oversight

U.S. Customs Service: Merchandise Processing Fee--Examination of Costs and Alternatives

Published by the Government Accountability Office on 1990-06-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                 .__ -_- - ---   -_ -- ___-_ --- - ..-.
.J IIIIP   1990
                   u .s. CUSTOMS
                   SERVICE
                   Merchandise
                   Procmsing Fee:
                   Examination of Costs
                   and Alternatives




                  RESTRICTED --Not to be released outside the
                  General Accomtlng Office unless specifically
                  approved by the Of&e of Congressional
                  Relations.
             united    states
GAO          General Accounting  Office
             Washington, D.C. 20648

             General   Government   Division

             B-239841
             June 151990
             The Honorable Dan Rostenkowski
             Chairman, Committee on Ways and Means
             House of Representatives

             Dear Mr. Chairman:
             This briefing report respondsto your June 28, 1989, request that we
             review the U.S. Customs Service’s(Customs) merchandise processingfee
             charged to importers. Unless Congressextends the fee, it will expire in
             September 1990. To assist in your deliberations on continuing the fee,
             you asked that we review Customs’ costs of processingimported mer-
             chandise to determine whether these costs could appropriately be used
             as a basis for the fee. As agreed,we also evaluated (1) Customs’ plans
             for changing the fee to address international trade concernson the cost
             basis and excessamounts that Customs collected through the present
             fee and (2) the problems Customscould face in instituting changesto the
             present fee.
             On April 27, 1990, we briefed your committee on our results and you
             asked that we summarize in writing the information we had presented.

             The merchandise processingfee was established by the Omnibus Budget
Background   Reconciliation Act of 1986 (P.L. 99-509). The fee, which is basedon the
             value of imported merchandise (ad valorem), yielded $729 million in col-
             lections during fiscal year 1989. The fee is set by Public Law 99-509 at
             0.17 percent of value, and the Secretary of the Treasury can recommend
             a lower rate to Congressif the rate generatescollections exceedingcosts.
             The collections from the fee finance Customs’ salaries and other costs
             associatedwith commercial activities. Commercial activities costs are
             those associatedwith processingpassengers,cargo, carriers (trucks and
             ships), and commercial mail in order to collect duties and examine
             imports and exports for compliance with trade laws. During fiscal year
             1989, Customs estimated commercial activities costs to be $584 million.

             The merchandise processing fee has been controversial. In February
             1988, the General Agreement on Tariffs and Trade (GA?T), a 97nation
             organization that overseesworld trade and mediates trade disputes,
             adopted a November 1987 report of a panel it convenedto hear com-
             plaints from member nations that the fee did not reflect Customs’ costs
             of services provided to individual importers. As a member of the GAG,
             the United States presented arguments and evidence defending the fee.


             Page 1                             GAO/GGWO-@lBR   Merchandise   Processing   Fee
                        After hearing arguments and evidence on this issue,the panel found
                        that the fee was inconsistent with U.S. obligations under international
                        trade agreementsthat addressimport fees. Specifically, the panel found
                        that (1) not all of the estimated costs of Customs’ commercial services
                        recovered through the fee were proper becauseCustoms included costs
                        for such things as airport passengerprocessingservices that importers
                        did not use and (2) the fee did not approximate the cost of processingan
                        individual merchandise shipment.
                        In its report, the panel also discussedthe problem of excesscollections
                        becausemember nations complained that the rate of the existing fee had
                        been set too high, generating more revenue than neededto cover Cus-
                        toms’ costs of commercial activities. Under existing law authorizing the
                        fee, the Secretary of the Treasury can make recommendationsto Con-
                        gress on reducing the fee to offset these past excesscollections. The
                        GATT panel did not make a finding on the use of these excesscollections.



                        Customs lacks data to establish the actual costs that would serve as a
    Resultsin Brief     basis for the merchandise processingfee. While Customs calculates costs
                        primarily by estimating the number of staff years used to process
                        imported merchandise, it doesnot keep data on the actual time its
                        employees spend in processingmerchandise.As a result, we were unable
                        to determine whether the estimates of staff years used in processing
                        merchandise were accurate. Customs recognizesthat it needsdata on
                        the time employeesspend processingmerchandise to establish accurate
                        cost estimates. In April 1990, Customs agreed to collect these data
                        through a new payroll system that is being developed. The system is
                        scheduled to begin operation by the spring of 1992.

