CLA-02 RR:CR:SM 563062 DCC
Mr. John Peterson
Neville Peterson LLP
17 State Street, 19th Floor
New York, NY 10004
RE: Ruling Request for Fungibility of Certain Base Oils under NAFTA
Dear Mr. Peterson:
This is in response to your letter dated July 2, 2004, requesting a ruling on behalf of ChevronTexaco, Corp. Specifically, you seek a ruling that certain classes of base oils may be treated as “fungible materials” for purposes of the North American Free Trade Agreement (“NAFTA”). We also considered your submission, dated February 14, 2004, on a related matter.
FACTS:
ChevronTexaco produces lubricating motor oils for passenger vehicles. Lubricating oils are manufactured by blending various base oils with additives to achieve a finished lubricant oil having a specified viscosity and other properties. Base oils are produced from base stocks of oil, which the Oil Analysis and Lubrication Dictionary defines as “the base fluid, usually a refined petroleum fraction or a selected synthetic material, into which additives are blended to produce finished lubricants.”
In order to ensure that the performance of engine oil products is not adversely affected when different base oils are used interchangeably by engine oil producers, the American Petroleum Institute (“API”) developed the API Interchangeability Guidelines. The API Guidelines specify a range of tests which lubricant manufacturers must perform on finished products in order to confirm that the substitution of one base oil for another in the formula does not adversely affect engine performance. For purposes of the API Guidelines, if a lubricant achieves satisfactory results on the specified engine performance tests, the new “candidate” base oil is deemed to be commercially interchangeable with the “replaced” base oil.
The API Guidelines define “base stocks” as:
[A] lubricant component that is produced by a single manufacturer to the same specifications (independent of feed source or manufacturer’s location) that meets the same manufacturer’s specification and that is identified by a unique formula, product identification number, or both. Base stocks may be manufactured using a variety of different processes including but not limited to distillation, solvent refining, hydrogen processing, oligomerization, esterification, and re-refining. Re-refined stock shall be substantially free from materials introduced through manufacturing, contamination, or previous use.
The API Guidelines also define a “base oil” as “the base stock or blend of base stock used in an API-licensed oil.” Licensing of motor lubricants by the API is an accepted industry practice. Although the API Guidelines divide base stock into five Groups, this ruling only pertains to Group I and Group II. These two Groups relate to naturally-derived oils and are defined as follows:
Group I base stocks contain less than 90% of saturates and/or greater than 0.03% sulfur and have a viscosity index greater than or equal to 80 and less than 120 using the test methods specified in Table E-1 [of the API Guidelines];
Group II base stocks contain greater than or equal to 90% saturates and less than or equal to 0.03% sulfur and have a viscosity index greater than or equal to 80 and less than 120 using the test methods specified in Table E-1 [of the API Guidelines].
In the oil lubricant industry, base oils are classified into groups based on their viscosity (i.e., resistance to flow), and viscosity index (i.e., stability of the viscosity over different temperatures). The higher the viscosity index, the less the viscosity changes over various temperatures. The viscosity and viscosity index are physical properties that are inherent in the base oil, and which cannot be significantly changed or altered through the use of an additive package. Furthermore, the viscosity and viscosity index of a base oil determine the viscosity and viscosity index of the finished lubricant.
In addition to the API groupings, lubricant manufacturers generally recognize four basic viscosity classes, as follows:
Range
Viscosity in Saybolt Universal
Seconds at 100o(S.U.S.)
Light Neutral
100 ~ 150 S.U.S
Medium Neutral
220 ~ 330 S.U.S.
Heavy Neutral
500 ~ 650 S.U.S.
Bright Stock
2400 ~ 2600 S.U.S.
According to your submission, lubricant manufacturers only commingle base oils within the same viscosity range, for example, two or more Light Neutrals. To prevent commingling of base oils with different viscosities, lubricant manufacturers generally maintain separate storage tanks for each of the four types of base oils.
For API Group I and II base oils used in the production of motor lubricants the viscosity index must be in the range of 80 ~ 120, indicating a high degree of consistency over temperature. ChevronTexaco proposes to blend NAFTA originating base oils with NAFTA non-originating base oils to manufacture lubricating motor oils. Specifically, ChevronTexaco proposes to commingle originating and non-originating Group I base oils. ChevronTexaco also proposes to commingle originating and non-originating Group II base oils. You seek a ruling to determine whether originating and non-originating base oils from the same API Group (Group 1 or Group 2) may be considered “fungible materials.” To the extent that non-originating and originating base oils are deemed to be “fungible materials,” you propose to identify them for NAFTA purposes using one of the NAFTA Inventory Management Methods set out in the Customs and Border Protection (“CBP”) regulations.
ISSUE:
Whether base oils within one API Group (Group I or II) may be treated as fungible materials allowing the use of an inventory management method to determine whether the finished lubricating oils are originating under NAFTA.
LAW AND ANALYSIS:
General Note 12 of the Harmonized Tariff Schedule of the United States (“HTSUS”) incorporates Article 401, North American Free Trade Agreement (“NAFTA”), into the HTSUSA. Note 12(b) provides 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 quantitive limitations set forth in the tariff schedule as “goods originating in the territory of a NAFTA party” only if –
they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or
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, or,
the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or
they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials.
The product specific rule for lubricating oils and base oils is contained in General Note 12(t), HTSUS. Under this rule, in order to become an originating good, the non-originating materials used to produce the finished good must satisfy the tariff shift rule applicable to lubricating oil, which is classified under heading 2710, HTSUS. The applicable rule for this HTSUS subheading provides as follows:
Note: The following TCR 4 applies only to goods of Mexico under the terms of this note:
A change to headings 2710 through 2715 from any other heading outside that group.
