FOR-2-05 RR:CR:DR
229556 RDC
Category: Foreign Trade Zones
U.S. Customs Service
Port Director
423 Canal Street
New Orleans, LA 70130
ATT: Michael J. Musmeci, Jr.
Re: Foreign Trade Zones; Petroleum Refinery Subzones; motor fuel; petroleum; attribution; T.D. 66-16; overage; gain.
Dear Mr. Musmeci:
This is in response to your request for a ruling regarding petroleum refinery subzones.
FACTS:
The foreign trade zone (“FTZ”).at issue is a petroleum refinery subzone
The following is the record of admissions to and removals from the FTZ for a one month period:
Month 1, last day: Total zone inventory is 100 barrels domestic status class III crude petroleum.
Month 2, day 4: 100 barrels class III crude petroleum are admitted into the zone in privileged foreign status.
Month 2, day 10: 91 barrels motor fuel are withdrawn from the zone for export to a non-NAFTA country. The zone operator attributes the withdrawn quantity to the privileged foreign status petroleum.
Month 2, day 15: 91 barrels motor fuel are entered for consumption from the zone. The zone operator attributes the entered quantity to the domestic status petroleum.
Month 2, last day: The zone operator conducts an inventory and finds that it has 18 barrels of class III petroleum and 3 barrels of motor fuel in the zone.
The zone operator proposes to list the 3 barrels of motor fuel as being admitted in domestic status.
ISSUE:
How must the discrepancy between the amounts provided by the T.D. 66-16 formula and the amount actually discovered by an end of period inventory, i.e., the 3 barrels motor fuel, be resolved?
LAW AND ANALYSIS:
Domestic status merchandise is defined by 19 USC § 81c(a), second and third provisions. Domestic status merchandise is limited to articles that are the growth, product or manufacture of the U.S., on which applicable internal revenue taxes have been paid and articles previously imported on which applicable duties and taxes have been paid which are taken into the zone from the Customs territory. The third proviso of 19 USC § 81c(a) provides that if the identity of the domestic status goods is lost, the goods are to be treated as foreign merchandise and subject to all the tariff and internal revenue laws applicable to foreign merchandise.
19 USC § 81c(d) permits the use of the Industry Standards of Potential Production on a Practical Operating Basis to attribute products to feedstocks for petroleum refineries operating in a FTZ. Those standards were published as T.D. 66-16. Subpart H, Part 146, Customs Regulations, implemented 19 USC § 81c(d) and prescribed the use of the standards set forth in T.D. 66-16 to attribute products to feedstocks.
By a final rule document published in the Federal Register as T.D. 95-35 (60 FR 20628) on April 27, 1995, Customs amended its foreign trade zone regulations (19 CFR part 146) to add special procedures and requirements governing the operation of petroleum refineries approved as foreign trade subzones, in implementation of § 9002 of the Technical and Miscellaneous Revenue Act of 1988, codified as 19 USC § 81c(d). These regulations, issued as a new subpart H to part 146 (§§ 146.91-146.96), essentially establish procedures to account for the various products refined in a subzone as well as the feedstocks that are used therein in such refining operations, with duty assessment being determined accordingly. Section 146.93 provides for inventory control and recordkeeping system.
Specifically, 19 CFR § 146.93(a) requires that all final product refined in, and either removed from or consumed within a petroleum refinery subzone, be attributed to feedstock admitted into the subzone in the current or prior manufacturing period. One method of attribution permits a quantity of product to be attributed as having been refined from a given quantity of feedstock to the extent that the quantity of such product was producible (could have been produced) from the stated quantity of feedstock (see 19 CFR § 146.95(a)(1) and (2)). This method, known as producibility, calls for the establishment of objective production standards to govern its application. Such standards, called industry standards of potential production on a practical operating basis, have been established, adopted and published in T.D. 66-16 (see 19 CFR § 146.95(a)(2)). In this regard, T.D. 66-16 lists several categories of products as well as a number of different feedstocks, together with the noted industry standards expressed in percentages. See T.D. 96-47 (May 8, 1996).
