CBP Rules Bonded Warehouse Operator Owes Duties on Withdrawn Shoes

A company formerly operating a bonded warehouse facility owes the government additional duties on 2,188 pairs of shoes that remained unaccounted for when the facility was shut down, ruled CBP headquarters in ruling H289595, released Aug. 26. CBP said the shoes, along with many other items, were improperly classified and stored by Jay Group in its facility before being withdrawn during the warehouse's closure. CBP ruled that Jay Group failed to rebut the presumption of correctness of its classification of shoes that remained unaccounted for in Jay Group’s final withdrawal, and instead accused CBP of factual errors.

Jay Group first established a bonded warehouse facility in 2007, which was used for the storage of "low-priced, used, damaged, or surplus" footwear, apparel and accessory items, said the company. Jay Group said CBP officials conducted annual compliance reviews of its bonded facilities since 2007, with a supplementary review in 2012, and at "no point" advised the company that its procedures were deficient.

In 2015, CBP officers conducted two additional on-site compliance reviews where they found incomplete records with missing entry numbers, that showed merchandise classified under various tariff schedule subheadings was commingled in storage. In August 2015, CBP issued a letter detailing the “multiple violations" noticed by officers during the two reviews that would need to be corrected to maintain the bonded status of the facility. These violations included failures to properly inventory and identify merchandise, to report discrepancies, to maintain records of manipulations and inventory control, and improper destruction of merchandise in bond, CBP said. Jay Group didn't dispute the findings and replied it would cease entries into its bonded warehouse until the violations were rectified, said the agency.

The following month, in a subsequent review, CBP found the Jay Group had failed to address any of the cited violations and noted a "major disconnect" between how goods were entered into the warehouse, the personnel responsible for pulling items, inventory records, and the company's broker. Jay Group then voluntarily suspended its bonded warehouse operations. The following year, the company filed a request to permanently discontinue its bonded warehouse operations, pending withdrawal of all bonded merchandise.

CBP conducted additional compliance reviews as part of the request and noted that the violations identified during the Summer and Fall 2015 compliance reviews had still not been corrected. Jay Group claimed that 3,596 pairs of shoes classified under subheading 6402.99.7990, were the sole remaining merchandise at the time of the inspections. Instead, CBP says it found "1,225 pairs of shoes classifiable under subheading 6402.99.3115, HTSUS, and 963 pairs of soccer cleats classifiable under subheading 6402.19.1520, HTSUS ... that were unaccounted for in Jay Group’s inventory records."

Because Jay Group was in the process of withdrawing all warehoused merchandise, CBP instructed the company to file withdrawals based on the actual inventory and not on its records. In January 2017, the company filed a final withdrawal for the 3,596 pairs of shoes it claimed to have on hand in 2016, without reference to the 2,188 pairs of separate classifications found by CBP. CBP then issued a Notice of Action, requiring additional duties on the 2,188 pairs of shoes found the previous year. Jay Group filed a protest that August, arguing that it owed no duties for the shoes because all merchandise warehoused in the protested entry was "properly entered, inventoried, and withdrawn."

In response, CBP produced photographs of the 2,188 pairs of shoes discovered during the fall 2016 compliance reviews along with their notes stating that they were unable to locate a single pair of the 3,596 shoes allegedly classified under subheading 6402.99.7990.

In its ruling, CBP concluded that Jay Group never rebutted the presumption of correctness of the shoe classification. Instead, the company argued that CBP made a mistake as to the existence of the shoes themselves. Jay Group provided three documents to CBP in support of its claim of a mistake, including a summary for the protested entry, the final withdrawal and an internal inventory log, the agency said. "These documents do not overcome the presumption of correctness of CBP’s quantification and classification of the 2,188 pairs of shoes at issue because they are not derived from an independent source and they are not reliable" in light of the company's previously sloppy recordkeeping, CBP said.

Because the compliance reviews had already shown Jay Group failed in its storage and identification of items, along with discrepancies at the facility, CBP ruled the company was in no position to argue issues of fact as to its inventories, when CBP had evidence to the contrary, the agency said.