United States General Accounting Office

GAO Testimony

Before the Subcommittee on Trade, Committee on Ways

and Means, House of Representatives

For Release on Delivery

Expected at

10:00 a.m., EDT

Tuesday,

March 11, 1997

U.S. CUSTOMS SERVICE

Office of Regulations and

Rulings Has Yet to Establish

Performance Measures

Statement of JayEtta Z. Hecker, Associate Director,

International Relations and Trade Issues, National

Security and International Affairs Division

GAO/T-NSIAD-97-115

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss several key issues regarding the

management of the U.S. Customs Service’s Office of Regulations and

Rulings (ORR). Specifically, I will address (1) what this office does, (2) how

it measures its performance, (3) the extent to which it is meeting its

internal timeliness goals, and (4) industry views regarding its performance.

Our observations are based on (1) work at Customs offices in Washington,

D.C., and New York; (2) visits to the ports of Los Angeles and Baltimore;

(3) discussions with a limited selection of representatives of the

international trade community, including importers, brokers, and

attorneys; and (4) analysis of the timeliness of key ORR rulings using

Customs’ automated system and case files. Before I get into our specific

observations, let me provide a brief summary.

Summary ORR facilitates the entry of goods into the United States, valued at over

$800 billion in 1996, by (1) drafting regulations implementing U.S. trade

laws; (2) issuing rulings on the proper classification, valuation, country of

origin and marking of imported goods; and (3) providing guidance to the

trade community and other Customs’ units on their compliance

responsibilities under Customs’ regulations and related laws.

While ORR’s legal and technical analysis and advice are critical to the

furtherance of Customs’ trade administration mission, Customs has not

included ORR in its annual plans identifying goals and performance

measures. As a result, unlike other Customs’ units, ORR has not prioritized

its work, set officewide objectives, or established how to measure its

overall performance as envisioned in the 1993 Government Performance

and Results Act (GPRA) (P.L. 103-62). ORR’s only performance-related

measure is set forth in a 1989 directive issued by the Commissioner of

Customs, which covers a limited but important segment of ORR’s work. The

directive requires that certain legal decisions, or rulings, that deal with the

classification of merchandise be issued within 120 days of receipt by the

Customs Service. In addition, ORR recently set a goal of 30 days for a

limited number of rulings dealing with the country of origin of textile and

apparel imports.

We found ORR has made no effort to determine whether it was meeting the

timeliness requirements established in the 1989 directive regarding

classification rulings. Based on our analysis, we learned that ORR did not

meet the requirement to issue rulings within 120 days for 53 percent of the

Page 1 GAO/T-NSIAD-97-115
classification cases closed in 1996 that we reviewed. Further, ORR did not

meet its internal 30-day target to issue rulings on country of origin cases

for 59 percent of the cases we reviewed. By not tracking whether it is

meeting its timeliness targets and by having performance measures on

only a limited segment of its work, ORR is not able to measure its overall

effectiveness. If Customs were to include ORR in the annual planning

process, ORR would assess its overall workload and priorities, and then be

able to determine whether its current timeliness goals for classification

rulings are appropriate or whether changes are needed in its processes

and de facto priorities.

Overall, representatives from the trade community we interviewed,

including importers and trade attorneys, were generally pleased with the

quality of ORR’s services. They indicated that, by and large, ORR rulings

provided important analyses and information about the duties they should

expect to pay on the goods they import; they noted that the rulings were

crucial to their ability to make effective business decisions and comply

with Customs’ regulations. The only concern they cited was the timeliness

of ORR’s decisions.

Background The U.S. Customs Service is a key agency for enforcing the nation’s trade

laws and policies. In addition to preventing imports of goods that threaten

our health and safety, it prevents the illegal export of protected

technologies, stolen merchandise, currency, and other contraband. In the

course of enforcing U.S. trade laws, Customs collects duties on imported

merchandise. ORR plays an important role in carrying out Customs’ trade

mission by providing legal and technical support regarding payment of

duties to Customs’ officers at the ports and at headquarters and guidance

to the trade community on Customs’ regulations and related laws.

ORR is headed by an Assistant Commissioner and has offices in Washington

and New York. Its staff of 248 consists mainly of attorneys and specialists

in commodity classification. For fiscal year 1997, out of Customs’ total

budget of $1.6 billion, ORR’s budget is $16.38 million, of which $15.2 million

is for salaries.

