CON-13-02-CON-13-03-FOR-2-03
RR:CR:DR 228536 IOR
Sidney H. Kufflik, Esq.
Lamb & Lerch
233 Broadway, 51st Floor
New York NY 10279
RE: Fuel supplies for vessels and aircraft; U.S. operated; 19 U.S.C. 1309(a)(1); sufficiency of documentation; 19 CFR Part 10
Dear Mr. Kufflik:
This is in response to your ruling request dated August 6, 1999, on behalf of the National Association of Foreign Trade Zones (“NAFTZ”), regarding the sale of fuel supplies from Foreign Trade Zones (“FTZs”) to the U.S. Department of Defense by NAFTZ members. This response follows a February 27, 2001 meeting between you, NAFTZ members, representatives of the Defense Logistics Agency and members of my staff.
FACTS:
The NAFTZ members propose to sell fuel supplies from FTZs to the U.S. military for use in vessels and/or aircraft operated by the U.S. military and claim exemption from duty and internal-revenue tax under 19 U.S.C. §1309(a)(1)(A). The NAFTZ takes the position that the contract entered into between the seller and the U.S. military, and the Defense Department’s Inspection and Receiving Report (DD Form 250) is sufficient to satisfy the statutory requirements provided for in 19 U.S.C. §1309(a)(1)(A), and that evidence of lading or actual use is not required. Citing HQ rulings 222825, dated June 28, 1991 and 223901, dated June 23, 1993, the NAFTZ takes the position that the party claiming the exemption needs to establish either that the fuel is used, or intended to be used for supplies of vessels or aircraft operated by the U.S. The NAFTZ takes the position that no customs regulations establish procedures for compliance with section 1309(a)(1)(A), and that Customs Regulations 10.59-10.65 address other provisions of section 1309.
ISSUE:
Whether the Customs Regulations 10.59 through 10.65 are applicable to claims for exemption under 19 U.S.C. §1309(a)(1)(A).
LAW AND ANALYSIS:
The statute in question, 19 U.S.C. §1309(a)(1) provides as follows:
Sec. 1309. Supplies for certain vessels and aircraft
(a) Exemption from customs duties and internal-revenue tax
Articles of foreign or domestic origin may be withdrawn, under such regulations as the Secretary of the Treasury may prescribe, from any customs bonded warehouse, from continuous customs custody elsewhere than in a bonded warehouse, or from a foreign-trade zone free of duty and internal-revenue tax, or from any internal-revenue bonded warehouse, from any brewery, or from any winery premises or bonded premises for the storage of wine, free of internal-revenue tax -
(1) for supplies (not including equipment) of (A) vessels or aircraft operated by the United States, (B) vessels of the United States employed in the fisheries or in the whaling business, or actually engaged in foreign trade or trade between the Atlantic and Pacific ports of the United States or 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, or (C) aircraft registered in the United States and 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;
In 1953 the statute was amended to extend the exemption to supplies withdrawn from foreign trade zones, and to enlarge the classes of vessels and aircraft covered to include all vessels and aircraft operated by the United States. See Pub. L. 243, §11(a), 67 Stat. 514, August 8, 1953 and Senate Report No. 632, 1953 U.S. Code Cong. and Adm. News, p. 2283, 2293. Prior to the amendment, withdrawals from foreign trade zones and vessels and aircraft operated by the U.S. were not covered by the statute.
On p. 6 of the ruling request, the NAFTZ asserts that “[p]resumably because §1309(a)(1)(A) is used so infrequently, there are currently no Customs regulations which establish procedures for satisfying §1309(a)(1)(A).” To the contrary, the regulations in Part 10 are intended to apply to all section 1309 removals from an FTZ. Customs has addressed the section 1309 exemption for withdrawals of supplies from FTZs for vessels and aircraft operated by the U.S., in prior rulings, HQ 222825, dated June 28, 1991, and HQ 223901, dated June 23, 1993. In HQ 223901 we state that the Customs Regulations issued under the authority of section 1309 are found in Customs Regulations 10.59 through 10.65. Specifically regarding FTZs, 19 CFR 146.69 provides:
146.69 Supplies, equipment, and repair material for vessels or aircraft.
(a) General Any merchandise which may be withdrawn duty and tax free in Customs territory under section 309 or 317, Tariff Act of 1930, as amended (19 U.S.C. 1309, 1317), and this chapter, may similarly be transferred from a zone, regardless of its zone status, under those statutes and regulations. Each transfer from a zone for delivery to a qualified vessel or aircraft, will be made on Customs Form 5512 (see §10.60 of this chapter). The person making entry shall furnish a bond on Customs Form 301 containing the bond conditions provided for in §113.62 of this chapter.
