CLA-2 CO:R:I 955203 JLV
Michael D. Sherman, Esq.
Collier, Shannon, Rill & Scott
3050 K Street, N.W.
Suite 400
Washington, D.C. 20007
RE: Refinery feedstock; crude oil; residual; topped crude;
mixture; inventory management; originating; non-
originating; CFTA; NAFTA; opening inventory;
commingling; fungible; reconstituted crude; GRI 3(b);
essential character; volume criterion
Dear Mr. Sherman:
In a submission dated October 7, 1993, as supplemented by
your submissions of October 21 and 29 and December 17, 1993,
January 28, 1994, and May 11, 1994, you request a ruling, on
behalf of a client, concerning the eligibility of imported
refined petroleum products as originating goods under the United
States-Canada Free-Trade Agreement ("CFTA"), approved and
implemented by the United States-Canada Free-Trade Agreement
Implementation Act, Public Law 100-449, 102 Stat. 1851 (September
28, 1998). In a submission dated January 28, 1994, you requested
that your submission of October 7, as supplemented, be treated as
a request for an advance ruling under the North American Free
Trade Agreement ("NAFTA"), approved and implemented by the North
American Free Trade Agreement Implementation Act, Public Law 103-
182, 107 Stat. 2057 (December 8, 1993). This ruling is our
response to your request for an advance ruling under NAFTA.
Furthermore, in view of the fact that there are outstanding
entries of petroleum products under the CFTA, this ruling is also
our response to the issues under the CFTA.
FACTS:
Various types of petroleum feedstock are shipped to a
refinery in Canada. Under a master agreement, feedstock is
processed to produce various finished products, including motor
gasoline, jet fuel, home heating oil, and No. 6 fuel oil. Some
of the finished products are imported into the United States.
Two of the feedstocks are described as "topped crude" and as
"reconstituted crude." Both terms are used in a general sense to
describe the feedstocks. The topped crude feedstock consists of
products which are the remaining fractions of crude oil after
certain light ends have been removed through atmospheric
distillation. The reconstituted crude feedstock is a mixture of
different petroleum products and is said to yield the same range
of products as does virgin crude oil.
The product called "topped crude" is described by you as a
petroleum oil which contains the same chemical compounds that
existed in that portion of the crude oil in its natural
underground reservoir. A topped crude has a distillation curve
(a curve plotted by temperature on one axis and the percentage of
oil that vaporizes on the other axis) that is similar to the
continuous distillation curve of a heavy crude oil. This type of
curve indicates that it contains a wide range of hydrocarbons
from which various types of petroleum products may be obtained.
However, we note that the similarity of the distillation curve is
only in the part of the curve that represents the complex
hydrocarbons that distil at a temperature greater than 600o F.
Topped crude, such as the topped crude in issue, does not have
the same range of hydrocarbons which naturally occur in heavy
crude because the light ends have been removed by processing.
This topped crude is, in fact, a processed petroleum oil.
Topped crude is often used as feedstock in a refinery
operation. The type of refinery operation depends on the quality
of the topped crude. Topped crude may also be used as a fuel
oil, provided it meets the viscosity requirements and other ASTM
requirements for a specific fuel oil. In some cases it is
necessary to add a distillate or lighter petroleum product to the
topped crude in order to satisfy the viscosity requirement.
Other terms used to describe the "topped crude" feedstock include
"reduced crude," "straight run fuel oil," "residual fuel oil,"
"residual" or "resid." Based on the facts submitted, the "topped
crude" used as feedstock is more generally described as residual
fuel oil from an atmospheric distillation unit.
The product called "reconstituted crude" is a product that
is mixed from available petroleum oils for specific refinery
needs. The relative percentages of the petroleum products used
in the mixture could range from a relatively low percentage of
crude oil and high percentage of topped crude to the opposite.
In fact, you state the topped crude is considered to be
interchangeable with heavy crude as a feedstock. The usual
mixture has consisted of approximately 45 percent light crude oil
and 55 percent topped crude. However, the mixture could contain
up to 70 to 80 percent topped crude. Based on the
representations by counsel, it is assumed that the relative
percentages of the wide range of hydrocarbons, especially those
obtainable during an atmospheric distillation, will remain
approximately the same regardless of the relative percentages in
the mixture. Based on these representations, it is assumed that
at least 25 percent of the mixture will separate out as a full
range of light oils by a fractional distillation at approximately
600o F to 650o F. The crude oil used in this mixture is
generally considered a "light" crude oil because of the
percentage of light ends in the crude oil. The distillation
curve of the mixture, on the other hand, is more similar to a
heavy crude with regard to the percentage of light ends that is
obtained during atmospheric distillation.
As used by counsel with regard to the facts of this case,
the term "reconstituted crude" refers to a mixture that results
from the combining of light crude oil, which is a virgin
petroleum product, and a topped crude oil, which is a petroleum
product processed by an atmospheric distillation. In effect, it
is an artificial mixture usually performed only at a refinery for
specific refinery requirements. As will be discussed later, the
term does not refer to a crude oil resulting from the recombining
of light oils and a topped crude from which the light oils were
previously taken so as to reconstitute the crude.