                        According to the Office of the U.S. Trade Representative, since the
                        United States is a member of the GATT, which has adopted the panel
                        report, the United States is obliged, as a matter of international law, to
                        abide by it. Consequently, the Bush administration has decided to
                        replace the fee with one that would address international concerns.
                        Customs developed two alternative fee proposals. Either proposal would
                        require congressionalaction to be adopted. Agency officials believe
                        either of these alternative proposals could

                      . bring collections in line with Customs’ aggregatecosts for processing
                        merchandise and
                      . link individual fees to the approximate cost of processingeach
                        importer’s individual merchandise shipment.


                        P8ge 2                               GAO/GGD-WBlBR   Merchandise   Proceseing   Fee




-
-
           lb239341




           Customs generally designedboth alternatives to collect enough revenue
           to offset those estimated commercial activities costs that the GATT panel
           said could be included in the fee. However, we found that Customs does
           not have data linking the individual fees contained in either proposal to
           the cost of processingan importer’s individual merchandiseshipment.
           Also, the fees proposed in these alternatives were not reduced to
           account for past excesscollections.
           Finally, Customs could face operational problems in instituting either
           alternative fee proposal. For example, under both proposals, importers
           could pay less if they combine individual shipment information onto one
           document as opposedto reporting shipment information individually.
           While Customs has proposed changesto limit this potential revenue loss,
           officials agreed they would still have to monitor either proposal to
           ensure revenue lossesdo not occur. (Seeapp. III for examples of how
           importers could pay smaller fees.)

           To examine these issues,we reviewed Customs’ planning documents and
Approach   data on costs. We did not assessthe reliability of the accounting and
           personnel systems that Customs usesto develop its cost estimates. In
           Washington, D.C., we spoke with officials from Customs’ headquarters,
           the Office of the U.S. Trade Representative, and the Office of Manage-
           ment and Budget. We also visited Customs’ ports in four cities (New
           York City; Los Angeles, California; Laredo, Texas; and Buffalo, New
           York). At these locations, we spoke with Customs officials responsible
           for processingmerchandise and with customs brokers who represent
           importers to Customs. We also spoke with representatives from several
           organizations such as the National Customs Brokers and Forwarders
           Association. Our work was done from June 1989 through May 1990 and
           in accordancewith generally acceptedgovernment auditing standards.
           Further details on our objectives, scope,and methodology are presented
           in appendix IV.
           We discussedthe information in this report with officials from Customs,
           the Office of the U.S. Trade Representative, and the Office of Manage-
           ment and Budget. They generally agreed with the facts presented.


           We plan no further distribution of this report until 30 days after its issu-
           ance date, unless you publicly releaseits contents earlier. After 30 days,
           we will send copies to the Secretary of the Treasury, the U.S. Customs
           Service, the U.S. Trade Representative, and other interested parties.


           Page 3                               GAO/GGD-BO-91BR   Mecchudse   Procereing   Fee
    Major contributors to this report are listed in appendix VI. Should you
    need additional information on the contents of this report, please con-
    tact me on 275-8389.

    Sincerely yours,



pl ~~/&iiid
    Lowell Dodge
    Director, Administration
      of Justice Issues




    Page 4                              GAO/GGDtKLDlBR   Mezdundbe   Processing   Fee
P8ge 5   GAO/GGDB@BlBR   Mexthndiae   Proceasing   Fee
Contents




Appendix I                                                                                     8
Customs’Merchandise     Authority for the Merchandise ProcessingFee
                        Controversy Surrounding the Merchandise ProcessingFee
                                                                                               8
                                                                                               9
ProcessingFee
Appendix II
Costsof Commercial      Costs RecoveredThrough the Merchandise ProcessingFee
                        Complete Evaluation of Costs Not Possible
Activities
Appendix III                                                                                  16
Alternative Fee         Transaction Fee
                        Modified Ad Valorem Fee
                                                                                              16
                                                                                              16
ProposalsDeveloped      Alternative Proposals Linked to RevenueNeeds                          17
by Customs              Past ExcessCollections Not Addressed                                  19
                        Ability to Administer and Control Alternative Proposals               21

