HQ 226238
WAR-5/TRA-11/ENT-7-07-RR:IT:EC 226238 AJS
Mr. Thomas Winkowski
Airport Director
U.S. Customs Service
Los Angeles International Airport
11099 La Cienaga Boulevard
Los Angeles, CA 90045
RE: Internal Advice; Duty-free sales enterprises; International travel merchandise; 19 U.S.C. 1555(b); 19 U.S.C. 1555(b)(8)(D); 19 CFR 19.35; 19 U.S.C. 1555(b)(2); HQ 224772; 19 U.S.C. 1555(b)(4); Customs Directive 3280-08; 19 U.S.C. 1490; 19 U.S.C. 1491; 19 CFR 18.24.
Dear Sir:
This is in reply to your request for Internal Advice of May 31, 1995, your file WAR-6- LA:I:LAX:C, concerning Delta Airlines, Inc (DAI) and International Travel Merchandise (ITM).
FACTS:
DAI has requested permission to implement a procedure for accepting advance orders of ITM from passengers on their Narita to Los Angeles flight. In this procedure, flight attendants onboard the flights would accept advance purchase orders of ITM (e.g., perfume, cosmetics, liquors, gifts and accessories) from passengers to be delivered to such passengers for their scheduled return flights. The advanced purchases would be filled by Inflight Duty Free Shops, Inc. (IDFS) and packaged inside a sealed box for loading as baggage on the return flight back to Japan. IDFS will comply with Customs Directive (C.D.) 3280-08, dated May 9, 1991, "International Travel Merchandise Sold on Board Aircraft". DAI considers this an activity within the ITM program and not within the scope of a "duty-free sales enterprise".
The City of Los Angeles, Department of Airports (DOA) has notified Customs that they believe that DAI's proposal violates its exclusive contract with Duty Free Shops, Inc (DFS). The DOA asserts that if U.S. Customs were to grant a non-DFS company approval to carry out
DAI's proposal, it would be contrary to the protection afforded local airport operators by 19 U.S.C. 1555(b)(4). The airports of Seattle-Tacoma, Honolulu, San Jose, Miami, Orlando and San Francisco have also expressed similar concerns in this matter.
ISSUE:
Whether DAI's proposal falls within the definition of a "duty free sales enterprise" as described in 19 U.S.C. 1555(b)(8)(D) or within the parameters of the ITM program as described within C.D. 3280-08.
LAW AND ANALYSIS:
Section 1908, Title I, of the Omnibus Trade and Competitiveness Act of 1988, enacted August 23, 1988, and effective with respect to section 1908 fifteen days after the date of enactment amended section 555(b) of the Tariff Act of 1930 (19 U.S.C. 1555(b)) to provide, among other things (in section 1555(b)(7)) that the Secretary, by regulation, establish a separate class of bonded warehouses for duty-free sales enterprises, taking into account the unique characteristics of the different types of "duty-free sales enterprises." Please note that "duty-free sales enterprises" are administratively referred to as "duty-free stores."
The Customs regulations (duty-free stores), implementing section 1908 of the Omnibus Trade and Competitiveness Act of 1988 were published in the Federal Register as T.D. 92-81 on August 20, 1992, with an effective date of October 19, 1992. See also 57 FR 47409 (October 16, 1992) and 58 FR 29349 (May 20, 1993). The Customs regulations designated duty-free stores as a new class of Customs bonded warehouse, namely, Class 9 (see 19 CFR 19.35 and 144.37(h)).
19 U.S.C. 1555(b)(8)(D) provides that the term "duty-free sales enterprise" means a person that sells, for use outside the customs territory, duty-free merchandise that is delivered from a bonded warehouse to an airport or other exit point for exportation by, or on behalf of, individuals departing from the customs territory. The different types of duty-free sales enterprises referred to in 19 U.S.C. 1555(b) are airport stores and border stores. See 19 U.S.C. 1555(b)(8)(A) and (B). Border stores include stores on both land and water borders; however, the regulations include seaport duty-free stores within the meaning of "border stores." The statute requires that duty-free stores must be located either within the same port of entry or within 25 miles from the exit point from which a purchaser of duty-free merchandise departs the customs territory. 19 U.S.C. 1555(b)(2)(B); 19 CFR 19.35(b).