You also state that the reconstituted crude may either be
mixed in a separate tank prior to introduction into the refinery
process or that the actual mixing may occur by pumping crude oil
and topped crude from separate tanks directly into the heating
unit in the refinery. Because of the nature of a refinery
process and the constant movement of feedstock through the
refinery, and your additional submission dated May 11, 1994, we
assume that the crude oil and the topped crude, when pumped
directly into the heating unit, are pumped simultaneously. You
have claimed that the records have been and will be maintained
so as to establish a verifiable percentage of light crude oil and
topped crude oil in the mixture at any given time.
You state that the finished petroleum products, classifiable
in heading 2710, HTS, qualify as originating goods under both the
CFTA and NAFTA because the production of these finished products
from non-originating "topped crude," which you claim is
classifiable as petroleum oil, crude, in heading 2709, HTS,
results in the required change in tariff classification to
heading 2710 from any other heading outside headings 2710 through
2715. In the alternative, you state, that if the "topped crude"
is not classifiable in heading 2709, then the reconstituted crude
feedstock is classifiable as petroleum oil, crude, in heading
2709 and, therefore, the finished petroleum products derived from
that feedstock are originating goods.
ISSUE:
Whether a residual petroleum product, which has been
subjected to an atmospheric distillation process to remove light
oils, is classifiable as a petroleum oil, crude, in heading 2709?
Whether a petroleum mixture, consisting of topped crude that
is classifiable in heading 2710 and light crude oil classifiable
in heading 2709, is classifiable as a petroleum oil, crude, in
heading 2709?
Whether petroleum products from the distillation of such a
feedstock mixture qualify as originating goods, if imported
before January 1, 1994, for preferential tariff treatment under
the United States-Canada Free-Trade Agreement?
Whether petroleum products from the distillation of such a
feedstock mixture qualify as originating goods, if imported on or
after January 1, 1994, for preferential tariff treatment under
the North American Free Trade Agreement?
LAW AND ANALYSIS:
For petroleum goods imported from Canada prior to January 1,
1994, and classifiable in heading 2710, HTS, the applicable rule
for determining whether the goods are eligible for tariff
preference under the CFTA is found at General Note
3(c)(vii)(R)(5)(bb), HTS (1993), which requires a change to
headings 2710 through 2715 from any other heading outside that
group. (General Note 3(c), HTS (1993) has been redesignated as
General Note 9, HTS (1994), which is suspended effective January
1, 1994, pursuant to Presidential Proclamation 6641, dated
December 15, 1993 (58 FR 66867, December 20, 1993).) For such
goods imported from Canada on or after January 1, 1994, the
applicable rule under the NAFTA is found at General Note
12(t)/27, subdivision 4, HTS (1994), which requires a change to
headings 2710 through 2715 from any heading outside that group.
Therefore, the controlling issue in either case is the
classification of the topped crude and the reconstituted crude.
The headings in issue are headings 2709 and 2710, HTS, which
provide for certain petroleum oils. Neither of these headings is
subdivided at the international level in the Harmonized Commodity
Description and Coding System. In pertinent parts, heading 2709
provides for "petroleum oils * * *, crude" and heading 2710
provides for "petroleum oils * * *, other than crude; * * *."
There are no section or chapter notes which define or otherwise
direct the classification of these products.
1. Topped Crude
Headings 2709 and 2710 both use the term "petroleum oil"
which is modified in heading 2709 by the additional term "crude"
and in heading 2710 by the additional phrase "other than crude."
These terms are not defined. However, it is well known rule of
tariff construction that, when a tariff term is not defined, the
correct meaning is the common meaning understood in trade or
commerce. Sanwa Foods, Inc. v. United States, ____ Ct. Int'l
Trade ___ (Slip Op. 93-169, Aug. 23, 1993); Schott Optical Glass
Inc. v. United States, 67 CCPA 32, 612 F.2d 1283 (1979).
Concerning the meaning of the term "crude" as it is used to
describe petroleum oil, we note that "unrefined petroleum is now
usually termed crude oil." "Petroleum," McGraw-Hill
Encyclopedia of Science and Technology, Vol. 13, page 284 (7th
edition, 1992). The first step in a refining operation is the
separation of crude oil into various fractions or streams in
order to isolate the desired products. "Petroleum processing,"
McGraw-Hill Encyclopedia of Science and Technology, Vol. 13, page
293 (7th edition, 1992). "Topped crude," the term used by
counsel to refer to a feedstock petroleum used by its client, is
the product of the first step of a refining operation in which
crude oil has been separated into specific streams of petroleum
oils in an atmospheric distillation unit. In fact, the topped
crude in this case is more generally described as the residual
fuel oil stream (residual) from such a separation process.
