Customs Ruling HQ 224812 - Protest 5301-92-100420; Manufacturing Drawback; Time for Completion of Drawback Claims; Time for Initiation of Audit of Drawback Claims; Commingling of Merchandise Before Receipt at Manufacturer's Factory; Tradeoff; 19 U.S.C. 1313(b), 1313(k), 1313(r); Public Law 103-182 Dear Sir:

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HQ 224812
Feb 15, 1995

Type : Drawback • HTSUS :
Related: 224107

DRA-2-01-CO:R:C:E 224812 PH

Assistant District Director
Commercial Operations
Houston, Texas 77052

RE: Protest 5301-92-100420; Manufacturing Drawback; Time for Completion of Drawback Claims; Time for Initiation of Audit of Drawback Claims; Commingling of Merchandise Before Receipt at Manufacturer's Factory; Tradeoff; 19 U.S.C. 1313(b), 1313(k), 1313(r); Public Law 103-182 Dear Sir:

The above-referenced protest was forwarded to this office for further review. At the request of the protestant, personnel of this office met with representatives of the protestant about this matter on February 2, 1994. Subsequently, at the request of the protestant, action on the protest was delayed to give the protestant the opportunity to submit additional material regarding the protest. The protestant did make an additional submission, by letter of June 16, 1994, which is enclosed for your file.

Our decision on the protest follows.

FACTS:

The protest is of the liquidation of five drawback entries (or claims) respectively dated May 7, 1987, December 23, 1988, March 24, 1989 (two claims, one for $3,459 and the other for $7,401), and June 26, 1989). Accelerated payment of drawback was requested and granted for the entries, resulting in a total accelerated payment of drawback for the protested entries in the amount of $82,725.

At the time under consideration in this matter, the protestant had an approved drawback contract (see Treasury Decision (T.D.) 84-1-(1)) for substitution manufacturing drawback under 19 U.S.C. 1313(b) and the then applicable Customs Regulations (19 CFR 22.6(g-1)), providing for a general drawback contract for crude petroleum and petroleum derivatives (after the revision of the Customs Regulations pertaining to drawback (see T.D. 83-212), this general drawback contract was published as T.D. 84-49). The contract provided for drawback in the manufacture of 17 listed articles, including the articles claimed to have been exported in the protested claims, distillate oils, residual oils, and asphalt, with the use of crude petroleum and crude petroleum derivatives. The contract permitted the substitution of duty- paid, duty-free, or domestic crude petroleum and crude petroleum derivatives for like merchandise of the same kind and quality which was imported and designated as the basis for drawback on the exported products. According to the contract, substitution was required to be on a class-for-class basis, and the classes were defined as follows:

Class I API Gravity 0-11.9 Class II API Gravity 12.0-24.9 Class III API Gravity 25.0-44.9 Class IV API Gravity 45-up

In its drawback contract, the protestant agreed to maintain records to establish "[t]he identity and specification of the merchandise we designate", "[t]he quantity of merchandise of the same kind and quality as the designated merchandise we used to produce the exported article", "[a] technical memorandum [relating to the producibility requirement]", and "t]hat within 3 years after receiving it at our refinery, we used the designated merchandise to produce articles [and] [d]uring the same three- year period, we produced the exported articles."

According to the materials in the file, the imported designated crude oil upon which drawback was claimed was received by the Louisiana Offshore Oil Port (LOOP), a deepwater port partially owned by the protestant. The LOOP consists of a receiving platform off the coast of Louisiana, a pipeline from the platform to a pumping station in Fourchon, Louisiana, and another pipeline to eight underground storage caverns in Clovelly, Louisiana. These caverns provide temporary crude oil storage to the five petroleum companies (including the protestant) which jointly own the LOOP, as well as certain other petroleum companies. According to the protestant's brief, seven of the eight caverns "service a single type of crude oil" and the eighth provides commingled storage for low-sulphur types (the protestant does not utilize the eighth cavern). The crude oils of the LOOP owners and other companies do not retain their physical identity although, according to the audit report, crude oils are generally segregated in the caverns by API gravity and sulfur content. (The protestant provides an extensive description, with exhibits, of the LOOP's and the protestant's accounting procedures which, it states, "ensure that the [protestant] always receives crude oil that is commercially equivalent to its imported product", although it concedes that "crude oil from different sources and owned by different shippers usually is commingled in LOOP cavern storage such that [the protestant] does not necessarily receive the actual molecules of its imported product at its refineries.")

According to the protestant, the LOOP maintains records of the types and quantities of crude oil which each owner or shipper has added to and withdrawn from the caverns so that the protestant and all other LOOP shippers know the cavern location(s) of their crude oil inputs and dates and quantities of withdrawals. According to the protestant, the crude oil is stored in caverns according to "types" (except for the eighth cavern which the protestant does not use and except in the case of "layering", described below). According to the protestant, an oil's "type" is determined by its geographic origin (e.g., Arabian, Maya, etc.), API gravity (e.g., heavy, medium, light, extra light), and, often, sulfur content (e.g., sweet, sour). The protestant states that "[s]o far as [the protestant] and the other LOOP shippers are concerned, any crude oil shipment which is (or may be) stored in a single-grade cavern during a particular month is identical to and interchangeable for all purposes with any other crude oil shipment which is (or may be) stored in that cavern during that month."

The protestant states that there are occasions when one of the single-grade LOOP caverns contains more than one grade of crude oil. In such cases, the specific gravity of the different grades of oil causes it to separate and form separate layers (e.g., a lighter crude oil on top of a heavier crude oil) and "virtually no mixing occurs."

