ENT 1-03
OT:RR:CTF:ER
H303275 ABH
Rolando Jocson
Drawback Specialist
U.S. Customs and Border Protection
Port of San Francisco, Drawback Branch
555 Battery Street
San Francisco, CA 94111
Re: Request for Internal Advice Request; Recycling of packaging materials in drawback claim under either 19 U.S.C. 1313(j) or 26 U.S.C. 5062(c).
Dear Mr. Jocson:
This letter is in response to your Request for Internal Advice, dated September 20, 2018. The Request for Internal Advice seeks clarification regarding whether destruction for drawback purposes is permitted where the distilled spirits, wine, and beer are destroyed in their entirety, but the packaging material of the imported goods is salvaged and recycled.
FACTS:
Parallel Environmental Services Corporation, dba Parallel Products (“Parallel”), is based in Louisville, Kentucky. The company offers liquid waste disposal and recycling services to beverages, ethanol, health and beauty, plastics, and transportation industries. Parallel also provides destruction and tax/duty recovery services to the alcoholic beverage industry.
Parallel itself does not have a drawback program and has not filed a drawback claim with U.S. Customs and Border Protection (“CBP”). It provided services to clients, however, that were priced based on potential drawback claims. For example, Parallel charged $3.25 per case for destruction under 19 U.S.C. § 1313(j) claims, with no recycling and all materials are sent to a landfill. Parallel charged $1.25-$2.50 per case for destruction under a 26 U.S.C. § 5026(c) claims, where alcoholic content is emptied down the drain or sent to a landfill and the packaging materials (e.g., aluminum, glass, plastic, cardboard, stretch wrap) were salvaged and recycled. The recycling fees earned were credited against the fee and the fee charged to the customer was reduced accordingly. Finally, for destruction services where the client was not going to seek any drawback, Parallel charged $.065 per case.
According to Parallel, the Port of Louisville approved their destruction processes and tax/duty services in 2007. In 2017, however, CBP officers sought further information from Parallel about their destruction processing services and ultimately advised Parallel that the destruction of imported goods that involved drawback and recycling of packaging materials was not permitted. The CBP Officers suggested that Parallel contact a drawback center to determine if their tax/duty recovery services were allowed. In October 2017, Parallel contacted the San Francisco Drawback Office for advice and the Drawback Office advised Parallel that no materials may be recycled if a request for drawback was going to be filed.
As a result of this advice, Parallel stopped offering services which allowed for the recycling of packaging materials and continued to dispose of all materials on a full destruction basis, such that all materials, including the liquids with alcoholic content and the packaging are sent to the landfill with no recycling.
In its Internal Advice request, Parallel limited its request to the destruction of distilled spirits, wine, and beer. Parallel stated that its customers are not seeking a duty drawback refund of any duty, tax, or fee paid on packaging material pursuant to 19 U.S.C. § 1313(q). Parallel also stated that its clients would not be seeking drawback for any applicable harbor maintenance taxes (“HMTs”) or merchandise processing fees (“MPFs”).
ISSUE:
Whether in the context of duty drawback claims of distilled spirits, wine, and beer (pursuant to 19 U.S.C. § 1313(j) and 26 U.S.C. § 5062(c)), destruction in lieu of exportation is permitted when the imported merchandise is destroyed, but the containers within which the imported good is contained is salvaged and recycled.
LAW AND ANALYSIS:
Parallel seeks this Internal Advice regarding two statutory provisions – 19 U.S.C. 1313(j) and 26 U.S.C. 5062(c). Section 1313(j) addresses unused merchandise drawback pursuant to Customs laws under Title 19. Section 5062(c) addresses drawback of excise taxes pursuant to the Internal Revenue Code under Title 26. Because the statutory provisions and the authorities differ, each will be addressed in turn.
19 U.S.C. § 1313(j)
Drawback is a refund or remission, in whole or in part, of a Customs duty, internal revenue tax, or fee. There are a number of different kinds of drawback authorized under law, but the one at issue is unused merchandise drawback pursuant to 19 U.S.C. § 1313(j). The implementing Customs regulations have recently been modernized pursuant to the Trade Facilitation and Trade Enforcement Act of 2015 (“TFTEA”) (Pub. L. 114-125, 130 Stat. 122), which was signed into law on February 24, 2016. Accordingly, Title 19, U.S. Code of Federal Regulations, Part 191, applies to drawback claims filed before or on February 23, 2019, whereas Part 190 applies to drawback claims filed after February 23, 2019. Section 906(q)(3) of TFTEA, however, provided for a transition period, beginning February 24, 2018, and ending February 23, 2019, during which claimants were permitted to file claims under the drawback process and regulations detailed in part 191 (and under section 313 of the Tariff Act of 1930 as in effect on the day before TFTEA was signed into law) or under the amended statute and the implementing regulations (Part 190).
Historically, drawback dating back to the Tariff Act of July 4, 1789, only permitted drawback of ninety-nine (99) percent of duties paid on imported merchandise (except distilled spirits) if the merchandise was exported within a year. Drawback expanded over time, however, to provide, among other things, refunds under certain circumstances for taxes and fees in addition to duties and to allow for merchandise to be destroyed as an alternative to exportation. Indeed, the concept of destruction in lieu of exportation has also evolved over time.