The statutes that govern ITM are 19 U.S.C. 1430, 1432, 1490, 1491, 1553 and 1584. The implementing regulations are sections 4.7, 4.7a, 4.11, 4.37, 18.24 -18.26, 122.47, 122.48, 122.133-122.137, and Part 127, Customs Regulations. Also, instructions on that merchandise are
in C.D. 3280-08. The Directive sets procedures to be followed to the extent that they are not in conflict with any statute or regulation. For example, the one-year period for allowing imported merchandise to remain unentered in the Directive was shortened to six months by the North American Free Trade Agreement (NAFTA) Implementation Act (Act of December 8, 1993, 107 Stat 2057, Pub. L. 103-182).
ITM must be reported to Customs on the aircraft or vessel manifest as cargo. When permission is given to land that merchandise and store it in a Customs Approved Storage Room (CASR), that merchandise is not entered and is in Customs custody. Unlike merchandise entered for warehousing under 19 U.S.C. I 555(b) and 1557, ITM has not been entered and is not entitled to remain in that status for five years, as is merchandise entered for warehousing. If ITM remains in a CASR beyond the six-month period, it becomes subject to the general order laws and regulations. The carrier would be required to notify a general order warehouse and the notified warehouse would take custody of that merchandise under 19 U.S.C. 1490 and 1491.
Merchandise in a duty-free shop operating under 19 U.S.C. 1555(b) and the relevant regulations is imported merchandise that has been entered. It is entitled to remain in such a warehouse for up to five years after importation. The statute entitles a proprietor to deliver such merchandise to an outward bound passenger while that person is in the Customs territory so long as the delivery is made at or beyond an exit point. A proprietor who so delivers that merchandise at an exit point is not required to show that the merchandise was exported.
A carrier who stores merchandise in a CASR cannot deliver merchandise to a passenger anywhere in the Customs territory. The carrier must load the merchandise on an aircraft or vessel that is leaving the Customs territory for a foreign destination and must report that loading on the aircraft or vessel outward manifest. ITM so loaded may not be delivered to a passenger until the aircraft or vessel leaves the U.S. Customs territory. That is, such merchandise must be shown to have been exported as defined in 19 CFR 101.1.
The concept of a physical retail store (class 9 bonded warehouse) located in an airport or elsewhere within 25 miles from the exit point (a border store) is central to being a duty-free store. 19 U.S.C. 155(b)(2) requires that the "duty-free sales enterprise" must be at the port of entry or within 25 miles from the exit point. In this case, DAI does not have a physical retail store located in an airport or elsewhere within 25 miles from the exit point. All sales are performed aboard aircraft while the purchased merchandise is required to be stored in a separate facility that is not a retail store open to the public and is not a bonded warehouse under section 1555. Therefore, DAI does not satisfy the description of a duty-free sales enterprise and is not governed by section 1555.
In HQ 224772 (1/13/94), this office addressed the issue of whether a centralized telemarketing sales office is included within the definition of a "duty-free sales enterprise" as defined in 19 U.S.C. 1555(b)(8)(D) and, as such, subject to the 25 statute mile requirement of 19
U.S.C. 1555(b)(2)(8). Customs determined that on the basis of the definition contained in section 1555(b), that a telemarketing company which takes advance orders for duty-free sales over the telephone and which is not the bonded warehouse operator who has control over and responsibility for the duty-free merchandise is not within the scope of the duty-free store law and regulations. In addition, Customs ruled that the telemarketing sales office cannot be designated as a duty-free store operator. Therefore, Customs concluded that a telemarketing office may be located anywhere in arranging advance sales of duty-free merchandise for a duty-free store so long as the actual duty-free shop operator effectuates the sales in a manner which complies with the existing law. Customs noted that it appeared from the facts presented there that the party requesting the ruling was already a duty-free store operator and wanted to either associate itself with a telemarketing company or establish itself as one. Customs additionally noted that the duty-free shop operator (a class 9 bonded warehouse operator), however, must abide by the regulations regarding the 25-mile requirement, that is, the warehouse must be located in the same port or within 25 miles of the port from where the departing passenger leaves the customs territory.
