United States General Accounting Office

GAO Report to the Committee on Finance,

U.S. Senate, and Subcommittee on

Trade, Committee on Ways and Means,

House of Representatives

May 1995 CUSTOMS SERVICE

Passenger User Fee

Collection Needs To Be

Reevaluated

GAO/GGD-95-138

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-260120 

May 22, 1995

The Honorable Bob Packwood, Chairman

The Honorable Daniel Patrick Moynihan

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Philip M. Crane, Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Subcommittee on Trade

Committee on Ways and Means

House of Representatives

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 19851

and the Tax Reform Act of 19862 authorized the U.S. Customs Service to

charge user fees for processing passengers and conveyances, such as

commercial vessels and vehicles, entering the United States.3

 The fee

established by COBRA for processing international air and sea passenger

arrivals in the United States is called the passenger user fee (PUF) and is

$6.50 per passenger. As agreed with the Committees, our objectives were

to (1) determine whether carriers have collected and remitted PUFs;

(2) assess any factors that may hamper the collection of this fee, including

statutory restrictions, internal control weaknesses, and audit limitations;

and (3) identify any options that may improve the collection and

remittance of the PUF.

To address the objectives we reviewed (1) applicable legislation and

regulations and Customs’ guidance and policies related to the PUF,

(2) Customs’ compliance audits of air and sea carriers4

 and Treasury’s

audit of the PUF for air passengers, (3) Customs’ passenger arrival data and

carrier PUF payment records, and (4) reports related to Customs’ internal

controls over the PUF done by Treasury and by us.

We conducted this review in Washington, D.C., and Los Angeles between

March 1994 and February 1995 in accordance with generally accepted

1

P.L. 99-272 (1986).

2

P.L. 99-514 (1986).

3

These public laws are codified at 19 U.S.C. 58c.

4

Sea carriers include cruise lines serving the United States. However, some freighter lines also carry

passengers on cruises.

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B-260120 

government auditing standards. Appendix I contains a more detailed

discussion of our objectives, scope, and methodology.

Background COBRA of 1985 and the Tax Reform Act of 1986 authorized Customs to

charge fees for providing various inspectional services. The fees are to be

deposited as offsetting receipts in the Customs User Fee Account, a

separate account within Treasury’s general fund. Use of the fees is not

subject to the annual congressional appropriation process. In fiscal year

1993, the latest year for which complete data were available, Customs

collected a total of $189.6 million in COBRA user fees, of which

$144.1 million were PUFs.

COBRA user fee revenues were initially used to pay for Customs’

inspectional overtime and excess preclearance costs.5

 The Customs and

Trade Act of 19906

 amended COBRA of 1985 to allow Customs to hire

inspectional personnel; purchase equipment; and fund related items, such

as computer software used to target passengers for inspection, that

enhance inspectional services, after overtime and excess preclearance

costs are funded. Customs data for fiscal year 1993 showed that overtime

costs and excess preclearance costs totaled $103.9 million and

$7.9 million, respectively. For the same year, costs for existing and new

inspectional positions and equipment and related items totaled

$43.5 million. Overall, the costs for COBRA-funded items totaled

$155.3 million in fiscal year 1993.

The annual allocation of COBRA user fee revenues has generated surpluses

each fiscal year since 1987 because revenues have exceeded reimbursable

costs. The annual surpluses have resulted in a cumulative surplus of

$189.5 million through fiscal year 1993. The surplus has been used to offset

the federal budget deficit.

The COBRA user fee statute and its implementing regulations7

 require that

air and sea carriers and other issuers of tickets and travel

5

Preclearance is the process through which international air passengers and their baggage are

tentatively examined and inspected by Customs for entry into the United States before departure from

a foreign location. The nine preclearance stations are in Canada—six, Bermuda—one, and the

Bahamas—two. Excess costs are the additional costs Customs incurs when providing inspectional

services in foreign ports, as compared to examining and inspecting air passengers and their baggage in

the United States. Such costs include housing and moving costs for Customs personnel as well as

excess management and operational costs.

6

P.L. 101-382 (1990).

7

19 C.F.R. 24.22(g).

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documents—such as travel agents—collect the PUF when a ticket or travel

document is issued to a passenger.8

 Passengers who meet the following

criteria are exempt from paying the PUF: (1) employees of air and sea

carriers traveling on official business; (2) diplomats who are in the United

States, or who have a diplomatic passport or visa; (3) passengers

precleared on Military Airlift Command flights; (4) passengers arriving due

to an emergency or forced landing; and (5) passengers transiting the

United States using an airport in-transit facility.

Carriers and other ticket issuers are required to remit the PUFs within 31

days after the end of the calendar quarter in which they were collected.

For example, PUFs collected between January 1 and March 31 are to be

remitted by May 1. If the PUF is not collected when the ticket is issued to a

passenger, the fee is to be collected from the passenger at the time of

departure by the departing carrier.

Customs has contracted with a bank in Atlanta, Georgia, to process PUF

payments, and carriers are required to mail their quarterly payments to

this bank. The bank processes the payments and then wires the funds to

the Federal Reserve Bank in New York City, which posts the funds to the

Customs subaccount in the Treasury account. The bank is also to send

related documentation—such as a detailed transaction report,

photocopies of checks, and a deposit slip—to Customs’ National Finance

Center (NFC) in Indianapolis, Indiana.9 NFC is to review the bank’s

documentation and record the payment information in a database that

tabulates this information and generates a report of carrier payments by

quarter.

In December 1993, Congress enacted the North American Free Trade

Agreement (NAFTA) Implementation Act,10 which amended the user fee

statute by (1) increasing the PUF from $5.00 to $6.50 through fiscal year

1997; and (2) eliminating the exemptions from the fee for passengers

travelling to the United States from Canada, Mexico, U.S. territories and

8

In our review, data were available only for air and sea carriers; therefore, our discussion excludes

other issuers of tickets and travel documents.

