FOR-2-05-RR:CR:DR 229467 IOR
Charles P. Flynn, Esq.
Burr, Pease & Kurtz
810 N. Street
Anchorage, AK 99501-3293
RE: Foreign trade zones; jet fuel; accounting; attribution; gains; losses; annual reconciliation report; 19 CFR 146.23(c); 19 CFR 146.25; 19 CFR 146.53
Dear Mr. Flynn:
We are in receipt of the ruling request dated February 20, 2002, on behalf of Anchorage Fueling and Service Company (“AFSC”), pertaining to accounting for fuel stored in Foreign Trade Zone 160. Our decision is based on a follow-up submission on behalf of AFSC, dated April 12, 2002, and telephone conversations with counsel for AFSC.
FACTS:
AFSC is a user of Foreign Trade Zone (FTZ) 160, and is organized and operates for the purpose of providing jet fuel storage and plane fueling services to commercial aircraft at Ted Stevens Anchorage International Airport. The shareholders of AFSC are substantially all of the airlines providing regular passenger and freight service to or through the airport. Under the AFSC established rules, only shareholders are entitled to have inventory within the FTZ. Currently, the use of foreign fuel within the FTZ is relatively low compared to domestic fuel.
According to the ruling request, AFSC has accounted to Customs in accordance with the accounting practices laid down in HQ 224628: It has maintained strict accounting records of opening inventory within the zone, admission to the zone, transfers within the zone, consumption (by delivery into aircraft) from the zone, and other withdrawals from the zone. Those records are then reconciled on a monthly basis with a physical inventory. Variances between the physical book inventories, either “gains” or “losses” in the terms of the trade, are then allocated in their entirety to users of foreign fuel from the zone within the past month.
The issue raised by the ruling request is the allocation and annual reconciliation of the “gains” and “losses”. Currently, AFSC makes the adjusting entries entirely based upon consumption of foreign fuel during the monthly period. With respect to gains and losses created by volumetric expansion and contraction, and gauging imprecision(, AFSC takes the position that basing the gains and losses on the foreign fuel used during one-month leads to substantial unfairness. A shareholder using foreign fuel one month may participate in a gain that month, and not share in a loss occurring in a month in which that shareholder removed no foreign fuel. An example of this disparity is shown by Exhibits A and B to the ruling request, and is described as follows:
For the period September, 2001 through December, 2001, [Shareholders A-D] received a gain attributable to volumetric expansion of 414,338 gallons, which, at a price of approximately $.75/gal., is equal to a monetary benefit of $310,753.50. None of these airlines [removed] foreign fuel in February, 2001, however, and therefore did not share in the loss of inventory attributable to volumetric contraction.
In order to rectify the foregoing “unfairness”, AFSC proposes that attribution of the gains and losses to foreign fuel on the basis of each shareholder’s total monthly consumption of foreign and domestic fuel, is consistent with law and regulation, and also proposes that reporting of cumulative gains and losses due to volumetric expansion and contraction, and gauging imprecision, on an annual basis is consistent with law and regulation. The basis of AFSC’s proposal is that the gain or loss is created by the volumetric expansion and contraction within the entire system (which includes foreign and domestic fuel) and is exacerbated by measurement issues throughout the entire system, and therefore the gains and losses should be shared by the shareholder in proportion of their use of the entire system, including the domestic fuel.
An example of the proposed attribution is provided as an attachment to AFSC’s submission dated April 12, 2002, for the month of February 2001. According to the attachment, in February 2001, the total loss was 63,515 gallons. The total number of gallons removed by all of the shareholders was 46,161,357. Shareholder A removed a total of 3,926,608 gallons, which is .0850626% of the total gallons removed. The quantity of 5,403 gallons is equal to .0850626% of the total loss of 63,515 gallons. AFSC proposes to attribute the loss of 5,403 gallons of foreign fuel in February 2001 to shareholder A.
With respect to the reporting of cumulative gains and losses, in its submission of April 12, 2002, AFSC represents that the annual reconciliation report is in addition to the reporting required under 19 CFR 146.53.
ISSUE:
Are the proposed procedures for attribution and reporting of gains and losses in accordance with current law and regulations?
