DRA-4/5-RR:IT:EC 224227 CC
Maryanne Carney
Chief, Drawback Branch,
Port of New York
U.S. Customs Service
6 World Trade Center
Room 762
New York, NY 10048
RE: Internal Advice request concerning drawback claims; Lonestar
Technologies, Ltd.; 19 U.S.C. 1313(c), 1313(j)(1), 1313(j)(2)
Dear Ms. Carney:
This is in response to your request for internal advice,
dated September 30, 1992, concerning drawback claims made by
Lonestar Technologies, Ltd. (Lonestar).
FACTS:
Lonestar, formerly Planned Technologies, Ltd., imports
telephones, telephone answering machines, and karaoke music
machines from manufacturers in the Far East. Lonestar also
directs individual retailers, such as Target Stores and K Mart,
to import the merchandise from Planned Technologies, Hong Kong
(PTHK). Lonestar is the major stockholder for PTHK. The direct
purchases that Lonestar makes from manufacturers are to maintain
an inventory of replacement goods in the U.S. and to make
domestic sales to companies.
Special arrangements have been made for the return of
merchandise by Lonestar to the overseas manufacturers, for both
direct purchases, where Lonestar is the importer of record, and
where the retail chains are the importers of record. Thus
Lonestar has agreed with the retail chains to take their returns,
and Lonestar ships the returns back to the manufacturers.
Lonestar has a "no-questions-asked" return policy, in which it
does not inquire as to the reason for the return of the
merchandise. Through Lonestar, individual retailers may exchange
merchandise where it is defective, its packaging is damaged, or
it has been returned to the stores by consumers for unspecified
reasons.
When a retailer finds merchandise to be unsalable for any
reason, it may send the merchandise to Lonestar. Lonestar will
provide an even exchange using inventory imported directly from
manufacturers. No records are maintained showing the reason for
return. All returned merchandise is commingled, making no
distinction between good, used, unused, broken, damaged or
defective products. After consolidation, the goods are exported
to the manufacturer.
Lonestar filed drawback claims under 19 U.S.C. 1313(j)(1).
All claims designated only Lonestar imports. No certificates of
delivery (CD) have been submitted by the retailers, although
three companies have filed letters, waiving drawback and
assigning drawback rights to Lonestar. Since many importers of
record are involved, counsel for Lonestar has stated that the
filing of CD's or waiver letters would be burdensome and has
requested that its client be relieved of this requirement.
The New York Region Drawback Branch requested an audit of
Lonestar's drawback claims in December 1991. The audit covered
four drawback entries. Among the findings in the audit report,
issued in September 1992, are that Lonestar's records did not
fully support its claims for direct identification same condition
drawback, same condition substitution drawback, and rejected
merchandise drawback.
The four drawback entries the subject of the audit are
unliquidated. Following the audit, your office made an internal
advice request for the four entries. In May 1993, counsel for
the claimant requested that its drawback claims be considered
under 19 U.S.C. 1313(j)(1). In May 1994 counsel for the claimant
requested that its claims be considered in light of the
amendments to the drawback law. Also it was requested that the
claims be considered under 19 U.S.C. 1313(j)(2).
ISSUE:
Whether the subject claims meet the requirements for
drawback under 19 U.S.C. 1313(c), 19 U.S.C. 1313(j)(1), or 19
U.S.C. 1313(j)(2)?
LAW AND ANALYSIS:
The drawback law was substantially amended by section 632,
title VI - Customs Modernization, Public Law 103-182, the North
American Free Trade Agreement Implementation Act (107 Stat.
