CIT Rules Against Toyota's NAFTA Drawback Claims Based on Non-Fungible Parts

(Under 19USC 1313(j)(4), an importer can receive "same condition" drawback on fungible merchandise (i.e. consisting solely of commercially interchangeable merchandise) imported into the U.S. when exported to a NAFTA country within three years of importation. A claimant need not track merchandise on a unit-specific basis if it can identify those exports eligible for drawback through an approved inventory accounting method listed in 19 CFR 191.14.)

Toyota Filed for NAFTA Drawback Using Inventory Accounting Methods

This case concerns a protest filed by Toyota seeking reversal of U.S. Customs and Border Protection's denial of Toyota's drawback claims on 42 entries of various service parts (fasteners, gaskets, etc.) that were imported into the U.S. and later exported to Canada between 1996 and 1999 for distribution to Canadian Toyota dealerships and customers.

As some of the exported entries commingled drawback eligible merchandise (imported service parts on which import duties were paid and subsequently exported to Canada unused) with drawback ineligible service items (domestically produced service parts or duty-free service parts), Toyota sought to identify its drawback eligible merchandise using two variations of the low-to-high inventory accounting method².

Customs Found Toyota's Turnover Method Invalid & Revoked Its Drawback Privileges

For years, Toyota sought and received drawback using the blanket variation of the low-to-high method. In April 1999, to meet system considerations and constraints of its outside drawback specialist, Toyota sought drawback using the inventory turnover variation with an inventory period of 48 days based on a "days of supply" calculation. In June 1999, Customs granted Toyota's application for accelerated drawback and other privileges for the shipments based on this method variation, but warned Toyota on multiple occasions that there was a possibility that its drawback claims would not be approved.

In August 2001, Customs notified Toyota of its intention to revoke the company's drawback privileges. Toyota submitted additional information on its 48 "days of supply" calculation and held a meeting with Customs, but in November 2001, Customs revoked Toyota’s drawback privileges. Toyota appealed the revocation, but the appeal was denied.

Toyota then Tried to “Perfect” its Claims by Switching to Blanket Method

Toyota then tried to "perfect" its claims (submit additional information) to again use the blanket method. Customs treated this as a request to "amend" the claims (make changes to information). However, Customs determined this request was time-barred by the 3-year time limit for amending drawback claims pursuant to 19 CFR 191.52 and denied Toyota's drawback claims. Toyota timely protested.

Customs Ruled Neither of Toyota's Methods Were Valid and Denied Drawback Claims

Customs denied Toyota’s protest, ruling that Toyota’s inventory method was noncompliant, as its 48 “days of supply” calculation applied an average turn-over period for all service parts rather than an average turn-over for each distinct part. Customs argued that in treating all of its various service parts as part of the same inventory, rather than treating each type of service part separately, Toyota violated regulations as only fungible goods could be treated as part of a single inventory.

Customs also noted that its previous refusal to allow Toyota to perfect its claims to switch to the blanket method from the inventory turnover method was erroneous as such a change would constitute a perfection and not an amendment. While Customs found Toyota was permitted to perfect its drawback claims under the blanket method, Customs denied the claims as it found Toyota’s inventory records failed to demonstrate the service parts for which it sought drawback were actually exported to Canada within the three year time period after importation required for NAFTA drawbacks.

Toyota Argued at CIT for Use of 3-Year Period Under the Turnover Method

Toyota did not dispute any of Customs' findings in its protest ruling. Rather, before the CIT, Toyota claimed that it should have been permitted to perfect its drawback claims under the inventory turnover method by using a three year average inventory turnover period. Toyota argued that it could use a three year turnover period as the average inventory period for all of its service parts because one of its service parts had remained in inventory for more than three years.

Also Argued Could Amend Blanket Method Claims as Customs Caused Toyota to be Untimely

Alternatively, Toyota argued that although the time for amending its drawback claims expired, it should be permitted to untimely amend its claims under the blanket method pursuant to 19 CFR 191.51(e)(1), which allows out-of-time amendments to drawback claims when Customs is responsible for the delay in submitting an amended claim. According to Toyota, Customs was responsible for Toyota's failure to file new paperwork to back up its drawback claims under the blanket as Customs "induced" Toyota to believe that its claims under the inventory turnover method would be allowed. Customs' delay in processing and ruling on Toyota's claims meant that, by the time its claims were formally denied, the three-year window for amending its claims had closed.

CIT Agreed with Customs, Ruled Against Toyota as Its Methods Were Noncompliant

The CIT largely agreed with Customs and ruled that all of Toyota's claims lacked merit and ordered that judgment be entered in favor of Customs. Customs had argued that Toyota's desire to use a three year inventory period failed because it did not comply with the NAFTA drawback statute and regulation, which requires the longest average inventory turnover period be calculated for each type of service part. The CIT agreed, and explained that Toyota cannot base the inventory turnover period for all of its parts from one part's inventory period; it must calculate the average inventory turnover period on a part-specific basis. Thus, Toyota cannot perfect its claims to apply the three-year inventory turnover period.

The CIT also said that if Toyota applied a three-year inventory turnover period, it would receive drawback for merchandise actually imported more than three years prior to exportation. However, no drawback can be granted for merchandise that was imported more than three years before being exported.

The CIT also found Toyota's evidence was insufficient to find Customs responsible for Toyota's failure to file proper drawback claims or its failure to timely amend its drawback claims under the blanket method. Rather, the CIT stated that the evidence demonstrated that Customs notified Toyota early on in the process that it had doubts as to whether Toyota's drawback claims complied with the governing regulations, at which point, Toyota still had time to amend its drawback claims.

¹In Toyota Motor Sales, U.S.A., Inc. v. U.S. (Slip Op. 11-113, dated 09/08/11) Toyota Motor Sales is the U.S.-based sales and service arm of the Toyota Motor Corporation.

²According to the CIT, the low-to-high method generally attributes the lowest available drawback amount to merchandise withdrawn from the inventory during a specified period of time. Under the blanket method, the low-to-high procedures are applied during the three year period preceding the drawback claim. The inventory turnover method is applied to commingled, fungible inventory over a period equal to the average turnover of the entire inventory. By applying this method to every inventory turnover 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.