Although residual from an atmospheric distillation process is
also considered a refinery feedstock for the recovery and further
processing of heavy gas oils, it is not traded or known in the
industry as crude oil. Therefore, it is reasonable to conclude
that this "topped crude" feedstock is not a crude oil for
purposes of heading 2709.
This conclusion is supported by the references in the
Explanatory Notes to headings 2709 and 2710 which specifically
describe the products of those headings. First, EN 27.09
describes the types of processes that are considered as not
affecting the nature or character of an oil as a "petroleum oil,
crude" for purposes of heading 2709. These processes are
essentially processes which are performed on the naturally-
occurring crude oil and which are incidental to the extraction
and movement of the crude oil: (1) stabilization to normalize
vapor pressure, (2) removal of very light fractions for use of
such fractions in the oil extraction process, (3) the addition of
only those hydrocarbons previously recovered by physical methods
during one of the named physical processes are allowed, and (4)
any other minor process that does not change the essential
character of the product (emphasis is added). Explanatory Notes
to the Harmonized Commodity Description and Coding System, page
217. A topped crude, which is a residual fuel oil from a
atmospheric distillation, has been clearly processed beyond the
limited types of processes identified in EN 27.09.
Second, EN 27.10(A) describes two categories of petroleum
oils that are "other than crude:" topped crudes, and relatively
broad fractions obtained by distillation or refining of crude
petroleum oils. These are petroleum products which have
undergone a type of separation process other than the processes
specified in EN 27.09. Explanatory Notes to the Harmonized
Commodity Description and Coding System, page 217 to 218. This
reference to "topped crudes" as one of the processed petroleum
products classified in heading 2710 is clear evidence as to the
limited scope of the term "crude" when applied to petroleum oils
of heading 2709. EN 27.10, which is the official interpretation
at the international level for heading 2710 in the Harmonized
System, provides clear direction as to the proper classification
of the topped crude as a "processed" petroleum product in heading
2710.
In this case, the initial boiling point (IBP) and the
chemical composition of the topped crude is a clear indication
that the "topped crude" is a residual product of an atmospheric
distillation process. Atmospheric distillation in a refinery is
not a minor or simple process such as the processes described in
EN 27.09. The term "topped crude" encompasses a broad range of
residual products that vary significantly in quality. Generally,
topped crude of the kind in issue is the bottom fraction of crude
oil that cannot be economically further processed or refined in
an atmospheric distillation unit. It is recognized that these
topped crudes may contain some hydrocarbons that could be
separated in an atmospheric distillation unit. However, the
presence of these relatively small amounts of hydrocarbons,
whether intentionally left in the topped crude or added to the
topped crude for various reasons, does not affect the character
of this product as a processed petroleum product.
Therefore, we conclude that the "topped crude" feedstocks
are petroleum oils, other than crude, and are classifiable in
heading 2710, HTS. The classification of topped crudes in
heading 2710 must have been apparent when the draft text of the
Harmonized Tariff Schedules of the United States was considered
by the Congress and passed into law in order to implement the HS
as the tariff nomenclature for the United States. Heading 2710
was subdivided in the HTS in order to address the many petroleum
products that fall within the heading. The first subdivision is
for "distillate and residual fuel oils (including blended fuel
oils)" and separates these products for tariff purposes into
subheading 2710.00.05, testing under 25 degrees A.P.I.,
subheading 2710.00.10, testing 25 degrees A.P.I. or more. One of
the common terms for topped crude, of the type described in the
facts of this case, is "residual fuel oil."
2. Reconstituted crude
As noted earlier, the term "reconstituted crude" as used in
this case does not refer to a crude oil resulting from the
recombining of light oils and a topped crude from which the light
oils were previously taken. The term "reconstituted crude"
refers, instead, to a feedstock mixture of petroleum products
which approximates a chemical composition that will result in
known percentages of various distillates and other products for
specific stages or processing units in a refinery. This chemical
composition of the mixture is based on the chemical analysis of
each component and not on a chemical analysis of the mixture.
According to the facts in this case, the product described
as reconstituted crude is a feedstock mixed at a refinery from
different types of petroleum oils. The actual percentages of the
constituents in the mixture will vary with the quality and
chemical compositions of the individual feedstock products. The
mixture contains petroleum products that are classifiable in
heading 2710, as well as crude oil classifiable in heading 2709.
The principal component from heading 2710 is residual oil from an
atmospheric distillation process.
Counsel argues that the mixture is classifiable under the eo
nomine provision for crude petroleum oils in heading 2709 because
it is a product that exhibits characteristics that are
essentially similar to naturally occurring crude oil. Rhone-
Poulenc, Inc. v. United States, 11 Ct. Int'l Trade 466 (1987).
Counsel states that the mixture is a petroleum mixture that is
made to resemble crude oil in its chemical composition, and, as a
refinery feedstock, the reconstituted crude is similar to a heavy
crude oil because it has the full range of hydrocarbons that are
normally found in crude oil before the initial separation in an
atmospheric distillation unit. According to counsel's argument,
the mixture is of the same class or kind of articles within the
eo nomine provision for crude petroleum oils. This argument
invokes the principle of classification set out in GRI 1, HTS.
