DRA 2; FOR 01
OT:RR:CTF:ER
H302869 HvB
David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
Suite 2702
New York, NY 10279
Re: BMW of North America: Request for Determination of Eligibility of Motor Vehicles for Substitution Unused Merchandise Drawback under 19 U.S.C. § 1313(j)(2); Possession; Foreign Trade Zone Operator
Dear Mr. Ostheimer:
This is in response your request, dated February 8, 2019, on behalf of BMW of North America, LLC (“BMW NA”), for a binding ruling on the eligibility of certain motor vehicles for substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2), as amended pursuant to Section 906 of the Trade Enforcement and Trade Facilitation Act of 2015 (“TFTEA”). In addition, we took into consideration your supplemental response dated December 16, 2020.
FACTS:
BMW NA wishes to claim substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2). BMW NA intends to designate motor vehicles exported by BMW Manufacturing Co., LLC. (“BMW MC”) from a foreign trade subzone operated by BMW NA. BMW MC is the manufacturer, owner and exporter of the motor vehicles exported from the FTZ. BMW MC has agreed to waive its right to claim drawback on the designated merchandise. BMW MC will assign that right to BMW NA, and will also provide the requisite certification, as required by 19 C.F.R. §§ 190.33(b)(2) and 190.82. When claiming substitution unused drawback, BMW NA will substitute the exported motor vehicles owned by BMW MC for motor vehicles imported and duty paid by BMW NA. BMW NA asks us to confirm whether BMW NA may satisfy the possession requirement under 19 U.S.C. § 1313(j)(2), by virtue of BMW NA being the operator of the FTZ where the motor vehicles owned by BMW MC are stored prior to exportation. This ruling does not address whether the proposed transaction complies with other requirements under 13 U.S.C. § 1313(j)(2).
In submitting this ruling request, BMW NA has also asked us to revoke Headquarters Ruling (“HQ”) H236882 (July 7, 2016). In that ruling, CBP considered whether CSI, a warehouse operator met the possession requirement under (pre-TFTEA) 19 U.S.C. § 1313(j)(2) as the operator of a warehouse in which the designated merchandise, i.e., jewelry, was stored. CSI argued that it satisfied the possession requirement because it had physical control of the jewelry. CSI did not hold legal title to the jewelry, was not involved in selling the merchandise, and merely complied with inventory instructions issued by the jewelry owners. CBP concluded that “because CSI did not have complete control and dominion over the exported merchandise while in its physical custody, it did not satisfy the possession requirement for substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2).”
ISSUE:
Whether BMW NA, has “possession” of motor vehicles owned by BMW MC per 19 U.S.C. § 1313(j)(2)(C)(ii), substitution unused drawback, by acting in its capacity as an FTZ operator where the motor vehicles are stored prior to exportation?
LAW AND ANALYSIS
Substitution unused merchandise drawback per 19 U.S.C. § 1313(j)(2) requires, inter alia, that the exported merchandise on which drawback is to be claimed,
is in the possession of, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback under this paragraph, . . . .
19 U.S.C. § 1313(j)(2)(C)(ii). On February 24, 2016, TFTEA (Pub. L. 114–125, 130 Stat. 122, February 24, 2016) was signed into law. Section 906 of TFTEA made significant changes to the drawback laws but the language at issue here, 19 U.S.C. § 1313(j)(2)(C)(ii)), is unchanged.
