August 24, 1999
CON-12-01-LIQ-15-RR:CR:DR 228102 IOR
CATEGORY: Harbor Maintenance Fee
Port Director U.S. Customs Service 300 S. Ferry St.
Terminal Island, CA 90731 ATTN: Gerald Rankin
RE: Harbor maintenance fee; AAFES; 26 U.S.C. §4461; 19 CFR 24.24(c)(7); 19 CFR 141.102; instrumentality of the U.S.; government agency
This is in response to your request for internal advice of June 8, 1998 (ENT-1-L:S:T GR), regarding entries made by the Army & Air Force Exchange Service (AAFES) of Oakland, California.
Entries filed by AAFES are being processed at Los Angeles and San Francisco as Type 52 entries. The entered merchandise is being exempted from Harbor Maintenance Fee (HMF) based upon Customs Regulations 24.24(c)(7) (19 CFR 24.24(c)(7)), and payment of duties is being deferred until liquidation of the entries in accordance with 19 CFR 141.102(d). The reason for this treatment is that Customs has received assurances that AAFES is an instrumentality of the United States, operating under regulations provided specifically for AAFES. Therefore, a determination has been made that the entries filed by AAFES qualify for treatment as "Government entries".
Some Customs officers, however, have questioned whether "Post Exchange" (PX) entries are meant to be accorded such benefits. They argue that Type 52 entries and the two referenced sections of the Customs Regulations are intended to cover importations that have an official governmental purpose, such as importations consisting of arms, munitions, office supplies, tools, etc. It is argued that importations by AAFES are different in that they consist essentially of department-store goods which are sold directly to consumers without any benefit to the Government.
You question whether the importations of AAFES fall within the scope of 19 CFR 24.24(c)(7) and 141.102(d), and whether they are being correctly processed as Type 52 entries.
Whether importations made by AAFES are entitled to treatment intended for instrumentalities of the U.S. and government entries under 19 CFR 24.24(c)(7) and 141.102(d)?
LAW AND ANALYSIS:
The collection, administration and enforcement of the HMF has been delegated to the Customs Service as part of the Comprehensive Water Resources Development Act of 1986, Pub. L. No. 960622, 100 Stat. 4082 (codified at 26 U.S.C. §4461), which provides, in pertinent part:
(a) General Rule.- There is hereby imposed a tax on any port use.
(b) Amount of tax.- The amount of the tax imposed by subsection (a) on any port use shall be an amount equal to 0.125 percent of the value of the commercial cargo involved.
(c) Liability and time of imposition of tax.- (1) Liability.- The tax imposed by subsection (a) shall be paid by- (A) in the case of cargo entering the United States, the importer, ....
The HMF statutory provision is implemented by 19 CFR 24.24, and paragraph (c) provides for exemptions as follows:
Exemptions. The following are not subject to the fee:
(7) Cargo or vessels of the U.S. or any agency or instrumentality of the U.S.
Whether AAFES is exempt from paying the HMF depends on whether the imported merchandise is considered cargo of an instrumentality of the U.S. The House Report, No. 99-228, at p. 9, states that "[t]he port use charge does not apply to the United States Government or any agency or instrumentality thereof." Therefore, the Customs Regulations are consistent with the legislative history of the Water Resources Development Act. The statute, legislative history and regulations do not limit in any way the type of merchandise to which the exemption is applicable.
The question of whether AAFES is an instrumentality of the U.S. government has been addressed by the United States Supreme Court in Standard Oil Co. of California v. Johnson, 316 U.S. 481 (1942), and United States v. State Tax Commission, 421 U.S. 597 (1975). In Standard Oil, the issue was whether a United States Post Exchange was exempt from paying a license tax, measured by gallonage, on the privilege of distributing motor vehicle fuel, imposed by the California Motor Vehicle Fuel License Tax Act. The Act provided that the tax is inapplicable to "any motor vehicle fuel sold to the government of the United States or any department thereof for official use of said government." 316 U.S. at 482. The court reviewed the formation and development of post exchanges and analyzed the relationship between post exchanges and the government of the U.S.:
On July 25, 1895, the Secretary of War, under authority of congressional enactments promulgated regulations providing for the establishment of post exchanges. These regulations have since been amended from time to time and the exchange has become a regular feature of Army posts. That the establishment and control of post exchanges have been in accordance with regulations rather than specific statutory directions does not alter their status, for authorized War Department regulations have the force of law.
