UNITED STATES COURT OF INTERNATIONAL TRADE

Slip Op. 25-26

Before the Court in Southwest Airlines Co., v. United States, Court No. 22-00141, Slip Op. 25-26 (March 18, 2025) were cross motions for summary judgment in connection to the fate of a customs passenger processing fee paid by customers who cancel their airline tickets and never travel at all. The case concerned a fee paid by customers, collected by airlines at the time of purchase and remitted to United States Customs and Border Protection (“Customs” or “CBP”). This collection occurs pursuant to 19 U.S.C. § 58c and 19 C.F.R. § 24.22(g), which states that “the Secretary of the Treasury shall charge and collect the . . . fees . . . for the provision of customs services in connection with . . . the arrival of each passenger aboard a . . . commercial aircraft from a place outside the United States.” These fees are generally remitted to Customs on a quarterly basis.

The issue turned on an audit conducted by Customs on November 20, 2019, when CBP issued a User Fee Audit Report finding that Southwest owed a total of $378,081.76 to CBP. Southwest, a commercial airline, offered customers the option to buy “nonrefundable” tickets, for which the customer received a travel credit, called a “Residual Travel Fund” (“RTF”), upon cancellation. RTFs include the amount originally paid as airfare, taxes, and fees, and can be used to purchase future travel on Southwest within one year. During July 1, 2014, through June 30, 2017, when a customer used an RTF to purchase a future ticket for international travel, Southwest collected a new fee from the RTF and remitted it to CBP. When a customer did not use an RTF within one year, it expired and Southwest accounted for the amount, including the original fee, as revenue. The amount owed to Customs represented $378,088.26 in underpayment based on the fees from canceled tickets where the RTF expired without being used, minus $6.50 in over-remittance associated with an unrelated issue. Southwest paid a total of $444,666.89 to CBP under protest, including the principal amount plus $66,585.13 in interest. The company brought this action against the U.S. government arguing that CBP illegally exacted this sum from Southwest. The central question addressed by the United States Court of International Trade turned on whether CBP can collect a fee where no passenger arrives in the United States on a commercial aircraft and where CBP provides no customs services.

The court concluded that (1) CBP is not entitled to a fee where no passenger travels and CBP provides no customs services and that (2) neither agency guidance nor federal common law empowers CBP to collect a fee where not expressly empowered by Congress. Therefore, for the reasons set out below, the court granted plaintiff’s Motion for Summary Judgment and denied the Government’s Cross-Motion for Summary Judgment.

The legal provision giving authority for this fee collection is connected to the fact that prior to 1986, customs services were largely funded via direct appropriations from Congress. In 1986, a change occurred when Congress enacted the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), establishing a system of fees to recover a significant portion of expenses related to the provision of customs services. Per COBRA, several different fees to must be collected in connection with the arrival of various vehicles, vessels, persons, and merchandise into the United States, including commercial trucks, railroad cars, private and commercial vessels and aircraft, and barges or other bulk carriers. The statute includes a “collection” provision, mandating that airlines “shall . . . collect from [customers] the fee . . . at the time the document or ticket is issued,” and “shall remit those fees to the Secretary of the Treasury at any time before the date that is 31 days after the close of the calendar quarter in which the fees are collected.” 19 U.S.C. § 58c(d)(1)(A). Per Customs regulations, airlines may account for “overpayments and underpayments” to CBP by adjusting the amount owed on their next quarterly remittance [19 C.F.R. § 24.22(g)(5)], and CBP may audit airlines to ensure they are properly remitting all the fees they collect. To clarify  ambiguities regarding the refund of fees, in 2010, Customs issued two nearly identical Guidance Letters to the airline industry stating that fees collected in connection with nonrefundable tickets should be refunded to the customers if a ticket is canceled. Notably, the letters indicated that state that when user fees are collected on behalf of CBP for unused tickets and such fees are not refunded to customers, the user fees are held in trust for the United States and must still be remitted, without credit, to Customs. In September 2017, Customs audited Southwest’s fee compliance  covering the period from July 1, 2014, through June 30, 2017, reviewing a sample of one hundred canceled “nonrefundable” tickets, including eighty-eight for which Southwest issued an RTF. For  the remaining twelve of the one hundred tickets in the sample, Southwest refunded the entire fare for the ticket to the purchaser’s credit card. When a ticket in the sample was canceled and  Southwest had previously remitted the fee amount to CBP, Southwest claimed a credit for the fee on a future fee remittance to CBP, regardless of whether Southwest refunded the amount to the purchaser’s credit card or issued an RTF. If Southwest had not already remitted the amount of the fee, Southwest did not include such amount in future fee remittances. Twenty-one RTFs of  the eighty-eight issued for canceled tickets in the sample eventually expired, having not been used within a year. For those twenty-one canceled tickets for which RTFs were issued and eventually expired, Southwest retained the funds the customer originally paid, including the fee, and accounted for the total amount as revenue.

The Audit Report issued in November 2019 found that the twenty-one canceled tickets for which RTFs were issued and eventually expired were “errors” because they involved instances where no refund was provided to the customer, and the passenger did not use the RTF. Customs did not identify as “errors” any of the remaining tickets in the sample, where Southwest either refunded the amount to the customer’s credit card or where the customer used the RTF before it expired. Customs extrapolated the twenty-one “errors” to compute an underpayment of $378,118.13 for all  “errors” during the period between July 1, 2014, and June 30, 2017. In November 2019 issued a liability assessment against Southwest based on the audit, claiming that Southwest owed  $378,081.76 to CBP, which Southwest paid to the agency under protest on January 2020. Southwest paid an additional $66,585.13 in interest on the original amount, also under protest in March 2020. In November 2021, however, Customs denied the protest.  As a result, in May 2022 Southwest sued the government for the recovery of the sums based on CBP’s statutory and regulatory authority relating to the customs passenger processing fee. According to 28 U.S.C. § 1581(a), the CIT reviewed this case pursuant to its exclusive jurisdiction over any civil action commenced to contest the denial of a protest. The Court found for Southwest, finding that Customs is not entitled to a fee where no passenger arrives to the United States and where the agency provides no customs service. Next, the Court held that neither the Guidance Letters nor federal common law empowered Customs to collect fees where no passenger travels. The Court reasoned that the  Guidance Letters do not force Southwest to refund funds collected as fees to the customers or else remit them to Customs. According to the Court, Customs has no equitable interest in a fee where no passenger travels and this means that Southwest does not have to hold funds collected as fees in a constructive trust for CBP. The Court concluded that no federal statute provides Customs the authority to collect the fees at the core of this case and that Southwest was free to treat the disposition of a canceled ticket (including funds collected as fees_ as a matter of contract with its customers. The Court did not find the need to determine whether RTFs qualify as refunds, especially because CBP is not entitled to the fees nor to being a beneficiary of a constructive trust containing such fees collected by plaintiff.