When it amended 19 U.S.C. § 1313(j) under TFTEA, (Pub. L. 114–125, 130 Stat. 122, February 24, 2016) Congress left in place this “possession” requirement for substitution unused merchandise drawback per 19 U.S.C § 1313(j)(2)(C)(ii). Thus, we consult the legislative history to the Customs Modernization Act of 1993, when Congress last amended 19 U.S.C. § 1313(j)(2)(C). The drawback law, including the possession requirement, was substantively amended by section 632, title VI - Customs Modernization, Public Law 103-182, the North American Free Trade Agreement Implementation Act (107 Stat. 2057), enacted December 8, 1993. Congress amended the possession requirement under §1313(j)(2) to its present-day language. In the House Report on the bill (section 632 of H.R. 3450) that became law, Congress noted that its “Reasons for Change” included expanding U.S. exports and easing administrative burdens. Congress then stated, "[h]owever, the Committee does not intend to create a 'market' for drawback rights." H.R. Rep. No. 103-361(I), at 130 (1993), reprinted in 1993 U.S.C.C.A.N. 2553, 2680. In the same report when discussing the new allowance for substituted merchandise under §1313(j), Congress states that it intended the general rule to be:
that the party claiming drawback must either have paid the duties on the imported
merchandise or have received from the person who imported and paid the duties on the imported merchandise a certificate of delivery for the imported merchandise, commercially interchangeable merchandise, or any combination thereof.
Id at 131. Moreover, for cases in which the claimant was not the importer, Congress intended that the claimant have proof of possession, e.g., a certificate of delivery. The legislative history therefore shows that Congress intended to limit the parties that may claim drawback and eliminated the possibility of drawback claimants merely trading paper ownership of the designated goods thereby creating the market for drawback rights.
In C.S.D. 85-52, CBP explained that “[t]o hold that for purposes of same condition drawback arbitragers and futures dealers in commodities have "possession" of these commodities because of the purchase of commercial paper and temporary storage in leased bins or tanks, would not further the intent of the Congress or the fundamental purpose of the drawback law.” CBP has consistently interpreted the “possession” requirement under 19 U.S.C. § 1313(j)(2) to mean “complete control over the articles or merchandise on premises or locations where the possessor can put the articles or merchandise to any use chosen.” C.S.D. 85-52 (Aug. 16, 1985). See also HQ 225166 (Apr. 10, 1996). In C.S.D. 85-52, CBP defined “possession” as “occupancy and exercise of dominion over property” citing to Ballantine’s Law Dictionary , 964 (3rd ed. 1969). Hence, CBP’s rulings on possession for purposes of 19 U.S.C. § 1313(j) reflect this intent. See, e.g., HQ 225228 (Dec. 23, 1994) citing H. Rep. 103-361, at 130 and HQ H236882 (July 7, 2016).
CBP has ruled that under certain circumstances drawback may be claimed when the substituted merchandise is in the physical custody of another, such as bailment, if the claimant maintains complete control and dominion over the merchandise. Per 19 U.S.C. § 1313(j)(2), possession includes ownership while in bailment. That is, the owner of the goods still has dominion and control over the goods while the goods are entrusted to another, the bailee. It does not mean, as BMW suggests, that the bailee, such as an FTZ operator to whom the goods have been entrusted possesses any rights beyond that of a mere custodian. In HQ 222500 (July 16, 1990), we allowed a claimant to satisfy the possession requirement even though the substituted merchandise was stored in leased storage tanks prior to its exportation. Tradecom, the claimant and bailor, leased storage tanks from a warehouse operator (the bailee) to store the duty-paid merchandise (soybean oil) from a warehouse “tank farm.” Tradecom produced receipts from the warehouse operator, Shipper’s Declaration of Exportation, and a bill of lading, to demonstrate its ownership. In finding that Tradecom had possession, CBP explained:
Drawback requires an actual and continuous occupancy or exercise of full dominion as defined in C.S.D. 85-52. However, it would cause undue hardship to require each company to own its own tanks to have possession and to hold that bailment situation defeats possession, and it would also defeat the purpose of the drawback law. For example, if one moves one’s furniture in a rental U-Haul truck versus one’s own truck, he still owns the furniture and has possession of it. Likewise, if one leaves his car in a parking garage, he is not giving up possession of his car. To find differently, would be a distinction without meaning.
See also HQ 224103, (Oct. 19, 1992) (summarizing HQ 222500, supra, and finding that claimant had possession of merchandise temporarily stored in barges).
