FOR-2-05-CO:R:C:E 224628 PH
William J. Phelan, Esq.
Phelan & Mitri
1177 Summer Street
Stamford, Connecticut 06905
RE: Foreign Trade Zone; Vessel and Aircraft Supplies; Jet Fuel;
Accounting Systems; 19 U.S.C. 81c; 19 U.S.C. 1309; 19 CFR
10.59 through 10.65; 19 CFR 146.21, 146.23, 146.25, 146.53,
146.69, 146.71; C.S.D. 82-152; C.S.D. 81-67
Dear Mr. Phelan:
In your letter of March 31, 1993, you requested that Customs
authorize an accounting and identification procedure described in
the materials you submitted with your letter for removal from
foreign trade zones (FTZ's) of jet fuel for use on foreign and
domestic flights. Our ruling follows.
FACTS:
A FTZ would be established at an international airport. The
FTZ would consist of the tanks and pipelines systems designed for
the storage and delivery of jet fuel to aircraft. We assume, for
purposes of this ruling, that all conditions and requirements
imposed by the FTZ Board (see 19 U.S.C. 81a et seq.) are met.
It is proposed that Customs authorize a procedure which would
permit the commingling in common storage of privileged foreign,
non-privileged foreign, and domestic jet fuel. The jet fuel so
commingled would be the property of, and would be used by, more
than one airline. It is proposed that identification of the fuel
removed from the commingled storage be permitted so that domestic
fuel would be considered removed for use on domestic flights and
privileged and/or non-privileged foreign fuel would be considered
removed for use on flights qualifying for duty-free treatment under
19 U.S.C. 1309.
You describe the records which are proposed to be used and
provide sample records for demonstration purposes. These records
would include "Daily Inventory Records" for foreign and domestic
fuel showing for each airline-- 1. Opening inventory.
2. Receipts into the FTZ (these receipts would show the
status (i.e., domestic or privileged or non-privileged
foreign; we note that there would be separate daily
inventory records for foreign and domestic fuel) and the
source of the fuel (i.e., either a FTZ refinery or an
import, for the foreign status fuel)). Each receipt of
jet fuel would be assigned a unique identification code
which would follow all quantities of that fuel through all
FTZ activities.
3. "Transfers out" (i.e., sales within the FTZ to other
airlines; such transfers would be supported by routine
commercial documentation (e.g., purchase orders, contracts,
invoices)).
4. "Transfers in" (i.e., purchases within the FTZ from
other airlines; see above in regard to documentation for
such transfers).
5. Consumption of fuel for foreign (qualifying under 19
U.S.C. 1309) and domestic (non-qualifying under 19 U.S.C.
1309) flights (consumption would be supported by records
of fuelings of individual aircraft (e.g., fueling tickets
or alternate documentation)).
6. Closing inventory.
You state that fuel would be consumed and sold by each airline
on a first-in, first-out (FIFO) basis according to the order of
receipt of the cargoes into the FTZ, regardless of the order of
receipt of separate quantities by the airlines (e.g., regardless
of when fuel already in the FTZ was received in a "transfer in"
from one airline to another). (We note that rather than being a
true FIFO system (in which all commingled merchandise would be
identified on a FIFO basis so that the merchandise longest in the
common inventory was always the first removed, regardless of
status), the proposed accounting procedure is actually for the
identification of merchandise within a particular status and owned
by a particular airline on a FIFO basis (e.g., even if the
merchandise longest in common inventory was non-privileged foreign
status jet fuel owned by airline A, and even if the merchandise
owned by airline B which was longest in common inventory was non-
privileged foreign status jet fuel, under the proposed procedure
airline B could remove domestic status jet fuel and the jet fuel
could be identified as jet fuel in that status owned by airline
B).)
You state that the airlines would manage their fuel
inventories so that in the ordinary course of business the
quantities of foreign and domestic fuel on hand would exceed the
amounts transferred out or consumed for foreign and domestic
flights, respectively. If an airline depletes its inventory of
foreign (or domestic) jet fuel so that it does not have sufficient
quantities to debit its daily consumption of foreign (or domestic)
flights, the airline's domestic (or foreign) inventory would be
debited as necessary to account for total consumption. Such
quantities would be reported in the consumption data on the Daily
Inventory Records. When an airline used foreign fuel on domestic
flights, the airline would file a consumption entry and pay the
appropriate duty. We understand, and assume for purposes of this
ruling, that the entry would be made and applicable duties would
be deposited in the 24-hour period immediately following the 24-
hour period in which the foreign fuel was removed from the FTZ.