9

NFC performs Customs’ accounting operations. Specifically, NFC is responsible for (1) developing

and implementing a Service-wide financial management program; (2) developing and providing data

processing and internal control services related to revenue, appropriations, and payroll systems;

(3) maintaining central control of all fiscal and accounting activities; and (4) preparing reports on

revenues collected and the use of appropriations.

10P.L. 103-182 (1993).

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B-260120 

possessions, and adjacent islands11 also through fiscal year 1997. The

changes became effective in January 1994.12 Customs estimated that about

18 million passengers traveled to the United States from the exempted

locations in fiscal year 1993, of whom 14 million were air passengers and

4 million were sea passengers. Customs also estimated that the elimination

of exemptions, coupled with the PUF increase, should generate an

additional $156 million in revenues annually through fiscal year 1997.

Customs performs compliance audits of air and sea carriers to determine

whether they collect and remit the proper amount of PUFs. Carriers are

required to maintain necessary documentation for 2 years to verify the

accuracy of their PUF remittances and determine their compliance with the

user fee statute. Audit staff from Customs’ seven regional offices conduct

the compliance audits under the direction of its Office of Regulatory Audit

(ORA).13 Such audits are initiated on the basis of referrals from Customs

field offices and from NFC, which is responsible for monitoring carrier

payments for possible changes, such as large fluctuations in carrier

payments over time. If such changes include significant declines in

payments, NFC may advise ORA to consider initiating a compliance audit.

Customs cannot use COBRA user fees to fund carrier compliance audits,

because the cost of these audits is not included among those listed in the

statute as payable from fee revenues.

The COBRA user fee statute contains no billing or other specific provisions

to assess damages or penalties or charge interest for nonpayment of the

PUF by carriers. However, pursuant to regulation, Customs can charge

interest for PUF amounts that carriers should have collected but did not,

and that the carriers collected but did not remit. According to Customs, in

order to charge interest, Customs must determine a nonpayment amount.

This is usually determined on the basis of an audit. Customs must then

establish a due date and bill the carrier for the amount of nonpayment. If

the carrier fails to remit payment by the due date, interest begins to accrue

after that date. In accordance with regulation, Customs can also assess

damages in some cases, but Customs has no authority to assess penalties

in relation to the PUF.

11U.S. territories and possessions include American Samoa, Guam, the Northern Mariana Islands,

Puerto Rico, and the U.S. Virgin Islands. Adjacent islands include all islands in the Caribbean Sea, the

Bahamas, Bermuda, St. Pierre and Miquelon, and the Turks and Caicos Islands.

12Beginning with fiscal year 1998, the country exemptions for Canada, Mexico, U.S. territories and

possessions, and adjacent islands will be reinstated and the PUF will revert to $5.

13ORA is the unit within Customs responsible for auditing private sector entities that move

merchandise across the borders of the United States.

Page 4 GAO/GGD-95-138 Passenger User Fees
B-260120 

Results in Brief Air and sea carriers collected and remitted to Customs $756.4 million in

PUFs from the fee’s inception in July 1986 through the end of fiscal year

1993, the latest year for which complete data were available. However,

compliance audits of air and sea carriers done by Customs and by

Treasury’s Office of Inspector General (OIG) found that some of these

carriers had not paid the PUFs they owed. The audits estimated that the

nonpayment14 for the audited carriers totaled about $15.3 million through

November 1994. In addition, the audits found that some carriers had

collected PUFs but had not remitted them. Other carriers had not collected

any PUFs for certain periods of time or from certain sources of ticket sales,

such as overseas offices of U.S. air carriers.

The actual amount of PUFs owed is unknown. However, a Treasury OIG

report projected that air carriers had owed about $45 million in PUFs from

July 1986 to December 1990. There were no estimates of amounts owed by

sea carriers.

Several factors hamper Customs’ ability to collect PUFs.

• The COBRA user fee statute requires that the carrier issuing a ticket or

travel document to a passenger collect and remit the PUF, rather than the

carrier transporting the passenger to the United States. Since carriers may

transport passengers who have purchased tickets from other carriers,

Customs cannot rely solely on passenger arrival data to determine a

carrier’s PUF liability. Second, the statute does not require carriers and

other ticket issuers to submit passenger-related supporting documentation

when remitting PUFs. Customs verifies remittances through audits of

carriers.

• The statute does not provide for specific sanctions for nonpayment.

Customs can assess damages for nonpayment, but only on carriers that

collected PUFs but did not remit them. Customs can charge interest for

PUFs owed that were identified during audits of carriers but cannot charge

interest on PUFs for the period between when a carrier collected the fees

and when Customs billed the carrier. Customs is developing legislative and

regulatory proposals to assess penalties and charge interest earlier for the

nonpayment of PUFs.

• The statute’s exemptions have been misinterpreted by carriers who have

incorrectly considered some of their passengers exempt from the PUF. For

example, some air carriers did not collect PUFs from passengers obtaining

14For purposes of simplicity, the term “nonpayment” includes the underpayment and nonpayment of

the PUF.

Page 5 GAO/GGD-95-138 Passenger User Fees
B-260120 

tickets on the basis of frequent flyer mileage because they incorrectly

assumed that such tickets were exempt from the fee.

• Air and sea carriers’ internal control weaknesses can also contribute to

PUF nonpayment. Customs’ compliance audits have found that some

carriers have not developed the necessary procedures and internal

controls to collect and remit the PUFs.