DAI's proposal is factually distinguishable from HQ 224772 on a number of grounds. First, DAI is not merely taking orders for a bonded warehouse operator who has control over and responsibility for the duty-free merchandise. As will be discussed infra, DAI is responsible for the ITM merchandise and compliance with the applicable regulations as the principal on the bond covering the ITM merchandise. Second, DAI is an airline and not a telemarketing sales office, and as such may sell articles aboard aircraft during international flights for exportation. Third, in HQ 224772 a duty-free store operator was involved with the sale of merchandise while this is not the case in DAI's proposal. Therefore, HQ 224772 is not applicable to the resolution of this case.
One of the requirements for a duty-free sales enterprise is contained in 19 U.S.C. 1555(b)(4) which provides that "[i]f a State or local or other governmental authority, incident to its jurisdiction over any airport, seaport, or other exit point facility, requires that a concession or other form of approval be obtained from that authority with respect to the operation of a duty- free sales enterprise under which merchandise is delivered to or through such facility for exportation, merchandise incident to such operation may not be withdrawn from a bonded warehouse and transferred to or through such facility unless the operator of the duty-free sales enterprise demonstrates to the Secretary that the concession or approval required for the enterprise has been obtained." In this instance, DFS has the exclusive rights to use LAX for the sale and delivery of duty-free merchandise. The DOA has notified Customs that it would not approve DAI's proposal as it believes that the proposal violates its exclusive contract with DFS. However, DAI is not a duty-free sales enterprise under section 1555 and thus does not need the approval of DOA to operate under the procedure described in this request.
C.D. 3280-08 provides the Customs procedure for the treatment of articles which may be sold aboard aircraft during international flights for exportation by passengers (i.e., ITM merchandise). C.D. 3280-08 specifically provides that articles such as watches, jewelry, cameras,
wearing apparel, and bottles of alcohol (other than 50 and 100 milliliter bottles and those for the dispensing of drinks by the flight crews) have been referred to as "in-flight sales merchandise, boutique items," and similar terms, and are offered for sale not only on aircraft, but on board vessels as well. Id. at 1. Articles of this nature which are withdrawn for exportation may be sold and delivered to passengers in flight for exportation and are referred to as "International Travel Merchandise", a generic term which includes articles sold on board both aircraft and vessels. Id. Thus, we note that ITM merchandise is sold on board an aircraft or vessel. This is an important distinction between ITM and duty-free sales merchandise. As discussed previously, duty-free sales merchandise is sold in a physical retail store located at an airport or elsewhere within 25 miles from the exit point and delivered to the person at or beyond the exit point. DAI asserts that its proposed procedure falls within the ITM program and not within the scope of a "duty-free sales enterprise." This request indicates that IDFS will comply with the requirements of the above C.D. if DAI's proposal is approved.
The rationale for the different treatment of ITM as opposed to duty-free sales merchandise is as follows. ITM is considered to be airline's cargo. See C.D. 3280-08 at 5. Therefore, an airline, like any business, can place its cargo into and withdraw it from a bonded warehouse, in accord with the applicable laws and regulations, for sale outside the bonded warehouse. The distinction which has historically been made between ITM programs and duty free-stores appears to be the point-of-sale of duty-free merchandise. See C.D. 3265-02, "Administration and Supervision of Duty-Free Stores," dated February 18, 1983 at 1 (this directive has been superseded and is cited here for historical reference); C.D. 3280-08 at 1. Specifically, the sale of goods associated with duty-free stores occurs within the bonded warehouse, whereas the sale of aircraft ITM occurs on an aircraft while in-flight.
