court has jurisdiction under 28 U.S.C. § 1581(a) (2006). For the reasons stated below, Toyota's motion is denied, and defendant's motion is granted.

BACKGROUND

Toyota is the U.S. based sales and service arm of the Toyota Motor Corporation. The company regularly imports service parts into the United States, and subsequently exports some of these parts to Canada for distribution to Canadian Toyota dealerships and customers. Toyota, therefore, routinely files drawback claims, seeking reimbursement of a substantial portion of the duties paid upon importation.

Plaintiff commenced this action to challenge Customs' denial of Protest No. 2704-03-100090 (the "Protest"), which sought reversal of Customs' denial of its drawback claims on forty-two entries of service parts exported from the United States to Canada between 1996 and 1999. At issue is Toyota's compliance with Customs' regulation 19 C.F.R. § 191.14 (2011), which governs the use of inventory accounting methods to identify drawback eligible merchandise, and Customs regulations 19 C.F.R. §§ 191.51and 191.52, which govern the time for filing and amending drawback claims. See Compl. ¶¶ 38-60.

I. Drawback Under NAFTA

Under 19 U.S.C. § 1313(j)(1),² an importer can receive a refund of ninety-nine percent of the amount of the duty, tax, or fee paid on unused merchandise imported into the United States, if the merchandise is exported within three years from the date of importation. Because Toyota's drawback claims concern unused merchandise exported to Canada, its claims arise under 19 U.S.C. § 1313(j)(4), which governs drawbacks for merchandise exported from the United States to its co-signatory countries under the North American Free Trade Agreement ("NAFTA Drawbacks"). NAFTADrawbacks are generally prohibited, unless the exported merchandise qualifies for an exception under 19 U.S.C. § 3333(a)(1)-(8). The parties do not dispute that the service parts could qualify for NAFTA Drawback under Section 3333(a)(2),³ which permits drawbacks on goods that were "exported to a NAFTA country in the same condition as when imported into the United States."

Because § 1313(j)(4) prohibits so-called substitutiondrawbacks⁴ for exports to NAFTA countries, reimbursement may only be claimed if the merchandise itself is actually (1) imported, (2) dutiable, and (3) subsequently exported. See Merck & Co., Inc. v. United States, 499 F.3d 1348, 1357 (Fed. Cir. 2007).

Pursuant to § 3333(a)(2)(B), a drawback claimant may, however, identify drawback eligible merchandise using inventory accounting methods, as set forth by regulation, to establish that the merchandise has been imported into the United States, that duties were paid thereon, and that it was exported within the time limits for drawbacks provided for in § 1313(j)(1). In other words, in submitting claims for NAFTA Drawback, a claimant need not track merchandise on a unit-specific basis if it can identify those exports eligible for drawback through an approved accounting method.

II. The Use of Inventory Accounting Methods to Identify Drawback Eligible Merchandise

Section 3333(a)(2)(B) provides that, for imported goods that are "commingled with fungible goods⁵ and exported in the samecondition, the origin of the good may be determined on the basis of the inventory methods provided for in the regulations implementing this title." Pursuant to this statutory authority, Customs promulgated 19 C.F.R. § 191.14 to "provide[] for the identification of merchandise or articles for drawback purposes by the use of accounting methods." See 19 C.F.R. § 191.14(a).⁶

In accordance with § 191.14(a), if an importer maintains fungible inventories consisting of both drawback eligible and ineligible merchandise (e.g., domestically produced products), any merchandise subject to drawback may be identified by inventory accounting methods. Using these methods, a drawback claimant may establish that, based on its inventory records, dutiable merchandise must have been exported within three years of importation, as required by § 1313(j)(1). Because Toyota commingled imported service parts on which it paid import duties and subsequently exported to Canada unused ("drawback eligible merchandise") with other service parts for which no drawback was available (e.g. , domestically produced service parts or duty-free service parts), it sought to identify its drawback eligible merchandise using the inventory accounting methods set forth in § 191.14(c). It is Toyota's compliance with § 191.14 that is asignificant issue in this action.

III. The Low-to-High Accounting Method

One of the permitted accounting methods for identifying drawback eligible merchandise under § 191.14(c) is the low-to-high method. Toyota's claims raise issues with respect to two variations of the low-to-high method, as set forth in § 191.14(c) - first, the low-to-high blanket method (the "Blanket Method"); and second, the low-to-high method with established inventory turn-over period (the "Inventory Turnover Method"). In general, the low-to-high method attributes the lowest available drawback amount to merchandise withdrawn from the inventory during a specified period of time. Like the other accounting methods set forth in § 191.14(c), this method can only be applied to an inventory of fungible merchandise. See 19 C.F.R. § 191.14(b)(1) ("The lots of merchandise or articles to be so identified must be fungible. . . ."). A fungible inventory is one that consists solely of commercially interchangeable merchandise. See 19 C.F.R. § 191.2(o).⁷ Thus, any variation of the low-to-high methodmay only be applied when an importer has commingled fungible drawback eligible and ineligible merchandise in a single inventory.

When applying the Blanket Method variation of the low-to-high method:

all receipts into and all withdrawals for export are recorded in the accounting record and accounted for so that each withdrawal is identified by recordkeeping on the basis of the lowest drawback amount per available unit of the merchandise or articles received into inventory in the period preceding the withdrawal equal to the statutory period for export under the kind of drawback involved (e.g., . . . 3 years under 19 U.S.C. § 1313(j) . . .). Drawback requirements are applicable to withdrawn merchandise or articles as identified (for example, if the merchandise or articles identified were attributable to an import more than . . . 3 years . . . before the claimed export, no drawback could be granted).

19 C.F.R. § 191.14(c)(iv)(A). Thus, under the Blanket Method, the low-to-high procedures are applied during the three year period preceding the drawback claim, which is equal to the statutory limitation period for drawback claims on unused merchandise. Because all of the merchandise identified through the use of accounting must also comply with the basic drawback requirements, the accounting is only applied to merchandise that is imported and exported during that three year period.

The Inventory Turnover Method variation of the low-to-high method is applied to commingled, fungible inventory over a period equal to the average turnover of the entire inventory. For example, if, on average, the entire inventory of a particularproduct were depleted every thirty days, the low-to-high method would be applied to units of that product taken into and withdrawn from inventory during a thirty day period. See 19 C.F.R. § 191.14(c)(3)(iii)(D). By applying this method to every thirty day period over the course of three years, a drawback claimant could demonstrate that all of the drawback eligible merchandise was both imported and exported within that period of time.

IV. Toyota's Drawback Claims

For some years, Toyota sought and received drawback using the Blanket Method. Beginning in April 1999, however, the company pursued a new accounting method⁸ - i.e., the Inventory Turnover Method - to identify its drawback eligible merchandise, pursuant to § 191.14(c)(3)(iii). Pl.'s Rule 56.1 Statement ¶¶6-7; Def.'s Resp. to Pl.'s Rule 56.1 Statement ¶¶6-7. According to Toyota, it switched from the Blanket Method to the Inventory Turnover Method because the latter would "serv[e] to meet the system considerations and constraints" of the company's outside drawback specialist. See Protest at 2.

On April 5, 1999, Toyota filed an application with Customsfor a Waiver of Prior Notice of Intent to Export⁹ and for the privilege of Accelerated Payment¹⁰ for drawback claims based on its use of the Inventory Turnover Method for the forty-two entries at issue here. Customs granted Toyota's application on June 11, 1999. The effect of Customs' approval was to permit Toyota to claim drawbacks on exports without first affording Customs an opportunity to inspect...