Customs’ ability to identify nonpayment through its compliance audits has

limitations. For example, Customs’ audit staff resources limit the number

of air and sea carrier compliance audits. As a result, at current resource

levels, Customs can audit only three or four carriers a year. Also, its

auditors have encountered several obstacles while conducting audits, such

as restricted access to records and incomplete and poor quality carrier

data.

In contrast to the collection and remittance of the PUF, remittance of most

of the other COBRA user fees, such as those for processing commercial

vessels, commercial vehicles, and barges, is required at the time and place

of arrival. This may also be an option worth considering for collecting and

remitting the PUF, although we did not evaluate the feasibility or costs of

implementing such an option.

Some Air and Sea

Carriers Have Not

Paid Passenger User

Fees Owed

Customs compliance audits and a Treasury OIG report15 found that some

air and sea carriers had not paid the PUFs they owed. Customs and

Treasury estimated that the carriers owed about $15.3 million through

November 1994. The audits also found that some carriers had collected

PUFs but had not paid them, while others had not collected any PUFs for

certain periods of time or from certain sources of ticket sales. The actual

amount of PUFs owed is unknown. However, the Treasury OIG report

projected that air carriers owed about $45 million in PUFs for the period

July 1986 to December 1990. Customs officials expected that nonpayment

of the PUF might increase because some carriers may not be aware of

changes to the fee made by an amendment—included in NAFTA—to the

user fee statute. The amendment eliminated the exemption, through fiscal

year 1997, for certain passengers not previously required to pay PUFs.

Compliance Audit Results Air and sea carriers remitted $756.4 million in PUFs they owed to Customs

from the fee’s inception in July 1986 through the end of fiscal year 1993. As

15Audit Report on the U.S. Customs Service Air Passenger User Fees (Office of Inspector General,

Department of the Treasury, March 26, 1992).

Page 6 GAO/GGD-95-138 Passenger User Fees
B-260120 

of November 1994, Customs had completed 64 compliance audits of 57

carriers.16 The audits estimated that through November 1994, 35 carriers

had not paid a total of about $13.8 million in PUFs to Customs. Nonpayment

was found in 38, or 59 percent, of the 64 audits.17 The other 26 audits did

not identify any PUF nonpayment.

Of the $13.8 million in PUFs identified as not having been paid, air carriers

owed about $11.9 million and sea carriers about $1.9 million. As of

November 1994, Customs had collected about $5.4 million of the amount

owed, leaving outstanding PUF liabilities of about $8.4 million.18 About

$7.9 million of the PUFs still outstanding was owed by three air carriers

that were in bankruptcy—one of which owed $7.1 million—and a sea

carrier that disputed Customs’ estimates of PUFs owed. Two other carriers

that were billed for PUFs—and had made partial payments—still owed

about $0.2 million in fees.

In addition to the Customs audits, the Treasury OIG audited three air

carriers to determine their compliance with PUF requirements and found

that one foreign air carrier had not paid Customs $1.5 million in PUFs it

owed.19 As a result of this audit, the carrier remitted the amount owed to

Customs. The other two carriers did not owe any PUFs.

Some Carriers Collected PUFs

but Did Not Remit Them

Customs compliance audits found that some air and sea carriers collected

PUFs but did not remit them to Customs. For example, an audit found that

a domestic charter air carrier collected $57,220 in PUFs from a tour

operator with whom it had contracted but failed to remit the fees to

Customs for 4 years. During the audit, the air carrier returned the PUFs to

the tour operator, who then remitted them to Customs. In another

example, a Customs audit found that a foreign air carrier collected PUFs on

ticket sales outside the United States totaling $362,410 but did not remit

them as required. The audit also found that the air carrier (1) erroneously

collected PUFs from passengers purchasing tickets in Canada, which at the

time was exempt from the PUF; (2) failed to collect PUFs from passengers

16Seven carriers were audited more than once.

17The Customs audits found that carriers also owed about $10.7 million in inspection user fees—a fee

similar to the PUF—to the Immigration and Naturalization Service (INS) for its costs associated with

inspecting arriving passengers.

18Customs considers about $0.3 million in PUFs owed by three air carriers as uncollectible, and

therefore it cancelled them as outstanding liabilities. A domestic air carrier had part of its estimated

PUF liability waived through a settlement with the Treasury Department. Treasury agreed with the

carrier that Customs used an erroneous methodology when estimating the PUF liability. In addition,

Customs cancelled the PUF liability of two foreign air carriers because of the low likelihood of

collecting the fees.

19The audit also found that the carrier had not paid about $1.3 million in inspection user fees to INS.

Page 7 GAO/GGD-95-138 Passenger User Fees
B-260120 

departing the United States who had not previously paid the PUFs when the

tickets were issued to them; and (3) collected but did not remit fees,

totaling $959,000, owed to other U.S. government organizations, such as

INS and the Internal Revenue Service. In a third example, Customs

identified two sea carriers that had collected $797,855 in PUFs but had not

remitted them as required. As a result of the audit, the carriers remitted all

the PUFs owed.

Some Air and Sea Carriers Did

Not Collect Any PUFs for

Certain Periods of Time or

From Certain Sources of Ticket

Sales

Customs compliance audits also found that some other air and sea carriers

did not collect any PUFs for certain periods of time or from certain sources

of ticket sales. For example, an audit estimated that a domestic air carrier

failed to collect and remit to Customs about $7.1 million in PUFs between

July 1986 and December 1991 from ticket sale sources, such as

international travel agencies and the carrier’s overseas offices. According

to a Customs official, Customs submitted a claim against this carrier in

bankruptcy court for $5.4 million for the period before the carrier’s

bankruptcy filing. Customs had not billed the carrier for the remaining

$1.7 million covering the period after the bankruptcy filing. In another

example, a Customs audit found that a sea carrier failed to collect and

remit $36,050 in PUFs from 20 of its cruises over a 4-year period. As a result

of the audit, the carrier remitted the amount owed.

