ENT-1-RR:IT:EC 225891 CC
Joseph F. Donohue, Jr., Esq.
Donohue and Donohue
26 Broadway
New York, NY 10004
RE: Entry of commingled petroleum products; General Note 17, HTSUS, use of an average inventory method to constructively segregate nondutiable and dutiable goods
Dear Mr. Donohue:
This is in response to your request of December 16, 1994, on
behalf of Amerada Hess Corporation (Hess), concerning the entry
of certain petroleum products.
FACTS:
You state that Hess imports various petroleum products
produced by its wholly owned subsidiary, Hess Oil Virgin Islands
Corp. (HOVIC), in accordance with two Headquarters rulings,
HQ 555032 of September 23, 1988 and HQ 557180 of December 23,
1993). Those rulings hold that such products qualify for duty-free treatment under General Note 3(a)(iv) of the Harmonized
Tariff Schedule of the United States (HTSUS) because the foreign
materials used in their production have undergone a double
substantial transformation and the products do not contain
foreign materials that exceed 50 percent in value. Among the
products covered are No. 2 fuel oil and diesel fuel.
HOVIC anticipates producing some No. 2 oil with materials
that will require only one transformation. Such product will not
be covered by either of the above rulings and will be subject to
duty. Due to storage limitations at the refinery, dutiable No. 2
oil will be commingled with duty-free No. 2 oil in storage tanks
prior to shipment. Similarly, dutiable diesel fuel will be
commingled with duty-free diesel fuel. You request a ruling
finding that commingled No. 2 oil or diesel fuel may be entered
as commingled merchandise pursuant to General Note 17, HTSUS,
segregating the dutiable and nondutiable portions of each
shipment by a recognized accounting method. In addition, you
request that we rule on what documents must be filed with the
entry to report dutiable and nondutiable quantities.
You request to account for the commingled inventory using a
"ratio methodology," which you state is consistent with the
"average method" for inventory management permitted by Customs in
the North American Free Trade Agreement (NAFTA) regulations. See
19 CFR 181, Appendix to Rules of Origin, Part IV, Section 7,
subsection (14) and Schedule X (Inventory Management Methods)
Part II, Section 14 (Average Method). Hess wishes to use this
method on a daily basis, and you have submitted the following
example to illustrate your request:
Assume that refinery records show that 80,000
barrels of nondutiable and 20,000 barrels of dutiable
No. 2 oil are in Tank No. 123 on March 1. On March 2,
50,000 barrels are withdrawn for shipment to the United
States. Hess proposes to enter 40,000 barrels as
nondutiable and 10,000 barrels as dutiable, based on
the 4 to 1 ratio shown in its daily records. Of the
50,000 barrels remaining in storage, 40,000 would be
considered nondutiable and 10,000 dutiable. Assume
that refinery records show that 20,000 barrels of
nondutiable No. 2 oil are added to Tank 123 on March 5,
20,000 barrels of dutiable No. 2 oil are added on March
6, and 15,000 barrels are withdrawn on March 7. Of
that withdrawal, 10,000 barrels would be entered as
nondutiable and 5,000 barrels as dutiable, based on the
2 to 1 ratio for that date. In sum, each day that
product is withdrawn, its dutiable and nondutiable
portion will be based on the dutiable/nondutiable ratio
reflected on the company's records for that day.
Concerning the entry documents in supporting its claims,
Hess proposes to file pro-forma invoices when the goods arrive,
with the commercial invoices arriving after the entry has been
made. Specifically, based on the refinery records described
above, HOVIC will advise Hess at the time of shipment of the
dutiable and nondutiable portions of the cargo, and the
respective quantity of each will be shown on the proforma invoice
(or addendum thereto) filed at the time of arrival and on the
commercial invoice filed subsequent to arrival. Since duty is
ultimately assessed on the discharged quantity, which can vary
slightly from invoice quantity, when the entry summary is filed,
duty will be calculated by applying the dutiable/nondutiable
ratios to the discharged quantity.
