CLA-02 RR:CR:SM 562918 SS
Mr. Joseph F. Donohue, Jr. Donohue and Donohue
26 Broadway Suite 911
New York, N.Y. 10004
RE: Petroleum products; U.S. Virgin Islands; insular possession; duty-free treatment; General Note 3(a)(iv), HTSUS; “treatment no less favorable”; §213(b) CBERA; CBTPA; “NAFTA parity” provision; General Note 12(t); General Note 3(f); Commingling of Goods
Dear Mr. Donohue:
This is in response to your submission dated November 26, 2003, on behalf of Hovensa, LLC, and Amerada Hess Corporation, concerning the applicability of General Note 3(a)(iv)(A) and (D), Harmonized Tariff Schedules of the United States (HTSUS), §213(b) of the Caribbean Basin Economic Recovery Act (as amended by the United States - Caribbean Basin Trade Partnership Act) and General Note 3(f), HTSUS, to certain petroleum products from the U.S. Virgin Islands. FACTS:
Hovensa owns and operates a petroleum refinery in St. Croix, U. S. Virgin Islands and exports its products to the United States and elsewhere. The principal feedstock to the refinery is imported foreign crude oil, which is processed in an atmospheric distillation unit (sometimes referred to as “the crude unit”). The products resulting from crude oil distillation process, generally include light ends, LSR, light
naphtha, heavy naphtha, kerosene, light gas oil, heavy atmosphere gas oil, and resid. These products are often referred to as “crude unit products.”
Other than the light ends, the crude unit products are generally converted into more valuable products through downstream processing, such as cracking, reforming, isomerization, hydrotreating (desulfurization) and other processes. Additives and dyes are introduced into some products in small quantities towards the end of the refining process, or when the products are in storage. The products resulting from the downstream processing are often referred to as “downstream products.”
Sometimes Hovensa will sell a crude unit product rather than use it in downstream processing. The crude unit product may be commingled in storage tanks with a similar downstream product. For example, light gas oil off a crude unit sometimes will meet the specifications for home heating oil and may be sold as such. At other times, home heating oil may not result until the light gas oil has undergone downstream processing. Because the home heating oil from the two streams are fungible, they will be commingled in a storage tank prior to sale and will be shipped to the United States in a commingled state.
While foreign crude oil is the principal refinery feedstock, other foreign feedstocks, such as resid and catfeed, or blendstocks, such as naphtha, are sometimes used in production. The feedstocks are processed in one or more of the downstream refinery units, but generally not in a crude unit. The blendstocks are blended in a line or in a tank. The resulting products often will be commingled in storage with similar crude unit products or other downstream products.
You assert that petroleum products produced from foreign crude oil are entitled to duty-free treatment under General Note 3(a)(iv)(D), HTSUS, because products of insular possessions are entitled to duty treatment no less favorable than the treatment afforded to such goods when they are imported from a beneficiary country under the CBERA. You indicate that the same petroleum product produced in a CBERA beneficiary country would be entitled to duty-free treatment under the CBERA as amended by the “NAFTA parity” provision of the United States - Caribbean Basin Trade Partnership Act. You assert that shipments of petroleum products entitled to duty-free treatment under General Note 3(a)(iv)(D), HTSUS, commingled with products that are eligible for duty-free treatment under General Note 3(a)(iv)(A) may be constructively segregated by refinery records and each portion entered duty-free under its respective duty-free provision.
ISSUES: Whether petroleum products produced from foreign crude oil are eligible for duty-free treatment pursuant to General Note 3(a)(iv)(D), Harmonized Tariff Schedule of the United States (HTSUS) and §213(b) of the Caribbean Basin Economic Recovery Act (CBERA).
Whether shipments of petroleum products eligible for duty-free treatment under General Note 3(a)(iv)(D) commingled with petroleum products that are eligible for duty-free treatment under General Note 3(a)(iv)(A) need to be constructively segregated by refinery records at the time of entry for each portion to be entered duty-free under its respective duty-free provision.
LAW AND ANALYSIS:
Petroleum Products Classified in Heading 2710 Produced from Foreign Crude Oil in an Insular Possession are Eligible for Duty-Free Treatment Pursuant to General Note 3(a)(iv)(D), HTSUS, and §213(b) of the CBERA.
The U.S. Virgin Islands are among the insular possessions of the United States. See 48 U.S.C. 1541(a) and 19 C.F.R. §7.2. Goods imported from an insular possession of the United States are eligible for duty-free treatment provided they meet the terms of General Note 3(a)(iv), HTSUS. General Note 3(a)(iv)(A) provides, in relevant part:
. . . goods imported from insular possessions of the United States which are outside the customs territory of the United States are subject to the rates of duty set forth in column 1 of the tariff schedule, except that all such goods the growth or product of any such possession, or manufactured or produced in any such possession from materials the growth, product or manufacture of any such possession or of the customs territory of the United States, or both, which do not contain foreign materials to the value of more than 70 percent of their total value (or more than 50 percent of their total value with respect to goods described in section 213(b) of the Caribbean Basin Economic Recovery Act), coming to the customs territory of the United States directly from any such possession, . . . are exempt from duty. (Emphasis added).