When the protestant withdraws crude oil from a LOOP cavern, it "usually" withdraws an entire cargo, in one or more batches, and delivers the withdrawn batches to a pipeline to a transshipment terminal in St. James, Louisiana. This pipeline is owned by the protestant and three other petroleum companies. The pipeline is metered and pipeline tickets are issued when crude oil is withdrawn from the caverns. "[T]o the extent possible in any pipeline, it [i.e., the batch of crude oil] is not commingled."

At St. James the protestant's crude oil "usually" is delivered into one of three segregated tanks for storage and reshipment via the protestant's pipeline to its Garyville, Louisiana, refinery or to one of its other refineries. According to the protestant, whether shipped to the Garyville refinery or one of the protestant's other refineries, the protestant's crude oil batches are handled individually and are not commingled with any other product prior to receipt at the refinery.

According to the protestant, more than 90% of the crude oil designated for the Garyville refinery is blended as it leaves the LOOP storage caverns. The blends "typically consist of two different crude oil grades." The blended oils are transshipped through the St. James terminal as segregated batches. "Because [the protestant] knows the blend composition of each crude oil batch that is delivered to its Garyville refinery via the LOOP/[pipeline] system, it can assign drawback value to each batch based upon its duty-paid import content."

The May 7, 1987, claim was the subject of a Customs audit (Report 511-88-DRO-002), dated September 29, 1989). According to the protestant, the audit was initiated in June of 1988. The findings of the audit were that the protestant failed to: (1) file Certificates of Manufacture and Delivery for products sold domestically so that the products did not have the status of drawback products; (2) provide evidence of exportation which would have shown the identity of the exporter of record, or provide the required evidence of reservation of drawback rights; and (3) provide a complete and accurate Chronological Summary of Exports. The audit report further concluded that if all necessary documentation exists for other unliquidated entries and the Chronological Summary of Exportation was properly prepared, the protestant should be paid drawback on exportations of residual oils, subject to the decision in an Internal Advice request sent to Headquarters.

The referenced Internal Advice request, Exhibit B of the audit report, was sent to Headquarters on September 28, 1989. Headquarters responded to the request with a ruling dated November 4, 1989 (File: 221794). In this ruling, Headquarters stated:

The commingling of the imported designated crude oil with either the same (SKAQ [i.e., same kind and quality]) or a different class (non-SKAQ) crude oil, prior to receipt of crude by the manufacturer/producer, and therefore prior to production, precludes any of the commingled crude oil from being designated as the imported drawback merchandise. When commingling occurs prior to receipt and production, even with the same class (SKAQ) crude oil, the specific identity of the actual imported designated crude oil is lost, and the manufacturer/producer cannot establish receipt and use of the actual imported designated merchandise. Had [the protestant] received the actual imported designated crude, and not crude of the same class (SKAQ), and then commingled it with same class (SKAQ) domestic crude, the imported designated crude would then be eligible for drawback designation. * * * It is the commingling at the LOOP caverns and/or the St. James Terminal that precludes drawback in this case. That the offloaded imported duty- paid crude is commingled with SKAQ (same class) crude belonging to another firm, or even fungible crude, if that could be established, makes no difference. The manufacturer/producer must, under the statute, designate and use the actual imported duty-paid merchandise. He cannot do this if he never receives it. Receipt, designation, and use of a SKAQ or fungible substitute does not satisfy the plain language of the statute.

According to the protestant's brief, after review of the audit report in August of 1990 the protestant met with Customs officials and subsequently remedied the procedural and verification issues raised in the audit report (in this decision we are addressing only what we understand to be the remaining outstanding issue in this protest; i.e., the establishment of delivery of the designated imported merchandise to the protestant's factory (refinery) and use of the merchandise at that refinery). At the meeting, according to the protestant, a Customs official advised that the protestant's unliquidated drawback claims which had been filed and paid prior to June 1985 would be approved because they were outside the 3-year time period for verification.

On August 16, 1991, another Internal Advice request was sent to Headquarters on this matter, this one requesting advice on whether the amendment to the drawback law effected by Public Law 101-382, section 484A (19 U.S.C. 1313(p)), applied to commingled inventories of imported crude oil before they reached the refinery (i.e., basically, whether the new law affected the November 24, 1989, ruling quoted above). On March 18, 1992, Headquarters wrote to an official of the protestant advising him of the August 16, 1991, Internal Advice request and giving the protestant an opportunity to comment on the matter. In the March 18, 1992, letter, Headquarters stated that "... we expect to take the same position [taken in the November 24, 1989, ruling]."

By letter of May 6, 1992, the protestant advised Customs it would attempt to respond to the opportunity to comment by the end of May. Subsequently, on August 5, 1992, the protestant's representative wrote to confirm a telephone conversation that Customs would extend until September 30, 1992, the protestant's time to comment on the matter. On October 2, 1992, the protestant's representative wrote to Customs Headquarters to confirm a telephone conversation in which it was reported that Customs Southwest Region had advised that the audit had been concluded and six drawback claims were liquidated on August 21, 1992, one claim approved and five denied (the denials "based on the import commingling issue"). This letter stated that the protestant would be filing a protest on the liquidations so the Internal Advice request was moot. By memorandum of October 15, 1992, Headquarters so advised Customs Southwest Region.

According to the protestant's brief, on May 14, 1992, the protestant revised each of its unliquidated claims covering exports between April 1985 and March 1989 to designate crude oil imports which were received at ports other than the LOOP and "therefore, did not involve pre-receipt commingling." The protestant states that this action was in response to the March 18, 1992, letter from Customs Headquarters inviting it to comment on the second Internal Advice request and "in order to avoid the closing of the audit and the denial of its outstanding drawback claims."