The detailed refinery records supporting the dutiable and
nondutiable quantities will be maintained by Hess. Hess, the
importer, acknowledges that it is the responsible entity for the
submission of those production records of its subsidiary and that
Hess is responsible for the accuracy of those records. Hess
acknowledges that those refinery production records are within
the scope of 19 U.S.C. 1508(a) and 1509(f). You state that since
such documentation will consist of daily production, storage and
shipment records, which collectively will constitute considerable
paperwork, Hess proposes not to file such records with each
entry, but to ensure that they are available for review by
Customs in the event such review is desired. You state that Hess
recognizes that a Customs officer at any port of entry could
request such records on a particular shipment at any time, and it
would, of course, supply them.
ISSUE:
May the proposed average inventory method be used to
constructively segregate commingled dutiable and nondutiable No.
2 oil or diesel fuel, pursuant to General Note 17, HTSUS?
LAW AND ANALYSIS:
General Note 17, HTSUS, provides for the commingling of
goods. This note states, it pertinent part, the following:
(a) Whenever goods subject to different rates of duty are
so packed together or mingled that the quantity or
value of each class of goods cannot be readily
ascertained by customs officers (without physical
segregation of the shipment or the contents of any
entire package thereof), by one or more of the
following means:
(i) sampling,
(ii) verification of packing lists or other documents filed at the time of entry, or
(iii) evidence showing performance of commercial settlement tests generally accepted in the trade and filed in such time and manner as may be prescribed by regulations of the Secretary of the
Treasury,
the commingled goods shall be subject to the highest
rate of duty applicable to any part thereof unless the
consignee or his agent segregates the goods pursuant to
subparagraph (b) hereof.
Clearly, the imported merchandise consists of dutiable and
nondutiable merchandise commingled in which the quantity of each
is not readily ascertainable. The imported merchandise,
therefore, will be subject to the highest rate of duty
applicable, which in this case is the dutiable merchandise,
unless one of the three means listed for constructively
segregating the merchandise applies. You claim that the
quantities of dutiable and nondutiable merchandise can be
determined by (ii) the verification of packing lists or other
documents filed at the time of entry.
In Coastal States Marketing, Inc. v. United States, 10 CIT
613, 646 F.Supp. 255 (1986), aff'd 818 F.2d 860 (CAFC 1987), oil
was loaded into a oil tanker in the Soviet Union. The tanker
continued to Italy where more oil was loaded. When the tanker
reached the United States, Customs treated the merchandise as
commingled articles under General Headnote 7, Tariff Schedules of
the United States (TSUS) (currently General Note 17, HTSUS).
Documentation provided at entry enabled Customs to determine the
precise amounts of oil originating from the two countries.
Consequently, Customs assessed duties on the oil of Soviet origin
separately from the oil of Italian origin. The court found that
Customs properly applied Headnote 7(a) for commingled
merchandise.
In HQ 955203, dated June 2, 1994, we discussed Coastal
States Marketing, supra, and the application of the note for
commingled goods (currently General Note 17, HTSUS), stating the
following:
In the event that Customs cannot readily ascertain the
quantity of each commingled good by verification of
documents presented at entry, the applicable rate of
duty is the highest rate applicable to any of the
commingled goods. Clearly, Customs has the authority
to determine what method or methods will be considered
sufficient for this purpose and what information will
be necessary to verify the documents filed at the time
of entry.
The issue that you raise is whether the average inventory
method you propose, contained in the facts portion of this
ruling, is sufficient to constructively segregate the commingled
petroleum for purposes of General Note 17, HTSUS.
The method you propose, which you call the "ratio method" is
not specifically contained in the NAFTA regulations for inventory
management. The "ratio method" essentially accounts for the
quantity of nondutiable and dutiable goods withdrawn from a tank
(and subsequently imported into the U.S.) based on the average of
the nondutiable and dutiable portions deposited in a tank. This
average is calculated on a daily basis.