Estimated PUF

Nonpayment

Except for the amounts estimated during Customs compliance audits, the

actual amount of PUF nonpayment is unknown. However, a 1992 report by

Treasury’s OIG on air passenger PUFs estimated the fee nonpayment by air

carriers at as much as $45 million, or $10 million a year. The estimate was

for the period beginning with the inception of the PUF in July 1986 and

ending in December 1990.20 There were no estimates of nonpayment by

sea carriers.

Some Carriers May Not Be

Aware of Their PUF

Liability Under NAFTA

According to Customs officials, the removal of the country exemptions

under the NAFTA implementing legislation will likely increase the number

of (1) passengers required to pay the PUF and (2) carriers required to

collect and remit it. The Customs officials were concerned that carriers

20International passengers also are required to pay a user fee to INS when they enter the country. The

Justice Department OIG did an audit on INS’ collection of the fee. In its April 1994 report, titled

Immigration and Naturalization Service, Collection of Carrier Fees, the Justice OIG estimated that 22

air carriers that had not remitted any fees had not paid as much as $15.8 million in fees from

January 1991 to December 1992. One of these carriers owed $11.6 million of the total amount. The

report also estimated that overall nonpayment for this period—by as many as 178 air carriers—could

total as much as $46.4 million, since those carriers that had remitted fees did not always remit them

accurately.

Page 8 GAO/GGD-95-138 Passenger User Fees
B-260120 

selling tickets to and from the previously exempt countries may not

comply with the PUF requirements. While Customs officials expect that the

air and sea carrier industry associations will notify their members of the

amendment’s changes, they believe that many air carriers that will be

subject to the PUF are not members of these associations and thus may be

unaware of their liability. Because Customs does not know who these

carriers are, it cannot notify them of their responsibility to collect and

remit the PUF. Customs officials told us that in addition, many of the air

carriers are small with limited automated resources and poor internal

controls that would hinder collecting and remitting PUFs. Customs officials

were also concerned that these carriers’ resource and internal control

limitations may result not only in nonpayment of PUFs but also in an

increased audit workload for Customs to identify those additional carriers

that may not have paid PUFs.

Factors That May

Contribute to PUF

Collection and

Remittance Problems

Factors that may contribute to PUF collection and remittance problems are

(1) the collection and remittance system established in the COBRA user fee

statute, (2) air and sea carriers’ internal control weaknesses, and

(3) limitations associated with Customs compliance audits.

COBRA User Fee Statute

Can Contribute to

Problems With Collection

and Remittance of the PUF

According to Customs officials and GAO and Treasury reports, sections of

the COBRA user fee statute can contribute to problems with the collection

and remittance of the PUF. Specifically, since ticket issuers are required to

collect and remit PUFs, Customs’ ability to determine the PUF liability of

these issuers or verify the accuracy of their fee remittances is limited. In

addition, Customs can only assess damages for nonpayment of PUFs owed

by carriers that collected but did not remit them, not on carriers that

should have but did not collect the fees. Customs is developing a proposal

for legislative and regulatory changes to give it the authority to assess

penalties for nonpayment of the PUF. Finally, carrier misinterpretation of

the statute in relation to the exemptions from the PUF can also contribute

to nonpayment of the fee. The PUF differs from most of the other COBRA

user fees in that remittance of those fees is required at the time and place

of arrival.

Statute Limits Customs’ Ability

to Determine Carriers’ PUF

Liability

The user fee statute’s PUF collection and remittance requirements limit

Customs’ ability to determine air and sea carriers’ liability for the fee and

can hamper its collection efforts. As previously discussed, the statute

requires that the carrier issuing a ticket or travel document to a passenger

Page 9 GAO/GGD-95-138 Passenger User Fees
B-260120 

collect and remit the PUF, rather than the carrier transporting the

passenger. In our August 1992 report,21 we identified the collection and

remittance requirement as an impediment to collecting the PUF. We

concluded that since carriers may transport passengers who have

purchased tickets from other carriers, Customs cannot rely solely on

passenger arrival data to determine a carrier’s PUF liability.

The Treasury OIG report also concluded that “the enabling legislation for

the user fee statute, as written, is difficult for the airline industry to follow

and for Customs to accurately implement.”

Carriers Not Required to

Submit Passenger-Related

Information

As discussed earlier, the user fee statute requires carriers and other ticket

issuers to remit PUFs within 31 days after the end of the calendar quarter in

which they were collected. However, the statute does not require these

carriers to submit passenger-related information in support of the

payments made. Instead, the implementing regulation requires that a

carrier submit its name, address, and tax identification number when

remitting PUFs. However, according to the Treasury OIG report, some air

carriers are not submitting this information. According to this report,

important air carrier passenger information that could be used to monitor

PUF payments would consist of (1) the number of passengers transported

into the United States and the number of passengers ticketed by one air

carrier but transported by another, (2) the number of passengers

exempted from the PUF, and (3) the number of passengers for whom PUFs

were not collected in a foreign country but were subsequently collected

upon departure from the United States. The report recommended that

Customs amend its regulations to require the submission of such

information. As of February 1995, Customs had not taken action to

implement this recommendation.

Our August 1992 report also concluded that without information from

carriers on the number of passengers entering the United States, Customs

had no basis for knowing whether carriers had remitted the proper

amount of PUFs. According to Customs, it must either rely on the good

faith of the carriers to collect and remit all the PUFs they owe or audit such

carriers to verify their remittances.

Limited Sanctions for PUFs

Owed

Customs is limited in the sanctions it can impose on carriers for PUFs

owed. It can assess damages on carriers that collect but do not remit the

PUF to Customs in a timely manner, and it can charge interest for PUF

21Financial Management: Customs Needs to Establish Adequate Accountability and Control Over its

Resources (GAO/AFMD-92-30, Aug. 25, 1992).