As stated above, on August 21, 1992, the claims were liquidated with denial of all drawback. On November 16, 1992, the protestant filed the protest under consideration. The contentions made in the protest will be addressed in the LAW AND ANALYSIS section of this ruling.

ISSUE:

Is there authority to grant the protest of denial of drawback in this case?

LAW AND ANALYSIS:

Initially, we note that the protest was timely filed under the statutory and regulatory provisions for protests (see 19 U.S.C. 1514 and 19 CFR Part 174). We note that the refusal to pay a claim for drawback is a protestable issue (see 19 U.S.C. 1514(a)(6)).

This protest involves drawback under 19 U.S.C. 1313(b). Basically, section 1313(b), often called the substitution manufacturing drawback law, provides that if imported duty-paid merchandise and any other merchandise (whether imported or domestic) of the same kind and quality are used within three years of the receipt of the imported merchandise in the manufacture or production of articles by the manufacturer or producer of the articles and articles manufactured or produced from either the imported duty-paid merchandise or other merchandise, or any combination thereof, are exported or destroyed under Customs supervision, 99 percent of the duties on the imported duty-paid merchandise shall be refunded as drawback, provided that none of the articles were used prior to the exportation or destruction, even if none of the imported merchandise was actually used in the manufacture or production of the exported or destroyed articles. Under section 1313(i), no drawback may be allowed under section 1313 unless the completed article is exported within five years after the importation of the imported merchandise.

The drawback law was substantively 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 the 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)).

The Customs Regulations pertaining to drawback, promulgated under the authority of section 1313(l), are found in 19 CFR Part 191. These regulations require the manufacturer or producer of articles for which drawback is claimed under section 1313(b) to maintain records establishing compliance with the requirements for drawback (see 19 CFR 191.32). The regulations provide for examination of these records and verification of drawback claims by Customs (19 CFR 191.2(o) and 191.10) and that all records required to be kept by the manufacturer or producer with respect to drawback claims must be retained for at least three years after payment of such claims (19 CFR 191.5). The claimant, in its drawback contract (T.D. 84-1-(1), referred to above), specifically agreed to comply with all of these requirements.

Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also, Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) "We are dealing [in discussing drawback] instead with an exemption from duty, a statutory privilege due only when the enumerated conditions are met" (emphasis added)).

COMMINGLING OF CRUDE OIL BEFORE RECEIPT AT REFINERY

The imported crude oil which serves as the basis for drawback in this case was commingled with that of other shipments, other owners, and (possibly) other grades (i.e., of API gravities different enough to be in different classes (see above)). The crude oil may have been commingled in its transportation by pipeline to St. James (i.e., in the protest, it is stated "to the extent possible in any pipeline, it is not commingled"). The crude oil may have been commingled in the St. James transshipment terminal (i.e., it was only "usually" delivered into one of three segregated tanks for storage and reshipment). The protestant concedes that "crude oil from different sources and owned by different shippers usually is commingled in LOOP cavern storage such that [the protestant] does not necessarily receive the actual molecules of its imported product at its refineries."

The protestant argues that although the crude oil received at the refinery may not consist of the literal molecules of the imported crude oil, the crude oil batches received at the refinery possess the same physical characteristics and, when aggregated on a first-in-first-out (FIFO) basis, are in exactly the same quantity as the designated import cargoes. The protestant contends that the commingling in the LOOP cavern storage is always among commercially identical and interchangeable, or fungible, crude oils. Citing a June 8, 1981, ruling (File: 716534), the protestant states that Customs has permitted the commingling of crude oil imported in bond with domestic and foreign crude oil of the same kind and quality in the pipeline in-bond movement of the crude oil.

We disagree with the protestant's arguments in this regard. We affirm our September 28, 1989, ruling (see above) that "[w]hen commingling occurs prior to receipt and production, even with the same class (SKAQ) crude oil [or even among fungible crude oils], the specific identity of the actual imported designated crude oil is lost, and the manufacturer/producer cannot establish receipt and use of the actual imported designated merchandise."

A review of the history of 19 U.S.C. 1313(b) supports this position. Before 1930, no substitution was allowed for manufacturing drawback. In the Tariff Act of 1930, such substitution was allowed for sugar or nonferrous metal or ore containing nonferrous metal, conditioned upon the use in manufacture or production of the imported and duty-free or domestic substitute sugar or nonferrous metal or ore 1 year from the receipt of the imported merchandise by the manufacturer or producer of the articles (Customs has long interpreted this time of receipt to be the time of receipt at the manufacturer or producer's factory, as currently provided in the Customs Regulations (19 CFR 191.32(a)(3); see also Notice of Proposed Revision in the Federal Register of August 26, 1982, 47 F.R. 37563, 37574; and C.I.E. 1091/61, publishing a ruling of August 2, 1961). In 1951, the privilege of substitution was extended to flaxseed and linseed and flaxseed and linseed oil (Act of August 8, 1951, 65 Stat. 175), in 1956 to printing papers, coated or uncoated (Act of August 6, 1956, 70 Stat. 1076) and in 1958 to all classes of merchandise (Act of August 18, 1958, 72 Stat. 624). The report language for the latter provision makes it clear that the intent of the legislation was to enable manufacturers to obtain drawback without "conducting their operations in such a way as to separately identify that part of their output containing imported materials and the amounts so used" (H. Rep. 1380, 85th Cong., 2d Sess. (1958)) (i.e., substitution was allowed only after receipt by the manufacturer or producer).