In addition to the Daily Inventory Records, the proposed
accounting system includes "Monthly Inventory Summaries" which you
state would summarize and total the data reported on the Daily
Inventory Records. Separate Monthly Inventory Summaries would be
maintained for foreign and domestic jet fuel. The records would
show, for each airline and in total:
1. Opening inventories.
2. Monthly FTZ receipts.
3. Monthly transfers out.
4. Monthly transfers in.
5. Monthly consumption.
6. Closing "book" inventories.
You state that on the last day of each month, a physical
inventory of all the fuel in the system would be taken and the
"book" and "physical" quantities would be reconciled. Because
foreign and domestic fuels are commingled, this reconciliation
would be effected by attributing to foreign and domestic fuels the
difference between the book and physical inventories on the basis
of the percentage of foreign and domestic fuel in the closing book
inventories for the month.
In the reconciliation procedure, if the physical inventory
was greater than the corresponding book inventory, the "gain" would
be distributed to each airline based on its percentage of total
consumption of jet fuel during the month and the month's "gain"
would be included in the appropriate opening inventory for the
following month. If the physical inventory was less than the
corresponding book inventory, the "loss" would be distributed on
the same basis to each airline and the month's "loss" would be
included in the appropriate opening inventory for the following
month. "Gains" and "losses" would be attributed to foreign and
domestic fuels as described in the immediately preceding paragraph.
ISSUES:
(1) Are the FTZ accounting procedures, provided for under
current law and regulations, met in the described proposal?
(2) Are the procedures for removal from a FTZ, provided for
under current law and regulations, met in the described proposal?
(3) Are the procedures for reconciliation of "book" and
"physical" inventories and for attributing "losses" and "gains" in
the described proposal in accordance with current law and
regulations?
LAW AND ANALYSIS:
Under 19 U.S.C. 1309(a), "[a]rticles of foreign or domestic
origin may be withdrawn ... from ... [a FTZ] free of duty and
internal-revenue tax" for supplies of foreign or United States
vessels or aircraft "actually engaged in foreign trade or trade
between the United States and any of its possessions, or between
Hawaii and any other part of the United States or between Alaska
and any other part of the United States ... [except that the
provisions for free withdrawals in this section are not applicable
to petroleum products for aircraft in flights exclusively between
Hawaii or Alaska and any United States airport]." The Customs
Regulations pertaining to section 1309 are found in 19 CFR 10.59
through 10.65.
The statute governing the creation and operation of FTZ's is
the Foreign Trade Zones Act of 1934, as amended (48 Stat. 998; 19
U.S.C. 81a through 81u). Under 19 U.S.C. 81c(a), foreign and
domestic merchandise of every description (except prohibited
merchandise) may be brought into a FTZ without being subject to
the U.S. Customs laws and may there be, among other things, stored,
mixed with foreign or domestic merchandise, or otherwise
manipulated and be exported, destroyed, or sent into the U.S.
customs territory. When foreign merchandise is so sent from a FTZ
into U.S. customs territory it is subject to the U.S. laws and
regulations affecting imported merchandise. Articles of the United
States and articles previously imported on which duty and/or tax
has been paid, or which have been admitted free of duty and tax,
may be taken into a FTZ from the U.S. customs territory, placed
under the supervision of the appropriate Customs officer, and,
whether or not they have been combined with or made part of other
articles while in the FTZ, be brought back thereto free of quotas,
duty, or tax. If the identity of such articles (i.e., the
"domestic status" articles described in the preceding sentence) has
been lost, articles not entitled to free entry by reason of
noncompliance with the requirements under the authority of this
provision are treated as foreign merchandise if they reenter the
customs territory. The Customs Regulations issued under the
authority of this statute are found in 19 CFR Part 146.
We assume, for purposes of this ruling, that the requirements
for admission into a FTZ are complied with in this case (see 19 CFR
Subpart C and section 146.22). As stated above, we also assume,
for purposes of this ruling, that all conditions and requirements
imposed by the FTZ Board are met. At issue then, are the
accounting procedures for the merchandise while it is in the FTZ,
the procedures for removal of the fuel from the FTZ, and the
procedures for reconciliation.