Schedule X, 19 CFR 181, Appendix to Rules of Origin,
NAFTA, provides inventory management methods for fungible
materials and fungible goods. For fungible materials, the
average method calculates the origin of materials withdrawn from
materials inventory based on the ratio of originating and non-originating material placed into inventory. An example
illustrating the average method for materials is contained in
Addendum A, Example 3. In that example, the average is
calculated on a daily basis, that is the average on the date of
withdrawal is used. This method also calculates the value of
originating and non-originating material withdrawn based on the
average cost of the material in inventory. Therefore, this
method could be described as the "moving average method." See,
e.g., Miller's Comprehensive GAAP Guide (1985), page 24.08.
The situation you describe entails placing the same kind of
petroleum into tanks for storage. No blending or production of
the petroleum takes place in these tanks. Under NAFTA,
therefore, the petroleum would be considered "goods" as opposed
to "materials." Consequently, if your request were made pursuant
to NAFTA, the average inventory method for materials described
above could not apply.
For fungible goods under Schedule X, 19 CFR 181, Appendix
to Rules of Origin, NAFTA, the average method calculates the
origin of fungible goods withdrawn from finished goods inventory
based on the ratio of originating and non-originating goods
placed into finished goods inventory. An example illustrating
the average method for goods is contained in Addendum B, Example
3. That example is consistent with your example in that only the
quantity of the two types of goods (for NAFTA, originating and
non-originating; in your proposal, dutiable and nondutiable) is
considered; the value of the goods is not considered. The major
difference in the two is that for the NAFTA average method, the
calculation of originating and non-originating goods is based on
the ratio in inventory at the beginning of the preceding one-month or three-month period. In your ratio method, the
calculation of dutiable and nondutiable goods is based on ratio
in inventory on the date of withdrawal.
Since the average method for goods described in NAFTA relies
on calculating the ratio based on the preceding one month or
three-month period, we could not accept that method for the
factual situation you pose. Your situation contemplates entering
commingled petroleum under General Note 17, HTSUS, in which it is
necessary to constructively segregate the dutiable and
nondutiable portions for particular entries. Calculating the
dutiable and nondutiable portions of an entry based on the ratio
of those portions contained in inventory in the previous month
would not necessarily reflect what is being withdrawn and entered
for purposes of General Note 17, HTSUS. Calculating the ratio
contained in inventory on the date of withdrawal is a way to
accurately show the quantity of dutiable and nondutiable
petroleum which is subsequently entered. Consequently, the ratio
method you propose would be an acceptable method to
constructively segregate the quantities of dutiable and
nondutiable petroleum which is entered.
Although the ratio method you propose is not specifically
contained in the NAFTA regulations for goods, your request is not
made pursuant to NAFTA. In addition, as stated above, we have
the authority to determine what method or methods will be
considered sufficient for purposes of General Note 17, HTSUS.
Consequently, we conclude, based on the foregoing discussion,
that the ratio method you propose is sufficient to constructively
segregate dutiable from nondutiable commingled petroleum in the
factual situation you have presented.
Concerning entry documentation, your proposal concerning
entry documentation is sufficient, if the refinery records are
made available to Customs by Hess upon request and the following
information is contained in the invoices: statement or
certification by Hess that an average inventory method, described
in this ruling, is being utilized to constructively segregate the
dutiable and nondutiable petroleum; ratio or percentage of
nondutiable and dutiable petroleum; quantities of dutiable and
nondutiable petroleum based on the above percentage or ratio; and
a statement by Hess that the detailed refinery records supporting
the entry, which include daily production, storage, and shipment
records, are available to Customs upon request.
HOLDING:
The ratio method for separating commingled products of a
U.S. insular possession into dutiable and nondutiable categories
is sufficient to constructively segregate under General Note 17,
HTSUS, so long as the importer is responsible for the accuracy of
those entry records and is responsible for their submission to
Customs in accordance with 19 U.S.C. 1508 and 1509.
Sincerely,
Director, International Trade
Compliance Division