Further, in HQ H236882 (July 7, 2016), CBP stressed that physical custody of merchandise is at most an indication of guardianship over merchandise, whereas “the key element in establishing possession… is that the possessor has ‘complete control’ and dominion over the exported merchandise.” (Citing HQ 225166, dated Apr. 10, 1996)). In HQ H236882, CBP contrasted CSI’s inability to use the merchandise at its discretion to that of the wholesaler in C.S.D. 87-18 (June 15, 1987) (finding that CSI did not satisfy the possession requirement because it did not have complete control and dominion while the merchandise was in its physical custody). Thus, CBP has consistently required that the claimant demonstrate full legal and physical possession. See C.S.D. 89-108, dated June 6, 1989 (concluding that a wheat importer did not meet the physical possession requirement because it’s relationship to the exported wheat was limited to arranging for the exportation of the substituted merchandise from the seller’s grain elevators to South America).
In deciding whether a claimant satisfies the 19 U.S.C. § 1313(j)(2) possession requirement, CBP has examined shipping documents and sales contracts associated with the designated merchandise to determine whether the claimant had “independent control” over the merchandise, or whether its control over the merchandise was at the direction of another party. See, e.g., HQ 225228 (Dec. 23, 1994), HQ 229338 (May 30, 2003) and HQ 229826 (July 21, 2003). For example, in HQ 224541 (Oct. 14, 1993), we concluded that the claimant did not meet the possession requirement under 19 U.S.C. § 1313(j)(2) based on insufficient documentation. To show possession, the claimant had produced telex instructions between it and the foreign instructions regarding the shipment of the merchandise. We observed that these instructions did not compel the claimant to maintain possession before it shipped the merchandise to the foreign purchaser and were non-binding. See also HQ 229838 (May 30, 2003). Whereas in HQ 229826 (July 21, 2003), we found that the claimant had established possession because the sales document showed it had operational control, meaningful title, and risk of loss, and the bill of lading identified the claimant as the consignee.” Clearly, the above demonstrates that Congress and CBP have consistently held that the requirement that a drawback claimant per 19 U.S.C. § 1313(j)(2) must both own and have control over the substituted goods.
We now turn to BMW’s arguments. First, BMW NA argues that the words following “possession” in §1313(j)(2)(2)(C)(ii), i.e., “including ownership while in bailment, in leased facilities, in transit to, or in any other manner . . .” is evidence that Congress intended to broaden the requirement to include a category where physical possession is not required, such as when goods are in bailment. BMW NA points to the statutory language for same condition drawback that was in place in 1985, when Customs issued C.S.D. 85-52 (Aug. 16, 1985). That provision, 19 U.S.C. § 1313(j)(2), provided that the goods be in “possession of the party claiming drawback.” As explained above, CBP has consistently interpreted this language to mean that the owner of the goods retains dominion and control over the goods while the goods are entrusted to another, the bailee, not that the bailee, such as an FTZ operator has any rights to the goods beyond that of a bailee.
BMW NA further contends that the term “operational control” reflects a category distinct from the possession category. However, as explained above, the language that BMW NA identifies has not changed. Other than language of the statute, BMW NA does has not provide any evidence showing that Congress intended to liberalize the definition of possession, nor that it intended for mere custodial control, e.g., goods in a leased facility, to satisfy the possession requirement.
Second, in BMW NA’s supplemental letter, BMW NA asserts that physical possession and operational control are two separate and distinct drawback requirements, based on the “disjunctive” in the regulatory definition of “possession.” 19 C.F.R. § 190.2, defines possession, for purposes of substitution unused merchandise drawback (19 U.S.C. § 1313(j)(2)), as “physical or operational control of the merchandise, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback.” BMW NA provides no support for this contention. BMW NA contends HQ H236882 is therefore misguided because it conflates the two concepts and made physical possession require operational control, but BMW NA does not further support this point. As further explained below, we note that BMW NA may have physical control of the merchandise, but physical control is not equivalent to “possession” or complete dominion and control within the meaning of 19 U.S.C. § 1313 (j)(2).