2057), enacted December 8, 1993. Title VI of Public Law 103-182
took effect on the date of enactment of the Act (section 692 of
the Act). According to the applicable legislative history, the
amendments to the drawback law (19 U.S.C. 1313) are applicable to
any drawback entry made on or after the date of enactment as well
as to any drawback entry made before the date of enactment if the
liquidation of the entry is not final on the date of enactment
(H. Report 103-361, 103d Cong., 1st Sess., 132 (1993); see also
provisions in the predecessors to title VI of the Act; H.R. 700,
103d Cong., 1st Sess., section 202(b); S. 106, 103d Cong., 1st
Sess., section 202(b); and H.R. 5100, 102d Cong., 2d Sess.,
section 232(b)). Since the drawback entries the subject of this
request have not been liquidated, the amendments to the drawback
law are applicable.
It has long been the position of Customs that drawback
claimants must adhere to the requirements set forth in the
applicable statutes and regulations to qualify for drawback. The
courts have repeatedly upheld this position (see, e.g., Swan
Tricot Mills Corp. v. United States, 63 Cust. Ct. 530, C.D. 3948
(1969); GAF Corporation v. United States, 72 Cust. Ct. 153, C.D.
4526 (1974); and United States v. Lockheed Petroleum Services,
Ltd., 709 F.2d 1472 (Fed Cir. 1983)). We have found in
application of the applicable statutes and regulations that
sufficient records must be maintained in order to support a claim
for drawback. See, e.g., HQ 223497 of July 2, 1992.
19 U.S.C. 1313(c)
The requirements under the amended section 1313(c)
(merchandise not conforming to sample or specification) are the
following:
1. The merchandise must:
(a) be not conforming to sample or specifications;
or
(b) be shipped without the consent of the
consignee; or
(c) be determined to be defective as of the time
of importation;
2. Duties must have been paid upon the merchandise on
which drawback is claimed;
3. The merchandise on which drawback is claimed must
have been entered or withdrawn for consumption;
4. Within 3 years after release from the custody of
the Customs Service, the merchandise on which drawback
is claimed must have been returned to the custody of
the Customs Service for exportation or destruction
under the supervision of the Customs Service.
Thus the law with respect to rejected merchandise drawback
was amended in three areas: 1) merchandise can now be destroyed
as opposed to only being exported: 2) the time period for
claiming drawback has increased from 90 days to 3 years; and 3)
what constitutes rejected merchandise has been liberalized.
Regarding the issue of rejected merchandise, House Report
103-361, 103d Congr., 1st Sess., 129 states the following:
Section 632 amends the rejected merchandise
drawback provisions ... to allow the importer and
foreign supplier to agree that the imported
merchandise was defective without reference to
purchase specifications or samples. If the
importer and foreign supplier could not agree that
the merchandise was defective, Customs would be
required to make that determination. Under
Section 632, imported merchandise could be used
for up to 3 years and the importer could get a
duty refund if it was shown that the merchandise
did not conform to specifications or sample or was
defective at the time of importation.
Therefore, in order to qualify for rejected merchandise
drawback, the claimant would need to provide evidence that either
the imported merchandise did not conform to sample or
specifications or the foreign supplier and Lonestar would have
to agree that the imported merchandise was defective or the
merchandise was defective at the time of importation. In
addition, we note that 19 U.S.C. 1313(c) does not provide for
substituting merchandise for drawback. Consequently, Lonestar
must show that merchandise that it is importing on which it pays
duty, is the same merchandise that is being exported; it cannot
export merchandise that was imported by the retailers under 19
U.S.C. 1313(c).
Counsel for Lonestar claimed in its letter of May 1994 that
House Report 103-361 provides that drawback rights are
transferable, and would not limit the use of rejected merchandise
drawback under section 1313(c) to the original importer. In
addition, counsel noted that 19 U.S.C. 1313(t) contemplates that
an importer will be able to issue a certificate which will enable
another party to assume the importer's right to claim drawback.
Although the amended statute for rejected merchandise
drawback does not specifically preclude a drawback claim for
someone other than the original importer, regulations which were
in effect prior to the amended law prohibited anyone other than
the importer from claiming drawback under 19 U.S.C. 1313(c).