The June 8, 1981, ruling (File: 716534) which the protestant cites in this regard, which permitted the commingling of bonded crude oil with domestic and foreign crude oil in a pipeline, is inapposite for this case. That ruling involved a bonded movement by pipeline, for which there was no specific statutory provision (see H. Rep. 103-361, supra, p. 150 ("[t]here is no present law specifically providing for the transportation in bond of merchandise by pipeline"). In this case, there is a specifically applicable provision (i.e., 19 U.S.C. 1313(b), and the other subsections in section 1313 discussed below), and they do not permit the commingling which occurred in the protested claims. (However, we believe that the protestant may have pointed out a means by which drawback may, in the future, be obtained for crude oil imported through the LOOP in a situation such as that described in this case. I.e., the merchandise could be entered for immediate transportation when it arrives at the LOOP receiving platform, and then transported under bond under the provisions of the newly enacted 19 U.S.C. 1553A (see section 664 of Public Law 103-182) to the protestant's refinery and identified under the provisions of the new provision. The protestant may wish to seek a binding ruling on whether this is possible.)

As stated above, the possibility that the special drawback provisions in 19 U.S.C. 1313(p) may be applicable to these claims has been raised (see second Internal Advice request, discussed in the FACTS portion of this ruling). That provision, as enacted in section 484A, Public Law 101-382 (104 Stat. 629, 707), permitted the identification, for drawback purposes, by inventory records kept on a monthly basis of certain crude petroleum and petroleum derivatives which are stored in common storage with other crude petroleum or petroleum derivatives of the same kind and quality. A condition precedent to qualification for drawback under this provision was that the articles must be withdrawn for export from the common storage facility. That is clearly not the case in the protested claims (the withdrawals from the LOOP storage caverns were for transportation to the refinery for manufacture or production). Section 1313(p) was amended by section 632 of Public Law 103-182 to permit accounting for petroleum derivatives on a quantitative basis, without reference to a common storage facility, upon compliance with certain conditions. The amended provision also clearly is not applicable to the protested claims, as the provision was made applicable only to finished petroleum derivatives and not crude petroleum.

The protestant contends that the tradeoff provision in the drawback law, 19 U.S.C. 1313(k), authorizes the designation of the crude oil in the protested entries. That provision provides that for purposes of section 1313(a) and (b), "the use of any domestic merchandise acquired in exchange for imported merchandise of the same kind and quality shall be treated as the use of such imported merchandise if no certificate of delivery is issued with respect to such imported merchandise." The legislative report for this provision also contemplates the exchange of domestic merchandise for imported merchandise (H. Conf. Rep. 98-1156, 98th Cong., 2d Sess. (1984), reprinted at 1984 U.S.C.C.A.N. 4910, 5242), as does the applicable section of the Customs Regulations (19 CFR 191.27). Even if the protested claims otherwise qualified for drawback under 19 U.S.C. 1313(k) and 19 CFR 191.27, they would be precluded from drawback under this provision because there is no exchange of imported merchandise for domestic merchandise.

The protestant contends that foreign merchandise may be treated as domestic merchandise for purposes of 19 U.S.C. 1313(k), citing C.S.D. 82-111. That ruling held that imported duty-paid merchandise could be treated as domestic or duty-free merchandise for purposes of 19 U.S.C. 1313(b). The basis for the ruling was a series of interpretations which treated foreign merchandise as domestic or duty-free (note that section 1313(b) already permitted the substitution of duty-free (i.e., foreign) merchandise as well as domestic merchandise). However, section 1313(k) was added to the drawback law after C.S.D. 82-111, and specifically provides for the exchange of only domestic for foreign merchandise, as does the legislative history thereto. Furthermore, the recent amendments to the drawback law effected by section 632 of Public Law 103-182 enacted into law the interpretation in C.S.D. 82-111, for purposes of section 1313(b). No such amendment was made to section 1313(k). We disagree with the protestant's contention in this regard.

In proposing to identify the crude oil which is commingled in the LOOP storage caverns, the protestant states that a FIFO accounting method enables it to follow its crude oil cargoes through the LOOP caverns (page 29 of the memorandum in support of the protest). Although it is true that Customs has permitted the use of FIFO, as well as other accounting purposes, for drawback purposes (see, e.g., 19 CFR 191.22(c), C.S.D. 79-252, C.S.D. 79- 301, C.S.D. 79-448, C.S.D. 82-25, C.S.D. 83-54, C.S.D. 84-82, and C.S.D. 88-1), we are aware of no such ruling with regard to the commingling of merchandise before it arrives at the manufacturer or producer's factory, as would be true in this case. Even if there were such a ruling, under each of the foregoing rulings and under 19 CFR 191.22(c), the merchandise to be commingled and identified must be fungible.

The protestant contends that the crude oil commingled in the LOOP storage caverns is fungible, but we are not satisfied this is so based on the evidence in the file. In this regard, see A.W. Drews, Manual on Hydrocarbon Analysis (4th ed., 1989; ASTM Manual Series: MNL 3), pp. 20-27: "Not only is the composition of crude oil highly complex, it is also highly variable from field-to- field, and even within a given field it is likely to exhibit inhomogeneity." According to this article, to obtain data on processing difficulties resulting from inherent impurities, the slate of products which can be refined from the crude oil, downstream processing and upgrading that may be necessary to eventually yield specification products, and to monitor the quality of crude oil stream over time, an inspection assay and a comprehensive assay are commonly used. The former involves determination of a "few key whole crude oil properties" such as API gravity, sulfur content, and pour point, and may also involve salt content, water and sediment, and trace elements (in this regard, see pages 16-17 of the memorandum in support of the protest: "A crude oil's type, more commonly referred to as its grade is determined by its geographic origin ..., API gravity ..., and, often, sulfur content ...."). The latter requires that the crude oil be fractionally distilled so that the refiner can assess the quantity and quality of products recoverable from a given crude oil and is usually performed only when a new field comes on stream or when the inspection assay indicates that significant changes in the stream's composition have occurred.