Page 10 GAO/GGD-95-138 Passenger User Fees
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amounts billed as a result of an audit of carriers. Customs has no authority

to assess penalties relating to PUFs. This limitation may contribute further

to problems with the collection and remittance of PUFs.

Customs can assess damages for PUFs owed, but only on carriers that

collected PUFs but did not remit them, not on carriers that should have but

did not collect the fees. This authority is based on Customs’ 1993

amendment to the international carrier bond regulation.22 The regulation

was amended to provide for damages against international carriers that

collected PUFs but did not remit them as required, i.e., within 31 days after

the end of the calendar quarter in which they were collected. As explained

by Customs’ Associate Chief Counsel, Tariffs, Trade, and Regulations, the

PUF amount owed must first be identified and Customs must then bill the

carrier for this amount. If the carrier fails to remit the amount billed,

Customs can assess damages. The Associate Chief Counsel explained that

the carrier would be liable for damages because it would have breached a

regulatory requirement that fees collected on behalf of the government be

remitted in a timely manner.23

Customs can charge interest for PUF amounts that carriers should have

collected but did not, and that carriers collected and did not remit. The

National Finance Center must first bill a carrier for the amount owed. If

the carrier does not remit the amount billed, interest begins to accrue from

the date of the bill. However, Customs cannot charge interest on PUFs for

the period between when a carrier collected the fees and when Customs

billed the carrier, essentially providing the carrier interest-free use of the

fees collected. For example, Customs did not charge interest for about

$1.5 million in PUFs owed—covering the period from July 1986 through

December 1990—by a foreign air carrier. In a 1992 memorandum,

Customs’ Office of the Chief Counsel stated that since Customs did not bill

the air carrier for the PUFs owed, it therefore did not establish the

2219 C.F.R. 113.64(a). This regulation requires that all international carriers post a bond to guarantee

the payment of all duties, taxes, and other charges.

23The Customs and Trade Act of 1990 amended the user fee statute to provide that all administrative

and enforcement provisions of the Customs laws and regulations apply to COBRA user fees, such as

the PUF.

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B-260120 

condition necessary—a due date for payment24—to charge and collect

interest.25

According to Customs officials, its authority to only charge interest or

assess damages on air and sea carriers for PUFs owed, rather than having

the authority to also assess penalties, may contribute to carriers owing

additional PUFs. These officials contend the fact that carriers cannot be

penalized either for not collecting any PUFs or collecting but not remitting

them may give carriers no incentive to comply with PUF requirements.

According to other Customs officials, the absence of penalties in the user

fee statute contributes to the loss of additional revenue for the

government in the form of penalties and interest that could be assessed on

the PUF amounts owed.

Customs is developing a proposal to allow it to assess penalties and charge

additional interest and damages for PUFs owed. The draft proposal

contains both statutory and regulatory changes. The statutory change

would add a penalty provision for PUFs owed. The regulatory change

would amend existing regulations to add a provision under which a carrier

could be charged interest for PUFs owed from the date the fees were

originally collected or should have been collected, as opposed to when

Customs billed the carrier. In addition, the current international carrier

bond regulation would be amended to provide Customs the authority to

assess damages against a carrier for PUFs owed but not collected and

remitted. The proposal, however, is not intended to change the current

procedures governing the collection and remittance of the PUF.

Misinterpretation of PUF

Exemptions Contributes to

Fees Being Owed

Customs compliance audits found that some carriers owed PUFs because

they misinterpreted the fee exemptions contained in the user fee statute.

For example, audits found that some air carriers did not collect the PUFs as

required from their employees, employees’ family members, and retired

employees not traveling on official business. Other air carriers did not

collect PUFs from frequent flyer ticket purchasers because they assumed

that such tickets were exempt from the fee.

In another example, a Customs audit found that a sea carrier disagreed

with Customs’ interpretation of the exemptions to the PUF and instead

believed that passengers returning by air from cruises ending in Mexico

24As discussed earlier, Customs can establish the billing date only on the basis of an audit.

25This memorandum cited as support a 1987 memorandum from the Office of Chief Counsel. According

to the memorandum, it would be difficult under the statutory language of 19 U.S.C. 58(c) to establish

that an [air carrier] is legally obligated to pay a fee it may not even have collected. However, if

Customs could establish that an air carrier had collected fees, Customs would have a debt upon which

to base an interest charge.

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B-260120 

after traveling in a nonexempt area and passengers on certain Caribbean

cruises that docked at a nonexempt port—and later docked at an exempt

port—were exempt from the PUF.

According to sea carrier industry association officials, exemptions from

the PUF were not clearly defined, thus leading to their misinterpretation.

For example, sea carriers did not know how their cruise itineraries,

especially those with multiple ports of call (including calls at more than

one U.S. port), were affected by these exemptions because Customs had

not provided any guidance about exemptions. Furthermore, the

association officials were concerned that Customs interpreted exemptions

in ways that would generate additional revenues. These officials used the

following hypothetical example to illustrate their concern. A cruise

originates in Miami, Florida; stops in San Juan, Puerto Rico; and proceeds

to ports in the Caribbean Sea before returning to Miami. The officials

claimed that according to Customs, a passenger on this cruise can be

assessed the PUF when arriving in San Juan and again for returning

(“arriving in”) to Miami. However, the association officials believed that

the PUF should not apply to the arrival in San Juan because there was no

Customs inspection at that port.