Appendix IV                                                                                   23
Objectives,Scdpe,and
Methodology
Appendix V                                                                                    24
Customs’Commercial
Activities Cost
Estimates for Fiscal
Year 1991 and
PlannedReductionsto
Address International
Concerns
Appendix VI
Major Contributors to
This Report

                        Page 6                             GAO/GGD-BO-BlBR
                                                                         Mclrhadlre   Proms&g Fee
          Contents




Figures   Figure I. 1: Authority for the Merchandise ProcessingFee                         8
          Figure 1.2: Controversy Surrounding the Merchandise                              9
               ProcessingFee
          Figure 11.1:Costs Recoveredthrough the Merchandise                              11
               ProcessingFee
          Figure 11.2:Complete Evaluation of Costs Not Possible                           13
          Figure III. 1: Description of Customs’ Two Alternative Fee                      15
               Proposals
          Figure 111.2:Alternative Proposals Linked to Revenue                            17
               Needs
          Figure 111.3:Past ExcessCollections Not Addressed                               19
          Figure 111.4:Ability to Administer and Control                                  21
               Alternative Proposals




          Abbreviations

          GATT       General Agreement on Tariffs and Trade
          MPF        Merchandise ProcessingFee
          USTR       Office of the U.S. Trade Representative


          Page 7                              GAO/GGLMO-SlBB   Merchandise   Processing   Fee
Custims’ Merchandise Processing Fee


                        Before 1986, Customs’ costs for processingmerchandisewere primarily
Authority for the       paid by general taxpayers. To recover costs for various services,
Merchandise             Congresspassedthe Omnibus Budget Reconciliation Act of 1986 (P.L.
ProcessingFee           99-509). The act becamelaw on October 21,1986, and authorized the
                        Secretary of the Treasury to charge importers a merchandiseprocessing
                        fee (MPF). The MPF is a fee on imports basedon the value of merchandise
                        (ad valorem). Public Law 99-609 set the MPF at 0.17 percent, and the
                        Secretary of the Treasury can recommenda lower rate if the rate gener-
                        ates collections exceedingcosts. MPF collections are deposited into a user
                        fee account and then are made available through appropriations to pay
                        Customs’ salaries and other costs associatedwith commercial activities.
                        In fiscal year 1989, Customs collected $729 million in merchandise
                        processingfees.

Fbure 1.1



       m        Authority for the
                Merchandise Processing Fee
            l   Omnibus Budget Reconciliation
                Act (P.L. 99-509) established
                the Merchandise Processing
                Fee
                aMerchandise Processing Fee
                 collections totaled $729
                 million in FY 1989




                        p&gee                                GAO/GGD9041BR   lkrchandlse   Procesalng   Fee
Fipun 1.2



      GAQ Controversy Surroundin,g the
          Merchandise Processing Fee
            l   GATT panel found that present
                fee is inconsistent with
                U.S. trade obligations
            l   Importing community is
                concerned that alternative fee
                proposals
                *are not supported by
                 cost dat& and
                @couldresult in revenue
                 losses and fee escalation
                         The MPF has been the subject of much controversy from foreign trading
Controversy              partners and members of the importing community (importers, industry
Surrounding the          associations,and customs brokers). In February 1988, the General
Merchandise              Agreement on Tariffs and Trade (GA-IT), a 97-nation organization that
                         overseesworld trade and issuesfindings on and mediates trade disputes,
ProcessingFee            adopted a November 1987 GAIT panel report challenging the fee. The
                         panel heard complaints from member nations that the MPF did not relate
                         to Customs’ costs of services provided to importers and reviewed
                         Customs’ estimated costs of services recovered through the MPF. The
                         panel agreed with member nation complaints, finding that the MPF was
                         inconsistent with U.S. obligations under international trade agreements
                         that address import fees. The panel objected to Customs recovering