Congressional recognition that the activities of post exchanges are governmental has been frequent. Since 1903, Congress has repeatedly made substantial appropriations to be expended under the direction of the Secretary of War for construction, equipment, and maintenance of suitable buildings for post exchanges. In 1933 and 1934, Congress ordered certain moneys derived from disbanded exchanges to be handed over to the Federal Treasury. And in 1936, Congress gave consent to state taxation of gasoline sold by or through post exchanges, when the gasoline was not for the exclusive use of the United States.
The commanding officer of an Army Post, subject to the regulations and the commands of his own superior officers, has complete authority to establish and maintain an exchange. He details a post exchange officer to manage its affairs. This officer and the commanding officers of the various company units make up a council which supervises exchange activities. None of these officers receives any compensation other than his regular salary. The object of the exchanges is to provide convenient and reliable sources where soldiers can obtain their ordinary needs at the lowest possible prices. Soldiers, their families, and civilians employed on military posts here and abroad can buy at exchanges. The Government assumes none of the financial obligations of the exchange. But government officers, under government regulations, handle and are responsible for all funds of the exchange which are obtained from the companies or detachments composing its membership. Profits, if any, do not go to individuals. They are used to improve the soldiers' mess, to provide various types of recreation, and in general to add to the pleasure and comfort of the troops.
Id., at 483-485 (footnotes omitted).
The court concluded:
From all of this, we conclude that post exchanges as now operated are arms of the government deemed by it essential for the performance of governmental functions. They are integral parts of the War Department, share in fulfilling the duties entrusted to it, and partake of whatever immunities it may have under the constitution and federal statutes.
Id., at 485 (emphasis added).
United States v. State Tax Commission, concerned a state regulation which required out-of-state liquor distillers and suppliers to collect from military installations within Mississippi, and remit to the State Tax Commission, a tax in the form of a wholesale markup of 17% to 20% on liquor sold to the installations. The court agreed with the lower court"™s determination that the post exchanges are instrumentalities of the U.S., and further concluded that the tax was a violation of the limitation of the Buck Act of 1940, now U.S.C. §§105-110:
Section 105(a) provides that no person may be relieved of any sales or use tax levied by a State on the ground that the sale or use occurred in a federal area. But §107(a) provides that §105(a) "shall not be deemed to authorize the levy or collection of any tax on or from the United States or any instrumentality thereof...."
421 U.S. 597, at 603. As the post exchanges were instrumentalities of the U.S., they were found to be exempt from the tax.
In Standard Oil Co., it was determined that the post exchanges have an official governmental purpose, entitling them to the same immunities and exemptions allowed the government. See also, Champaign-Urbana News Agency, Inc. v. J.L. Cummins News Co., Inc., 632 F.2d 680 (7th Cir. 1980). As stated in Standard Oil Co., post exchanges were established by regulation. The general policies of AAFES are set forth in Army Regulation 60-10/ Air Force Regulation 147-7 (July 18, 1988), which provide in 1-9, the legal status of AAFES:
a. The AAFES is an instrumentality of the United States. It is entitled to the immunities and privileges enjoyed by the Federal Government under the Constitution, Federal statutes, established principles of international law, and international treaties and agreements.
Based on the foregoing precedent cases, we find that AAFES is an instrumentality of the U.S., and as such the cargo it enters is exempt from the HMF. The position that AAFES is an instrumentality of the U.S., although not in issue, was not questioned in HQ 223332, dated May 3, 1990. As stated above, there is no limitation on the types of importations of an instrumentality of the U.S. which are exempt from the HMF. The concern raised in the internal advice, that the type of merchandise being imported does not warrant the same treatment given to government agencies, was essentially addressed by the court in Champaign-Urbana News Agency, Inc. v. J.L. Cummins News Co., Inc., supra, in which the court determined that AAFES is a governmental instrumentality, and as such is exempt from liability under the antitrust laws. In examining the features of AAFES, the court compared it to private enterprises:
AAFES is a unique and impressive operation although to some it appears to be just another chain of department stores. In 1969 AAFES ranked third behind Sears, Roebuck & Company and J.C. Penney Company with sales that year in excess of $3.5 billion. In 1976 AAFES had over 3,000 retail outlets with over 10,000 other types of facilities including auto repair, customer service, vending facilities, and movie theatres.