In order to determine whether petroleum is subject to the 70 percent or 50 percent foreign content limit, we must examine section 213(b) of the Caribbean Basin Economic Recovery Act (“CBERA”). In 1983, Congress enacted the CBERA to promote economic revitalization and facilitate expansion of economic opportunities in the Caribbean Basin region. Section 213(a) of CBERA allowed preferential duty-free treatment on nearly all products grown, produced or manufactured in designated Caribbean beneficiary countries that had at least 35 percent local content and were imported directly from the beneficiary country. However, section 213(b) excluded certain products from preferential tariff treatment, including petroleum and petroleum products, which were designated as “import sensitive products.” Thus, according to General Note 3(a)(iv)(A), petroleum products produced in an insular possession are subject to the 50 percent foreign content limit.
Prior to the enactment of the CBERA, General Note 3 of the Tariff Schedules of the United States (TSUS)(the predecessor to the HTSUS), provided that the foreign content limit for almost all products of insular possessions was 50 percent. However, the note was amended as part of the CBERA to increase the foreign content limit. The foreign content limit was raised to 70 percent for most goods. However, the “import sensitive products,” such as petroleum products, retained the 50 percent foreign content limit. The purposes of the amendments are explained in House Report No. 98-266, 98th Cong., 1st Sess. 1, reprinted in 1983 U.S. Code Cong. & Ad. News 643:
Section 104 contains a number of measures designed to maintain the competitive position of Puerto Rico and the U.S. insular possessions which might otherwise be adversely affected by the Caribbean Basin Initiative. The Committee believes that Puerto Rico and the Virgin Islands are important components of the U.S. presence in the Caribbean region and agrees with the Administration that the economic development of the U.S. possessions will be enhanced by the legislation. Although insular possessions are not part of customs territory, current law recognizes their special status and gives their imports preferential treatment. H.R 2769 will improve such treatment. . . .
Section 104(a) amends general headnote 3(a) of the TSUS with respect to the duty-free treatment of products of U.S. insular possessions. General Headnote 3(a)(i) currently provides that any article containing foreign materials shipped to the United States from its insular possessions may enter free of duty if the value of the foreign content does not exceed 50 percent of the total value of the article.
Section 104(a) increases the permissible foreign content from 50 percent to 70 percent for duty-free treatment of all articles imported from the insular possession except those products exempt from duty-free status under section 103. The purpose of this provision it to maintain the overall competitive position of the insular possessions relative to CBI beneficiary countries. With respect to CBI exempt products, the maximum foreign content remains 50 percent. Since such products are excluded from duty-free treatment under section 103(b), it is not necessary to increase the foreign content potential under general headnote 3(a) as an equalizing measure for the insular possessions. (Emphasis added).
The CBERA also contained other measures to reduce any potential detrimental effect that it might have on U.S. insular possessions. Section 102(d) amended general headnote 3(a) of the TSUS to entitle articles imported from insular possessions to “no less favorable” duty treatment than that accorded to eligible articles from designated Caribbean Basin countries. The House Report states that the purpose of the provision was to “maintain the competitive position of the insular possessions relative to the Caribbean Basin.” See House Report No. 98-266, 98th Cong., lst Sess. 1, reprinted in 1983 U.S. Code Cong. & Ad. News 643. The current version of Note 3(a)(iv)(D) provides as follows:
Subject to the provisions in section 213 of the Caribbean Basin Economic Recovery Act, goods which are imported from insular possessions of the United States shall receive duty treatment no less favorable than the treatment afforded such goods when they are imported from a beneficiary country under such Act.(emphasis added).
It seems clear that Congress, in creating special benefits for the Caribbean beneficiary countries, tried to ensure that the insular possessions were not put at a disadvantage. Since petroleum and petroleum products were exempt from duty-free treatment under the CBERA, they received “no less favorable” treatment under the insular possessions provision because products from insular possessions were entitled to duty-free treatment provided the 50 percent foreign value content limit was met.
However, the CBERA was amended in May 2000 by the United States-Caribbean Basin Trade Partnership Act (“CBTPA”). Under section 213(b)(3), as amended, certain articles produced in a CBTPA beneficiary country which were previously excluded from preferential treatment, became entitled to the same tariff treatment as originating Mexican goods under the North American Free Trade Agreement (“NAFTA”). Section 213(b)(3)(A) provides as follows:
(A) Equivalent Tariff Treatment
(i) In general. - Subject to clause (ii), the tariff treatment accorded at any time during the transition period to any article referred to in any of subparagraphs (B) through (F) of paragraph (1) that is a CBTPA originating good shall be identical to the tariff treatment that is accorded at such time under Annex 302.2 of the NAFTA to an article described in the same 8-digit subheading of the HTS that is a good of Mexico and is imported into the United States.