Prior to 2000, destruction required that the merchandise be rendered valueless and if the merchandise retained any value as an article of U.S. commerce it was not sufficiently destroyed for purposes of seeking drawback. Historically, in interpreting the term destruction, as used in the drawback law when merchandise or articles are alleged to be destroyed in lieu of exportation, Customs followed the Customs Court case American Gas Accumulator Co. v. United States, Treasury Decision (T.D.) 43642 (Cust. Ct., 3rd Div. 1929). In that case, the Court defined destruction as,
destruction as an article of commerce. In other words, if articles were destroyed to such an extent that they were only valuable in commerce as old scrap they still would be articles of commerce to which duty attached upon importation, and therefore could not be said to have been destroyed.
56 T.D. 368, 370. Accordingly, striking machine parts with a heavy, solid ball and then dismantling the parts for scrap iron, did not amount to destruction for purposes of drawback under 19 U.S.C. § 1313(j), HQ 222975 (Sept. 4, 1991), but scrap metal buried in a public landfill whereby recovery would be economically infeasible was considered destroyed for drawback purposes, Customs Service Decision (C.S.D.) 79-419 (cited in HQ 222742 (Dec. 11, 1991).
Following this definition of destruction, CBP looked at the issue of recycling and determined that recycling merchandise in the Customs territory did not constitute destruction for purposes of drawback because it resulted in articles of Commerce. HQ 224110 (Mar. 17, 1993). In one ruling, recycling was permitted to satisfy the destruction requirement of 19 U.S.C. § 1313(j)(2) only upon proof that local laws required it and that the cost of the recycling exceeded the value of the goods recycled. HQ 224742 (Dec. 11, 1991).
In 1998, when implementing the North American Free Trade Agreement Implementation Act, Public Law 103-182 (Dec. 8, 1993), popularly known as the Customs Modernization Act 1998, Customs proposed a regulatory definition of “destruction” as “the complete destruction of articles or merchandise to the extent that they have no commercial value.” Drawback Proposed Rule, 62 Fed. Reg. 3082, 3098 (Jan. 21, 1997). Commenters suggested that the definition of destruction in proposed § 191.2(g) “should provide for the allowance of drawback when merchandise was not completely destroyed, had value, and was partially recovered or recycled.” Drawback Final Rule, 63 Fed. Reg. 10,970, 10,972 (Mar. 5, 1998). Customs responded that “the proposal to allow drawback when complete destruction does not occur (and the resulting scrap has value) is not within Customs authority to implement by regulations.” Id.
In 2000, Congress amended 19 U.S.C. § 1313 and added subsection 1313(x), which allowed destruction for drawback purposes even when material was recycled or recovered from the imported merchandise as long as the value of any such recovery was deducted from the value of the imported merchandise destroyed for purposes of determining the amount of duties to be refunded as drawback to a claimant. Pub. L. 106-476, Sec. 1462 “Drawbacks for Recycled Materials” (Nov. 9, 2000). This new subsection, however, only applied to drawback claims authorized under 19 C.F.R. § 1313(a), (b), and (c). Id. Under TFTEA, however, Congress extended this § 1313(x) provision to drawback claims authorized under § 1313(j). TFTEA, Section 906(m). Because of the transition period provided for in TFTEA Section 906(q)(3), discussed above, the extension of § 1313(x) to § 1313(j) drawback claims became effective as of February 24, 2018.
The Congressional changes made in 2000 and under TFTEA were reflected in the modernized drawback regulations under Part 190. The previous definition of “destruction” under pre-TFTEA regulations, 19 C.F.R. § 191.2(g) stated, “Destruction means the complete destruction of articles of merchandise to the extent that they have no commercial value.” The modernized drawback regulation, 19 C.F.R. § 190.2 states that,
Destruction means the destruction of articles or merchandise to the extent that they have no commercial value. For purposes of 19 U.S.C. 1313(a), (b), (c), and (j), destruction also includes a process by which materials are recovered from imported merchandise or from an article manufactured from imported merchandise, as provided for in 19 U.S.C. 1313(x).
In sum, as of February 24, 2018, claimants may seek 1313(j) drawback when the merchandise has been destroyed in lieu of exportation, even if the claimant recycles some part of the imported merchandise so long as the claimant deducts the value of that recovered/recycled merchandise from the value of the imported merchandise that is destroyed for purposes of determining the amount of duties, taxes, and fees to be refunded as drawback to the claimant pursuant to 19 U.S.C. § 1313(x).
Accordingly, the advice given by the San Francisco drawback office in October 2017, was correct at the time – that any recycling of merchandise for which a 1313(j) claim was being sought was not permitted for purposes of destruction in lieu of exportation. As discussed above, that law has since changed. Accordingly, if Parallel offers services that include the recycling of merchandise, the client, i.e., the drawback claimant, can seek drawback of duties, taxes, and fees paid on that merchandise, as long as the value of that recovered/recycled material is deducted from the value of the imported merchandise destroyed for purposes of determining the amount to be refunded as drawback pursuant to 19 U.S.C. § 1313(x).
