FOR 2-02
OT: RR: CTF: ER
H282598 KF
Dipak Mavar
SKAPS Industries
335 Athena Drive
Athens, GA 30601
Re: Permissible accounting methods; 19 C.F.R. § 146.23; the value of waste recovered from manufacturing operations; 19 U.S.C. § 81c(a); 19 C.F.R. § 146.65(b)(2).
Dear Mr. Mavar:
This is in response to your letter, dated December 20, 2016, requesting a ruling on the propriety of PBR Inc. dba SKAPS Industries’ (“SKAPS”) proposed accounting method to track domestic and privileged foreign status fiber used to manufacture fabric in a Foreign Trade Zone (“FTZ”), and how to determine the value of waste or scrap recovered from the manufacturing process. The Classification and Marking Branch will separately address your request for a ruling classifying the waste or scrap recovered from manufacturing fabric in a FTZ.
FACTS:
SKAPS is authorized to manufacture Polypropylene Geotextiles within FTZ No. 26, subject to condition that SKAPS elects privileged foreign status for all the foreign status polypropylene fiber it admits. See 78 Fed. Reg. 170, 54234 (September 3, 2013). SKAPS explains in its request that it manufactures geo-synthetic and non-woven geotextile drainage fabric in FTZ No. 26 for sale within the United States and abroad.
The fabric manufactured by SKAPS consists of privileged foreign and domestic status polypropylene staple fiber. Upon admission, each bale of fiber is assigned a unique identifier and tracked throughout the manufacturing process via a First-In, First-Out (“FIFO”) inventory control method. Manufacturing occurs through the use of machines that subject the fibers to various processes such as stretching and heating in order to combine them into a finished fabric. SKAPS records the weight of privileged foreign and domestic status fiber fed into a machine during manufacturing. During the manufacturing process SKAPS routinely trims the edges of the fabric roll being produced.
Daily, upon the conclusion of manufacturing, each roll of finished fabric produced is assigned a unique identifier or stock keeping unit (“SKU”) that records its weight per yard. All trimmed fabric cuttings are collected and combined with any portions of defective fabric that SKAPS removed from a finished fabric roll. SKAPS weighs the total combined waste yielded by its daily manufacturing operations, assigns it a unique identifier and tracks it through a FIFO method. SKAPS quantifies and determines the zone status of the total combined waste based on the recorded weights of the total privileged foreign and domestic status fibers used. SKAPS apportions its waste based on the percentage of privileged foreign and domestic status fibers used in its daily manufacturing operations. SKAPS seeks approval of the apportionment and FIFO methods it uses to quantify and account for the waste it produces.
SKAPS bales or rolls its total combined waste for sale to a recycler within the United States. SKAPS intends to claim an allowance on the duty owed on the privileged foreign fiber it admits to manufacture fabric, based on the value of the resulting non-privileged foreign waste produced. SKAPS requests a ruling approving the sales price paid by the recycler as the allowance value for the non-privileged foreign waste it removes from FTZ No. 26. SKAPS proposes to claim a waste allowance through two means. In Scenario A, SKAPS proposes to deduct the value of waste from the value of the privileged foreign fiber bales it admits for manufacturing in FTZ No. 26. SKAPS will subsequently fill out entry documents for each finished fabric roll removed from FTZ No. 26 to reflect the reduced value of the privileged foreign fibers contained in the fabric. In Scenario B, SKAPS will compile its daily collection of combined total waste until a buyer can be identified, then deduct the sales transaction value from the total value of the finished fabric rolls calculated in its weekly FTZ entry during the week that a sale occurs.
ISSUES:
Whether waste may be accounted for by apportioning the weight of the waste to the percentage of the varied zone status raw materials used in the manufacturing process that generated the waste.
Whether recoverable waste may be valued based on its sale price to a recycler.
LAW AND ANALYSIS:
Whether waste may be accounted for by apportioning the weight of the waste to the percentage of the varied zone status raw materials used in the manufacturing process that generated the waste.
All merchandise “temporarily deposited, admitted, granted a zone status and/or status change, stored, exhibited, manipulated, manufactured, destroyed, transferred, and/or removed from a zone” must be accounted for through inventory control and recordkeeping systems. See 19 C.F.R. § 146.21(a)(1). For accounting purposes, merchandise can be identified and tracked by assignment of a zone lot number or other unique identifier. See 19 C.F.R. § 146.23(a)(1). If merchandise is fungible, it can be identified by assignment of a unique identifier and tracked by use of an authorized inventory control method such as FIFO. See 19 C.F.R. § 146.23(a)(2). A zone lot number or unique identifier must provide the following information specified in inventory records: location, zone status, cost or value, balance history and adjustments, destruction, and any generated scrap, waste, and by-products. See 19 C.F.R. § 146.23(b).