What ORR Does ORR carries out its principal mission by (1) drafting regulations

implementing U.S. trade laws; (2) issuing rulings on the proper

classification, valuation, country of origin and marking of imported goods;

and (3) providing guidance to the trade community and other Customs’

Page 2 GAO/T-NSIAD-97-115
units on their compliance duties under Customs’ regulations and related

laws. ORR informs the trade community primarily through its rulings, which

affect the duty an importer will pay. These rulings advise importers on

how they can be in compliance with Customs’ laws and help importers

make marketing and pricing decisions by providing information on the

cost of importing their goods. For example, ORR’s prospective

classification rulings give both the requesting importer and importers of

similar goods vital information to help them determine the amount of

duties and fees they will be charged when they eventually enter their

merchandise at a port. Customs’ officers, at any port, will accept the

merchandise under the classification contained in the ruling. Importers

can use duty information to help weigh whether to import a new line of

merchandise.

ORR also handles importers’ applications for further review protesting the

duties they have paid. For example, an importer who believes he or she

has been charged too much duty by a Customs’ port official can protest

the official’s decision on the duty owed. If the protest cannot be resolved

at the port, the importer can seek relief from ORR. Also, a Customs’ port

inspector deciding whether to seize a shipment for a Customs’ law

violation can call ORR for guidance on the law and policy regarding the

classification, value, admissibility, entry, and detention or seizure of

merchandise.

Under the Customs Modernization and Informed Compliance Act of 1993

(P.L. 103-182), responsibility was shifted from Customs to importers for

assuring that shipments are in compliance with Customs’ classification,

duty, and reporting requirements.1

 Because of this additional

responsibility, importers are relying more than ever on ORR’s rulings and

educational activities. Under the act, importers are expected to use

reasonable care to enter, classify, and value imported merchandise and

submit any information necessary for Customs to properly assess duties.

How ORR Measures

Its Performance

As we noted in a 1996 report,2 the Customs Service as an organization has

been in the forefront, in some areas, of the effort to improve government

performance. While Customs as a whole and other Customs’ units have

developed a strategic management framework that integrates planning,

1

Informed compliance attempts to maximize importers’ voluntary compliance with Customs’ laws and

regulations by keeping them clearly and completely informed of their legal obligations.

2

Executive Guide: Effectively Implementing the Government Performance and Results Act

(GAO/GGD-96-118, June 1996.)

Page 3 GAO/T-NSIAD-97-115
budgeting, and performance measurement, ORR does not have such a

system in place. The Office has not established any overall goals,

priorities, or specific performance measures in order to prepare to meet

the implementation requirements of GPRA.

3

 Establishing a strategic

management framework, as envisioned in GPRA, could help ORR assess its

priorities and determine what goals are feasible and responsive to the

business needs of the trade community.

ORR’s only performance-related measure was set forth in a 1989 directive

issued by the Commissioner of Customs. The directive specifies timeliness

requirements for a limited segment of ORR’s work; it requires that certain

rulings that deal with the classification of merchandise (those done by

about 30 of ORR’s headquarters attorneys) be issued within 120 days of

receipt by Customs of a request for such a ruling.4 ORR, however, does not

consider the directive’s requirements to be related to GPRA. In addition, the

Assistant Commissioner informed us in writing that ORR has no specific

performance measures in relation to the annual plan; rather, he said, ORR

provides support and technical assistance to the strategies and processes

outlined in the plan. Because ORR provides a direct service to the trade

community by issuing rulings, it does appear that having performance

objectives for issuing these rulings would be appropriate.

ORR’s Timeliness on

Classification Rulings

ORR was unaware of whether it was meeting its 1989 directive’s timeliness

goals for issuing classification rulings. The directive requires issuance of

classification rulings referred to ORR headquarters within 120 days from

the date of their receipt by the Customs Service. While Customs has an

automated tracking system, called the Legal Case Inventory System (LCIS),

to monitor rulings subject to the directive and is required to do so by the

directive, we found that ORR makes little, if any, effective use of the system

for that purpose. Finally, we found that ORR has not consistently met the

3

GPRA requires all U.S. government agencies to set goals, measure performance, and report on their

accomplishments. As a first step, the act states that agencies must develop strategic plans by the end

of fiscal year 1997. In addition, the Office of Management and Budget required agencies to submit

major parts of their strategic plans by June 1996.