Section 191.142(b)(6) of the Customs Regulations (19 CFR
191.146(b)(6)) provides, "Drawback under this section
[Merchandise not conforming to sample or specifications or
shipped without the consent of the consignee] is payable to the
exporter-claimant who is the importer of record or the actual
owner named in the import entry." In addition, the language of
19 U.S.C. 1313(c), as amended, has not changed to indicate that
drawback can be claimed under this section by someone other than
the importer. Although changes in the law regarding rejected
merchandise are discussed in House Report 103-361, allowing
drawback under 19 U.S.C. 1313(c) for someone other than the
importer is not one of those changes. In addition, counsel
argues that section 1313(t) contemplates that an importer will be
able to issue a certificate which will enable another party to
assume the importer's right to claim drawback. There is nothing
in the statute or legislative history which shows that a drawback
certificate could be issued from an importer to another party to
claim drawback under 19 U.S.C. 1313(c). Although we note that
Customs Regulations concerning drawback are being drafted in
light of the amendments to the law, at this time we are unaware
of any change in the law regarding who may make a drawback claim
pursuant to 19 U.S.C. 1313(c).
19 U.S.C. 1313(j)
The requirements under the amended section 1313(j)(1)
(direct identification unused merchandise drawback) are the
following:
1. The merchandise on which drawback is claimed must
have been imported;
2. A duty, tax, or fee imposed by Federal law because
of the importation of the imported merchandise must
have been paid;
3. The exporter (or destroyer) has the right to claim
drawback but may endorse that right to the importer or
any intermediate party;
4. The merchandise on which drawback is claimed must
have been exported or destroyed under Customs
supervision within 3 years of the date of importation;
and
5. the merchandise on which drawback is claimed must
not have been used (except as permitted under section
1313(j)(3) in the United states before the exportation
or destruction.
The requirements under the amended section 1313(j)(2)
(substitution unused merchandise drawback) are the following:
1. There must be imported merchandise on which was
paid any duty, tax, or fee imposed under Federal law
because of its importation;
2. The drawback claimant must have either:
(a) Imported the imported merchandise; or
(b) Received from the person who imported and
paid any duty due on the imported merchandise a
certificate of redelivery transferring to that party
the imported merchandise, commercially interchangeable
merchandise, or any combination thereof;
3. There must be other (substitute) merchandise which
is:
(a) Commercially interchangeable with the imported
merchandise; and
(Exported or destroyed under Customs supervision
within 3 years of the date of importation of the
imported merchandise; and
4. Before the exportation or destruction of the other
(substitute) merchandise, that merchandise:
(a) May not be used (except as permitted under
section 1313(j)(3) in the United States; and
(b) Must be in the possession (as described in
the amended section 1313(j)(2)(C)(ii) of the person
claiming drawback.
Both 19 U.S.C. 1313 (j)(1) and (j)(2) require that the
merchandise on which drawback is claimed may not be used. A
definition of the term unused merchandise was not provided in the
language of the new act. In Customs Service Decision (C.S.D.)
81-222 and C.S.D. 82-135, however, it was found that an article
is used when it is employed for the purpose for which it was
manufactured and intended. In addition, 19 U.S.C. 1313(j)(3), as
amended, provides that the performance of certain "incidental
operations" (such as testing, cleaning, and inspecting) on the
imported item, not amounting to a manufacture or production, is
not treated as a use of the merchandise. Much of the merchandise
has reached the ultimate consumer and was returned. In HQ 222633
of December 10, 1990 we found that if the ultimate consumer took
household glassware home and discovered that it was defective,
then the merchandise was considered to be used and 19 U.S.C.