In the alternative, counsel argues that the feedstock
mixture is classifiable as a crude oil in heading 2709 on the
basis of the principles set forth in GRI 2(b) and GRI 3 as they
apply to mixtures of two or more materials. To the extent that
the mixture has the essential character of the crude oil, counsel
argues that the applicable classification is in heading 2709
because it has the same physical characteristics, chemical
composition and uses as does naturally-occurring crude oil.
The Harmonized Tariff Schedule (HTS) provides no additional
guidance concerning the description or classification of crude
petroleum oils and other (than crude) petroleum oils. The term
"reconstituted crude petroleum" is not used in the nomenclature
at the international level. However, it does appear in the
Harmonized Tariff Schedule. In Additional U.S. Note 1(a) to
Chapter 27, HTS, the term "reconstituted crude petroleum" is used
to identify a petroleum product that, if a product of Canada, may
be admitted free of duty under certain conditions. The note does
not define the term "reconstituted crude petroleum." However,
the term was previously defined in Headnote 2(a) to Part 10 of
Schedule 4, Tariff Schedules of the United States (TSUS), the
predecessor to Additional U.S. Note 1(a), HTS:
Part 10 Headnotes:
* * * *
2. For purposes of this part --
(a) "Reconstituted crude petroleum" (items
475.05 and 475.10) is a product which is essentially
the equivalent of crude petroleum and which is made by
adding fuel oil, naphtha, or other petroleum fractions
to crude or topped crude petroleum;
(Headnote 2(a), Part 10, Schedule 4, TSUS (1987))
This definition was inserted into the TSUS after the hearings on
the proposed draft for the TSUS. In opposing a proposed tariff
item for mixtures of petroleum products, counsel for several oil
companies briefly discussed "so-called reconstituted crude
petroleum" as a topped crude in which very light ends were
removed by a simple distillation for purposes of stabilization
and transportation of the light ends and then were returned to
the topped crude for processing at a refinery. This was compared
with crude oil from which light ends had escaped at the wellhead,
but were captured, condensed, stabilized and ultimately returned
to the crude for processing. See Tariff Classification Study,
Explanatory and Background Materials, Schedule 4, pages 291, 314
to 315 (November 15, 1960). The definition of "reconstituted
crude petroleum" seems to have implemented this concern: that
very lightly topped crudes, mixed with the light oils taken from
the lightly topped crude, should remain classifiable as crude
oils. Therefore, under the TSUS, the use of the term
"reconstituted crude" was understood to refer to a product that
had been processed in a far more limited way than is the case
here.
It must be acknowledged that from the point of view of the
use of the product as a feedstock, the mixture ("reconstituted
crude") and crude oil appear to be similar. However, several
points must be made in connection with these goods and the
structure of the TSUS texts and the current HTS texts. First, it
must be observed that, under the TSUS, reconstituted crude
petroleum was classifiable under items 475.05 and 475.10,
depending on specific gravity. The text of the superior language
to those TSUS tariff items included an eo nomine designation for
"crude petroleum oil (including reconstituted crude petroleum),"
as well as eo nomine designations for "topped crude petroleum"
and "distillate and residual fuel oils." The TSUS headnote
merely defined what was already specifically identified in the
tariff provisions. On the other hand, the text of the HTS
heading 2709 does not include a reference to any petroleum oil
other than "crude" petroleum oil. Furthermore, the Additional
Note 1(a) to Chapter 27 does not, of itself, direct
classification of the "reconstituted crude petroleum" to heading
2709, HTS. Because Note 1(a) to Chapter 27 is an additional U.S.
note, we would assume that the intent was to extend the tariff
treatment given under the TSUS and not to expand the scope of the
term so as to affect the structure of the Harmonized System.
Secondly, crude oil mixed with a substantial amount of
residual from an atmospheric distillation process is not known as
crude oil, either in the industry or by name. Based on
counsel's submission, the mixture may contain an overwhelming
proportion by volume of topped crude which, as we have concluded,
is classifiable in heading 2710. To refer to this mixture, which
is essentially a refinery mixture, as crude oil, would be
misleading in the industry, notwithstanding its use as a
feedstock in a refinery. The residual oil in the mixture is
itself used as a refinery feedstock in the same manner, as stated
by counsel, as a heavy crude. However, because residual has
already been processed through an atmospheric distillation, it is
normally used as a feedstock for a vacuum distillation or
cracking unit. Therefore, the use as a feedstock would not be a
sufficient basis for determining whether or not a feedstock
mixture is a crude petroleum oil.
In regard to counsel's first argument that the reconstituted
crude has the essential character of a crude oil and is
classifiable as a crude oil in heading 2709, we conclude that the
mixture cannot be classifiable in heading 2709 under GRI 1, HTS.