Customs officials responded that the issue of assessing the PUF more than

once is a matter of differing interpretations between the sea carrier

industry and Customs. According to Customs’ interpretation, the user fee

statute clearly states that the PUF shall be collected for each arrival at a

U.S. port—in the above example, San Juan and Miami. Furthermore, such

arrivals do involve some form of Customs inspection, although such an

inspection may not be readily apparent to passengers. According to the

Customs officials, their December 1993 fact sheet about the changes to the

PUF resulting from an amendment to NAFTA, including clearly defined

exemptions, was sent to known air and sea carriers. We have no

information regarding the impact of the Customs fact sheet on the carriers’

ability to determine their PUF liability.

Carrier Internal Control

Weaknesses Contributed to

Nonpayment

Customs compliance audits of air and sea carriers have attributed the

nonpayment of the PUF by some of these carriers to the inadequacy of their

internal controls. According to Customs officials we spoke with in one

region, collecting and remitting the fee is not a high priority for some of

these carriers. Consequently, carriers have not developed the necessary

procedures and internal controls to collect and remit the PUFs. For

example, an audit attributed a domestic charter air carrier’s failure to

Page 13 GAO/GGD-95-138 Passenger User Fees
B-260120 

remit PUFs it had collected to its own inadequate internal controls as well

as those of the tour operators with whom it had contracted. According to

the audit, the carrier and tour operators did not periodically review their

flights to ensure their compliance with PUF requirements, nor did they have

a system to ensure that the PUFs were collected and remitted. In another

example, an audit found that inadequate internal controls contributed to

the failure of a foreign air carrier to remit the PUFs and fees it had collected

on behalf of other U.S. government organizations. The audit found that the

carrier’s regional office in the United States that was responsible for

remitting the PUFs and other U.S. government agency fees did not have

access to the carrier’s worldwide sales and fee collection data and did not

maintain passenger data. Consequently, the regional office was unable to

compute the carrier’s liability for PUFs collected outside the United States.

Another Customs audit attributed PUF nonpayment by a domestic air

carrier to the carrier’s (1) lack of compliance with the PUF requirement;

(2) failure to comply with its own procedures; and (3) inadequate internal

controls to ensure the collection of PUFs from various ticket sale sources,

such as international and domestic travel agencies. Customs’ audit found

that while specific procedures existed for collecting the PUFs, one of the

carrier’s policies prevented any corrective action if the carrier’s internal

audits found that PUFs had not been collected. According to this policy, if a

corrective adjustment involved less than $25, the adjustment would not be

made. Since the PUF was $5 at that time and thus below the adjustment

threshold, the policy nullified the effectiveness of the carrier’s own audits.

Another Customs audit attributed the nonpayment of PUFs by a foreign sea

carrier to its lack of a system to account for the collection and payment of

the fee. The carrier also lacked formalized administrative procedures to

ensure compliance with PUF requirements.

A Customs audit found that weak internal controls over record-keeping

procedures resulted in a domestic air carrier not remitting $229,674 in PUFs

it owed Customs. In addition, as a result of these weaknesses, the carrier

erroneously remitted to Customs about $6.3 million in inspection user fees

that should have been remitted to INS. The audit concluded that the carrier

did not have adequate controls over documents and records to ensure

proper recording of fees or to perform independent checks of recorded

amounts.

The Treasury OIG audit of air carriers attributed an air carrier’s

nonpayment of PUFs to a computer programming error. Because of this

Page 14 GAO/GGD-95-138 Passenger User Fees
B-260120 

error, the carrier failed to remit PUFs collected in foreign countries from

the sale of tickets with a U.S. destination.

Limitations Associated

With Customs Carrier

Compliance Audits

Customs compliance audits of air and sea carriers were limited in several

ways. Customs’ audit staff resources limit the number of air and sea

carrier compliance audits it can perform. Audits are funded from Customs’

salaries and expenses appropriation. Customs cannot use the COBRA user

fees to fund carrier audits because the cost of such audits is not included

among those listed in the statute as payable from fee revenues. According

to a Customs official, Customs has about 9 auditors nationwide—from a

total audit staff of about 300 auditors—conducting PUF audits. However,

since the nine auditors are also responsible for auditing other entities,

such as importers and customhouse brokers, none of them work on

carrier audits full-time. Consequently, according to a Customs official,

Customs can audit only three or four carriers a year. As a result, Customs

has audited only 19 percent of carriers that have actually remitted PUFs.

According to Customs officials, Customs auditors have encountered

several obstacles while conducting audits of carriers that limit the audits’

effectiveness. The obstacles include (1) restricted access to carrier

records, especially foreign air and sea carrier ticket sales and accounting

records; (2) incomplete and poor quality carrier data, such as accounting

records; and (3) delayed carrier responses to information requests.

According to Customs officials, these obstacles limited the effectiveness of

audits because they contributed to making such audits very difficult,

time-consuming, and incomplete. For example, during a Customs audit, a

domestic air carrier did not allow access to its automated systems and did

not provide documents in a timely manner. Further, the carrier purged

some data, preventing Customs auditors from using them. As a result,

completion of the audit was delayed. Another domestic air carrier did not

maintain adequate accounting records, which made tracing and verifying

remittances difficult. In other examples, foreign air carriers have refused

access to records kept in their home countries, citing sovereignty

issues—i.e., records of a foreign-owned corporation not being subject to

review by another foreign government’s agency—and the high cost of

transporting such records to the United States. According to a Customs

official, the inability to access all of a carrier’s records may render

estimates of nonpayment incomplete. Of particular importance is access to

sales records, because the PUF is collected upon the sale of a ticket.

Because of their inability to access records located in foreign countries,

Customs auditors have been unable to adequately verify the accuracy of

Page 15 GAO/GGD-95-138 Passenger User Fees
B-260120 

certain air carriers’ ticket sales, and hence the accuracy of their

remittances. Consequently, these auditors have had to qualify their

estimates of PUF nonpayment.