SKAPS states in its request that it admits bales of domestic and privileged foreign status fiber, which it accounts for by assigning the bales a unique identifier and tracks through a FIFO method inventory control method. A FIFO inventory control method is generally appropriate for comingled zone status merchandise removed from a FTZ. See HQ 230840 (September 30, 2005). SKAPS utilizes the same methods to account for and track the total waste generated by processing the fiber in its daily manufacturing operations. Pursuant to 19 C.F.R. § 146.23(a)(2), use of a unique identifier and FIFO method is appropriate only for merchandise that is fungible.
Merchandise is fungible if it is “identical and interchangeable in all [commercial] situations.” See 19 C.F.R § 146.1(b). In HQ 228969 (September 27, 2002), United States Customs and Border Protection (“CBP”) determined that a single set of chemicals used as raw materials in manufacturing operations within a FTZ were fungible. In HQ H102097 (February 29, 2012), CBP determined that natural gas admitted into a FTZ was fungible because it was indistinguishable in its properties such that a physical inspection could not distinguish between the various gases stored. As in HQ 228969, SKAPS uses polypropylene fiber as a single input raw material for its manufacturing operations. As in HQ H102097, the fiber is indistinguishable in its properties, as demonstrated by its unvarying polypropylene staple composition. The waste SKAPS produces from polypropylene fiber as its single source material is equally indistinguishable by physical inspection, and it is used interchangeably in all the commercial transactions proposed by SKAPS. See 19 C.F.R § 146.1(b). We therefore find that SKAPS may assign its daily combined collected waste a unique identifier and track it through a FIFO method because it is fungible.
Pursuant to 19 C.F.R § 146.21(a), an accounting and inventory control system (“tracking system”) must, at minimum, be capable of (1) accounting for all merchandise within a FTZ, from admission to manufacture to removal; (2) accurate reporting; (3) revealing shortages or overages of merchandise “in sufficient detail to determine [its] quantity, description, tariff classification, zone status, and value;” (4) yielding all information requisite to enter merchandise into the customs territory of the United States; and (5) providing a clear audit trail from admission to manufacture to removal. Accordingly, SKAPS’ proposed tracking system must be able to quantify and track the zone status of the privileged foreign and domestic status bales utilized in its daily manufacturing operations through their transformation into, and removal as, finished fabric rolls and waste.
SKAPS requests CBP’s approval to quantify waste by weighing the daily total cuttings or scrap trimmed from fabric rolls during manufacturing, combined with defective fabric removed from finished fabric rolls. SKAPS also requests CBP’s approval to track the zone status of its waste by assigning it a status in proportion to the weight of the total privileged foreign and domestic status fiber bales utilized during manufacturing.
In HQ 228969, Bayer Corporation (“Bayer”) proposed a comparable method of quantifying and tracking the status of chemical waste generated in a FTZ. Bayer utilized domestic and non-privileged foreign chemicals as raw materials to be combined in varying amounts during manufacturing. Each chemical vat or tank was assigned a unique identifier, and tracked from manufacturing to removal through a FIFO inventory control method. Bayer collected and weighed the waste generated by its daily manufacturing operations. Bayer sought to quantify its daily waste and determine its zone status by applying a chemical formula which correlated the weight of the waste to the percentage of the different zone status raw materials input during manufacturing. CBP approved Bayer’s proposal because it determined that a “finite amount of raw material” was contained in the daily finished chemicals produced and waste generated, such that the quantity of waste could be definitively calculated.
SKAPS similarly utilizes a finite amount of raw domestic and privileged foreign fibers which are combined in its daily manufacturing operations. SKAPS highlights in its request that no other inputs are used or added during manufacturing. Akin to Bayer in HQ 228969, SKAPS can definitively quantify its inputs and outputs by tracking the weight of raw material, finished fabric, and combined waste from a day’s manufacturing operations. SKAPS’ proposed method of quantifying its waste is also akin to Bayer’s chemical formula because it develops a calculation which correlates and apportions the zone status of waste based on the zone status and quantity of the raw material fed into its machines during production. Accordingly, we find that SKAPS can accurately track the zone status of its daily total combined waste by correlating its weight to reflect the percentage of the privileged foreign and domestic status fiber bales which generated the waste.
Whether recoverable waste may be valued based on its sale price to a recycler.
Pursuant to 19 U.S.C. § 81c(a), an allowance shall be deducted from the duties owed on privileged foreign merchandise that is removed from a FTZ after being manipulated or manufactured to create a final article. Privileged foreign status may be elected for merchandise which, prior to its admission to a FTZ, has “not been manipulated or manufactured so as to effect a change in tariff classification.” See 19 C.F.R. § 146.41(a).