Moreover, BMW NA does not explain how the role and level of responsibility of an FTZ operator differs from that of a warehouse operator. CBP regulations describe an FTZ operator’s level of responsibility as that of “prudent manager of a storage, manipulation, or manufacturing facility.” See 19 CFR § 146.4(a). Under 19 C.F.R. § 146.4, an FTZ’s operator must “supervise all admissions, transfers, removals, recordkeeping, manipulations, manufacturing, destruction, exhibition, physical and procedural security, and conditions of storage in the zone.” In addition, an FTZ operator is required to establish procedures “adequate to ensure the security of the merchandise located in the zone in accordance with applicable Customs security standards and specification. 19 C.F.R. § 146.4(e). See also HQ H253748 (April 3, 2017) (holding that a zone operator is responsible for proving zone status of merchandise under its control). See also 19 C.F.R. §§ 146.4(h) and § 146.21(a)(1). In sum, an FTZ operator has no rights to goods within its FTZ other than that of a prudent bailee.
We agree with BMW NA that as an FTZ operator, it would exercise physical control over the designated motor vehicles, but it has not explained how its relationship to the motor vehicles differs from that of CSI, the claimant in HQ H236882. In previous decisions, CBP has framed the issue of whether a claimant has possession over the commodity as “[d]oes the person possess the paper or the commodity itself?” HQ 225166 (Apr. 10, 1996), citing C.S.D. 87-18. In the instant context, BMW NA has not provided us with evidence showing that it will acquires title to the motor vehicles when they are stored in its custody. In HQ 225166, upon reviewing the documentary evidence CBP found that the claimant could not satisfy the possession requirement because is relationship to the merchandise was “custodial”. The claimant never received any meaningful title or risk of the loss to goods. CBP noted that “custody is defined as [t]he care and control of a thing or a person. The keeping, guarding, care, watch, inspection, preservation, or security of a thing.” When BMW NA acts as an FTZ Operator, it has physical custody of the motor vehicles that are stored at its FTZ, which is reflected in the CBP regulations. Accordingly, CBP finds that BMW NA, when acting in its capacity as FTZ Operator does not meet the requirements for possession under § 1313(j)(2) of the motor vehicles that are admitted to its FTZ for storage prior to their exportation by BMW MC, because BMW NA cannot put such merchandise to any use chosen.
Third, BMW NA argues that BMW NA has physical possession over the merchandise when acting in its capacity as FTZ operator, by virtue of its regulatory obligations to CBP and that it has physical control of the merchandise. However, possession differs from custody, as explained above. The plain language of 19 U.S.C. § 1313(j)(2)(C)(ii) unambiguously requires the claimant to have possession of the merchandise. A party may have operational control merchandise that is in the custody of another party’s leased facility for storage or bailment and be able to claim that it possesses the merchandise. This is further indicated by the clause that begins with the word “including” and ends with the phrase “in any other manner.” As we have stated in previous rulings, two parties cannot possess the same object at the same time. See HQ H236882, supra, citing HQ 251666 (April 10, 1996).
Accordingly, the facts outlined in BMW NA’s request are akin to HQ H236882, supra, in which we held that the claimant warehouse operator CSI did not satisfy the possession requirement under 19 U.S.C. § 1313(j)(2) because it did not have complete control and dominion over the exported merchandise while the merchandise was in its physical custody. Therefore, we see no legal basis to revoke that ruling and find differently here, given that neither the law nor its application has changed.
HOLDING
For the reasons discussed above, BMW NA acting in its capacity as an FTZ operator does not satisfy the “possession requirement” of the substituted motor vehicles as required for substitution unused drawback merchandise claims filed pursuant to 19 U.S.C. § 1313(j)(2).
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 ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” If the activities vary 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,
Gail G. Kan, Chief
Entry Process and Duty Refunds Branch