                         P8ge9                              GAO/CG~~glBRMerehandiseProcessingFee
    Am=*       1
    ~~~tmns’   Merchandise   Processing   Fee




    costs for services that importers did not use. Customs’ costs improperly
    charged to importers were those associatedwith
. collecting duties from airport passengersentering the country,
l processingexport documentation,
l processing imports exempt from the MPF, and
. carrying out international affairs activities of Customs officials sta-
  tioned overseas.
    The panel also found that the MPF did not approximate the cost of
    processingan importer’s individual merchandise shipment and could
    result in overcharging importers.
    The panel also heard complaints from member nations that the rate of
    the existing fee had been set too high, generating more revenue than
    neededto cover all of Customs’ costs. Under existing law authorizing the
    MPF, the !%cretary of the Treasury can make recommendations to
    Congresson reducing the fee to offset past excesscolIections. The panel
    did not make a fading on the use of these excesscollections.
    According to the Office of the U.S. Trade Representative (USTR),since
    the United !3tatesis a member of the GATT,which has adopted the panel
    report, the United States is obliged, as a matter of international law, to
    abide by it. Co~uentIy, the Bush W                    has decided to
    replace the fee with one that would address international concerns.The
    panel did not deflne the specific fee structure that would bring the fee
    into compliance with trade agreements,nor did it define the term
    “approximate cost” in its finding that the fee did not relate to the cost of
    processing an individual merchandise shipment. To address the panel
    finding, Customs proposed to replace the present fee with one that
    would charge different prices for various types of shipments.
    In addition to international concerns,importers, customs brokers, and
    industry associationsexpresseddisagreement with the Customs pro-
    posal. As a compromise, Customs deveIoped a secondalternative that
    retains the ad valorem but with certain limits to address international
    concerns.Importers, customs brokers, and industry associationscon-
    tinue to express concernsthat (1) fees contained in the alternatives do
    not reflect the cost of processingan individual importer’s merchandise
    shipment and (2) importers could pay smaller fees if the proposals were
    adopted, causing Customs to collect insufficient revenues to offset costs
    and subsequently requiring Customs to increase the fees to make up for
    revenue losses.


    P8ge 10                                     GAO/GGLNO-S1BB   Merchandise   Processing   Fee
b&s of Commercial Activities


                             Customs is supposedto recover its commercial activities coststhrough
CostsRecovered               the MPF. For fiscal year 1989, Customs estimated these costs at $584
Through the                  million. Costs of commercial activities include salaries and other costs
                             associatedwith the following:
Merchandise
ProcessingFee            . Customs trade, legal, audit, and technical staff who collect duties,
                           examine imports, and processexport and import documents;
                         l Customs investigators who investigate commercial fraud by importers;
                         l Customs inspectors who collect duties from individuals entering the
                           country and examine carrier records, cargo, and commercial mail; and

Figure 11.1



       GAQ Costs Recovered Through The
           Merchandise Processing Fee
              l   Estimated costs paid by the
                  fee totaled $584 million
                  in FY 1989
              l   Costs recovered are those
                  associated with all commercial
                  activities
              l   Costs are estimated based on
                  data in Customs’ accounting
                  and personnel systems


                             P8ge 11                              GAO/GGDgoQlBR   Mexvhmdbe   Processing   Fee
. Customs management and administrative staff, including data
  processing and international affairs personnel, who support commercial
  work.

  Customs calculates the cost of commercial activities using its accounting
  and personnel systems. It assigns 100 percent of direct salary and
  expensecosts for its trade, legal, audit, and technical staff recorded in
  the accounting system to the costs of commercial activities. However,
  Customs inspector and investigative personnel do both commercial and
  enforcement work. For example, inspectors do commercial work by
  examining cargo to determine whether the shipment complies with trade
  rules, including trademark and copyright requirements. These inspec-
  tors also do drug enforcement work by identifying high-risk shipments
  to detect illegal drugs.
  Customs’ accounting system generally doesnot record separate cost
  data by the type of commercial and enforcement work done. Therefore,
  Customs estimates these costs by taking the total positions recorded in
  the personnel system and asking its program managersto estimate the
  number of full-time equivalent positions doing (a) commercial work and
  (b) enforcement work. Customs usesthese personnel estimates to dis-
  tribute direct costs recorded in the accounting system to the cost of com-
  mercial activities and other enforcement work. After distributing direct
  costs on the basis of these personnel estimates, Customs generally dis-
  tributes management and administrative support costs using the same
  ratio.