4

Classification rulings that involve interpretation of the Harmonized Tariff Schedule (HTS), but no

legal analysis, are the responsibility of ORR’s National Commodity Specialist Division located in New

York City. The HTS is an extension of the 6-digit Harmonized Commodity and Coding System, the

internationally recognized system for classifying commodities. The 1989 directive requires that the

division issue classification rulings within 30 days. ORR told us that the New York division consistently

met this target. However, we were unable to verify that this was the case. Although we requested

information on this division’s performance in a January 28th letter, ORR has not provided the data.

Page 4 GAO/T-NSIAD-97-115
directive’s timeliness requirements on its 1996 classification rulings.5 ORR

told us that its ability to issue timely rulings was affected by

uncontrollable events and by a heavier workload coupled with diminished

staffing resources. We were not able to verify whether these factors

contributed to delayed rulings.

ORR Unaware of Whether

It Is Meeting Timeliness

Goals

We found that ORR did not know whether it was meeting the timeliness

goals set forth in its 1989 directive. ORR lacks crucial information to make

this determination because it is not effectively using LCIS to monitor these

rulings, as required under the directive. The directive states that LCIS “will

be the backbone for controlling the timeliness of rulings.” However, ORR’s

Assistant Commissioner told us that “to use the LCIS to determine that the

self-imposed time frames are met is an improper use of the system. Rather,

LCIS ’red flags’ a matter for the OR&R first line managers to review the file

and discuss it with the case handler.”

We found that, although ORR enters case information into LCIS, it is not

excluding the rulings subject to the directive. ORR informed us that its

regular reports do not include this information. Thus, ORR could not readily

provide the necessary information for us to do an analysis of its

performance regarding timeliness. Ultimately, ORR had to request special

programming from Customs’ Office of Information Technology to provide

us with the data we needed to conduct this analysis.

ORR’s Inconsistent

Application of Directive

Renders LCIS Data for

Measuring Performance

Inaccurate

ORR is not consistently calculating the 120-day processing period according

to its directive. As a result, key LCIS data elements ORR uses to calculate the

120-day period are inaccurate.

ORR told us it calculates what it calls the “days in process” from the LCIS

“assigned date”—the date the case was assigned to a case handler—to the

LCIS “closed date”—the date the ruling is issued. The Assistant

Commissioner of ORR wrote us that “the date received in the first Customs

office and the ‘assignment date’ data element were originally intended to

be the same. . . . The foregoing is how it should be, but, clearly with

5

We reviewed 55 percent, rather than our intended 100 percent, of the cases closed in 1996. We

requested from ORR case files for all classification and country of origin cases closed in 1996 and

subject to the directive. ORR provided us with 83 classification cases and 108 country of origin cases it

identified as the complete set. We eliminated two classification files due to incomplete information.

Therefore, we reviewed a total of 189 files. In verifying the automated data ORR provided us, we

discovered that ORR should have included an additional 154 cases. ORR could not adequately explain

this discrepancy.

Page 5 GAO/T-NSIAD-97-115
automated systems the data is only as good as what is entered and there

will be cases where the above was not adhered to.”

ORR also told us that it factors into its calculation of the number of days in

process certain events beyond its control that could delay its issuance of

the ruling. The directive states that a ruling may be delayed only for

required laboratory analysis or when other agency consultation is needed.

In calculating the 120-day processing days,6 ORR’s policy is to adjust the

assignment date when the case is considered to be in process to the date

when any delay has been removed.7

Of the 189 rulings we examined subject to the directive and closed in 1996,

ORR had not consistently adjusted the assignment date according to our

review of LCIS data relative to data in the actual paper case files. We found

that 53 percent of the “assigned” dates on LCIS were incorrect,8

 with

25 percent of those off by 3 months or more. The “closed” date, on the

other hand, had an error rate of 3 percent for the same set of cases.

