The transportation of natural gas, crude oil and other liquids by pipeline has unique attributes that make customs reporting and accounting difficult, and easy to miss altogether. A pipeline is buried in the ground, out of sight and mind. The hydrocarbons continue moving to their destination as if the border does not exist. Crude oil and other liquids move in consecutive batches, like rail cars on a train of infinite length. Natural gas moves in a continuous stream, with all shippers’ goods commingled. A shipper does not own any particular molecules in the stream, and takes instant delivery of different molecules than it put in.
All hydrocarbons imported into Canada by pipeline are duty free regardless of origin. They are subject to GST (unless in-transit through the United States); however, that tax is recoverable as an input tax credit by substantially all importers. There are no “admissibility” issues. It is difficult to smuggle narcotics, used mattresses or firearms in a batch of crude oil.
The legal obligation to account for imports by pipeline is the same as it is for imports by other means. Under section 17 of the Customs Act, the duties and taxes remain an in rem charge on the goods until someone takes responsibility to account for and pay them. The primary liability rests with the importer of record – the person who arranges for release. The owner at the point of release is jointly and severally liable.
The identity of the importer of record is not specified in the Customs Act the way a taxpayer is in the Income Tax Act or Excise Tax Act. Rather, the importer of record may be anyone with an interest in the import of the goods who comes forward to accept the obligations associated with importation, in return for obtaining release.
It is physically impossible to release goods imported by pipeline using the normal shipment-by-shipment process. Consequently, there is currently no mechanism in Canada for the importer of record to be identified before a shipment enters the commerce of the country. The CBSA allows importers to account for importations by pipeline on a monthly basis following importation. Where this happens, the identity of the importer of record becomes clear after the fact. However, if reporting and accounting do not happen, how does the CBSA determine the importer of record, and therefore liability?
To illustrate the problem, let’s assume that a Canadian marketing company purchases a batch crude oil in the United States from an American seller and resells it for delivery to a refinery in Ontario. Either the marketing company or the refiner could act as importer of record. If neither files the monthly accounting entry, and their contract is silent on the responsibility for customs entry, who has the primary liability under section 17? Could joint and several liability be enforced against one of them as owner when release does not occur?
The situation becomes more complicated as more persons become involved. What if the marketing company delivers portions of the batch to two different refinery customers?
The issue is more complex still with natural gas. An importer does not own any particular molecules in the commingled stream, and the size of its contractual right to a portion of the stream varies as it buys and sells gas while in the pipeline. Further, imported gas is generally commingled with Canadian gas before it is delivered.
Fortunately, our American neighbours provide a model to show us how we might approach these issues.
The American Approach
The American policy for imports by pipeline is based on a U.S. Customs and Border Protection (“CPB”) policy called the Monthly Consolidated Entry of Non-Dutiable Merchandise Procedure (“Monthly Entry Procedure”) published in 1970. This policy provides for the optional filing of monthly entries to cover high volume repetitive shipments (at least 2 per week or 7 per month) of duty-free goods. The shipments must be consigned by one carrier to one importer through one port. Importers who do not use the Monthly Entry Procedure must file daily entries.
An importer wishing to use the Monthly Entry Procedure makes application to the director of the port. The format of the application must include the following information.
- A detailed description of the merchandise to be shipped.
- The identity of the seller and importer and their business relationship.
- The points of origination of the goods.
- Copies of pertinent orders, instructions and correspondence between the shipper and importer including an indication of the expected volume and number of shipments per month.
- Sample copies of documents which will be employed under the monthly entry procedure.
If its application to use the Monthly Entry Procedure is accepted, the importer files a consolidated entry within 10 days from the end of each calendar month. Unlike other carriers, pipeline operators are not required to present manifests or packing lists at the time of importation. However, they are required to keep records and make them available to the CPB. A manifest is filed by the importer of record with the consolidated monthly entry. This may be done on a spreadsheet. Pipeline operators must provide facilities through which the CPB may sample the goods being imported.
In 1992 and 2006, the CPB issued instructions to their district offices to inform importers by pipeline, particularly natural gas importers, of their reporting responsibilities, and the penalties, civil and criminal, they might face for ignoring customs laws. The fact they had to do this indicates that non-compliance for pipeline importations remained a significant problem.
The key feature and advantage of the American approach is that it requires someone to commit to being the importer of record before an importation occurs, making it clear who has the related customs liabilities. If the entries are not made, or questions need to be answered, the CBP knows who to contact.
A potential Canadian Solution
A similar system could be established in Canada. The key to success would be regular tracking and follow-up by the Canada Border Services Agency (“CBSA“). They would have to register importers and their proposed transactions, check carriers’ records regularly for any unregistered transactions and check and review the entries made against registered transactions. This would involve some additional work, but likely much less than is involved in the normal monitoring and releasing of imports by other means.
As far as I am aware, the CBSA has paid limited attention to imports by pipeline for many years. This is a comfortable situation for importers as long as it persists; however, the situation is dangerous for both importers and the CBSA. While an assessment of GST would generally be recoverable as an input tax credit, the related interest would be a cost unless waived by the CBSA. The penalties for failure to report and account for imported goods can be significant – anything up to the full value of the goods. However, there may be some question whether a court would uphold such penalties when the mechanism for assigning liability at the point of importation was not present.
Should the CBSA adopt a policy akin to the one outlined above, the approach should be to bring all importers into compliance without assessing penalties or interest, until the process had been operating for some time and is generally understood.