(ii) Exception. - Clause (i) does not apply to any article accorded duty-free treatment under U. S. Note 2(b) to subchapter II of chapter 98 of the HTS.
Subparagraph (B) of paragraph (1) lists petroleum, or any products derived from petroleum, provided for in headings 2709 and 2710 of the HTSUS. Thus, petroleum became eligible for preferential treatment under the CBERA provided that it is a “CBTPA originating good” and is imported directly from a CBTPA beneficiary country.
The House Report discussed the reason for the change:
The Committee believes that expanding the benefits of the Caribbean Basin Initiative on a temporary basis, by offering tariff and quota treatment similar to NAFTA, will promote economic recovery in the region, while encouraging the countries to make necessary economic reforms.
See House Report 106-591, Part 1, 106th Congress, 2d Session.
In comments accompanying the publication of the regulations implementing the CBTPA amendments, Customs described the effect of the amendment to section 213(b) as follows:
The effect of paragraph (3) of section 213(b) is to provide for the application of NAFTA tariff treatment to goods excluded from the CBI, except for textile and apparel article. . . . Thus, imports of . . . petroleum and petroleum products . . . would be eligible for a reduction in duty equal to the preference Mexican products enjoy in accordance with the staged duty-rate reductions set forth in Annex 302.2 of the NAFTA, provided that the merchandise in question meets the origin rules for a NAFTA originating good (in other words, it must meet the NAFTA rules of origin set forth in General Note 12 of the HTSUS and in the Appendix to Part 181 of the Customs Regulations (19 C.F.R. Part 181)).
65 Fed. Reg. 59650, 59652 (Oct. 5, 2000); T.D. 00-68.
A "CBTPA originating good" is defined as a good that meets the rules of origin for a good as set forth in General Note 12, HTSUS, (19 U.S.C. §1202) and the NAFTA Rules of Origin Regulations in the appendix to 19 C.F.R. Part 181, as applied under 19 CFR 10.233(b). See CBERA §213(b)(3), 19 U.S.C. 2703(b)(3) and 19 C.F.R. §10.232(a). Thus, in order to determine whether or not a petroleum product is eligible for preferential treatment under the CBERA, we must examine the NAFTA rules of origin to determine whether the product is considered “NAFTA originating.”
General Note 12(b), HTSUS, states in pertinent part:
For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as "goods originating in the territory of a NAFTA party" only if - -
. . .
(ii) they have been transformed in the territory of Canada, Mexico and/or the United States so that - -
except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s), and (t) of this note or the rules set forth therein . . .
General Note 12(t), Chapter 27, Note 4, sets forth the rule of origin for goods of Mexico classified under heading 2710:
A change to headings 2710 through 2715 from any heading outside
that group.
For the purposes of this ruling, we assume the petroleum products at issue are classified under heading 2710, HTSUS. They may be products that emerge directly from a crude unit, or products that emerge from a downstream process following crude distillation. Under the relevant tariff shift rule, products of heading 2710, HTSUS, will be originating under NAFTA if produced from a non-originating material that is classified under a heading other than headings 2710 through 2715. Since crude petroleum falls under heading 2709, and additives and dyes fall under heading 3811 and 3204, respectively, heading 2710 products produced from non-originating crude oil, whether or not they contain additives or dyes, will qualify for preferential duty treatment under NAFTA, and hence under CBERA. The duty rates applicable to NAFTA originating Mexican products of heading 2710, HTSUS, is “Free.”
Thus, the key question is whether the petroleum products produced from foreign crude oil in an insular possession are entitled to the same preferential tariff treatment as that given to similar products produced in a CBTPA beneficiary country. The statutory language is clear. General Note 3(a)(iv)(D) requires that goods imported from U. S. insular possessions receive “no less favorable” duty treatment than that afforded to goods imported from beneficiary countries under CBERA. It is also clear that the purpose of General Note 3(a)(iv) is both to promote the economic development and maintain the competitive position of the U.S. insular possessions.
To date, the only application of General Note 3(a)(iv)(D), and its predecessor, has been in the context of applying the double substantial transformation concept to U.S. insular possessions. In T.D. 88-17, Customs applied the double substantial transformation concept, which had been applied to goods produced in GSP and CBERA countries, to goods produced in insular possessions.