  Page 18                             GAO/GGD-@MUBR   Mm        Proceaehg   Fee
                          Appendix II
                          Casta of Commercial   Activities




Figure 11.2



       GAQ Complete Evaluation of
           Costs Not Possible
        .,
           Accounting data support
              l

           $126 million in direct
           commercial activities costs
              l   Customs lacks hard data to
                  support most of the remaining
                  costs




                          Customs’ accounting system contains commercial activities cost infor-
CompleteEvaluation        mation supporting the direct trade, legal, audit, and technical costs that
of CostsNot Possible      are to be recovered through the MPF.These costs totaled $126 million, or
                          about 22 percent of total estimated commercial activities costs ($584
                          million) for fiscal year 1989. However, we were unable to determine
                          whether most of the remaining costs ($458 million) assignedto commer-
                          cial activities represented an accurate reflection of costs. For example,
                          Customs does not know actual direct inspection costs associatedwith
                          collecting duties from passengersentering the country and processing




                           P8ge 13                             GAO/GGWO-91BR   MB       Prows&g   Fee
commercial cargo. For fiscal year 1089, Customs estimated these inspec-
tion costs at $179 million, or about 31 percent of the $684 million in
total estimated commercial activity costs.
Customs’ inspection and control unit, which collects duties from individ-
uals entering the country and processescommercial cargo, also does
enforcement work to detect drugs and other illegal cargo entering the
United States. Customs does not know how much time its inspectors
spend processingpassengersand cargo versus detecting drugs and other
illegal cargo becauseit does not collect this information. Without this
information, we were unable to determine whether the amounts
assignedto commercial activities accurately reflect costs.

Customs officials said they would need a work measurement system to
accmately allot resourcesbetween commercial and enforcement work.
The last such study was done in 1982 and collected data on a random
sampling basis at all ports (seepage 18). customs officials said that they
have no plans to redo that study becausethey support an ad valorem
type MPFthat would not require the detailed data

Another way to distinguish the resourcesused in commercial and
enforcement work would be to require inspectors to record time they
spend on each of these functions when they fti out their payroll
records. Customs is developing a new payroll system, which is scheduled
to start operations in the spring of 1992. Customs officials said that the
new system can provide work measurement data, such as time spent in
processingmerchandise and doing enforcement work. In April 1990,
Customs officials agreed to use the new system to collect work measure-
ment data so that they could establish accurate cost estimates.




pye   14                             GAo/GGDm@1Ba -            procuhg   Fee
Appendix III

Aibrnative Fee Proposals Developed
bycustoms

Transaction Fee             The first proposal, known as a transaction fee, would charge a $47 fee
                            for all formal entries and an $11 fee for informal entries.’ To reflect
                            higher processingcosts, the proposal contains a $3 surcharge for formal
                            and informal entry documents submitted to Customs manually rather
                            than electronically. The proposal also includes six special fees for dif-
                            ferent services used by importers. For example, importers may have to
                            ship merchandise through several Customs ports before the cargo
                            reachesits final destination where duties must be paid. Customs needs
FblNm Ill.1



        m          Description of Customs’ Two
                   Alternative Fee Proposals
               l   Transaction proposal would
                   establish fees that
                   reflect the cost of services
                   used
               l   Modified ad valorem would
                   retain a value-based fee but
                   with changes to help reduce
                   under- and overcharging



                             ‘EntIieaareJ  documents filed with Customs as a record of import&on,        description, vahw, and disposi-
                            tionofaglvenlotofimportedmer&ndk                 bymimporkrorbmke.r.Fomtalentaiesareentriesof
                            ~withavPlutuswlly~thPn$1,2M),and~~entrlesareentrieaofmerchan-
                            d&3ewithav8lwusuaUyles8than$1,260.




                            P8ge 15                                               GAO/GGlh#lMUBR         Ibhdud~        Prtnxaaing   Fee
                    to track these shipments (known as in-bond shipments) to ensure duties
                    are paid. Importers who use them would pay a higher fee than those
                    who do not.