632 F.2d at 683. After examining the organization, purpose and policies of AAFES, the court concluded:
AAFES is obviously not just a big cut rate store operated by the government to make life difficult for civilian merchants. To try to separate AAFES from our military forces is to wholly ignore all its unique features distinguishing it from private enterprise and to ignore the long established views of both the Congress and the Executive Branch. We should not decide this case on the basis of a mere glance through the front window of an exchange and thereby come to the conclusion that since it looks like any ordinary store it must be one. AAFES is a very important and integral part of our military structure providing a much needed service to military personnel around the world.
Id., at 692. It is not the character of the merchandise that warrants the exemption from payment of HMT, but the identity of the importer. The objective is to enable AAFES to provide its services at the least amount of cost possible, to provide the greatest benefit possible to the government.
With respect to the exemption from payment of estimated duties at the time of entry, as provided for in 19 U.S.C. §1505(a), 19 CFR 141.102 provides as follows, in pertinent part:
Entry or withdrawal for consumption in the following situations may be made without depositing the estimated Customs duties, or estimated taxes, or both, as specifically noted: ...
(d) Government entries. If a shipment is entered or withdrawn for consumption by a U.S. Government department or agency, or an authorized representative thereof, no deposit of estimated Customs duties or taxes shall be required if a stipulation is furnished in lieu of the bond. The proper department or agency will then be billed after liquidation of the entry for any duties or charges due.
The provision, which has since been amended, was initially included in the Customs Regulations in 1923, and provided that "[e]stimated duties need not be deposited on shipments consigned to Government departments or bureaus or authorized representatives thereof." Thus, the parties to which the exemption is applicable has essentially not changed since the provision was first introduced. The provision is included in the regulations on the basis of three Treasury Decisions. The first, T.D. 37330, dated September 16, 1917, instructed the collectors of Customs to immediately release, after entry, all supplies imported by the War Department, because for supplies urgently needed for the Army it is impracticable for its officers to deposit estimated duties at the time of entry. On January 8, 1918, T.D. 37469 was issued, and instructed the collectors of Customs to immediately release, without deposit of estimated duties, supplies imported by the Navy Department for the Navy. On October 25, 1922, T.D. 39285 was issued, and referencing the prior two T.D.s, instructed the collectors of Customs and others, to apply the same procedure as outlined in the prior two T.D."™s to "all shipments consigned to executive departments and other Government institutions or duly authorized representatives thereof." The procedure provided for billing the appropriate importer for any duties due, after liquidation of the entries.
While under the first two T.D."™s the payment of duties after liquidation was allowed specifically only for supplies of the Army and the Navy, the last T.D. broadened the application to all shipments of the government, thereby in no way limiting the application to military supplies. Whether or not AAFES is exempt from paying estimated duties depends upon the determination of whether AAFES is a "U.S. Government department or agency or an authorized representative thereof", and not upon the type of merchandise being entered. There is nothing to suggest that AAFES is a "U.S. Government department or agency, or an authorized representative thereof," based on a literal reading of those terms.
The issue of the status of AAFES, was specifically addressed in Ellsworth Bottling Co., v. United States, et al., 408 F. Supp. 280, 284 (W.D. Ok. 1975). In Ellsworth Bottling Co., an action was filed against AAFES under 5 U.S.C. §702, the Administrative Procedure Act (APA), which allows judicial review to "a person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute" (emphasis added). A threshold consideration for the court was whether AAFES is an agency within the meaning of the APA. The court based its determination on the definition of agency in 5 U.S.C. §701(b) of the APA under which an "agency" is "each authority of the Government of the United States, whether or not it is within or subject to review by another agency." The court cited Standard Oil Company of California v. Johnson, supra, in which it was determined that post exchanges are "arms of the government" and stated that AAFES is a modern day post exchange, and cited to the Department of the Army regulations in 32 CFR 554.7. The regulations cited set forth the organization of the post exchange, and are now contained in separately published regulations (General Policies of AAFES AR60-10/AFR147-7). They were removed from the CFR, effective June 15, 1978, in support of the Presidential objective to improve Government regulations, based on the determination that, along with other regulations, they do not have sufficient impact on the public to warrant publication in the Federal Register and the CFR. 43 FR 26443 (June 20, 1978). The Federal Register notice also stated that the deletion does not revoke or cancel the Army regulations concerning the same subject information.