Our analysis of the terms in the heading and the Explanatory
Notes to headings 2709 and 2710 leads us to conclude that the
products of heading 2710 are distinguished from the crude
petroleum oil of heading 2709 on the basis of the nature of the
processing from which the petroleum product is obtained. Heading
2709, when read in light of EN 27.09, is limited to petroleum
oils that have not been processed by a refinery operation. This
is consistent with definitions of crude oil. See definition of
crude oil at page 326, Oil: A practical guide to the economics
of world petroleum, Peter Ellis Jones, Nichols Publishing, New
York (1988); definition of crude oil at page 17-7, Petroleum
Products Handbook, Virgil B. Guthrie, Editor, McGraw-Hill Book
Company, Inc., New York (1960). To the extent that a crude
petroleum oil is mixed with a petroleum oil that has been
processed, then the mixture cannot be classifiable as a crude
under GRI 1 unless the addition of an oil of heading 2710 is so
minimal that it does not affect the unrefined character of the
crude oil. GRI 1 and GRI 2(b), HTS.
However, it remains to consider counsel's second argument
with respect to essential character of the feedstock as a
mixture. If a good which consists of two or more materials is,
prima facie, classifiable under two or more headings, and no one
heading provides the most specific description because each
refers in part only to the goods, then classification is based,
in the first place, on the material or component that imparts the
essential character to the good. GRI 3(b), HTS. If a mixture is
not classifiable by reference to GRI 3(b), then the mixture is
classifiable in the heading which occurs last in numerical order
among the headings that equally merit consideration. GRI 3(c),
HTS.
The Explanatory Notes to the Harmonized Commodity
Description and Coding System set forth factors which, when
applied to the individual materials or components of a mixture,
may be used to determine the essential character of a product.
EN (VIII) to the General Rules for the Interpretation of the
Harmonized System (for GRI 3(b)) provides as follows:
(VIII) The factor which determines the
essential character will vary as
between different kinds of goods.
It may, for example, be determined
by the nature of the material or
component, its bulk, quantity,
weight or value, or by the role of
a constituent material in relation
to the use of the goods.
EN (VIII) to GRI 3(b) at page 4 of the Explanatory
Notes to the Harmonized Commodity Description and
Coding System
An analysis under GRI 3(b) thus requires a comparison of the
relative importance of the different materials that make up a
product in order to determine which of them provides the
essential character to the product. As applied to the mixture in
this case, the analysis requires a comparison of the role of the
topped crude of heading 2710 and the light crude oil of 2709.
The light crude oil component is commercially recognized as
a material for use as refinery feedstock in the production of
processed petroleum products. The topped crude component,
although its physical and chemical characteristics make it
suitable for use as a fuel oil, either directly or by cutting
with a distillate, is also commercially recognized as a material
for use as feedstock for a refinery because it contains many
different complex hydrocarbons which can be further processed.
As noted earlier in this ruling, the refinery processes are
generally different for light crude oil and for topped crude
(residual of an atmospheric distillation). Processing of light
crude oil must be done initially in an atmospheric distillation
unit. Processing of a topped crude (i.e., residual) in an
atmospheric distillation unit will have little significant effect
on that petroleum feedstock. Nevertheless, crude oil and topped
crude are both used as feedstock for refinery operations.
Therefore, the relative significance of the components to the use
of the mixture is not, of itself, a distinguishing characteristic
for the purpose of determining which of the components imparts
the essential character of the mixture.
The changing demands in the market and in a refinery
operation do not always allow for a constant or fixed percentage
or ratio to be used in a feedstock mixture. Production
requirements, storage capacities and refinery capacities
(processing capability of the different units in a refinery)
often will direct the actual percentages of feedstock materials
in a mixture. Inasmuch as both components of the mixture are
feedstocks with different characteristics for a refinery process,
the percentage of a component which is greater than 50 percent by
volume is a relatively constant factor that reflects which of the
components imparts an essential character to the mixture. If the
topped crude, for example, is greater than 50 percent by volume,
the mixture would appear to have the essential character of a
topped crude feedstock because such a large percentage of the
product will be destined for the vacuum or cracking units. If
the crude oil predominates by volume, the mixture would appear to
have the essential character of a crude oil feedstock.
Another factor which must be considered is the effect of the
value of the two components on the mixture. In this case, the
comparative values of a light crude and a topped crude (residual)
will affect the value of the mixture in proportion to the
percentages of each component. For example, as the percentage of
the topped crude increases, the value of the mixture decreases.
Notwithstanding the argument that the light crude oil is
responsible for imparting a value to the mixture, it is our
conclusion that the criterion of "value" is a secondary
consideration when compared with the criterion based on the
actual percentages by volume of the two types of feedstock
components. This is especially true in view of the fact that the
mixture is not a product which is itself offered for sale as a
feedstock.
In summary, the light crude oil component and the topped
crude are both feedstocks for a refinery, and each has, in its
own way, an effect on the character of a mixture with respect to
the process by which petroleum products will be extracted. As
previously noted, light crude oil is unprocessed petroleum that
must first enter the separation process in an atmospheric tower.