Section 146.93(a) further requires: that if the refiner uses the producibility method of attribution, that “records be kept to attribute final products to feedstocks which are eligible for attribution as set forth in this section during the current or prior manufacturing period” (146.93(a)(1)). Section 146.93(b) states that only feedstock admitted into the FTZ is eligible for attribution and that the quantity of feedstock eligible for attribution in a manufacturing period is calculated as beginning inventory, plus receipts less shipments of feedstock out of the subzone, and less ending inventory. Section 146.93(c) provides that final product consumed in or removed from the FTZ “subzone must be attributed to a feedstock eligible for attribution during the current or a prior manufacturing period.” Finally Section 146.93(f) requires that the refiner use its method of measurement – by weight or volume – consistently.
The facts presented are based on the producibility method of attribution per 19 CFR § 146.95(a). Section 146.95 (a)(1) states,
A subzone operator must attribute the source of each final product. The operator is limited in this regard to feedstocks which were eligible for attribution during the current or prior manufacturing period. Attribution of final products is allowable to the extent that the quantity of such products could have been produced from such feedstocks, using the industry standards of potential production on a practical operating basis, as published in T.D. 66-16. Once attribution is made for a particular product, that attribution is binding. Subsequent attributions of feedstock to product must take prior attributions into account. Each refiner shall keep records showing each attribution.
With regard to the facts as presented, it is stated that “all petroleum products quantities are corrected for temperature as required by 19 CFR § 146.94(e).” The manufacturing period selected by the refiner is a calendar month. Under the practical operating standards set in T.D. 66-16, 91 percent of class III petroleum can be converted into motor fuel. 19 USC § 81c(d) as implemented by subpart H, Part 146 of the Customs Regulations, permits a petroleum refiner to attribute removals to admitted petroleum on that formula.
Therefore, the maximum motor gasoline producible from the 200 barrels of class III petroleum stated to be in the FTZ was 182 barrels. In order to maximize the duty benefit conferred by the zone operation, the refiner attributes the motor gasoline exported during month 2, day 10 to the privileged foreign status petroleum. This attribution is binding and results in 9 barrels of privileged foreign status and 100 barrels of domestic status petroleum remaining in the FTZ – though zero privileged foreign status petroleum is available for attribution to motor gasoline.
The refiner next must attribute the 91 barrels of motor fuel entered for consumption during month 2 on day 15 to the domestic petroleum. There is no other petroleum available in the FTZ during the current or prior manufacturing period available for this attribution. Again, the maximum motor gasoline producible from the domestic class III petroleum is 91 barrels. Since 91 barrels of motor fuel was entered for consumption, 9 barrels of domestic and 9 barrels of privileged foreign petroleum remain – though zero domestic status nor privileged foreign status petroleum remains for attribution to motor gasoline.
Thus, the maximum amount of motor gasoline was removed from the FTZ, 91 barrels on month 2, day 10 and another 91 barrels during month 2, day 15. Hence, only 18 barrels of petroleum, 9 barrels domestic and 9 barrels privileged foreign should remain in the FTZ – no motor gasoline should remain in the FTZ. However, upon physical inventory, 3 barrels of motor gasoline are found to be in the zone.
Application of the tables in T.D. 66-16 preclude attribution of the 3 barrels of motor fuel found in Month 2, last day. Application of the second and third provisos to 19 USC § 81c(a) prevent the motor fuel from acquiring domestic status. The third proviso to 19 USC § 81c(a) makes it clear that the loss of identity here - even if the domestic petroleum might have been the source of the motor fuel - result in that fuel being treated as foreign merchandise when brought out of the zone.
Section 146.91 of the Customs regulations provides that “the provisions relating to zones generally, which are set forth elsewhere in this part, . . . shall apply as well to a refinery subzone, insofar as applicable to and not inconsistent with the specific provisions” of subpart H. 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.
With 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). Therefore, the overage of three barrels of motor fuel 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).
HOLDING:
The overage of three barrels of motor fuel would have to be entered under a consumption entry or application for admission as foreign status merchandise into the FTZ would have to be timely made under 19 CFR § 146.53(d).
Sincerely,
Myles Harmon, Acting Director
Commercial Rulings Division