We note that the data which the assays are intended to obtain, as described above (i.e., on processing difficulties, products which can be refined, processing and upgrading which may be necessary, and monitoring the quality of the stream over time) appear to relate to the fungibility of crude oil for drawback purposes and appear to call for more information than the protestant provides in describing the crude oil under consideration. I.e., according to the protestant, a foreign supplier of the protestant "may" provide the protestant with a report indicating the source, grade, quantity and API gravity of the imported crude oil (page 23 of the memorandum in support of the protest) and crude oil is stored in the LOOP storage caverns according to its geographical origin, API gravity and (often) sulfur content (page 17 of the memorandum in support of the protest). In view of the article by A.W. Drews cited above, we do not believe that the protestant has established that the crude oil is identical and interchangeable in all situations for commercial purposes (see 19 CFR 191.2(l).

SUPPLEMENTAL EVIDENCE

As stated above, the protestant was given the opportunity to submit additional records to address the problem of identification of the imported merchandise as the merchandise received at the protestant's refinery. With its letter of June 16, 1994, the protestant provided such documents. Documents were provided relating to each of the entries under protest, except for the entries designated for the May 7, 1987, drawback entry for which the protestant states that LOOP documentation is no longer available. Not all of the documentation we requested was provided for the drawback entry which we selected (i.e., the entry selected was the December 23, 1988, entry, but laboratory analysis reports for the imported crude and the pipeline tickets were not provided for this entry). In the interest of the most complete analysis of this matter possible, we have selected one of the entries for which these reports were provided for review. The drawback entry selected is the March 24, 1989, entry ($3,459.00)

According to this drawback entry, 88,468 barrels of class III crude oil, imported on February 26, 1986 (entry number given), at New Orleans was designated for this drawback entry. Also according to the drawback entry, the designated crude oil was received at the protestant's Detroit, Michigan, refinery in February of 1986 and consumed in April of 1986. According to the entry summary for the designated entry, 908,265 barrels of Mexican Isthmus crude oil, with an API gravity of 33.7, were imported to the LOOP on the HOUSTON TRADER (importing carrier). There is a laboratory analysis report for "isthmus crude oil" on board that vessel analyzing API gravity (35.1; 34.7), water by distillation (.15%; .30%), sediment by extraction (.05%; less than .01%), water and sediment (.10%; .2%), sulfur (1.22%; 1.27%), and sediment and water volume percent (.15%; .30%), respectively, for both a "vessel composite" and an "automatic in- line sample."

The LOOP February 1986 Marathon Oil Co. Mexican Isthmus Activity report shows receipt in LOOP of 904,633.81 barrels on February 27, 1986, and the batch is identified as "02ITM048". The inventory level at the end of February is shown as 987,335.21 barrels. The LOOP Individual Shipper Inventory for February 1986 shows the same information and identifies the cavern as 04 and the segment as 10. There is a LOOP "Summary Batch Ticket" for this batch showing the same information, with a composite density of 0.8521 (34.5 degrees) and a BS&W percentage (by distillation) of 0.35%.

The LOOP March 1986 Marathon Oil Co. Mexican Isthmus Activity report shows deliveries from LOOP on March 1, 2, and 14 of 519,281.51 barrels (batch id. 02LCP097), 359,102.49 barrels (batch id. 02LCP099), and 299,588.76 barrels (batch id. 02LCP114), respectively. The same report shows LOCAP activity of receipts on the respective dates of 520,322.36 barrels (ticket number 32), 360,182.99 barrels (ticket number 33), and 300,189.09 barrels (ticket number 36) and deliveries on March 4, 5, and 15 of 521,994.83 barrels, 357,363.01 barrels, and 299,949.23 barrels, respectively. The same report shows Marathon pipeline activity of receipts on March 4, 5, and 15 of 521,994.83 barrels (ticket number 23), 357,363.01 barrels (ticket number 24), and 299,949,23 barrels (ticket number 29), respectively, and deliveries on March 4, 5, 6, and 15 of 280,013.11 barrels (ticket 38), 357,041.94 barrels (ticket 39), 86,830.30 barrels (ticket 40), and 299,518.23 barrels (ticket 47). (The discrepancy between receipts and deliveries is accounted for by attributing 63,307.12 barrels to the 156,542.90 barrels delivered on March 3 (ticket 37) and 117,441.34 barrels to the 299,518.23 barrels delivered on March 15 (ticket 47).)

The March Individual Shipper Inventory shows the March 1, 2, and 14 deliveries from LOOP (batch id.'s 02LCP097, 02LCP099, and 02LCP114, respectively). There are "Summary Batch Tickets" for these batches showing the same information, with a composite density of .8501, .8510, and .8510, respectively, and a BS&W percentage (by distillation) of .20%, .30%, and .20%, respectively.