After studying comments in response to its proposal, Customs concluded that the double substantial transformation concept should be applied to the U. S. insular possessions in order to carry out Congress’ intention to maintain the competitive position of the possessions. Customs rationale was clearly stated:
Customs believes that it was the intent of Congress to give the insular possessions an economic advantage when it enacted General Headnote 3(a). When the GSP and CBI programs were enacted, Congress also amended General Headnote 3(a), by the addition thereto of subparagraphs (iii) and (iv) respectively, to provide that articles imported under the Headnote shall receive duty treatment “no less favorable” than that afforded under the GSP or CBI. These Headnote amendments were inserted specifically to maintain the competitive position of the possessions relative to GSP and CBI beneficiaries. . . .
Inasmuch as the double substantial transformation concept is applied to GSP and CBI beneficiary countries, failure to apply the concept under General Headnote 3(a) would, as a practical matter, place insular possessions at a disadvantage in relation to GSP and CBI countries.
. . .
The fact that after two specific amendments were made to the Headnote (effected by CBI statute), Congress has not seen fit to limit the product coverage demonstrates an intention to afford insular possession a unique position in relation to CBI beneficiaries. Furthermore, it is equally clear that by retaining the 50 percent requirement for CBI-excluded products, Congress intended to provide the insular possessions with the advantage over CBI countries of being able to import these products into the U.S. duty-free. (Emphasis added).
T.D. 88-17; 53 Fed. Reg. 12143, 12144 (Apr. 13, 1988), reprinted in 22 Cust. Bull. 128, 132-33 (1988).
Given the plain language of General Note 3(a)(iv)(D), its legislative history and the prior application of the provision by Customs, Customs believes that General Note 3(a)(iv)(D) should be applied to afford petroleum products “no less favorable” treatment than the duty-free treatment such products would receive under CBERA. To fail to do so would place insular possessions at a disadvantage in relation to CBERA countries.
In the context of the instant ruling request, this means that the NAFTA rules of origin applicable to petroleum products produced in CBTPA countries should be applicable to similar petroleum products produced in insular possessions. Otherwise, the insular possessions will be placed at a disadvantage relative to CBTPA country refineries. This is precisely the situation that General Note 3(a)(iv)(D) seeks to prevent.
The application of General Note 3(a)(iv)(D) ensures that crude unit products of insular possession are treated no less favorably than the same products produced at the CBTPA refineries. It also follows that when those crude unit products are used in downstream operations to produce other products classified under heading 2710, those downstream products also are entitled to the same preferential treatment as like CBTPA beneficiary country products.
Shipments of petroleum products eligible for duty-free treatment under General Note 3(a)(iv)(D) commingled with petroleum products that are eligible for duty-free treatment under General Note 3(a)(iv)(A) do not need to be constructively segregated by refinery records at the time entry in order to receive duty-free treatment.
You indicate that a petroleum product which is eligible for duty-free treatment under General Note 3(a)(iv)(D) and §213(b)(3) of the CBERA (product of U.S. insular possession meeting the tariff shift criteria), may be commingled with a petroleum product which is eligible for duty-free treatment under General Note 3(a)(iv)(A)(product of U. S. insular possession containing not more than 50% foreign materials). You assert that the commingled shipment may be constructively segregated by refinery records and each portion entered duty-free under its respective duty-free provision.
General Note 3(f), HTSUS, recognizes that goods subject to different duty rates may be commingled at the time of shipment, but may be constructively segregated for entry purposes. However, in this case we do not have goods that are subject to different duty rates. Both portions are entitled to duty-free treatment under General Note 3(a)(iv). Thus, there is no need to constructively segregate the shipment at the time of entry. However, in order for preferential treatment to be granted, records must be sufficient for Customs to verify that the entire shipment qualifies for duty-free treatment.
HOLDING:
Under NAFTA, petroleum products classified under heading 2710 that are produced in Mexico from non-originating crude oil are NAFTA originating, and eligible for NAFTA preferential treatment when imported into the United States, assuming all other applicable requirements are met.
Under section 213(b)(3)(A) of CBERA, petroleum products classified under heading 2710 that are produced in a CBTPA beneficiary country from non-originating crude oil are CBTPA originating, and are eligible for the same preferential treatment as Mexican NAFTA originating products classified under the same 8 digit HTSUS subheading.
Under General Note 3(a)(iv)(D), petroleum products falling under heading 2710 that are produced in an insular possession from non-originating crude oil are entitled to no less preferential treatment than that accorded to such products when they are produced in a CBTPA beneficiary country. Thus, the products are eligible for duty-free preferential treatment under General Note 3(a)(iv)(D) and §213(b)(3) of the CBERA provided all other applicable requirements are met.
When products eligible for duty-free treatment under General Note 3(a)(iv)(D) and §213(b)(3) of the CBERA and are commingled with products that are eligible for duty-free treatment under General Note 3(a)(iv)(A), the commingled shipment need not be constructively segregated by refinery records at the time entry in order to receive duty-free treatment.
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If you have any questions regarding the foregoing, please let us know.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division