DRA-4-CO:R:C:E 224633 AJS
Regional Director, Commercial Operations
U.S. Customs Service
South Central Region
423 Canal Street
New Orleans, LA 70130
RE: Request for Internal Advice; 19 U.S.C. 1313(j)(2);
"fungibility"; C.S.D. 85-52; petroleum; laboratory reports; 19
CFR 191.2(l); Guess? Inc. v. U.S.; Fortunato v. Ford Motor Co.;
Federal Rule of Evidence 803(6); U.S. v. Blackburn.
Dear Regional Director:
This is in reply to your request of April 5, 1993, for
Internal Advice (IA) concerning the fungibility of petroleum in
various substitution same condition (SSC) drawback claims.
FACTS:
Your established procedure for the subject SSC drawback
cases has been to refer these claims to the Customs Laboratory
for technical advice regarding fungibility. Utilizing chemical
analysis certificates supplied by the drawback claimant on the
imported and exported shipments, the Customs Laboratory has
rendered reports on each claim. The certificates of analysis
have not always been from an independent, Customs approved
laboratory. In some cases, the drawback claimant has used its
own company laboratories to sample and analyze the shipments, and
submitted its own internal report as evidence of fungibility.
Your office has rejected these reports and the claims on which
they are based.
ISSUE:
Whether an internal laboratory report submitted by the
drawback claimant is acceptable as evidence of fungibility for
purposes of 19 U.S.C. 1313(j)(2).
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LAW AND ANALYSIS:
Section 313(j)(2) of the Tariff Act of 1930, as amended (19
U.S.C. 1313(j)(2)), provides that for SSC drawback purposes, the
merchandise substituted for exportation must be fungible with the
duty-paid merchandise and in the same condition as was the
imported merchandise at the time of importation.
Fungibility is defined in section 191.2(l), Customs
Regulations, (19 CFR 191.2(l)), as "merchandise which for
commercial purposes is identical and interchangeable in all
situations." Customs has interpreted fungibility as not
requiring that merchandise be precisely identical; identical for
"commercial purposes" allows some slight differences. The key is
complete commercial interchangeability. As stated in C.S.D. 85-
52: "[t]he commercial world consists of buyers, sellers,
comminglers, government agencies and others. If these groups
treat articles or merchandise as fungible or commercially
identical, the articles or merchandise are fungible . . . When
two or more units of apparently identical properties are treated
differently by the commercial world for any reason, they are not
fungible." 19 Cust. Bull. 605, 607 (1985). Interchangeability
means that the article, merchandise, or good is treated as
identical for commercial purposes, or in a commercial context, by
those entities that commonly deal in such articles, merchandise,
or goods.
The courts have recently addressed the question of
fungibility in Guess? Inc. v. United States, 752 F. Supp. 463
(Ct. Int'l Trade (CIT) 1990), 24 Cust. Bull. No. 51, 26 (December
19, 1990), vacated and remanded, No. 1145 (Court of Appeals for
the Federal Circuit (CAFC) September 11, 1991), 26 Cust. Bull.
No. 10, 30 (March 4, 1992); See also Tandom Corp. v. United
States, Slip. Op. 92-197 (CIT, October 29, 1992). The CAFC
essentially agreed with the interpretation of the term "fungible"
as expressed by the CIT, but remanded for procedural reasons. In
Guess?, the plaintiff argued that the fungibility of goods in a
general or contractual sense should suffice to bring them within
the coverage of 19 U.S.C. 1313(j)(2). However, the CIT stated
that "[w]e are not dealing here [i.e., fungibility] with a
question of whether a party has satisfied a commercial contract."
Guess? p. 29, See also CAFC p. 39. The CAFC added that "[w]e are
dealing instead with an exemption from duty, a statutory
privilege due only when enumerated conditions are met." Guess?
p. 33. Further, the CAFC stated that "[s]uch a claim is within
the general principle that exemptions must be strictly construed,
and that doubt must be resolved against the one asserting the
exemption." Guess? p. 34.
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In this instance, the IA applicant asks whether its
internal laboratory reports are acceptable as evidence of
fungibility. The applicant asserts that these reports are
accepted in many cases by both import vendors and export
customers. However, we note that these reports are accepted in
the context of whether a party has satisfied a commercial
contract. As stated in Guess?, we are not dealing with the
satisfaction of a commercial contract but whether a certain
shipment of duty-paid petroleum is fungible with a certain
shipment of exported petroleum. Therefore, the fact that
laboratory reports are acceptable for commercial purposes is not
necessarily controlling for determining fungibility under 19
U.S.C. 1313(j)(2).