There are LOCAP pipeline meter tickets for the Clovelly field location for the account of Marathon, identifying the crude as being "Seg 10", referring to the batch id.'s (ticket 32 for 02LCP097 on at 0634 on March 1 and off at 2024 on March 1, with a net amount of barrels of 520,322.36, "true" gravity of 34.9; ticket 33 for 02LCP099 on at 0339 on March 2 and off at 1509 PM on March 2, with a net amount of barrels of 360,182.99 barrels, "true" gravity of 34.7; and ticket 36 for 02LCP114 on at 2100 on March 13 and off at 0403 on March 14, with a net amount of 300,189.09 barrels, "true" gravity of 34.7). There are receipt tickets for the St. James Terminal for the account of Marathon identifying the crude receipted as being "#60 Seg 10 ITM" (ticket 23, API gravity of 33.9, on at 1330 hours on March 2 and off at 0540 hours on March 4, with a quantity of 521,994.83 barrels; ticket 24, API gravity of 34.4, on at 1658 hours on March 4 and off at 2000 hours on March 5, with a quantity of 357,363.01 barrels; and ticket 29, API gravity of 34.1, on at 1307 hours on March 14 and off at 1218 on March 15, with a quantity of 299,949.23 barrels). There are receipt tickets for Garyville (i.e., the location of the refinery) identifying the crude as being "#60 Seg 10 ITM" for the account of Marathon (ticket 37, API gravity of 34.1, BS&W 0.05%, on at 2015 on March 2 and off at 0806 on March 3, with a quantity of 156,542.90 barrels; ticket 38, API gravity of 34.6, BS&W 0.05%, on at 0806 on March 3 and off at 0547 on March 4, with a quantity of 280,013,11 barrels; ticket 39, API gravity of 34.5, BS&W 0.20%, on at 1645 on March 4 and off at 2000 on March 5, with a quantity of 357,041.94 barrels; ticket 40, API gravity of 34.2, BS&W 0.20%, on at 1225 on March 6 and off at 1905 of March 6, with a quantity of 86,830.30 barrels; and ticket 47, API gravity of 34.6, BS&W 0.15%, on at 2005 on March 14 and off at 2053 of March 15, with a quantity of 299,518.23 barrels).

The foregoing evidence (along with certain other evidence or information submitted in this case) is set forth in the summary beginning on the following page. We note that the drawback entry which we have evaluated is the drawback entry in which the evidence appears to be the most favorable to the protestant's arguments (i.e., no LOOP documentation was provided for the May 7, 1988, entry; no laboratory reports were provided for the March 24, 1989 ($7,401), and December 23, 1988, entries; and the laboratory reports for the June 26, 1989, drawback entry show a variance in the API gravity larger than any of the laboratory reports or other documents showing API gravity submitted (i.e., the API gravity readings for the vessel "RUTH M" are 34.8 (vessel composite) and 33.8 (automatic in-line sample), the Customs laboratory report API gravity reading is 33.9, the LOCAP ticket "true gravity" readings are 34.0 and 27.4, the St. James terminal ticket API gravity reading is 32.9, and the Garyville ticket API gravity reading is 33.1). We note that in the case of both drawback entries for which laboratory reports were provided the location of the factory in the drawback entry is stated to be Detroit, Michigan, but the records provided show movements between the LOOP caverns and Garyville, Louisiana. Obviously, in a drawback claim based on receipt and use by the drawback claimant's Detroit refinery, establishment that the designated imported merchandise was delivered to Garyville (if that can be established by the described records) does not establish that the designated imported merchandise was delivered to Detroit.

* * * * *

SUMMARY OF SUPPLEMENTAL EVIDENCE

IMPORT

02/26/86 908,265 bbls. of Mexican Isthmus Crude, Class III imported on HOUSTON TRADER (Lab report: API 35.1, 34.7; water & sed. .10%, .2%; sulfur content 1.22%, 1.27%

RECEIPT INTO LOOP

02/27 904,633.81 bbls. of Mexican Isthmus Crude receipted into LOOP, Cavern 10, Segment 10 from HOUSTON TRADER (API stated to be 34.5; BS&W .35%), ID. 02ITM048 (according to records, there would be 82,701.4 barrels of crude in this cavern, this segment, carried over in Marathon's account).

OUTPUT FROM LOOP (to LOCAP); INPUT AND OUTPUT APPEAR TO BE ON FIFO BASIS, BUT ONLY AGAINST MARATHON'S INPUTS AND OUTPUTS; EVEN THOUGH THESE FACILITIES ARE OWNED AND USED BY 5 PETROLEUM COMPANIES, AND ARE USED BY OTHERS

03/01 519,281.51 bbls. (specific gravity .8501; BS&W .20%), ID. 02LCP097

03/02 359,102.49 bbls. (specific gravity .8510; BS&W .30%), ID. 02LCP099

[NOTE: On 03/08/86 there was an input into cavern 4, segment 10 of 601,945.10 (ID: 02ITM057) of Mexican Isthmus crude imported on the HOUSTON TRADER, with an API gravity of 33.6 and BS&W of .25%.]

03/14 299,588.8 bbls. (specific gravity .8510; BS&W .20%), ID. 02LCP114

RECEIPT BY LOCAP AT CLOVELLY FOR TRANSPORT BY PIPELINE TO ST. JAMES (DURING TRANSPORT BY THIS PIPELINE, TO EXTENT POSSIBLE CRUDE IS NOT COMMINGLED)

03/01 520,322.36 bbls. (API 34.9, BS&W 0.00%) crude from Seg. 10 (reference 02LCP097) between 0634 and 2024 (# 32)

03/02 360,182.99 bbls. (API 34.7, BS&W 0.00%) crude from Seg. 10 (reference 02LCP099) between 0309 and 1509 (# 33)

03/13 300,189.09 bbls. (API 34.7, BS&W 0.00%) crude from Seg. 10 (reference 02LCP114) between 2100 (March 13) and 0403 (March 14) (# 36)

RECEIPT AT ST. JAMES TRANSSHIPMENT TERMINAL WHERE CRUDE IS "USUALLY" DELIVERED INTO 1 OF 3 SEGREGATED TANKS FOR SHIPMENT

03/02 521,994.83 bbls. (API 33.9, BS&W .05%) crude from #60 Seg. 10 ITM between 1330 (March 2) and 0540 (March 4) (# 23)