Emphasis added. From the language in section 146.69, it is apparent that
the regulations implementing section 1309 are equally applicable to the statute as amended, despite the fact that FTZs are not specifically described in sections 10.59 through 10.65. The reference to section 10.60 in the parenthetical above, and the reference to regulations implementing sections 1309 and 1317, shows that the regulations in Part 10 were intended to apply to section 1309 removals from a zone. Section 146.69, was promulgated in 1986, well after the amendment of section 1309. Clearly it was intended to make the regulations in 10.59 through 10.65 applicable to withdrawals from FTZs under section 1309.
Under 19 CFR 10.59(d), aircraft are deemed to be vessels for the purpose of allowing section 1309 privileges with respect to the application of 19 CFR 10.60 through 10.64. Under 19 CFR 10.62(a)(5) and (6), the vessel that obtained the fuel is to be identified. By virtue of section 10.59(d), that requirement also applies to aircraft. Moreover, 19 CFR 10.62(f) requires that the parties in interest retain records of the transaction to demonstrate eligibility for verification by the Customs Service. Paragraph (e) of section 10.62 provides the procedures and imposes liability for duty if fuel is delivered to an ineligible vessel (or aircraft by virtue of section 10.59(d)). Further, there is no distinction in the language of the statute, between subsections (a)(1)(A) and (B) or (C), that would render the regulations applicable to subsections (B) and (C), but not to (A). Consequently, the assertions by the NAFTZ that there are no regulations implementing section 1309(a)(1)(A) and that it is sufficient to simply express an intent to use the fuel on a qualified vessel or aircraft, without an actual use, are expressly contrary to the existing regulations.
Relying on prior HQ rulings 222825, dated June 28, 1991 and 223901, dated June 23, 1993, the NAFTZ ruling request asserts that eligibility for the section 1309 exemption can be established either by the use of the supplies or the intended use of the supplies, and that “there is no requirement that one must prove that the supplies were actually used in U.S. operated vessels or aircraft, so long as one establishes that the supplies ‘are for use’ in U.S. operated vessels or aircraft.” In HQ 222825, dated June 28, 1991, relied on by the NAFTZ, Customs stated that in order to qualify for the section 1309 exemption “satisfactory evidence of sale and delivery of the petroleum products to the United States Government and that the petroleum products actually were used, or are for use, in vessels or aircraft operated by the United States must be provided to the local Customs authorities.” The NAFTZ’s argument that the cited Customs rulings permit an expression of intended use without an actual use, ignores the facts of the rulings and the context in which they were decided.
The statutory language that the withdrawals of supplies be for vessels and aircraft of the United States, requires either evidence of actual use or evidence of intent. The requirement of intent is not such that an individual can express an intent to use the supplies, and the actual use is thereby not required. The courts instruct that intent can only be inferred from acts and circumstances. American Custom Brokerage (a/c Astral Corp.) v. U.S., 72 Cust. Ct. 245, 375 F.Supp. 1360 (1974) (testimony of vessel owner and vessel captain coupled with the actual return of the vessel to the Mediterranean showed an intent not to bring the vessel permanently into the U.S. and that intent resulted in the absence of an importation). Rentner v. U.S., 15 Ct. Cust. Appl. 147 (1927) (since intent not to sell gowns imported under a TIB entry was contradicted by sales within a few days after importation it was proper to exclude testimony of the importer's employees as to the importer's expressions of intent not to sell the gowns).
In HQ 222825, dated June 28, 1991, Customs permitted an exemption under section 1309 for fuel sold and delivered to the U.S. Government. The exemption was permitted on the basis of a certification from the Defense Fuel Supply Center (DFSC) of the Defense Logistics Agency, that the subject fuel purchases from the withdrawer “during the period in question…have been for use in aircraft and vessels of the U.S. military services including active, reserve, and National Guard components.” Such documentation is not presently provided for in the regulations. Customs determined that the DFSC certification along with the evidence of sale and delivery to the U.S. Government satisfied the requirement that the merchandise actually was used, or was for use, in vessels or aircraft operated by the U.S. Unlike the specific ruling request before us, HQ 222825 concerned past events. Therefore the facts in HQ 222825 do not support the assertion that merely the intended use of the merchandise is sufficient to qualify for the exemption in section 1309. Moreover, in HQ 222825, Customs had the ability to determine compliance with section 10.62(a) of the regulations by conducting a verification under section 10.62(f).