On the other hand, topped crude is a processed petroleum that is
further processed in a vacuum tower or cracking unit. Therefore,
the percentage by volume is the criterion which, when considered
together with the nature and role of each component in a
petroleum mixture of light crude and topped crude, lends the
clearest indication as to the nature of the mixture as a
feedstock. To the extent that the percentage of light crude oil
is greater than 50 percent of the total volume of the feedstock,
we determine that the light crude oil imparts the essential
character of the feedstock mixture.
Therefore, we conclude that, provided that the mixture of
light crude oil and topped crude (residual) contains more than 50
percent by volume of light crude oil, the mixture is classifiable
in heading 2709 as a petroleum oil, crude.
3. Application of CFTA
The gasoline, home heating oil, No. 6 fuel oil and other
petroleum products in issue that were produced in Canada from the
topped crude or from the feedstock mixture are said to be
petroleum products classifiable in heading 2710, HTS.
In view of our conclusion that topped crude itself is
classifiable in heading 2710, any goods classifiable in heading
2710 that were produced in Canada from a non-originating topped
crude do not qualify under the specific rules of origin for
petroleum products of heading 2710, HTS. Under the CFTA, goods
of heading 2710, if produced from non-originating materials,
qualify as originating goods only if the non-originating
materials used in their production were classifiable in a heading
other than headings 2710 through 2715.
To the extent that the goods, other than a residual from an
atmospheric distillation, were produced entirely in Canada from
the feedstock that was a non-originating mixture of light crude
oil and topped crude in which the light crude oil constitutes
more than 50 percent of the mixture by volume, the goods qualify
as originating goods under the specific rule for the CFTA because
the non-originating mixture is classifiable in heading 2709, HTS.
See General Note 3(c)(vii)(R)(5)(bb), HTS (1993). Provided that
the other applicable requirements are satisfied, the petroleum
goods produced from this feedstock mixture would be eligible for
tariff preferences as originating goods.
Because classification of the feedstock mixture in heading
2709 is dependent upon the light crude oil constituting more than
50 percent by volume of the mixture, it is imperative that the
production records be sufficient to demonstrate to Customs
satisfaction that, on a daily basis, the mixture used in the
refinery always consisted of at least more than 50 percent by
volume of light crude oil. The use of a non-originating
feedstock mixture that is classifiable in heading 2710 would have
resulted in goods that fail to satisfy the specific change in
tariff requirement.
4. Commingling of goods under the CFTA
Based on the representations made by counsel that the actual
percentage of crude oil in a feedstock mixture may have been 50
percent or less by volume at any time during the 1992 and 1993
production years, we conclude that the product produced at the
refinery consists of both originating and non-originating goods.
Unless these goods were directed to separate tanks for
originating and non-originating goods, they were commingled.
Physical identification would have been impossible.
The CFTA addressed only one situation involving the
identification of originating and non-originating articles which
were used together. In Paragraph 6 to Annex 301.2 of the United
States-Canada Free-Trade Agreement, it was required that the
value of materials be directly attributed to goods under
consideration in order to identify the value of originating and
non-originating materials used in the production of a good which
was subject to a regional value content requirement. Section
202(c)(5) of the United States-Canada Free-Trade Implementation
Act of 1988, Public Law 100-449, 102 Stat. 1851 (September 28,
1988). If physical identification were not possible or
practical, an inventory identification method (FIFO) was allowed
to establish the requirement of "directly attributed" in that
limited situation, i.e., the situation involving originating and
non-originating materials used together in a good that was
subject to a regional value content requirement. See HQ ruling
556346 of January 24, 1992. Thus, pursuant to the requirements
in Paragraph 6 to Annex 301.2, Customs determined that an
inventory management method could be used in place of physical
identification to determine which materials were directly
attributed to the goods. The normal requirement of physical
identification was otherwise required.
The treatment of commingled goods was not addressed in
either the CFTA or the implementing statute or regulations.
Therefore, in the event that both originating and non-originating
products were produced at the refinery during the period in
question and were not put into separate tanks, the legal effect
of the commingling of these goods needs to be addressed in order
to determine whether any of the commingled product may be
determined to be "originating" when some or all of the commingled
product is exported under a claim for CFTA tariff preference.
General Note 5, HTS (1993) [formerly designated as General
Headnote 7(a) under the TSUS (1987); redesignated as General Note
5 in 1988, effective January 1, 1989, and now currently
designated as General Note 14 by Proclamation 6641 of December
15, 1993, 58 FR 66867, at 67032, December 20, 1993, effective
January 1, 1994], addresses commingling of goods. In the absence
of a specific statutory or regulatory provision under the CFTA,
General Note 5 is applicable. It provides in pertinent part as
follows:
General Note 5. Commingling of Goods.