The amount of allowance deducted for waste removed from a FTZ is the value of the waste generated from the manipulation or manufacture of privileged foreign merchandise. See Goodman Manufacturing, L.P. v. The United States, 69 F.3d 505, 512 (Fed. Cir. 1995). The waste generated by manufacturing privileged foreign merchandise into a finished article has non-privileged foreign status. See 19 C.F.R. § 146.42(b). The value of non-privileged foreign status waste recovered in a FTZ is the “the price actually paid or payable to the zone seller in the transaction that caused the recoverable waste or scrap to be transferred from the zone.” See 19 C.F.R. § 146.65(b)(2).
SKAPS intends to deduct an allowance for the non-privileged foreign waste it generates by manufacturing privileged foreign fiber bales into finished fabric rolls. SKAPS seeks approval to value its non-privileged foreign waste based on the price per pound sales transaction value established by SKAPS’ sale of the waste to a recycler.
In HQ 223330 (February 26, 1992), CBP determined that an allowance could be claimed for defective and spare fabric removed during the cutting process of fabric manufactured within a FTZ. In HQ 547142 (May 12, 1999), CBP determined that plastic components compressed by a baler into units to be periodically sold as recyclable waste could be valued based on the price paid for the waste pursuant to 19 C.F.R. § 146.65(b)(2). As in HQ 547142, SKAPS seeks to value non-privileged foreign waste, compressed by a baler or rolled into units for sale, based on the sales price per pound paid by a recucler. We therefore find that SKAPS may claim an allowance on the non-privileged foreign waste it removes from FTZ No. 26 based on its sales price per pound to a recycler because this value constitutes the “price actually paid…in the transaction that caused the recover[ed] waste or scrap” to be removed from the FTZ. See 19 C.F.R. § 146.65(b)(2).
SKAPS proposes to deduct the value of its waste allowance through two means. In Scenario A, SKAPS will reduce the value of the privileged foreign fiber used to manufacture a fabric roll. In Scenario B, SKAPS will reduce the value of the fabric rolls tabulated in its weekly entry summary.
In Goodman Manufacturing, the Court of International Trade determined that the “only [allowance] approach consistent with section 81c and 19 C.F.R. § 146.65(b)(2)” is a deduction of the market value of the waste removed from a FTZ from the market value of the privileged foreign merchandise previously admitted to the FTZ for manufacturing purposes. See 69 F.3d at 512 (Fed. Cir. 1995). The dutiable market value of privileged foreign merchandise is “the price actually paid or payable for the merchandise in the transaction that caused the merchandise to be admitted into the zone,” reduced or increased by the statutory criteria specified in 19 C.F.R. § 146.65(b)(2). The price paid or payable is “the total payment (whether direct or indirect…) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. § 1401a(b)(4). If “there is no such price actually paid or payable, or no reasonable representation of that cost,” an alternative price computation unrelated to the market value of the finished articles created by manufacturing privileged foreign merchandise is permitted. See 19 C.F.R. § 146.65(b)(2).
SKAPS specifies in Scenario A that it is maintains records of the price per pound of the privileged foreign fiber it imports to admit into FTZ No. 26 for manufacturing purposes. SKAPS did not identify in its request any basis for using a value computation other than the purchase price per pound of polypropylene fiber it paid to a seller for importation to the United States, pursuant to 19 C.F.R. § 146.65(b)(2). See e.g. HQ 547142 (finding that the price paid or payable for imported merchandise could be ascertained from its corresponding commercial invoice); and HQ H086775 (March 12, 2010) (finding that the value of merchandise evidenced by purchase orders constituted the price paid or payable for its admission). Regardless of whether SKAPS prices privileged foreign fiber based on its price paid or payable, or the alternative value computation permitted by 19 C.F.R. § 146.65(b)(2), we find that only Scenario A is consistent with FTZ regulations because it deducts the market value of non-privileged foreign waste from the market value of the privileged foreign fiber at the time of its initial admission into FTZ No. 26. See Goodman Manufacturing, 69 F.3d at 512 (Fed. Cir. 1995).
We find that Scenario B is impermissible under Goodman Manufacturing because it proposes deducting a waste allowance from the value of the finished articles manufactured from privileged foreign merchandise. Id. The only allowance scenario consistent with FTZ regulations subtracts the value of waste from the value of the privileged foreign merchandise which generated the waste. Id.
HOLDING:
Based on the information provided, we find that: (1) SKAPS may quantify and account for the zone status of its waste by correlating the weight of the waste to the percentage of the domestic and privileged foreign fiber bales that generated the waste; (2) SKAPS may value the waste or scrap it produces from manufacturing privileged foreign fiber based on its sales price to a recycler, and may calculate an allowance by deducting the value of the waste from the value of the raw privileged foreign fiber bales that generated the waste.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruing letter, either directly, by reference, or by implication, is accurate and complete in every material respect.” If any fact in the transaction varies from the facts stipulated to herein, this decision shall not be binding on CBP, as provided for in 19 C.F.R. § 177.9(b).
Sincerely,
Monika R. Brenner Acting Chief
Entry Process & Duty Refunds Branch