Customs decision in HQ 223901, was a response to a prospective ruling request. In that case, jet fuel was to be transferred via pipeline from the bonded warehouse blending tank into the shipping tank, to await final transfer through dedicated lines onto American flag vessels under charter to U.S. Military Sealift Command to U.S. Defense Department installations. Title was said to pass to the Defense Department at the dock flange between the shipping tank and the vessel. In that ruling Customs stated that the subject merchandise “will be eligible for duty-free treatment under 19 U.S.C. 1309 if it is withdrawn for the qualifying aircraft from the bonded warehouse” (emphasis added). As in HQ 222825, Customs set forth the requirement that in order to prove eligibility under section 1309, “satisfactory evidence of sale and delivery [of the supplies] to the United States Government and that the fuel was actually used, or are for use, in aircraft operated by the United States must be provided to the local Customs authorities. In that case, there was no determination of whether the requirement had been met, as no evidence was provided. In HQ 223901, the delivery of jet fuel to the American flag vessels under charter to U.S. Military Sealift Command, alone, was not sufficient to qualify for the exemption. Customs stated that it required additional evidence regarding the withdrawal for qualifying aircraft, and that the merchandise be transported by bonded carrier, in the event that the proposed American flag vessels were not bonded carriers. That the vessels were under charter to U.S. Military Sealift Command was not sufficient evidence that the fuel was for vessels or aircraft operated by the United States. Therefore, Customs sought additional evidence of use.
There exist court decisions applying section 1309, from which we can determine that a regulatory requirement to insure the intended use of the merchandise is warranted.
In McGoldrick v. Gulf Oil Corp., 309 U.S. 414, 60 S. Ct. 664, 84 L. Ed. 840 (1940), the court explained how section 1309 is a means of regulating foreign commerce, and discussed the implementation of section 1309 by regulations:
Customs regulations to insure the devotion of the imports to the intended use are likewise within the Congressional power since such regulations are not only necessary or appropriate to protect the revenue, but are means to the desired end, the regulation of foreign commerce by insuring that the particular class of exempted imports are used for the purposes for which the exemption is allowed.
309 U.S. 428, 60 S. Ct. 669.
In Standard Oil Company of New Jersey v. United States, 32 C.C.P.A. 190 (1945), the court concluded that fuel delivered to a vessel not engaged in foreign trade after leaving the port at which the fuel had been withdrawn, was not entitled to the exemption. The vessel had been sold from one line to another after receiving the subject fuel. The court did not consider the status of the vessel at the time of receiving the fuel, but only the actual use of the fuel. Id. at 197. The outcome is distinct from that in Asiatic Petroleum Corp. v. United States, 36 C.C.P.A. 9 (1948). In Asiatic Petroleum Corp., the court held that once fuel was withdrawn from a bonded warehouse and was laden on board a vessel engaged in foreign trade, the fuel became an exported article, and “there was no further Government interest in it from the tax standpoint.” Id. at 15.
The most recent decision pertaining to section 1309, Citgo Petroleum Corporation v. United States, 104 F. Supp. 2d 106, No. 2000-55, slip op. (Ct Int’l Trade 2000), confirms our conclusion. The court discussed the purpose of section 1309, generally stating that the original and main purpose of the provision was to place U.S. vessels engaged in foreign trade on an equal footing with foreign vessels. The CIT in Citgo heavily relied on the language of the International Civil Aviation Organization’s publication Policies on Taxation in the Field of International Air Transport, ICAO Doc. 8632 (3d ed. 2000) (hereinafter “ICAO Doc.”). The court held that section 1309 is “broadly worded to be consistent with the international agreements” entered into under the Convention on International Civil Aviation (art. 24(a), 61 Stat. 1180, 1186 (entered into force April 4, 1947)), and extended and described in the ICAO Doc. The ICAO Doc. discusses supplies in the context of them being “taken on board”. That supplies are taken on board is thus required in order to obtain the benefit.
From the foregoing cases, we conclude that the current regulations requiring evidence to Customs of the identity of the vessels or aircraft upon which supplies for which exemption under section 1309 is claimed, are laden, are reasonable and consistent with the language of the statute.
However, we agree that the regulations do not currently set forth the documentation that would be satisfactory evidence of compliance with section 1309(a)(1)(A), and as discussed in HQ 222825 and 223901. Such documentation would include an executed contract between a Government Agency and a completed DD 250, referencing the contract. The establishment of the documentation required to qualify for the exemption for supplies of vessels and aircraft operated by the U.S. is properly accomplished through the regulatory process, as opposed to a ruling. Therefore, until appropriate regulations are published, the criteria for qualifying for the exemption under section 1309, are those set forth in 19 CFR 10.59 through 10.65, and as set forth in Customs Rulings. By copy of this decision we will initiate the process to amend the Customs Regulations in accordance with this decision and prior decisions.
HOLDING:
Customs Regulations 10.59 through 10.65 are applicable to claims for exemption under 19 U.S.C. §1309(a)(1)(A).
Sincerely,
John Durant
Director, Commercial
Rulings Division