                    Customs and USTRofficials believe that in their judgment this proposal
                    would address GAIT concernsthat fees be tied to Customs’ costs of
                    processingan importer’s individual shipment of merchandise. We also
                    believe transaction fees could represent prices that are related to the
                    costs of processing an importer’s individual shipment becauseimporters
                    would be charged for somespecific services they use. Customs officials
                    agreed that the services covered in the transaction proposal represent
                    Customs’ maor merchandise processingservices used by importers.
                    Currently, Customs does not have the data to develop transaction fees.
                    (* page 18.1

                    The secondproposal, known as a modified ad valorem fee, would still be
ModifiedAdValorem   basedon merchandise value but with limits. For formal entries, the ad
Fee                 valorem would be 0.16 percent of merchandise value with a minimum of
                    $20 and a maximum of $400. Like the transaction proposal, the proposal
                    contains an $11 fee for informal entries and a $3 manual submission
                    surcharge for formal and informal entries.
                    The Bush administration has submitted proposed legislation to Congress
                    recommending adoption of the modified ad valorem. Customs and the
                    U~TRbelieve this proposal addressesGAIT concernsthat importers of
                    high-value shipments were being overcharged and that these
                    overcharges were subsidizing importers of low-value shipments. Agency
                    officials believe that the upper and lower limits, coupled with informal
                    and manual entry fees, will reduce over- and undercharging and address
                    GAW concernsthat the fee approximate the costs of processingan
                    importer’s individual shipment. It is unclear to us whether these modi-
                    fied ad valorem fees would approximate the costs of processing an
                    importer’s individual shipment becauseof a lack of cost data.
                            kw*         m
                            Altematlve Fee Propoda   Developed
                            by Customa




Figure III.2



         GAQ Alternative Proposals Linked
             to Revenue Needs
               l   In redoing the MPF, Customs
                   plans to reduce FY 1991
                   collections by $110 million
               l   Customs used an outdated
                   study to develop transaction
                   fees
               l   Customs did not collect cost
                   data to develop modified ad
                   valorem fees

                            Customs generally designedboth proposals to collect enough revenue in
Alternative Proposals       fiscal year 1991 to offset its estimate of those commercial activities
Linked to Revenue           costs that the GAIT panel said could be included in the fee. Because
Needs                       Customs lacks data on commercial activities costs and doesnot have
                            data to link the proposed fees to the costs of processingan individual
                            merchandise shipment, it estimated the reductions to collections and the
                            individual fees as follows.




                            Pyre   17                            GAO/GGMO-9lBR M-        Promming   Fee
     Reductions in Collections   To address the GAIT panel finding concerning the four cost elements that
                                 importers were charged for but did not use, Customs plans to reduce the
                                 amount of revenue collected in fiscal year 1991 by $110 million. (See
                                 app. V for a list of planned reductions.) Concerning the reduction associ-
                                 ated with processingimports exempt from the MPF, Customsestimated
                                 that $45 million would have been generated assuming there was no
                                 exemption and used the number as a reduction figure. Regarding the
                                 remaining three cost elements (passengerprocessing,export processing,
                                 and international affairs), Customs reduced estimated costs recovered
                                 through the fee by $66 million2 However, in estimating the cost ele-
                                 ments that GATT said should not be recovered through the MPF,Customs
                                 did not exclude about $14 million in management and administrative
                                 support costs related to the commercial services importers did not use.
                                 Customs officials attributed the problem to an oversight and agreed to
                                 reduce revenue collected by this additional amount.


     Methods Used to Estimate    According to Customs officials, the transaction fee proposal is basedon
     Fees                        a 1982 time study. This study collected data from all ports and included
                                 data on the amount of time employeesspent in processingdifferent
                                 types of shipments. Customs officials recognizedthat increased automa-
                                 tion and new methods for processingshipments had significantly
                                 changed Customs’ merchandise processingsince 1982. However, they
                                 used the study becauseit was the only information available. These offi-
                                 cials agreed a new study would be neededto develop reliable data for
                                 transaction fees. According to an official who helped design the original
                                 study, Customs could collect new data but it would take about 2 years.
                                 BecauseCustoms is supporting the modified ad valorem MPF, officials
                                 said they have no plans to redo the study.
                                 In developing the modified ad valorem, Customs made a series of calcu-
                                 lations using various fees, percentage rates, and data on the value of
                                 imports. From these calculations, Customs chosea combination of fees
                                 and a percentage rate that yielded the collections neededto recover esti-
                                 mated commercial activities costs minus the costs that the GATT panel
                                 said should not be charged to importers. Customs officials said they did
                                 not collect cost data becausethey believed that putting upper and lower
                                 limits on the fees would address GAIT concerns.