Further, Customs has not identified all the carriers required to collect and

remit PUFs; thus, it cannot target and audit all the carriers that have not

remitted the PUFs they owe. The March 1992 Treasury OIG report identified

63 air carriers subject to PUFs that Customs had not previously identified.

The Treasury OIG reviewed 15 of these carriers and estimated that they

may have owed Customs a total of $356,150 in PUFs in 1989. In addition, the

report concluded that without a complete list of air carriers required to

collect and remit PUFs, Customs could not ensure that all air carriers were

collecting and remitting PUFs. The report recommended that Customs

identify all carriers required to collect and remit the PUF. Our August 1992

report also found that Customs did not have a complete and accurate list

of carriers subject to PUFs and concluded that such a list was a basic

control to identify those carriers that were not remitting the fees. Customs

is in the process of obtaining air passenger arrival data from the

Department of Transportation. The data are intended to assist Customs in

targeting carriers for audit and in identifying carriers that transport

passengers to the United States.

Options That May

Enhance Collection

and Remittance of the

PUF

Options that may enhance the collection and remittance of the PUF include

(1) requiring remittance of the fee at the time and place of arrival like

other COBRA user fees, such as that for processing commercial vessels; and

(2) billing air and sea carriers for the fees they owe on the basis of

passenger data submitted at arrival. We discussed these options with

officials from Customs and air and sea carrier industry associations.

According to association officials, many of their members would probably

oppose options such as billing carriers because of increased

administrative burdens and costs. We did not evaluate the feasibility or

determine the costs of implementing the options discussed.

Requiring Remittance of

PUF at Time and Place of

Arrival

In contrast to the PUF, remittance of most of the other COBRA user fees,

such as those for processing commercial vessels and vehicles, is required

at the time and place of arrival. For example, in the case of a commercial

vessel of 100 tons or more, the COBRA user fee statute requires the payment

upon arrival of a processing fee of $397 for inspectional services

Page 16 GAO/GGD-95-138 Passenger User Fees
B-260120 

provided.26 Payment of this fee is a condition for entering the United

States. The commercial vessel fee is to be collected at each port of arrival,

regardless of the number of arrivals in the course of a single voyage.27

According to some Customs officials, air and sea carriers could remit the

PUF at the time and place of arrival as part of submitting their manifests28

for each arriving flight or cruise. While requiring remittance of the PUF by

carriers at the time and place of arrival could enhance fee revenues and

reduce the need for compliance audits, it could also require additional

Customs personnel at ports of entry to process the remittances. In

addition, carriers would still have to collect the PUF from passengers,

relying on internal controls that some audits have shown to be inadequate.

Furthermore, carriers could be liable for fees they did not collect or fees

they could not collect from passengers who traveled using other carriers’

tickets.

Billing Air and Sea Carriers

for PUFs Owed

According to some Customs officials, Customs could bill air and sea

carriers for the PUFs they owe. A carrier’s PUF liability could be determined

on the basis of passenger arrival data submitted by carriers upon arrival. A

billing system could enhance PUF revenues, eliminate the need for audits,

and allow Customs to use data it already collects from carriers’ manifests

to determine fee liability. In addition, by billing carriers, Customs could

establish due dates for PUF remittances and be able to charge interest for

amounts not remitted by the due date.

Conclusions Customs’ and Treasury OIG’s compliance audits of air and sea carriers

estimated that some of these carriers had not paid about $15.3 million in

PUFs they owed. The Treasury OIG also estimated that carriers owed

$45 million in PUFs for the period July 1986 to December 1990. The PUF

collection and remittance system established in the COBRA user fee

statute—including the requirement to collect the fee when tickets are

issued to passengers—and air and sea carriers’ internal control

weaknesses can contribute to problems in collecting PUFs.

26“Arrival” means arrival at a port of entry in the customs territory of the United States, or any place

served by a port of entry.

27Payment of the commercial vessel fee is not to exceed $5,955 per year. This amount equals 15 arrivals

per vessel.

28A manifest includes data such as the carrier’s name, flight—or cruise—number, origin and

destination, and number of crew and passengers.

Page 17 GAO/GGD-95-138 Passenger User Fees
B-260120 

Customs has relied on compliance audits of air and sea carriers to

determine whether they collect and remit the proper amount of PUFs.

However, these audits were limited in several ways, including audit staff

resources and restricted access to carrier ticket sale and accounting

records. The limitations have resulted in Customs auditing 19 percent of

carriers that have actually remitted PUFs and producing incomplete

estimates of nonpayment.

The PUF collection system established in the COBRA user fee statute

hampers the fee’s collection efforts. Options exist for changing the

structure of the PUF collection and remittance system. For example, if the

PUF were collected directly from carriers at the time and place of arrival,

as is the case with most other COBRA user fees, or if carriers were billed for

PUFs on the basis of passenger arrival data, Customs would not have to

rely on carrier internal controls to collect the fee from passengers.

Customs would also not have to rely on its audits to ensure and verify

compliance. If such options were made available to Customs, it could

develop procedures to oversee the timely collection of the fee and reduce

nonpayment problems. We did not evaluate any of the options discussed;

thus, we do not know all of the costs or benefits of implementing any of

these options.

Matter for

Congressional

Consideration

Congress may want to consider requiring Customs to (1) evaluate the

feasibility of various options to increase collection of the PUF, such as

changing the fee collection and remittance system to one similar to other

COBRA user fee systems, or billing carriers for the fee; and (2) recommend

legislative changes that would be necessary to implement options that are

considered feasible and cost-beneficial.