The general requirements for inventory control and
recordkeeping in a FTZ are provided in 19 CFR 146.21. Under this
provision, a FTZ operator is required to maintain inventory control
and recordkeeping systems capable of: (1) accounting for all
merchandise undergoing operations (listed in the provision) in a
FTZ, including the admission into, storage in, and/or removal from
a FTZ; (2) producing accurate and timely reports and documents as
required by the applicable Customs Regulations; (3) identifying
shortages and overages of merchandise in a FTZ in sufficient detail
to determine the quantity, description, tariff classification, zone
status, and value of the missing or excess merchandise; (4)
providing all information necessary to make entry for merchandise
transferred to the Customs territory; and (5) providing an audit
trail to Customs forms from admission through transfer of
merchandise from a FTZ either by zone lot or Customs authorized
inventory method. Under 19 CFR 146.23(a)(1), which provides for
the accountability for merchandise in a FTZ, a zone lot number or
unique identifier is required to be used to identify and trace
merchandise. Under paragraph (b) of this provision, inventory
records are required to specify by zone lot or unique identifier
the following information: (1) location of the merchandise; (2)
zone status of the merchandise; (3) cost or value of the
merchandise; (4) beginning balance, cumulative receipts and
removals, adjustments, and current balance on hand by date and
quantity; (5) destruction of the merchandise; and (6) scrap, waste,
and by-products. Under paragraph (a)(2) of this section, fungible
merchandise may be identified by an inventory method authorized by
Customs which is consistently applied, such as FIFO, and using a
unique identifier. Under paragraph (c) of this provision, the FTZ
operator is required to take at least an annual physical inventory
of all merchandise in the FTZ and to notify Customs of any
discrepancies in accordance with 19 CFR 146.53 (see also 19 CFR
146.25, under which the operator is required to prepare an annual
reconciliation report for Customs).
We have issued a number of rulings on the above requirements.
In Customs Service Decision (C.S.D.) 82-152, we addressed the issue
of "... whether the identity of the domestic jet fuel, privileged
foreign jet fuel, and nonprivileged foreign jet fuel [in a FTZ] can
be maintained after the mixing [in the FTZ] so that the portion of
the combined product attributable to the domestic jet fuel may be
returned to Customs territory free of duty." We held in the
affirmative (i.e., a known volume of finished specification
domestic jet fuel could be mixed in a FTZ with a known volume of
finished specification foreign jet fuel and retain its identity as
domestic jet fuel if the proportions of the domestic and foreign
components were determined by independent volume measurements prior
to their being mixed and assuming that it is possible to accurately
and rationally calculate the quantity of domestic components in the
mixture). See also, C.S.D. 81-67, holding similarly for the
mixing, in specified quantities, and co-feeding of privileged
domestic and non-privileged foreign crude oil into a distillation
unit and the accounting for the resultant refined products (i.e.,
the resultant products were permitted to retain their zone identity
if the quantities derived from each could be established through
approved inventory control and accounting procedures) (note that
C.S.D. 81-67 provides for the shipment of finished products "on a
[FIFO] basis within each status, foreign or domestic ..." (emphasis
added)).
Thus, Customs has permitted merchandise to retain its FTZ
status in operations similar to that under consideration. We
conclude, except in regard to the procedures for the physical
inventory, reconciliation, shortages and overages (discussed
below), that the accounting procedures described herein and in your
submission meet current statutory and regulatory requirements.
Removal of merchandise from a FTZ is provided for in the
Customs Regulations as described below. Under 19 CFR 146.62 and
146.63, entry is required for foreign merchandise which is to be
entered for consumption. The general provisions for exportation
from a FTZ are found in 19 CFR 146.67, under which transfers from
a FTZ for direct exportation or transportation and exportation are
required to be made on Customs Form 7512. Removals from a FTZ of
merchandise under 19 U.S.C. 1309 are also required to be made on
Customs Form 7512 (19 CFR 146.69). Under 19 CFR 146.43(b), no
application or permit is required for the transfer to the Customs
territory of domestic status merchandise except when it is mixed
or combined with merchandise in another zone status (in this
regard, note the above-cited rulings on how domestic status
merchandise may retain its status when mixed with merchandise of
another status). Under 19 CFR 146.71, no merchandise (with an
exception inapplicable in this case) may be transferred from a FTZ
without a Customs permit on the appropriate entry or withdrawal
form or other document as required under 19 CFR Part 146.