C.D. 3280-08 states that the facility where the ITM is retained for export on aircraft is referred to as the CASR. Id. at 2. ITM merchandise may arrive at the CASR by entry or withdrawal for immediate exportation, entry or withdrawal for transportation and exportation, warehouse or consumption entry, and various kinds of shipments from BATF bonded or controlled premises. Id. CASR facilities are not themselves required to be bonded. Id. Thus, we note that ITM is not stored for export in a bonded facility. This is another important distinction between ITM and duty-free sales merchandise. As noted previously, duty-free sales merchandise is stored for export in a bonded warehouse.
C.D. 3280-08 also provides that the CASR may be operated by an airline, or by another party, such as an airport concessionaire or caterer, under agreement with the airline. Id. at 3. A caterer may be a party who supplies ITM merchandise to an airline. In this case, it appears that the CASR will be operated by IDFS as a caterer. However, responsibility for the merchandise and compliance with the regulations and this directive remains with the principal on the bond covering the merchandise. Id. Inasmuch as the ITM merchandise is DAI's cargo and being sold
by DAI, it would be required to be the principal on the bond under 19 CFR 18.25. Therefore, responsibility for the ITM and compliance with the regulations and this directive remains with DAI even though IDFS will operate the CASR.
C.D. 3280-08 states that ITM may not be sold (including the taking of orders) or delivered to passengers on outgoing flights until the aircraft has departed from the last U.S. airport (including technical stopovers) for a foreign destination, nor sold or delivered to passengers on incoming flights after the landing at the first U.S. airport of arrival from a foreign destination. Id. at 5. In a memorandum of August 1, 1991, to all Regional Commissioners, the Assistant Commissioner of the Office of Inspection and Control stated that handing out order forms and taking orders in advance, for the purpose of completing a sales transaction upon eventual departure from the U.S. is not in conflict with the intent of this directive. Furthermore, the memorandum stated that the practice of splitting the sales transaction, which is often necessary on short flights, is permissible provided the delivery of goods takes place after departure from the U.S. In this case, orders are merely taken on the inbound flight and delivery is concluded on the outbound flight. Therefore, this procedure does not violate either the above directive or memorandum.
After reviewing C.D. 3280-08, we conclude that DAI's proposal does not violate the ITM procedure. We note that DAI specifically states that it will comply with the subject directive through IDFS. Under the directive, district directors (currently port directors) are responsible for enforcement of the recordkeeping and maintenance requirements of this directive. In addition, port directors will ensure that the carrier has sufficient internal documentation controls and physical security to safeguard the merchandise until properly laden. Spot checks of the CASRs and their procedures shall be made at least once a year to determine that adequate control continues to be exercised as required by the directive. If a spot check reveals significant discrepancies, the matter should be referred to the Field Director of Regulatory Audit for followup.
We note that C.D. 3280-08 additionally states that the transfer of ITM merchandise to the CASR or subsequently to the aircraft does not require the approval of the airport authority under section 19 U.S.C. 1555(b). Id. at 5. This specific language supports the conclusion that ITM merchandise is separate and distinct from the duty-free sales enterprise provisions of section 1555.
HOLDING:
DAI's proposal is a permissible operation within the parameters of the ITM program. DAI's proposal does not falls within the definition of a duty-free sales enterprise as described in 19 U.S.C. 1555(b)(8)(D). As such, DAI does not require the approval from the proper authority pursuant to 19 U.S.C. 1555(b)(4) in order to implement its proposal.
The Office of Regulations and Rulings will take steps to make this 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 60 days from the date of this decision.
Sincerely,
Director,
International Trade Compliance Division