Agency Comments We provided a draft of our report to Customs and requested that cognizant

Customs officials provide us with oral comments on the report’s contents,

conclusions, and matter for consideration. On February 24, 1995, we met

with Customs officials, including the Budget Division’s Financial Program

Advisor, to discuss their comments on the report. Under Customs’ ongoing

reorganization, the Budget Division is responsible for the user fees,

including the PUF; thus, it commented on the report on behalf of Customs.

The officials agreed with the report’s contents and its conclusions and

matter for consideration.

Page 18 GAO/GGD-95-138 Passenger User Fees
B-260120 

As agreed with your offices, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days from the

date of this letter. At that time, we will send copies to interested parties

and make copies available to others upon request.

Major contributors to this report are listed in appendix II. If you have any

questions or need additional information on the contents of this report,

please contact me at (202) 512-8777.

Laurie E. Ekstrand

Associate Director, Administration

 of Justice Issues

Page 19 GAO/GGD-95-138 Passenger User Fees
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

22

Appendix II 

Major Contributors to

This Report

24

Abbreviations

ATA Air Transport Association

COBRA Consolidated Omnibus Budget Reconciliation Act

IATA International Air Transport Association

ICCL International Council of Cruse Lines

INS Immigration and Naturalization Service

NAFTA North American Free Trade Agreement

NFC National Finance Center

OIG Office of Inspector General

ORA Office of Regulatory Audit

PUF Passenger User Fee

Page 20 GAO/GGD-95-138 Passenger User Fees
Page 21 GAO/GGD-95-138 Passenger User Fees
Appendix I 

Objectives, Scope, and Methodology

House Conference Report No. 213,1 accompanying the Omnibus Budget

Reconciliation Act of 1993,2

 required GAO to report to the Senate

Committee on Finance and the House Committee on Ways and Means on

the efficiency, effectiveness, and fairness of Customs’ user fees. As agreed

with the Committees, our objectives were to (1) determine whether air and

sea carriers have collected and remitted Customs’ passenger user fee

(PUF); (2) assess the factors hampering any nonpayment of this fee,

including statutory restrictions, internal controls, and audit limitations;

and (3) identify any options that may improve the collection and

remittance of the PUF.

To address our first objective, we interviewed officials from Customs’

User Fee Task Force, Office of Regulatory Audit (ORA), Office of Chief

Counsel, and National Finance Center (NFC). We also reviewed relevant

documents about the user fees established by the Consolidated Omnibus

Budget Reconciliation Act of 1985 in general, and the PUF in particular,

including legislation, implementing regulations, and policies and guidance.

In addition, we reviewed (1) completed Customs and Treasury audits of

air and sea carriers, (2) air and sea carrier PUF payment records

maintained by NFC and international passenger arrival data maintained by

Customs, and (3) a draft Customs proposal to establish interest and

penalty provisions for nonpayment of PUFs. Finally, we discussed the

nonpayment of PUFs with officials from the Air Transport Association

(ATA), the International Air Transport Association (IATA), and the

International Council of Cruise Lines (ICCL) to obtain their perspectives on

this issue.3

To address our second objective, we reviewed a 1992 Treasury Office of

Inspector General report that assessed Customs’ internal controls. We

discussed Customs’ responses to the report’s findings and

recommendations with cognizant Customs officials. In addition, we

reviewed our applicable standards and guidance related to internal

controls and our audits of Customs, including our 1992 report on Customs’

financial management and our 1994 report on Customs’ fiscal year 1993

1

H.R. Conf. Rep. No. 213, 103rd Cong., 1st Session at 922 (1993).

2

P.L. 103-66 (1993).

3

ATA represents 22 air carriers in the United States, Canada, and the Netherlands and serves as the

link between these carriers and various government and private sector organizations. IATA serves a

similar function representing about 215 air carriers worldwide, including 75 foreign carriers that serve

the U.S. market. ICCL represents 22 cruise lines in the United States and other countries on legislative

and regulatory issues that affect cruise line operations.

Page 22 GAO/GGD-95-138 Passenger User Fees
Appendix I 

Objectives, Scope, and Methodology

financial statements,4 which tested and evaluated Customs’ internal

controls. We also discussed Customs’ internal controls and their

effectiveness, and possible improvements, with relevant Customs officials.

To address our third objective, we identified options to collect and remit

the PUF and discussed these options with officials from Customs and ATA,

IATA, and ICCL. We did not evaluate the feasibility or determine the costs

and benefits of implementing any of the options discussed.

We did our work at Customs headquarters in Washington, D.C.; at

Customs’ Pacific Region headquarters in Long Beach, California; at the Los

Angeles airport; and at the Washington, D.C., headquarters of ATA, IATA, and

ICCL. We did not verify the accuracy of the information provided. We also

did not conduct independent audits of air and sea carriers to determine

their compliance with PUF requirements. Further, we did not assess the

validity of the audit methodologies. We did not test the internal controls

we reviewed, but we relied on our completed audits of Customs.

We obtained oral comments on a draft of this report on February 24, 1995,

from Customs officials. These comments are discussed on page 18. We did

our work between March 1994 and February 1995 in accordance with

generally accepted government auditing standards.

4

Financial Audit: Examination of Customs’ Fiscal Year 1993 Financial Statements (GAO/AIMD-94-119,

June 15, 1994).

Page 23 GAO/GGD-95-138 Passenger User Fees
Appendix II 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

James M. Blume, Assistant Director, Administration of Justice

 Issues

Seto J. Bagdoyan, Evaluator-in-Charge

David P. Alexander, Senior Social Science Analyst

Office of the General

Counsel, Washington,

D.C.

Ann H. Finley, Senior Attorney

General Government

Division, Los Angeles

Darryl W. Dutton, Assistant Director, Administration of Justice

 Issues

Los Angeles Field

Office

Walter L. Raheb, Assignment Manager

(264425) Page 24 GAO/GGD-95-138 Passenger User Fees
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