03/04 357,363.01 bbls. (API 34.4, BS&W .05%) crude from #60 Seg. 10 ITM between 1658 (March 4) and 2000 (March 5) (# 24)

03/14 299,949.23 bbls. (API 34.1, BS&W .10%) crude from #60 Seg. 10 ITM between 1307 (March 14) and 1218 (March 15) (# 29)

DELIVERY AT GARYVILLE, LA. (SITE OF REFINERY)

03/02 156,542.90 bbls. (API 34.1, BS&W .05%) crude from 60 Seg. 10 ITM between 2015 (March 2) and 0806 (March 3) (# 37)

03/03 280,013.11 bbls. (API 34.6, BS&W .05%) crude from 60 Seg. 10 ITM between 0806 (March 3) and 0547 (March 4) (# 38)

03/04 357,041.94 bbls. (API 34.5, BS&W .20%) crude from 60 Seg. 10 ITM between 1645 (March 4) and 2000 (March 5) (# 39)

03/06 86,830.30 bbls. (API 34.2, BS&W .20%) crude from 60 Seg. 10 ITM between 1225 (March 6) and 1905 (March 6) (# 40)

03/14 299,518.23 bbls. (API 34.6, BS&W .20%) crude from 60 Seg. 10 ITM between 2005 (March 14) and 2053 (March 15) (# 47)

SUMMARY

Based on FIFO accounting and times of delivery and receipt (i.e., there were 82,701.4 bbls. in Marathon's account for cavern 4, segment 10 when the import was delivered to LOOP and that, together with the timing of the deliveries to Garyville appears to preclude the 03/02 delivery from being attributed to the import), the last four deliveries to Garyville may be attributed to the import. A comparison of the import to the Garyville deliveries is as follows:

Import Garyville deliveries

API 35.1 - 34.7 34.2 - 34.6 Water & Sed. .10, .2% .05 - .2% Sulfur cont. 1.22 - 1.27 None provided

* * * * *

Even using above-described records most favorable to the protestant, and even if we make the most favorable assumptions possible on the basis of these records (and if we ignore the fact that in the two drawback entries for which laboratory reports were provided there is no evidence tracing the transportation of the imported crude from the LOOP caverns to the factory where the manufacturing operations took place, according to the drawback entry), we are not convinced that the protestant has established that the imported crude oil which serves as the basis for drawback in this case was received at the refinery. The imported crude was commingled with crude of this drawback claimant and the crude oil of other owners of the LOOP. In our September 28, 1989, ruling (see above), we held this was not permissible and, for the reasons given above, we are in this decision affirming that ruling.

Even if commingling such as occurred in this case of merchandise before its delivery at the factory of the manufacturer or producer were permitted, the provision in the Customs Regulations providing for the use of accounting methods to identify lots of commingled merchandise for drawback purposes requires that the lots of merchandise be fungible (as do the rulings on this issue, cited above). As noted above in our discussion of fungibility, among the key elements for determining fungibility of crude oil are API gravity, sulfur content, and pour point. In this case, although specifications for the API gravity are provided for the imported merchandise, the merchandise in transport, and the merchandise delivered to the refineries, sulfur content is provided only for the imports for two entries (and not for the merchandise in transport and as delivered to the refineries) and pour point is not provided at all. In view of the commingling which occurred after the analysis of the imported crude oil (i.e., in which the sulfur content was analyzed) in the LOOP and in view of the possible commingling of the merchandise after it left the LOOP (as described above), we believe that the additional evidence provided by the protestant does not at all establish the fungibility of the imported merchandise and the merchandise with which it was commingled in its storage and transportation to the refinery. We believe that the summary of supplemental evidence, above, clearly shows the problems involved in this regard.

AMENDED CLAIMS BASED ON NON-LOOP IMPORTS

As an alternative argument, if Customs holds that the importations of crude oil commingled in the LOOP storage caverns may not serve as a basis for drawback in the protested claims, the protestant contends that the May 14, 1992, revision of the unliquidated claims by the substitution of crude oil imports received at ports other than the LOOP (and not involving "pre- receipt commingling") must be deemed to have been timely filed.

Under 19 U.S.C. 1313(r), as added by section 232 of Public Law 103-182 (and effective as to this protest, see above):

A drawback entry and all documents necessary to complete a drawback claim, including those issued by the Customs Service, shall be filed or applied for, as applicable, within 3 years after the date of exportation or destruction of the articles on which drawback is claimed .... Claims not completed within the 3-year period shall be considered abandoned. No extension will be granted unless it is established that the Customs Service was responsible for the untimely filing.

Thus, the provision now in the Customs Regulations (19 CFR 191.61) was enacted into law by Public Law 103-182 (with the addition of the conforming provision for destruction). House Report 103-361 (supra, at p. 130) explains this provision as "set[ting] a period of 3 years from the date of exportation or destruction in which to file a complete claim."

In our interpretation of 19 CFR 191.61, we have taken the position that to be complete, the designated imports and the exports upon which a drawback claim is based must be included in a drawback claim. We have ruled that the provision in 19 CFR 191.64, under which a claimant may amend or correct a drawback entry or file a timely supplemental entry with the permission of the regional commissioner, is governed by the 3-year time limit for completion of a claim. We have ruled that corrections which only perfect a drawback claim may be permitted after the 3-year period, but a claim may not be amended by expanding the scope of the claim after the expiration of the 3-year period. Adding different consumption entries designating different imported merchandise would be such an expansion of the scope of a drawback claim. (See, in regard to the foregoing, ruling 224107, dated February 23, 1993, in which it was ruled that drawback claims could not be amended after the 3-year period when an audit (initiated prior to the expiration of the 3-year period; audit report dated after expiration of the 3-year period) recommended partial denial of the claims and the claimant attempted to amend the claims with the use of other imports "that were encompassed and verified in the audits, yet still had unused portions available to claim." See also, our letter of June 26, 1992 (File: DRA-1-CO:R:C:E PH), setting forth Customs position on this issue in regard to H.R. 5100, 102d Cong., 2d Sess., a predecessor to title VI of Public Law 103-182.)

