CLA-2 CO:R:C:G 086276 JGH
Ms. L. L. Elsenhans
Business Manager-Solvents
Shell Chemical Company
One Shell Plaza
P.O. Box 2463
Houston, Texas 77252
RE: The acceptance of "End-Use" Certification on Importations of Ethanol for the Satisfaction of the "Actual Use Requirements."
Dear Ms. Elsenhans:
This decision concerns the adequacy of Shell's record-keeping system for tracking imported ethanol sales from entry through end use in satisfaction of Customs regulations. At entry, Customs requires the importers of nonbeverage ethanol to comply with the actual use requirements of 19 CFR 10.131139, where it is claimed that the importations will not be used in the production of a motor fuel and, thus, not subject to the additional duties imposed under subheading 9901.00.50, HTSUS.
FACTS:
Shell ships crude industrial ethanol (CIE) from Saudi Arabia to Texas City, Texas, where it is unloaded at a Union Carbide (UCC) facility. A shipment may consist of about 7 million gallons of 170 proof ethanol. The CIE is said to contain about 91 percent ethanol and 8 percent water. At this facility Shell pays UCC to distill the CIE into 190 and 200 proof finished ethanol. Shell retains 45 percent of the shipment and sells UCC 55 percent. Data sufficient to maintain inventory records on both CIE and finished ethanol at the UCC facility are provided by UCC on a monthly basis. This data is used for internal control, reports to Customs and Bureau of Alcohol, Tobacco and Firearms (BATF), and payment to UCC for product conversion costs. Shell moves the upgraded ethanol it retains through the Shell "proprietary system" to its Distilled Spirits Plants (DSP) at Deer Park, Texas, and Argo, Illinois. From these points it is sent to DSPs at Wilmington, California, and Sewaren, New Jersey.
At these DSPs each gallon is blended with a denaturant according to the individual customer's needs. Extensive record keeping is said to be kept at each DSP to meet BATF requirements, with each gallon received at a DSP being accounted for, with records being maintained for each blend made, and accounting for the amount of ethanol and denaturants used. A material balance is developed monthly based on physical inventory and production records.
ISSUE:
Whether Shell's record-keeping system accurately tracks ethanol importations and satisfactorily identifies the end use of each gallon as required by the actual use requirements of 19 CFR 10.131 through 10.139.
LAW AND ANALYSIS:
Nonbeverage ethanol is subject to an additional duty of 15.85 cents per liter if imported for fuel use or to be used in producing fuel. Subheadings 2207.10.60/9901.00.50, HTSUS.
The basic question is whether Shell's "Blanket End-Use Certification" is capable of keeping track of all the imported ethanol from the time of entry through end use, in order to establish to Customs satisfaction that the imported ethanol was not used for fuel purposes.
The "Actual Use" regulations not only require the importer to state the intended use of the imported material at entry, but in addition, proof must be submitted of the actual end use within the specified period. In view of the amount of ethanol imported and the number of "end-use" customers, the potential number of end use certifications which could be submitted to Customs presents a staggering logistics problem. Therefore, an alternative approach is suggested in U.S. Note 2, subchapter 1, Chapter 99, HTSUS, which defines the ethanol subject to the additional duty; it states, in effect, that the importer must certify to the satisfaction of the Commissioner of Customs that the ethanol was not used for fuel purposes. In the procedure proposed, the importer will certify the nonfuel use at entry, keep track of the ethanol entered, and agree to produce end-use certificates from the ultimate customers, if Customs deems them necessary. It will work as follows:
At entry, records are adjusted for the amount of CIE based on 190 proof equivalent gallons. The volume of CIE entering the United States each calendar year is converted into equivalent volume of 190 proof ethanol. The total of all entries for the year in 190 proof ethanol-equivalent determines the amount of volume that must be end-use certified and accounted for in each inventory year. Of course, in the circumstance where the ethanol is converted to anhydrous (200 proof) ethanol, it would be accounted for based on 100 percent ethanol. Inventory records are kept both on the amount of CIE unloaded at the UCC facility at Texas City and the finished ethanol processed there. Each shipment from this facility is recorded for tracking transportation gain/loss, and appropriate accounting entries made to reflect actual amounts delivered to the DSPS. Extensive records are kept for each gallon blended and sold at the DSP, following BATF requirements, identifying the denaturant used. It is stated that frequent audits are made by external auditors, and also bi-annually by Price Waterhouse.
For 1985 the end-use certification used a material balance approach to account for both imported ethanol and commingled domestically produced ethanol. The certification submissions for 1985 through 1988 used a first in - first out (FIFO) inventory method, matching sales and internal uses in chronological order, on the assumption that the domestic inventory was consumed first.
A review of the "Blanket End Use Certification" procedures reflects that all of the use, sales, losses, gains, or samples in the day-to-day operations are accounted for. End-use blanket certification will be obtained for the amount sold to the final customers. The certificates will be obtained in the first quarter of the subsequent year for ethanol sold to customers in the previous calendar year. These certificates will relate to purchased volumes of ethanol and certify the amount purchased from Shell and state how the ethanol was used. Any ethanol not sold and consumed in the calendar year of entry will be certified in the calendar year when actually consumed.
Certification of end use would utilize a method which would match sales and internal uses in chronological order with import entries. Where the imported product is commingled with domestic, using the FIFO accounting procedure, diversions attributable to imported ethanol would become subject to additional duty.
To facilitate the end-use certification, Shell will require a certificate of the end use to be held by the final purchaser; it will describe in detail how the ethanol was actually used. Such end use certificates will be held available for Customs inspection, upon reasonable notice, for a period of 5 years from date of purchase.
For 1985 acceptable blanket end-use certification was obtained for the end use volumes sold to customers. The end-use customers certified that the volumes purchased from Shell were not used for fuel and stated how they were used.
HOLDING:
1) At entry Shell will certify that the imported ethanol will not be used for fuel and indicate how it will be used.
2) Adequate records will be kept and acceptable accounting procedures followed to track the ethanol from entry through DSPs, sales and end uses.
3) Shell will require ethanol purchasers to state that the ethanol will not be used for fuel and state how it will be used. This would include intermediate purchasers who would be required to remind their customers of the necessity to maintain proper records.
4) "Blanket End-Use Certification" will be furnished Customs in the first quarter of the subsequent year for finished ethanol sold customers in the previous year. The certificates will show the amount sold in 190 proof equivalent gallons and to whom. It will also state that the ethanol was not used for fuel and indicate how it was used.
5) Shell will require that the end user maintain records which establish how the ethanol was, in fact, used.
6) Where commingling of imported and domestic ethanol occur, using the FIFO accounting procedure, diversions to fuel sales attributable to foreign ethanol are subject to additional duty.
7) Ethanol sold but not consumed during the calendar year will not be certified by the end user until consumed.
8) Since Shell is the importer of record, it is responsible under 19 CFR 10,137 for the production of all ultimate end-use certificates, including the ethanol sold to UCC.
9) The End-Use customer will retain records of how the ethanol was finally used, with records which establish the fact being retained for possible Customs inspection ( with reasonable notice being given beforehand) for a period of 5 years from date of purchase.
10) To establish uniformity to the program, Shell will provide Customs with samples of the invoices, sales records or other forms, which would contain the proposed notice given to the customer to remind of his obligation to maintain use-records for the prescribed period and to report any diversion.
Sincerely,
John Durant, Director
Commercial Ruling Division