(a) Whenever goods subject to different rates of
duty are so packed together or mingled that
the quantity or value of each class of goods
cannot be readily ascertained by customs
officers (without physical segregation of the
shipment or the contents of any entire
package thereof), by one or more of the
following means:
(i) sampling
(ii) verification of packing lists or other
documents filed at the time of entry, or
* * * * *
the commingled goods shall be subject to the
highest rate of duty applicable to any part
thereof unless the consignee or his agent
segregates the goods pursuant to subparagraph
(b) hereof.
General Note 5 provides that commingled goods shall be assessed
the highest rate applicable to any one kind of goods included in
the commingled goods, unless the quantity and value of each of
the kinds of goods can be readily ascertained either by the usual
method of Customs examination or by one of the methods specified
in General Note 5. See Section 152.13 of the Customs Regulations
(19 CFR 152.13).
In Coastal States Marketing v. the United States, 646
F.Supp. 255 (CIT 1986), aff'd 818 F.2d 860 (CAFC 1987), the issue
before the court was the country of origin of a mixture of gas
oil from the Soviet Union and fuel oil from Italy. Customs
treated the goods as commingled goods and, based on documentation
presented by plaintiff, assessed a higher rate for the part of
the goods that were determined to be Soviet gas oil and a lower
rate for the part of the commingled goods that were determined to
be Italian fuel oil. In affirming Customs action in this regard
the court concluded that Customs properly applied General
Headnote 7(a), TSUS, for commingling of merchandise, to the oil
mixture in question by segregating the components of the blend
pursuant to available documentation.
The principle of the application of General Headnote 7(a) in
Coastal States also applies to a situation involving commingled
goods under the CFTA. For purposes of this discussion, General
Note 5(a)(ii), HTS (1993) sets forth the method in General Note 5
that applies in this case. In the event that Customs cannot
readily ascertain the quantity of each commingled good by
verification of documents presented at entry, the applicable rate
of duty is the highest rate applicable to any of the commingled
goods. Clearly, Customs has the authority to determine what
method or methods will be considered sufficient for this purpose
and what information will be necessary to verify the documents
filed at the time of entry.
Under our ruling the approved method for purposes of
implementing Paragraph 6 of Annex 301.2, CFTA, was an inventory
identification based on FIFO. In the case of originating and
non-originating petroleum products which are commingled in a tank
after production in a refinery, FIFO would also be an appropriate
inventory method for identifying the originating and non-
originating final goods because a refiner is able to follow a
feedstock through the refinery process to its final products. A
FIFO method would establish, for Customs purposes, any "layers"
of originating and non-originating products that may result from
a refinery operation. If adequate refinery operating records are
maintained by the refiner, withdrawals of commingled product for
export under the CFTA could, therefore, be readily ascertained as
originating and non-originating goods when imported into the
United States.
Customs has, in another context, set forth other methods
which can be used for this purpose. Section 7(14) and Schedule X
of the Appendix to Part 181, Title 19 Code of Federal Regulations
(19 CFR Part 181, Appendix) implement Section 202(f) of the North
American Free Trade Agreement Implementation Act and provide for
inventory management methods which, if applicable, could be used,
for example, in the event a producer uses fungible originating
and non-originating materials or commingles fungible originating
and non-originating goods. These inventory management methods
are considered sufficient to ascertain the quantity of materials
or goods that are "originating" for purposes of the NAFTA
provisions related to fungible materials and goods. It is
reasonable that such methods are also sufficient to ascertain the
quantity of goods that are originating for purposes of applying
General Note 5 to the CFTA.
For any acceptable inventory identification method, daily
refinery operating records must be sufficiently specific for
Customs to verify the percentages of light crude oil and topped
crude in a feedstock mixture at any time during the production
process, the nature of the light crude and the topped crude
(i.e., chemical composition of each component) in the mixture,
the output of the refinery as related to the feedstock input and
any other information which is relevant to the verification of
the claim for tariff preference under the CFTA. If the available
records are not sufficient for Customs to readily ascertain,
under the method employed, the quantity of CFTA originating goods
in a shipment of commingled originating and non-originating
goods, the entire shipment would be subject to the non-CFTA rate
of duty.
5. Application of the NAFTA
In view of our conclusion that topped crude itself is
classifiable in heading 2710, any goods classifiable in heading
2710 that were produced in Canada from a non-originating topped
crude do not qualify under the specific rules of origin for
petroleum products of heading 2710, HTS. Under the NAFTA, goods
of heading 2710, if produced from non-originating materials,
qualify as originating goods only if the non-originating
materials used in their production are classifiable in a heading
other than headings 2710 through 2715.
To the extent that the goods, other than a residual from an
atmospheric distillation, are produced entirely in Canada from
the feedstock that is a non-originating mixture of light crude
oil and topped crude in which the light crude oil constitutes
more than 50 percent of the mixture by volume, the goods qualify
as originating goods under the specific rule for the NAFTA
because the non-originating mixture is classifiable in heading
2709, HTS. See General Note 12(t)/27, subdivision 4, HTS (1994).