LAW AND ANALYSIS:
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 C.F.R. §146.23(c) and 146.25). The procedures for shortages and overages in a FTZ are set forth in 19 C.F.R. §146.53.
Under 19 C.F.R. §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 C.F.R. §146.53(c), the FTZ operator is responsible under its FTZ Operator's bond for shortages (unless Customs is satisfied that under 19 CFR 146.53(c)(i)-(iv) the merchandise was never received in the zone, removed from the zone under proper permit, not removed from the zone, or lost or destroyed in the zone through fire or other casualty, evaporation, spillage, leakage, absorption, or similar cause, and did not enter the commerce of the U.S.). 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 C.F.R. §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).
In the ruling request, in reliance on 19 CFR 146.53(c)(1) (iv), AFSC concludes that the regulations provide that losses need not be reported or paid if the port director is satisfied that the foreign status goods were “lost or destroyed in the zone through fire or other casualty, evaporation, spillage, leakage, absorption, or similar cause, and did not enter the commerce of the U.S.” The regulation provides only that the losses need not be paid. A shortage of 1% or more must still be reported, if the missing merchandise would have been subject to duties and taxes of $100 or more upon entry into the Customs territory. The exception provided for in subparagraph (1)(iv) pertains to the operator’s responsibility under its bond, not to the reporting requirement. If AFSC is proposing that shortages due to volumetric contraction and gauging imprecision do not need to be reported under 19 CFR 146.53(a)(3), such proposal is not in accordance with the regulations. Whether this is AFSC’s proposal, is not clear from the ruling request.
In HQ 227252, dated April 29, 1997 (copy enclosed), it was stated that Customs is satisfied that volumetric expansion and contraction and gauging differences are “similar causes” to those listed in 19 CFR 146.53(c)(1)(iv). In this case we also are of the opinion that the gauging “imprecision” described in the FACTS above is a similar cause tantamount to a “gauging difference”.
With respect to attribution of the gains, as stated in HQ 224628, dated January 10, 1994 (copy enclosed), the gains may not be attributed, for Customs purposes, to foreign and domestic status fuel proportionate to their use. 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). However, with respect to attribution of the gains among the shareholders, as also stated in HQ 224628, “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 [total] monthly consumption, assuming that there is a written agreement on the attribution of the gains so that right to make entry can be established.”
With respect to the shortages, as stated in HQ 224628, the losses cannot be attributed, for Customs purposes to foreign and domestic fuel on the basis of proportionate use, but must be attributed to the foreign merchandise. Under the Customs Regulations, the 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.” In HQ 224628, Customs stated it 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)). In HQ 227252, Customs stated, that provided the Port Director was satisfied that the conditions in 19 CFR 146.53(c)(1) were met, “because it would have no effect on the revenue…we have no objection to attributing the losses to the [shareholders]…on the basis of their monthly consumption, assuming that there is a written agreement on the attribution of the losses.”
With respect to the reporting, the FTZ operator is required to record upon identification the losses described in 19 CFR 146.53(a)(3), and record all shortages and overages in its annual reconciliation report (see 19 CFR 146.23(c) and 146.25). No specific method of preparation of the annual reconciliation report has been provided that is different from the current procedures in place, therefore we cannot rule upon any particular method of preparation of the annual reconciliation report.
The foregoing approves the basis of the proposed attribution among the shareholders, as consistent with the regulations. However, nothing in the regulations requires that the proposed basis for attribution be applied as opposed to the basis currently being applied.
HOLDING:
The proposed procedures for attribution of gains and losses on the basis of the total consumption of the shareholders is in accordance with the current law and regulations. The FTZ operator is responsible to Customs for any gains or losses. Customs has no objection to attribution of the gains and losses on the basis of the total consumption of the shareholders, if the FTZ operator obtains the written agreement of its tenants to assume this responsibility among themselves. No alternative method of reporting and annual reconciliation of the gains and losses has been proposed. Shortages resulting from volumetric contraction and gauging imprecision are subject to the reporting requirement set forth in 19 CFR 146.53(a)(3).
Sincerely,
John Durant, Director
Commercial Rulings Division
Enclosures