In this particular case and because Parallel has limited its request to the destruction of distilled spirits, wine, and beer, subtracting the value of the recycled goods from the value of the imported goods (distilled spirits, wine, and beer) that are not subject to ad valorem tariffs, would not result in a reduction of drawback. The language of 19 U.S.C. § 1313(x) does not consider tariffs that are not assessed on an ad valorem basis. Chapter 22 of the Harmonized Tariff Schedule of the United States (“HTSUS”) covers the HTS provisions governing tariffs on beer, wine, and distilled spirits. The rates of duty on those alcoholic beverages are assessed based on liters of beverage imported. To the extent that there are HTSUS break outs for different packaging or containers, the distinction relates to quantity of liters rather than the type of packaging. See e.g., Ch. 2205.90.2000 (“Vermouth and other wine of fresh grapes flavored with plants or aromatic substances: Other: Vermouth: In containers each holding over 2 liters but not over 4 liters”) versus Ch. 2205.90.4000 (Vermouth and other wine of fresh grapes flavored with plants or aromatic substances: Other: Vermouth: In containers each holding over 4 liters”). These breakouts, for example, have differing rates of duty – 3.5¢/liter and 3.8¢/liter respectively. The container size distinction does not relate to whether the material of the container is, for example, aluminum or glass.
Because the HTSUS assessment of duties on alcoholic beverages is based on liquid quantity, rather than the ad valorem value that could potentially be affected by the containers within which the beer, wine, or distilled spirits was contained, subtracting the value of the recycled containers from the value of the imported merchandise would not result in a reduction of the amount of drawback claimed. Legislative history indicates that this result was not Congress’ intent. In 2015, when Congress added a drawback claim under the authority of § 1313(j) to the § 1313(x) allowance of recycling as a form of destruction, Congress stated that,
Section 906(m) amends section 313(x) of the Tariff Act of 1930 (19 U.S.C. 1313(x)) to require the amount of drawback claimed pursuant to subsection (j) to be reduced by the value of any materials reclaimed from the destruction of unused merchandise.
Trade Facilitation and Trade Enforcement Act of 2015, Senate Report 114-45 (May 13, 2015), 114 S. Rpt. 45 (May 13, 2015). This statement by Congress that “the amount of drawback claimed” is to be “reduced by the value of any materials reclaimed,” is an expression of intent that although recycling in lieu of destruction is to be incentivized, there is an expectation that the drawback claimant does not receive a windfall, but rather reduces the amount of duties, taxes, and fees refunded by any value received by reclaiming or recycling the unused merchandise. Accordingly, although § 1313(x) does not contemplate tariffs that are not assessed on an ad valorem basis, we extend the principle expressed in the legislative history to this particular case where the tariffs are based on liquid quantity and require the drawback claimed to be reduced by the value of any materials reclaimed or recycled.
26 U.S.C. § 5062(c)
Parallel also seeks advice as to whether in the context of claims for refund of the internal revenue taxes paid on distilled spirits, wine, and beer pursuant to 26 U.S.C. § 5062(c), destruction in lieu of exportation is permitted when the imported merchandise is destroyed, but the containers holding the alcoholic content is salvaged and recycled. Title 26 of the Internal Revenue Code (“IRC”) establishes a regime of excise taxation for beer, wine, and distilled spirits. The IRC includes its own refund provision for imported alcohol pursuant to 26 U.S.C. § 5062(c), which states that
[u]pon the exportation [or destruction] of imported distilled spirits, wines, and beer upon which the duties and internal revenue taxes have been paid or determined incident to their importation into the United States, and which have been found after entry to be unmerchantable or not to conform to sample or specifications, and which have been returned to customs custody, the Secretary shall, under such regulations as he shall prescribe, refund, remit, abate, or credit, without interest, to the importer thereof, the full amount of the internal revenue taxes paid or determined with respect to such distilled spirits, wines, or beer.
See also 19 C.F.R. §§ 190.161 & 191.161. Accordingly, § 5062(c) allows for a full refund of internal revenue excise taxes paid on alcoholic beverages when such beverages are exported or destroyed provided that the other statutory requirements are met. The statute is completely silent with respect to packaging material. Because the relevant IRC provision is silent regarding the destruction or exportation of packaging material, CBP has no legal basis by which to take recycling of packaging into consideration upon refunding the internal revenue taxes paid pursuant to 26 U.S.C. § 5062(c).
HOLDING:
In sum, Parallel’s customers can seek drawback of duties and excise taxes on alcoholic beverage importations pursuant to 19 U.S.C. § 1313(j) and 26 U.S.C. § 5062(c), even if the containers are salvaged and recycled by Parallel. To the extent, however, that Parallel reclaims and/or recycles the merchandise, the value recovered must be deducted from the drawback claimed.
You are to mail this decision to the Internal Advice requester. The Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/, which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov, or other method of public distribution.
Sincerely,
for Craig T. Clark, Director
Commercial and Trade Facilitation Division