                                 2Although the GATT panel finding ~&edw~~~r                          pmcessing
                                                                                                           its, Cus-
                                 tomsoffici&saidthatthe-                                               processing
                                                                                           estimates for       allpas-
                                 !iengem.
                                       consequently,customs
                                                          included
                                                                allpaemger    pmceshgc&sinit.9t66rniUionesthate.




_.
                          Appendtx Ill
                          AlternirtiveFeePropoeah       Deweloped
                          by Cuetorrm




Ftgun III.3



        m         Past Excess Collections
                  Not Addressed
              l   Customs did not reduce the
                  fee to offset past                excess

                  collections
              l   For FY 1988 and FY 1989
                  combined, past excess
                  collections totaled about
                  $235 million




                          Member nations also complained to the GATT panel that the rate of the
Past Excess               existing MPF had been set too high, generating more revenue than needed
CollectionsNot            to cover all the costs of Customs’ commercial activities. During the GAIT
Addressed                 panel hearings, the United States explained that MPF legislation contains
                          a fee reduction mechanism that allows the Secretary of the Treasury to
                          make recommendations to Congresson reducing the MPF in subsequent
                          years to offset past-excesscollections. For fiscal years 1988 and 1989
                          combined, Customs estimated that these past excesscollections totaled
                          about $235 million.



                          Page 19                                   GAO/GGD9091BB   Merchandise Processing Fpe
Agency officials did not address past excesscollections in calculating
changesto the fee for fiscal year 1991. They said that becausethe MPF
statute is due to expire, their first two priorities were to develop pro-
posed legislation to (1) eliminate from the proposals the costs that
should not be charged to importers and (2) address concernsabout the
MPF exceedingthe cost of processingan importer’s individual merchan-
dise shipment. Agency officials also noted that adjusting the fee requires
congressionalaction. They said that their proposed legislation to change
the MPF gives the Secretary of the Treasury the authority to adjust fees.
According to agency officials, if Congressadopts their proposed legisla-
tion and extends the law, the Bush administration will probably address
excesscollections in setting fees for fiscal year 1992.




Page20                               GAO/GGDdO4UBRMerchand&eProceseingFee
                            Appendix IIl
                            Alternative  Fee Propoda   Developed
                            by Chotoma




Figure III.4



        GM Ability to Administer and
           Control Alternative Proposals
               l   Transaction proposal would be
                   more difficult to administer
               l   Brokers need 2 to 6 months
                   to prepare for transaction
                   fees
               l   Customs is proposing changes
                   to reduce possible revenue
                   losses


Ability to Administer
and Control
Alternative Proposals

Administering Alternative   Customs officials and brokers said transaction fees would be more diffi-
Fee Proposals               cult to administer than modified ad valorem fees. Customs officials said
                            they do not have methods and procedures to collect two of the six spe-
                            cial transaction fees. For example, they said they would have to develop


                            Page 21                                GAO/GGDW91BR   Merchandise   Recessing   Fee
                          Ala=-     m
                          Altenutlve Fee Proposals   Developed
                          by Customs




                          a method for collecting proposed fees on in-bond shipments. Customs
                          officials also said that becauseof the larger number of transaction fees,
                          their offices may need more personnel to collect fees. Brokers com-
                          mented that a scheduleof transaction fees would complicate their oper-
                          ations more than a modified ad valorem becauseof the time required to
                          (1) educate employeesand clients on the various fees, (2) develop oper-
                          ating procedures, and (3) program their automated systems. They said
                          they would need about 2 to 6 months to implement transaction fees into
                          their operations.


Potential for Reduced     In discussionswith brokers, we learned there are at least two ways in
                          which reduced collections could occur under both alternative fee pro-
Collections               posals. First, brokers and importers could reduce the fees they pay by
                          combining information from the entries onto a summary document.
                          Customs’ regulations allow this practice. The examples below illustrate
                          how smaller collections could result.

                        . Under the transaction fee, a broker combines five entries on a summary
                          document. Instead of paying $236 ($47 X 5 entries), the broker would
                          pay $47 for the summary document -a loss of $188 to Customs.
                        . Under the modified ad valorem, a broker combines 10 entries each
                          valued at $6,000 on a summary document, for a total value of $50,000.
                          Instead of paying $200 ($20 minimum X 10 entries), the broker would
                          pay $75 ($60,000 X 0.15 percent) for the summary value-a loss of
                          $126 to customs.