The court in Ellsworth Bottling Co., applied the following analysis in determining whether AAFES is an agency for purposes of the APA:
The test for determining whether an arm of the Government has sufficient authority to justify classifying it as an agency under the APA is whether the arm has the authority to act with the sanction of the Government behind it. Lassiter v. Guy F. Atkinson Co., 176 F.2d 984 (Ninth Cir. 1949); Kam Koon Wan v. E. E. Black, Limited, 188 F.2d 558 (Ninth Cir. 1951). The AAFES acts with the sanction of the Government behind it as under the 1970 amendments to the Tucker Act, 28 U.S.C. § 1346(a)(2), an express or implied contract with the AAFES is to be considered an express or implied contract with the United States, and as under the 1970 Amendment to the Supplemental Appropriations Act, 31 U.S.C. § 724a, any judgment or compromise settlement against the United States arising out of an express or implied contract entered into by the AAFES is to be paid out of treasury funds, subject to reimbursement by the AAFES. See W. B. Fishburn Cleaners, Inc. v. Army & Air Force Ex. Serv., 374 F. Supp. 162 (N.D.Tex. 1974) and SwiffTrain Company v. United States, 443 F.2d 1140 (Fifth Cir. 1971). Thus, the AAFES is an agency within the meaning of 5 U.S.C. §702.
408. F. Supp. 280 at 282.
In W.B. Fishburn Cleaners, Inc. v. Army and Air Force Exchange Service, 374 F. Supp. 162, the court found that AAFES is an agency under the APA, in part because by contending that it is entitled to the immunities and privileges enjoyed by the federal government, and that law suits by or against AAFES are in effect by or against the U.S., AAFES is estopped from asserting that it is not an authority of the government.
The court in Lee Construction Co., Inc. v. Federal Reserve Bank of Richmond, 558 F.Supp. 165 (D. Md 1982), had to determine for the purpose of jurisdiction under the APA, whether the Federal Reserve Bank of Richmond (bank) is an "agency." The court acknowledged the difficulty of the issue before it thoroughly analyzed the organizational structure and function of the bank:
As far as this Court knows, that question has not been decided to date in any reported case. "The law on the simple question of what is an agency is quite complex." 1K. Davis, Administrative Law Treatise § 1:2, at 3 (2d ed. 1978) [hereinafter cited as Davis (2d ed.)]. "Any general definition can be of only limited utility to a court confronted with one of the myriad organizational arrangements for getting the business of the government done. . . . The unavoidable fact is that each new arrangement must be examined anew and in its own context." Washington Research Project, Inc. v. HEW, 164 U.S. App. D.C. 169, 504 F.2d 238, 24647 (D.C. Cir. 1974) (McGowan, J.) (citations omitted), cert. denied, 421 U.S. 963, 44 L. Ed. 2d 450, 95 S. Ct. 1951 (1975).
558 F. Supp. 165, at 172-173. In support of the conclusion that the bank is an agency, the court also cited the decision in Ellsworth Bottling Co., supra.
As the Customs Regulations do not define the term "agency" and there is no set definition of an "agency" for Customs purposes, we must rely on other applications of the term. We are persuaded that if AAFES was considered to be an agency for jurisdictional purposes under the APA, Customs has no basis to conclude that AAFES is not an "agency" within the meaning of 19 CFR 141.102(d).
With respect to your question whether the entries are being correctly processed as Type 52 entries, we can only direct you to Customs Directive 099 3550-061, issued September 18, 1992, which contains instructions for preparation of CF 7501. According to the directive, Type 52 entries are to be used when "any U.S. Federal Government agency (other than DCMAO) is the importer of record". It would follow that the Type 52 entry is to be used for entries to which 19 CFR 141.102(d) is applicable.
Importations made by AAFES are entitled to treatment intended for instrumentalities of the U.S. and U.S. government entries under 19 CFR 24.24(c)(7) and 141.102(d).
John Durant Director Commercial Rulings Division