Provided that the other applicable requirements are satisfied,
the petroleum goods produced from this feedstock mixture would be
eligible for tariff preferences as originating goods.
Because classification of the feedstock mixture in heading
2709 is dependent upon the light crude oil constituting more than
50 percent by volume of the mixture, it is imperative that the
production records be sufficient to demonstrate to Customs
satisfaction that, on a daily basis, the mixture used in the
refinery always consists of at least more than 50 percent by
volume of light crude oil. The use of a non-originating
feedstock mixture that is classifiable in heading 2710 would
result in goods that fail to satisfy the specific change in
tariff requirement.
6. Opening inventory under the NAFTA
Opening inventory for fungible materials and for fungible
and commingled goods is determined under one of the appropriate
methods established in Section 9 or Section 15 to Schedule X of
the Appendix to Part 181 of Title 19, Code of Federal Regulations
(19 CFR Part 181), published as an interim regulation in the
Federal Register, December 28, 1993 (58 FR 68520).
7. Commingling of fungible goods under NAFTA
Under the NAFTA, the treatment of commingled fungible goods
is distinctly different from the treatment of such goods under
the CFTA. Section 202(f)(2) of the North American Free Trade
Agreement Implementation Act, Public Law 103-182, 107 Stat. 2057
(December 8, 1993), provides that the determination of whether a
good is an originating good may be made on the basis of an
inventory management method if originating and non-originating
goods are fungible and commingled. Section 7(14) and Schedule X
of the Appendix to Part 181, Title 19 Code of Federal Regulations
(19 CFR Part 181, Appendix) implement Section 202(f) and provide
for inventory management methods which, if applicable, could be
used, for example, in the event the refinery uses a feedstock
mixture that fails to be classified in heading 2709.
In any case, in order for preferential tariff treatment to
be granted, daily records must be sufficient for Customs to
verify the percentages of light crude oil and topped crude in a
feedstock mixture, the nature of the light crude and the topped
crude (chemical composition of each component) in the mixture,
the output of the refinery as related to the feedstock input and
any other information which is relevant to the verification of
the claim for tariff preference under the NAFTA.
8. Circumvention
For purposes of the CFTA, under General Note
3(c)(vii)(C)(3), HTS (1993), a good shall not be considered
originating if it undergoes a change in tariff classification
merely by virtue of having undergone "any process * * * in
respect of which the facts as ascertained clearly justify the
presumption, that the sole object was to circumvent the
provisions of subdivision (c)(vii) of this note." Similarly, for
purposes of the NAFTA, under General Note 12(m)(ii), HTS, a good
is not considered originating merely by reason of "any production
or pricing practice with respect to which it may be demonstrated,
on the basis of a preponderance of evidence, that the object was
to circumvent this note." It is our position that the
atmospheric distillation of a residual petroleum product is
repetitive and commercially unnecessary to the extent that the
product to be obtained from the atmospheric distillation is a
residual petroleum product.
Whether characterized as "reverse processing" (see, for
example, the Statement of Administrative Action for the CFTA,
page 175 of House Document 100-216, July 26, 1988) or
circumvention (see, for example, the Statement of Administrative
Action for the NAFTA, pages 493 and 498 of House Document 103-
159, Vol. 1, November 4, 1993), the mixing of crude oil and
topped crude (residual fuel oil), and the subsequent production
of a "residual" from the atmospheric distillation of the mixture,
in effect, achieves the return of the residual, used in making
the mixture, to its original condition.
Therefore, to the extent that a residual from an atmospheric
distillation is removed from the refining of a mixture of light
crude oil and topped crude, classifiable in heading 2710 and is
either exported or mixed with another petroleum product and
exported to the United States, that product would not be
considered an originating good under either the CFTA or the
NAFTA. In effect, the residual merely constitutes a return of
the non-originating topped crude to its condition at the time it
was mixed with the light crude oil.
9. Other laws and regulations
This determination applies only to preferential tariff
treatment under the CFTA and the NAFTA, and, therefore, does not
affect the enforcement of other laws and regulations administered
by the Office of Foreign Assets Control, this agency or any other
agency of the United States Government.
HOLDING:
The "topped crude" or residual fuel oil is classifiable as a
petroleum oil, other than crude, in heading 2710, HTS. The
products produced in Canada from the topped crude do not qualify
as originating goods under either the CFTA or the NAFTA.
The "reconstituted crude," consisting of a mixture of light
crude oil and topped crude (residual fuel oil) in which the light
crude oil constitutes by volume over 50 percent of the total
mixture, is classifiable as a petroleum oil, crude, in heading
2709, HTS. The products produced in Canada from this mixture,
other than a product which is a residual fuel oil from an
atmospheric distillation, qualify as originating goods under both
the CFTA and the NAFTA and may be eligible for tariff preferences
under the provisions of each agreement, provided that the records
are sufficient to establish that all the conditions outlined in
this ruling have been met, and that all other applicable
requirements are satisfied.
Sincerely,
John Durant, Director