We have considered the applicability of the statutes and
Customs Regulations relating to Customs bonded warehouses (note
that there also the filing of an entry or a Customs Form 7506 or
7512 is required before withdrawal of merchandise; see 19 CFR
144.31 - 144.39 and 10.60 and 10.62) in an analogous situation
(letters dated October 20, 1989 (File: 221483), May 8, 1990 (File:
222258), and April 29, 1991 (File: 222914)). In these rulings,
we permitted the transportation (after removal from a Customs
bonded warehouse under 19 U.S.C. 1309) in a single hydrant fueling
system of bonded jet fuel with unbonded jet fuel if (assuming
strict controls and timely accounting) the fueling system was
equipped with certain physical safeguards and if entry was made and
duty paid for any quantity of bonded fuel which was introduced into
the hydrant system when a like quantity was not loaded on a
qualified (under 19 U.S.C. 1309) aircraft within 24 hours of the
introduction of the bonded fuel into the hydrant system. We stated
that we were willing to defer the collection of duties (required
when the withdrawal from the warehouse for consumption was filed;
19 CFR 141.101(b))) for 24 hours. In an October 15, 1991, ruling
(File: 223268), these rulings were applied to fuel transported
from a FTZ and introduced into such a single hydrant system and it
was made clear that the requirement for loading a qualified
aircraft within 24 hours of the introduction of the bonded fuel
into the hydrant system meant that the fuel must be so loaded in
the same 24-hour period (defined as a 24 hour period beginning at
12:01 a.m. and ending at 12:00 midnight).
As indicated above, the above rulings may be applied to the
situation under consideration (i.e., because the requirements for
withdrawal from a warehouse are similar to those for removal from
a FTZ; note that we applied the above-described single hydrant
fueling system rulings to jet fuel removed from a FTZ under 19
U.S.C. 1309). Because in the situation under consideration the
jet fuel is not removed from the FTZ until loading on aircraft,
the safeguards in the physical layout of the hydrant system (e.g.,
check valves to prevent backflow) are unnecessary in this case.
The proposal includes strict controls (i.e., the Daily Inventory
Records for foreign and domestic fuel showing for each airline
opening and closing inventories, receipts (with a unique
identification code) into the FTZ, transfers in and out and
commercial documentation supporting such transfers, and consumption
of fuel for foreign and domestic flights supported by fueling
tickets or similar documentation, as well as a monthly physical
inventory of the fuel in the FTZ) and timely accounting. If an
airline depleted its inventory of domestic jet fuel so that it did
not have sufficient quantities for its consumption that day for
domestic (non-qualifying under 19 U.S.C. 1309) flights, the
airline's foreign inventory would be debited as necessary to
account for the consumption of jet fuel on domestic flights. This
would be reported on the Daily Inventory Record and the airline
would file a consumption entry and pay the applicable duty in the
24-hour period immediately following the 24-hour period in which
the foreign fuel was loaded onto the non-qualifying aircraft.
Under the proposed accounting procedure, the airline's foreign
inventory would be debited on the FIFO basis described above (i.e.,
foreign receipts, identified with a unique identification code
showing FTZ status, would be debited on the basis of first received
in the FTZ).
Based on the above discussion, we conclude that the proposed
procedures for removal of fuel from the FTZ are permitted by
current law and regulations (as interpreted by the above rulings).
As stated above, the Customs Regulations require a physical
inventory of all merchandise in a FTZ at least annually. The FTZ
operator is required to notify Customs of any discrepancies. The
FTZ operator is also required to prepare an annual reconciliation
report for the FTZ (19 CFR 146.23(c) and 146.25). The procedures
for shortages and overages in a FTZ are set forth in 19 CFR 146.53.
Under 19 CFR 146.53(a)(3), a FTZ operator is required to
report to Customs any shortage of 1 percent or more in the quantity
of merchandise in a lot or covered by a unique identifier, if the
missing merchandise would have been subject to duties and taxes of
$100 or more upon entry into the Customs territory. Furthermore,
the operator is required to record upon identification all
shortages and overages, whether or not they are required to be
reported as in the preceding sentence, in its inventory control and
recordkeeping system, and to record all shortages and overages in
its annual reconciliation report (see above). Under 19 CFR
146.53(c), the FTZ operator is responsible under its FTZ Operator's
bond for shortages (unless Customs is satisfied that one of the
listed excuses pertains). Upon demand by Customs, the FTZ Operator
is required to make entry for and pay duties and taxes applicable
to merchandise which is missing or otherwise not accounted for.