ORR Did Not Meet

Timeliness Goals in

Directive

We corrected the relevant LCIS data and found that ORR did not consistently

meet the 1989 directive’s timeliness goals. Specifically, ORR achieved the

directive’s 120-day goal in 47 percent of the 81 cases that involved

providing a ruling on classification of merchandise under chapters 1-97 of

the HTS. The average number of days for classification cases in process

was 147. Figure 1 shows the extent to which classification cases fell below

or above the 120-day goal. In about 25 percent of the cases, the days in

process ranged from about 200 to over 500 days.

6

ORR also considers delaying events to include meetings initiated by a ruling requester, new

information affecting the case, other ruling cases pending, proposed changes in rulings, pending court

cases, and requests for confidentiality.

7

For example, if the delay were due to the need for a laboratory analysis, the new assignment date

would be the date that ORR received the laboratory results. For cases with multiple delaying events,

the new assignment date would be the date when the last source of delay was eliminated.

8

We defined an “incorrect” assignment date as follows: (1) a case with no delays outside ORR’s

control—the assignment date was not the date the ruling request was received in the first Customs

office or (2) a case with such delays—the assignment date was not adjusted according to ORR

procedures.

Page 6 GAO/T-NSIAD-97-115
Figure 1: Number of Days in Process for ORR Classification Cases Closed in 1996 and Subject to the Directive

Days in Process

0

60

120

180

240

300

360

420

480

540

10th

Case

20th

Case

30th

case

40th

case

50th

case

60th

case

70th

case

80th

case

cases

Source: Customs’ LCIS.

Regarding textile country of origin cases, ORR told us it had set a special

goal of 30 days or less to issue these rulings.9

 Figure 2 shows the

distribution of country of origin cases below and above 30 days. For over

half of the country of origin cases, the days in process ranged from about

40 to about 190 days.

9

ORR set this goal because of the effect on its workload of new rules of origin for textile and apparel

products effective July 1, 1996. ORR textile country of origin rulings had been delayed due to the need

to research and analyze the new rules. Thus, ORR made these rulings a top priority. ORR told us that

its 30-day goal for textile country of origin rulings “was not in effect until February or March of 1996.”

We based our analysis on the cases ORR provided us, namely—108 textile country of origin rulings

closed throughout the entire 1996 calendar year. Only 8 of the 108 cases we reviewed were closed

prior to April 1996.

Page 7 GAO/T-NSIAD-97-115
Figure 2: Number of Days in Process for ORR Textile Country of Origin Cases Closed in 1996 and Subject to the Directive

Days in Process

0

30

60

90

120

150

180

10th

Case

20th

Case

30th

Case

40th

Case

50th

Case

60th

Case

70th

Case

80th

Case

90th

Case

100th

Case

Cases

Source: Customs’ LCIS.

Industry Views

Regarding ORR’s

Performance

Overall, industry representatives we interviewed, including importers,

brokers, and trade attorneys, were generally pleased with the quality of

ORR’s services. They indicated, that while they did not always agree with

ORR rulings and decisions, these rulings and decisions generally provided

important analyses and information about the duties they should expect to

pay on the merchandise they import. They said that ORR’s services were

critical to their ability to make effective business decisions and comply

with Customs’ regulations.

The key concern industry representatives cited regarding ORR’s

performance related to the timeliness of its decisions, including rulings

and decisions regarding protests and penalties. They indicated that delays

in ORR decisions could sometimes adversely affect their ability to make

plans to import and price their products. For example, a toy company

representative told us that a 1-year delay in an ORR classification ruling

hampered his company’s ability to import and sell a particular product.

Specifically, the ruling was to determine whether a toy set including a

Page 8 GAO/T-NSIAD-97-115
miniature piece of luggage should be classified as a toy or a luggage item;

the ruling was significant as toys have no duty while luggage has relatively

high duties. Due to the potential effect on the item’s price of no duty

versus a substantial duty, the company had to withhold its importation of

the item until it received the ORR ruling.

ORR’s Assistant Commissioner acknowledged that delayed rulings can

negatively affect importers, particularly those importing seasonal goods,

holiday items, or items subject to fashion trends.

Mr. Chairman and Members of the Subcommittee, this concludes my

prepared remarks. I will be glad to answer any further questions you may

have.

(711219) Page 9 GAO/T-NSIAD-97-115
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