1313(j) was not applicable. In, C.S.D. 84-100 of February 28,
1984, it was stated concerning use that if consumers tried to use
cutlery and it would not perform, then 19 U.S.C. 1313(j) would
apply, but if the cutlery were used more than incidentally with
unsatisfactory results, that law would not apply. No final
determination was made in that case due to insufficient
information, e.g., whether the consumers were retailer-wholesale
distributors or the ultimate users. In this case, although the
audit found that some merchandise was returned by consumers who
had not used the merchandise, it was also found that Lonestar did
not maintain any records as to why the merchandise was returned
to the retailer, nor has the extent of consumer use been
documented by either the retailer or Lonestar in all cases.
Since much of the merchandise has been used and that which has
not cannot be documented by Lonestar, the requirement that the
merchandise not be used under 19 U.S.C. 1313(j) has not been met.
In addition, under both 19 U.S.C. 1313(j)(1) and 19 U.S.C.
1313(j)(2) certificates of delivery are required. Section
191.141(b)(1) of the Customs Regulations (19 CFR 191.141(b)(1))
provides that an exporter-claimant filing drawback under 19
U.S.C. 1313(j) document all transfers by certificates of delivery
in accordance with 19 CFR 191.65. The audit found that for the
claims under review, Lonestar was not the importer of record, nor
did it maintain certificates of delivery from the actual
importers of record. Therefore, the requirement to document
transfers by maintaining certificates of delivery has not been
met by Lonestar.
Under 19 U.S.C. 1313(j)(2), as amended, the claimant must
show commercial interchangeability. Prior to the amendments in
the law, the standard for substitution was fungibility. We found
under the prior law that defective or unacceptable merchandise is
not fungible with designated merchandise that has not been shown
to have the same defect to the same extent or unacceptable
characteristic, and is not eligible for same condition
substitution drawback. HQ 219941 of December 22, 1987.
According to House Report 103-361, which explains the change
from fungibility to commercial interchangeability in the amended
law, the new standard is intended to be made less restrictive
(i.e., "the Committee intends to permit the substitution of
merchandise when it is commercially interchangeable rather than
when it is commercially identical.") The Committee also stated
that in determining whether two articles are commercially
interchangeable, the criteria to be considered would include, but
not be limited to: Governmental and recognized industrial
standards, part numbers, tariff classification, and relative
values.
Under this commercial interchangeability standard, all the
criteria would be met except for the relative value. The
defective merchandise would have much less value than the
functioning merchandise. If Lonestar were importing defective
merchandise and exporting defective merchandise, or importing
functioning merchandise and exporting functioning merchandise,
then the merchandise would have the same relative value. But it
appears that for the most part, Lonestar is importing functioning
merchandise and exporting defective merchandise which would not
have the same relative value. Even if there are cases where like
merchandise of the same value is being imported and exported, the
audit has revealed that Lonestar was not able to substantiate
the reasons for return of the merchandise to the foreign
supplier. Thus, Lonestar has not met the commercial
interchangeability requirement of 19 U.S.C. 1313(j)(2).
Common requirements to 19 U.S.C. 1313(c), (j)(1), and (j)(2)
19 U.S.C. 1313(c), (j)(1), and (j)(2) all require that
merchandise on which drawback is claimed be exported or destroyed
within three years from the date of importation. In the audit it
was found that because of the "no-questions-asked" return policy
for consumers of the retailers, it is possible merchandise was
returned after 3 years from the date of importation. Thus
Lonestar has failed to provide evidence to show that its claims
for drawback were made within the three year statutory period.
HOLDING:
Lonestar does not have adequate records to show that it has
met the requirements for drawback under 19 U.S.C. 1313(c), 19
U.S.C. 1313(j)(1), or 19 U.S.C. 1313(j)(2) for the subject claims
and, therefore, is not eligible to receive drawback.
The Office of Regulations and Rulings will take steps to
make this decision available to Customs personnel via the Customs
Rulings Module in ACS and to the public via the Diskette
Subscription Service, Freedom of Information Act, and other
public access channels within 60 days from the date of this
decision.
Sincerely,
Director, International Trade
Compliance Division