In regard to overages, under 19 CFR 146.53(d), the person with the
right to make entry of the merchandise shall file, within 5 days
after identification of an overage, an application for admission
of the merchandise to the FTZ or file a consumption entry for the
merchandise (if such application of entry is not timely made, the
merchandise is required to be sent to General order).
The procedures proposed for handling shortages (described as
"losses" in the proposal) are not consistent with the above (i.e.,
in the proposal monthly "losses" would be attributed to foreign and
domestic status fuel on the basis of proportionate use and would
be distributed to each airline on the basis of its percentage of
total monthly consumption). Under the Customs Regulations, these
"losses" are the responsibility of the FTZ operator, who, upon
demand by Customs, is required to make entry for and pay duties
applicable to the fuel (Note: Customs would have no objection if
the airlines participating in the proposed operation decided to
apportion duties and taxes among themselves on the above basis, but
the FTZ operator must be responsible to Customs, and has a bond
guaranteeing to do so (see 19 CFR 113.73(b))). Furthermore, since
the identity of the merchandise included in "losses" would have
been lost, under 19 U.S.C. 81c(a), it could not be proportionately
attributed to domestic and foreign merchandise; it would all have
to be attributed to the foreign merchandise (if privileged and non-
privileged foreign status merchandise could have been included in
the "losses" according to the FTZ records, the losses would be
attributed to the foreign status merchandise subject to the higher
rate of duty (see 19 CFR 146.2(a)(3))).
In the proposed procedures, overages (described as "gains" in
the proposal) would also be attributed to foreign and domestic
status fuel on the basis of proportionate use and would be
distributed to each airline on the basis of its percentage of total
monthly consumption. Attribution of gains (or overages) to foreign
and domestic status fuel is inconsistent with the above-described
Customs Regulations; either all of the gains would have to be
entered under a consumption entry or application for admission into
the FTZ would have to be timely made under 19 CFR 146.53(d).
Because it would have no potential effect on the revenue, we have
no objection to attributing the gains to the airlines on the basis
of their monthly consumption, assuming that there is a written
agreement on the attribution of the gains so that right to make
entry (see 19 CFR 141.11 et seq.) can be established. The airlines
to which the "gains" were attributed would be required to make
entry or application for admission into the FTZ, as stated above,
and failure to timely do so would result in the fuel for which no
such entry or application was made being sent to General Order.
HOLDINGS:
(1) Except in regard to the procedures for the physical
inventory, reconciliation, shortages and overages (see below), the
described FTZ accounting procedures described herein and in your
submission meet current statutory and regulatory requirements (see
C.S.D.'s 82-152 and 81-67).
(2) The proposed procedures for removal of the fuel from the
FTZ (i.e., requiring the described records and accounting and,
within 24 hours, the filing of a consumption entry and the deposit
of duties for foreign fuel which, according to the Daily Inventory
Records, would have to have been used on a non-qualifying (under
19 U.S.C. 1309) flight) are permitted under current law and
regulations (as interpreted in the rulings cited in the LAW AND
ANALYSIS portion of this ruling).
(3) The procedures for reconciliation of "book" and
"physical" inventories in the described proposal, and for
attributing "losses" and "gains" are not in accordance with current
law and regulations. To comply with current regulations, the
proposal would have to be modified as indicated in the LAW AND
ANALYSIS portion of this ruling. I.e., gains and losses could not
be attributed to foreign and domestic status fuel on the basis of
proportionate use; instead all gains would have to be timely
entered under a consumption entry or application for admission into
the FTZ would have to be made and all losses would be subject to
entry and the payment of duty, upon demand by Customs, as foreign
merchandise of the status (privileged or non-privileged) subject
to the higher rate of duty. Although gains could be attributed to
airlines (which would be required to make the consumption entry or
application for admission into the FTZ) on the basis of their
monthly consumption, provided there was an appropriate written
agreement establishing right to make entry, losses would have to
be attributed to the FTZ operator which would be responsible, under
its FTZ Operator's bond, for making entry for, and paying duties
on the fuel, upon demand by Customs. (In addition, the
requirements for promptly notifying Customs of any discrepancies
and for the annual reconciliation report (see 19 CFR 146.23,
146.25, and 146.53) must be complied with.)
Sincerely,
John Durant, Director
Commercial Rulings Division