Our search of over 100 court cases which mention laboratory
reports did not reveal any instance in which fungibility was
determined solely on the basis of a drawback claimant's internal
laboratory report. A great many of these cases involved
instances in which a Customs laboratory report was involved with
the resolution of the issue at hand. Therefore, the acceptance
of a drawback claimant's own laboratory reports is not required
based on any type of case law precedent.
In our view, the acceptance of the drawback claimant's
internal laboratory report to establish fungibility in and of
itself is analogous to the evidentiary principle that "[t]est
results [prepared for litigation purposes] should not be
admissible as evidence, unless made by a qualified, independent
expert or unless the opposing party has the opportunity to
participate in the test." C. McCormick, Evidence, section 202,
at 867 (1992) citing Fortunato v. Ford Motor Co., 464 F. 2d 962,
966 (2d Cir. 1972), cert. denied 409 U.S. 1038. Internal
laboratory reports prepared for drawback purposes are prepared in
order to receive a statutory privilege, and not in the ordinary
course of business. The submission of evidence to qualify for a
statutory privilege is similar to submitting evidence to
establish a fact during litigation. Accordingly, it would appear
reasonable to require that laboratory reports intended for
submission as evidence of fungibility be prepared by an
independent laboratory. As stated in Guess?, drawback is a
statutory privilege which must be strictly construed, and doubt
must be resolved against the one asserting the privilege. We
view the potential danger to the revenue of accepting a
claimant's internal report prepared for drawback purposes to be
of a possible self-serving nature and thus creating the type of
doubt discussed in Guess?. Without the safeguard of an
independent laboratory report, Customs
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possesses no method in which to corroborate the information
contained in these internal reports and therefore the potential
for fraud and abuse is great.
The IA applicant contends that acquiring an independent
laboratory report in all drawback cases is expensive and onerous.
Your memorandum also points out that in some cases the importer
may not be aware of the need to obtain a laboratory report at the
time of importation, or that the possibility for obtaining
drawback on the duty-paid merchandise may not materialize until a
later date. Based on these concerns, we cite to Federal Rule of
Evidence 803(6) which provides for the admission of:
Records of regularly conducted activity. A memorandum,
report, record, or data compilation, in any form, of acts,
events, conditions, opinions, or diagnoses, made at or near the
time by, or from information transmitted by, a person with
knowledge, if kept in the course of a regularly conducted
business activity, and if it was the regular practice of that
business activity to make the memorandum, report, record, or data
compilation, all as shown by the testimony of the custodian or
other qualified witness, unless the source of information or the
method or circumstances of preparation indicate lack of
trustworthiness. The term "business" as used in this paragraph
includes business, institution, association, profession,
occupation, and calling of every kind, whether or not conducted
for profit.
The rationale for this rule is that records prepared and
kept in the ordinary course of business are presumed reliable for
two general sorts of reason. United States v. Blackburn, 992
F.2d 666, 670 (7th Cir. 1993). First, businesses depend on such
records to conduct their own affairs; accordingly, the employees
who generate them have a strong motive to be accurate and none to
be deceitful. Id. Second, routine and habitual patterns of
creation lend reliability to business records. Id. Based on
Rule 803(6) and its rationale, the drawback applicant may submit
certain internal laboratory reports as evidence of fungibility.
Generally, the report must be made at or near the time of
importation, be kept in the course of a regularly conducted
business activity, and it must be the regular practice of that
business activity to make the report. These reports may then be
forwarded to the Customs Laboratory for technical review to
determine if the information provided within the reports supports
fungibility. The applicant may not simply submit a report
stating that petroleum is fungible because of the potential
self-serving nature of such a report. Rather, it must
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submit a laboratory report which contains sufficient technical
information for Customs to determine that the petroleum is
fungible. Of course, if Customs officials have reason to believe
that the information is suspect or not trustworthy, they may
refuse to accept the information contained therein as evidence of
fungibility.
HOLDING:
A drawback claimant's laboratory analysis is acceptable to
show fungibility if the claimant shows that the analysis was done
in the ordinary course of business, identifies the analyst, and
offers to provide the analyst's work papers to Customs for
review. An analysis shall be considered to be done in the
ordinary course of business if the person using the analysis for
drawback purposes can show that the analysis was relied upon by
that person in a commercial transaction; i.e., a buyer who paid
the seller based on the analysis shall be considered to have
relied on that analysis.
Sincerely,
John Durant, Director