Note: The following TCR 4 and 4A apply only to goods of Canada under the terms of this note that are entered, or withdrawn from warehouse for consumption, on or after January 1, 2003:
4. (A) A change to headings 2710 from any other heading, except from headings 2711 through 2715; or
Production of any good of heading 2710 as the result of atmospheric distillation, vacuum distillation, catalytic hydroprocessing, catalytic reforming, alkylation, catalytic cracking, thermal cracking, coking or isomerization.
4A. A change to headings 2711 through 2715 from any heading outside that group, except from heading 2710.
General Note 12(g) provides that,
(g) Fungible goods and materials. For purposes of determining whether a good is an originating good [under NAFTA]—
(i) where originating and non-originating fungible materials are used in the production of a good, the determination of whether the materials are originating need not be made through the identification of any specific fungible material, but may be determined on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury.
Furthermore, the term “fungible” means “that the particular materials or goods are interchangeable for commercial purposes and have essentially identical properties.” GN 12(g). See also NAFTA Rules of Origin Regulations codified at 19 C.F.R. § 181, App., Sec. 2(1). The NAFTA Rules of Origin Regulations provide the following instructions for the treatment of fungible materials for purposes of determining whether a good is an originating good:
SECTION 7. MATERIALS
(16) Subject to subsection (16.1), for purposes of determining whether a good is an originating good,
where originating materials and non-originating materials that are fungible materials
are withdrawn from an inventory in one location and used in the production of the good, or
are withdrawn from inventories in more than one location in the territory of one or more of the NAFTA countries and used in the production of the good at the same production facility,
the determination of whether the materials are originating materials may be made on the basis of any of the applicable inventory management methods set out in Schedule X.
19 C.F.R. § 181, App., Sec. 7(16), as amended by 67 Fed. Reg. 15480 (Apr. 2, 2002), and 67 Fed. Reg. 19810 (Apr. 23, 2002).
Schedule X of the NAFTA states that the inventory management methods for determining whether fungible materials referred to in section 7(16)(a) of the Appendix are originating materials are as follows: (a) specific identification method; (b) FIFO method; (c) LIFO method; and (d) average method.
Because ChevronTexaco plans to store originating and non-originating base oils in common storage tanks, you claim that it is not possible for the company to determine the origin of the base oils withdrawn from those tanks. Moreover, the blending operations that are performed in order to transform base oil into finished lubricating oil do not satisfy the process-based product specific rules of origin for goods under subheading 2710, HTSUS. It is therefore necessary for ChevronTexaco to distinguish between NAFTA originating and non-originating base oils in order to determine the NAFTA originating status of materials and goods manufactured from them. Consequently, the question presented is whether base oils within one API Group (Group I or II) may be treated as fungible materials under an authorized inventory management method.
You assert that the API Guidelines support your view that base oils within a particular API Group (Group I or II) are commercially interchangeable. You note that under the API Guidelines, substitution of base oils must be done in such a way to ensure that engine oil performance is not adversely affected by the substitution of one base oil for another. Moreover, you contend that because the API Guidelines allow substitution, the base oils at issue should be treated as commercially interchangeable. You also argue that base oils within a particular API Group (Group I or II) have essentially identical properties. You point out that these base oils meet certain standards for saturates level and sulfur content.
CBP has previously considered the issue of whether materials are fungible for purposes of NAFTA. In Headquarters Ruling Letter (“HRL”) 562344, dated September 2, 2002, CBP considered whether originating gold ore and slag was fungible with non-originating scrap and waste gold derived from production or used goods when these materials were commingled to produce refined gold bars and grain. In that ruling, CBP determined that the unrefined gold materials were “appropriately considered fungible for the purposes of determining the NAFTA eligibility of the refined gold.”
In HRL 562255, dated February 22, 2002, CBP addressed the issue of whether certain NAFTA originating yarn and non-originating yarn from Pakistan, commingled and then subjected to processing operations such as dyeing, were fungible for NAFTA purposes. CBP held that:
For NAFTA preference purposes, once the Pakistani and NAFTA originating yarn are commingled before they are dyed, the yarn is fungible material within the meaning of the provision in GN 12(g)(ii). The fact that the yarn is commingled and used indiscriminately in the dyeing process is dispositive that the yarn is interchangeable for commercial purposes and has essentially identical properties.
Consistent with our prior rulings, and based on the information presented, we find that the originating and non-originating base oils are fungible materials provided they are within the same API classification, i.e., Group I or II. By virtue of their API classification, base oils within a particular Group have essentially identical properties in terms of saturates level, sulfur content, and viscosity index. Furthermore, the API Guidelines allow the substitution of base oils within a particular Group. Therefore, we find that the base oils within Group I or II are interchangeable materials for commercial purposes.
Accordingly, based upon General Note 12(g), HTSUS, we find that the base oils mixed in inventory and used in the production of lubricating motor oil are fungible materials. Therefore, the determination of whether the lubricating motor oils are “originating” may be determined on the basis of one of the inventory management methods set out in 19 C.F.R. § 181, App. Schedule X. In order for preferential tariff treatment to be granted under these circumstances, however, the importer’s records must be sufficient to allow for verification by CBP of the respective quantities of originating and non-originating base oils which are received into inventory, and any other information which the port director deems relevant in order to substantiate the importer’s claim for tariff preference under the NAFTA.
HOLDING:
Based on the information provided, the use of an inventory management method described in Schedule X of the NAFTA Rules of Origin is appropriate for determining the originating status of lubricating motor oils produced from a particular API Group (Group I or II).
A copy of this ruling letter should be attached to the entry documents filed at the time the merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division