FOR-2-03/DRA-2-02-CO:R:C:E 224198 JRS
Mr. David J. Tomcik
Chevron U.S.A. Inc.
225 Bush Street
San Francisco, California 94104-4289
RE: Ruling request on the eligibility of duty-paid crude entered
for consumption in privileged foreign status from a FTZ
refinery to be designated as a basis for a substitution
manufacturing drawback claim under 19 U.S.C. 1313(b); 19
U.S.C. 1313(b); 19 U.S.C. 81c; C.S.D. 83-85; C.S.D. 85-33;
C.S.D. 85-49
Dear Mr. Tomcik:
This is in response to your request for a ruling dated
September 17, 1992 (File Ref.: USC.CUSA.05.00; .05.10; .45) on
the above-referenced subject. Our decision follows.
FACTS:
Chevron U.S.A. Inc. (Chevron) imports crude petroleum and/or
finished and unfinished product(s) for further processing and
eventual sale. Typically, Chevron imports large quantities of
foreign class III crude at its refineries at Pascagoula,
Mississippi and Philadelphia, Pennsylvania, and in accordance
with its substitution drawback contract (T.D. 89-89(1)),
designates such duty-paid crude in substitution for other
imported duty-paid, duty-free or domestic class III crude used to
manufacture exported products.
Chevron is currently seeking FTZ status for its Pascagoula
and Philadelphia refineries. Chevron proposes that crude
petroleum will be admitted to the proposed FTZ's in privileged
foreign status. The resulting products manufactured from such
privileged foreign crude will be identified under customs
approved accounting procedures. Upon transfer from the FTZ for
domestic consumption, duty will be based on the crude content of
such products in accordance with the accounting procedure.
Chevron requests that such duty-paid crude from a FTZ refinery is
eligible to be designated as the basis for drawback with the
substitution provisions of 19 U.S.C. 1313(b) at a non-FTZ
refinery where all other provisions of the claim are in
accordance with the Customs regulations (19 CFR Part 191) and its
approved drawback contract, T.D. 89-89(1).
ISSUE:
Whether the duty assessed on entry from a FTZ on an article
that was produced in the zone with the use of privileged foreign
merchandise is eligible for designation as a basis for drawback
under 19 U.S.C. 1313(b) on exported articles manufactured with
merchandise of the same kind and quality at a non-FTZ refinery of
the same manufacturer?
LAW AND ANALYSIS:
In accordance with the Foreign-Trade Zones Act of 1934, as
amended, 19 U.S.C. 81a-u, privileged foreign merchandise admitted
in a foreign-trade zone is imported into the United States (see
C.S.D. 83-21), and its use in manufacture or production therein
constitutes use in the United States (see C.S.D. 81-44). C.S.D.
85-33 and C.S.D. 83-85.
Our response is limited to the privileged foreign status
issue in accordance with Chevron's request for a ruling. As you
probably are aware, the law (19 U.S.C. 81c) permits an importer
the privilege to have the tariff classification, and rates of
duty on foreign merchandise determined and fixed in its condition
as sent into the zone rather than in its condition as sent into
the Customs territory. The request for privilege status for
foreign merchandise cannot be granted after the merchandise has
been manipulated or manufactured so as to effect a change in the
tariff classification of the merchandise. See C.S.D. 81-192
(copy enclosed).
The provisions of 19 U.S.C. 1313(b) provide, in pertinent
part, for the allowance of drawback on exported articles
manufactured or produced in the United States with the use of
imported duty-paid, duty-free, or domestic merchandise of the
same kind and quality. As set forth in the Foreign-Trade Zones
Act (19 U.S.C. 81c), foreign merchandise in a zone is, except as
otherwise provided therein, exempt from the Customs laws of the
United States affecting imported merchandise; therefore, while in
a FTZ such merchandise is exempt from the payment of duty. The
fact that duty on privileged foreign status merchandise used in
the manufacture of an article in a zone is not paid before the
manufacture occurs does not bar drawback under 19 U.S.C. 1313(a).
See C.S.D. 83-85. Although C.S.D. 83-85 addressed only direct
identification manufacturing drawback under 19 U.S.C. 1313(a), it
is equally applicable to substitution manufacturing drawback
under 19 U.S.C. 1313(b).
C.S.D. 85-49 clearly explains that when privileged foreign
or nonprivileged foreign status merchandise is in a foreign trade
zone, it is considered "conditionally free" merchandise until it
enters the domestic market. For that reason, Customs held in
C.S.D. 85-49 that the drawback claim was properly denied since
the articles manufactured from the privileged foreign and
nonprivileged foreign status merchandise and exported from the
zone did not meet the plain language of the substitution
manufacturing drawback law of 19 U.S.C. 1313(b).
Chevron plans to enter the articles manufactured in the FTZ
with the use of privileged foreign status merchandise and
designate those import entries against the exported articles
which were manufactured in the Customs territory pursuant to its
drawback contract for petroleum. It is clear that when duty is
paid on privileged foreign status merchandise upon entry into the
U.S. Customs territory, it becomes "imported duty-paid
merchandise" and thus eligible for designation as "imported duty-
paid" merchandise for drawback under 19 U.S.C. 1313(b). C.S.D.
85-49; see also C.S.D. 83-85; C.S.D. 85-33; C.S.D. 79-464.
However, the date of receipt by Chevron must be the date of
admission into Chevron's subzone. The 3-year period for use of
both the imported, duty-paid merchandise and the substituted
merchandise would start on that same date. Because there would
be no duty-paid entry against which to base a claim of drawback,
the exportation of the articles manufactured at the non-FTZ
refinery would have to be subsequent to the date that the
privileged foreign status merchandise is entered into Customs
territory from the subzone.
We find no bar in permitting the duty-paid articles entered
from the FTZ to qualify as the basis of a drawback claim as
"imported duty-paid merchandise" for the exported goods
manufactured under a section 1313(b) drawback contract at a non-
FTZ refinery, assuming compliance with applicable drawback
statutory and regulatory requirements including same kind and
quality and time limitations.
A drawback claimant must establish, through recordkeeping
and reporting, that the articles which were manufactured in the
foreign trade zone with the use of privileged foreign status
merchandise are, in fact, entered into the Customs territory with
the payment of duty in order to be eligible for drawback
designation under 19 U.S.C. 1313(b). Further, a drawback
contract should clearly set forth the recordkeeping procedures
that will be maintained to establish compliance with the
applicable law, regulations, and this interpretive ruling.
Of course, drawback would be precluded if these articles
were exported from the FTZ rather than entered for consumption
because no import entries would exist which could be designated.
Articles manufactured in the FTZ with the use of substituted
(privileged foreign status) merchandise are not eligible for
drawback when exported unless the substituted merchandise
consists of imported duty-paid or duty-free merchandise. As
stated above, merchandise admitted in the FTZ in privileged
foreign status is conditionally free, not imported duty-paid or
duty-free. See the enclosed copy of C.S.D. 85-49.
HOLDING:
Imported articles in privileged foreign status used to make
new articles in a foreign trade zone that are entered into the
Customs territory with payment of duty are eligible for
designation of the payment of drawback upon the exportation of
other articles made in the Customs territory with the use of
substituted merchandise upon compliance with the applicable laws
(19 U.S.C. 1313(b)) and regulations (19 CFR Part 191).
EFFECT ON OTHER RULINGS:
This ruling extends the application of C.S.D. 83-85 from
19 U.S.C. 1313(a) to 19 U.S.C. 1313(b).
Sincerely,
John Durant, Director
Commercial Rulings Division