                          Customs now proposesto charge fees basedon each entry as opposedto
                          charging a fee on the summary document. This action will correct the
                          first potential revenue loss problem associatedwith combining entry
                          information onto a summary document. However, it will not prevent the
                          secondway in which potential revenue lossescould occur.
                          Under both proposals, brokers and importers could combine different
                          merchandise in a shipment onto one entry document to keep the fee low.
                          Customs officials said that while regulations do not prohibit this prac-
                          tice, there are economic reasonsthat would discourageit. For example,
                          if an entry is selectedfor inspection, all the merchandise would be held
                          by Customs until the inspection is completed, thus delaying the
                          importer’s ability to fill customer orders. Officials said that under either
                          proposal they will have to monitor import practices to assesswhether
                          revenue lossesare occurring.



                          P8ge 22                                GAO/GGDBLL@lBIt   Merchandise   Processing   Fee
Appendix IV

Objectives, Scope, and Methodology


                  The objectives of our review were to assess
              .   Customs’ methods for estimating commercial activities costs,
              .   Customs’ plans to address international concernson the MPF,
              .   alternative fee proposals for recovering costs, and
              .   problems Customs could face in administering fees and controlling
                  against revenue loss.
                  To collect information on these issues,we interviewed Customs officials
                  responsible for budgeting and accounting, trade operations, inspection
                  and control, and user fee development. We reviewed documents that
                  dealt with methods Customs used to estimate its commercial activities
                  costs for fiscal year 1989 through 1991 and plans for complying with
                  the GATI- panel findings. We spoke with officials from USTR,the Office of
                  Management and Budget, and members of the Treasury Department’s
                  Commercial Operations Advisory Committee concerning the fee pro-
                  posals. This committee was formed by the Omnibus Budget Reconcilia-
                  tion Act of 1987 (P.L. 100-203) to advise the Secretary of the Treasury
                  on issuesrelating to Customs’ commercial activities.

                  To find out how difficult it would be to administer and control pro-
                  posals, we spoke with Customs’ headquarters officials, Customs offi-
                  cials, and customs brokers at ports in New York City; Los Angeles,
                  California; Laredo, Texas; and Buffalo, New York. These locations were
                  selectedin consultation with Customs officials who said these ports
                  represent merchandise processingoperations common among all ports.
                  These ports accounted for over $238 million, or 33 percent of the MPF
                  collections during fiscal year 1989. At these locations, we spoke with
                  Customs officials responsible for processingimports and a total of 30
                  brokers.
                  We selected a judgmental sample of the 30 brokers from lists of brokers
                  provided by Customs. Brokers were selectedbased on the size and type
                  of operations as indicated by their annual entry volume. We did not pro-
                  ject the views obtained from these interviews becauseof the small
                  number of brokers interviewed. We also spoke with industry representa-
                  tives from the National Customs Brokers and Forwarders Association,
                  the American Association of Exporters and Importers, and the Joint
                   Industry Group.
                  Our work was done from June 1989 through May 1990 and in accor-
                  dance with generally acceptedgovernment auditing standards.



                  Page 22                             GAO/GGD90-91BR   Merchandise   Process~   Fee
Custmps’ Commercial Activities Cost l3stimatis
for F’iscd Year 1991 and Planned lhductions ID
Address Internatiorkl Concerns
               Dollars in thousands
               Commorckl AclMtler costs                                                                 6676,200
               PhnnodRoductbns
               Passenger processing’                                                       wmo)
               Export processing                                                             (1,400)
               International affairs                                                         (1Dw
               MPF exempt imports                                                           (45,ooo)
               Total aqusmms                                                                           0110,300)
               %cludes all Costs of processing passengers, including airport pessengefs.
               Source: U.S. Customs Service




               Page 24                                           GAO/GGI.MW@IBR       Memhandbe    Processtn.g Fee
Qpendix VI

Major Gmtributors to This Report


GeneralGovernment Weldon McPhail, Assistant Director, Administration               of Justice Issues
Division, Washington, 2: ~%c~~~~~~~chmge
DC.                   Eric S. Rauch: Writer-Editor
                      Mary E. Cassady,Social ScienceAnalyst
                            Anna T. LittleJohn, Secretary/Typist




(2-1                         Ptgt26                                GAO/GGD-9M1BR   Mere-    Processing   Fee



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