In the five protested claims, the months of export were as follows:

May 7, 1987, claim October 1985 December 23, 1988, claim February 1986 March 24, 1989, claim ($3,459) April 1986 March 24, 1989, claim ($7,401) May 1986 June 26, 1989, claim July 1986

Thus, in each of these claims the audit was initiated (in June of 1988) before the expiration of the 3-year period for completion of the claims and the audit report was issued after the expiration of the 3-year period. This is almost on "all-fours" with the February 23, 1993, ruling cited above, which interpreted the provision in 19 CFR 191.61 as not allowing the sort of amendment proposed in this case. As stated above, the provision in section 191.61 has now been enacted into law (with the addition of the conforming provision for destruction), resulting in less discretion for Customs in this matter. Customs simply has no authority to permit the amendment of a drawback claim (by the addition of different imports than originally claimed) after the expiration of the 3-year period after exportation, unless it is established that Customs was responsible for the untimely filing.

In the case of the protested claims, we fail to see how Customs could have been responsible for the untimely filing, since the audit report was not issued until after the expiration of the 3- year period (as in the February 23, 1993, ruling cited above) and the request for Internal Advice on the effect of the importations through LOOP was not sent to Headquarters until after expiration of that period (i.e., the date of the Internal Advice request is September 28, 1989). The protestant contends that the delay in filing the amendments to the claims (i.e., in designating different entries) was occasioned by Customs and was not the fault of the protestant. According to the protestant:

The delay occurred because Customs undertook the audit and identified a new legal issue, i.e., whether the commingling of crude oil received at the LOOP precludes drawback designation. * * * It would be wholly inequitable for Customs to take the position that a drawback claimant is prohibited from modifying a claim after three years from the applicable export date(s), while Customs is free to review claims and rule upon their sufficiency at any time, even after the three-year period. * * * The only fair and reasonable interpretation of the regulations that authorize the amendment of drawback claims is to permit the tolling of the three-year claim completion period during the time of Customs's review. Certainly, that time period must be tolled while Customs Headquarters considers an internal advice request. [Memorandum in support of protest, pp. 12, 13.]

As stated above, Customs has not followed the protestant's proposed interpretation (in the February 23, 1993, ruling cited above). Further, H. Report 103-361, supra, on Public Law 103-182 casts light on this issue. According to that Report (at p. 131), "[w]ith respect to the filing period ... the Committee understands that Customs would have 3 years from the date of payment of a claim to initiate the verification of that claim." (Emphasis added.) Thus, the legislative history for the statute enacting into law the 3-year limit on amendments to drawback claims clearly does not contemplate a tolling of the 3-year period when an audit is initiated, it requires Customs to initiate the audit prior to the expiration of that 3-year period. As for the contention that the 3-year time period should be tolled while Customs Headquarters considers an internal advice request, we note that in this case the internal advice was needed as an integral part of the audit (as recognized by the protestant, see Memorandum in support of protest, pp. 3, 4, 6, in the latter instance, quoting Headquarters' March 18, 1992, letter stating that "[f]inal action on the audit remains pending"). Accordingly, we conclude that the 3-year period should no more have been tolled while the internal advice was under consideration (in this regard, we note that the first internal advice was answered less than 2 months after it was requested and action on the second internal advice request was delayed to give the protestant an opportunity to comment on the issue) than it should have been tolled during the audit.

In regard to other unliquidated entries referred to in the protest, liquidation of those entries should be guided by this decision (i.e., drawback claimed on the basis of imports which were commingled in the LOOP storage cavern as described in this ruling should be denied and amendments adding different imports to drawback claims more than 3 years after the date the exportations in the claims should also be denied). The protestant states that liquidation has been withheld on four claims on which accelerated payment of drawback was made more than 3 years before the audit was initiated. Customs current position in regard to such claims is that drawback may be granted in such cases (i.e., cases where an audit was initiated more than 3 years after payment of drawback and drawback would be denied because of insufficient records) only if the protestant can establish that it did keep adequate records to support its claims and that such records were destroyed after the 3-year period for retention of the records (19 CFR 191.5) (or if the records were destroyed during the 3-year period, that the conditions in Aurea jewelry Creations, Inc., v. United States, 13 CIT 712, 720 F. Supp. 189 (1989), aff'd 9 Fed. Cir. (T) 95, 932 F. 2d 943 (1991) are met) (see, e.g., rulings 224815, dated April 11, 1994, and 224501, February 10, 1994, copies enclosed).

Based on our analysis of this matter in this case, if the four claims in which the protestant states that drawback payment was made more than 3 years before the audit was initiated were based on LOOP importations, we seriously doubt that the protestant can establish that it kept adequate records to support its claims (i.e., because of the failure to show that the imported merchandise was received at the refinery, as shown above). Therefore, unless you have evidence to the contrary in regard to this issue, these claims should be liquidated without drawback.

HOLDING:

There is no authority to grant the protest of the denial of drawback in the protested drawback claims.

The protest is DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed, with the Customs Form 19, by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

Enclosures