Customs Ruling HQ H305251 - Substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2); foreign status components of articles produced within a Foreign Trade Zone.

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HQ H305251
Dec 10, 2021

Type : • HTSUS :
Related: 224997; 228008; 230591; 559454; 228969; H275567; H183474

DRA 4
OT:RR:CTF:ER
H305251 KF

Mr. David Ostheimer
Lamb & Lerch
233 Broadway
Suite 2702
New York, New York 10279

RE: Substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2); foreign status components of articles produced within a Foreign Trade Zone. Dear Mr. Ostheimer: This is in response to your letter, dated August 19, 2019, requesting a ruling on the drawback eligibility of vehicles withdrawn from a Foreign Trade Zone pursuant to 19 U.S.C. § 1313(j)(2). FACTS: Mercedes-Benz USA, LLC (“MBUSA”) produces vehicles in a Foreign Trade Zone (“FTZ”) with domestic and foreign status components. The foreign components are both in privileged and nonprivileged foreign status. Once production is complete, MBUSA proposes withdrawing the finished vehicles for exportation under bond without filing an entry for consumption. MBUSA seeks to claim unused merchandise drawback under 19 U.S.C. § 1313(j)(2) on the vehicles it so exports from an FTZ, substituting them for previously imported and entered vehicles which remain within the United States. MBUSA seeks confirmation that vehicles so exported from an FTZ, containing foreign status components on which no duties were paid, are eligible for substitution unused merchandise drawback.

ISSUE: Whether vehicles produced within an FTZ from domestic and foreign status components and exported without being entered for consumption are eligible to be substituted for imported and duty-paid vehicles to claim drawback under 19 U.S.C. § 1313(j)(2).

LAW AND ANALYSIS: Drawback “means the refund, in whole or in part, of the duties, taxes, and/or fees paid on imported merchandise.” 19 C.F.R. § 190.2. Pursuant to 19 U.S.C. § 1313(j)(2), drawback may be claimed on exported merchandise which is substituted for imported and duty-paid merchandise. Among the requirements for claiming drawback under 19 U.S.C. § 1313(j)(2), the substituted merchandise must be: (A) [] classifiable under the same 8-digit HTS subheading number as such imported merchandise; (B) [exported or destroyed under customs supervision] before the close of the 5-year period beginning on the date of importation of the imported merchandise and before the drawback claim is filed … ; and (C) before such exportation or destruction— (i) [] not [be] used within the United States, and (ii) [be] 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, if that party— (I) is the importer of the imported merchandise, or (II) received the imported merchandise, other merchandise classifiable under the same 8-digit HTS subheading number as such imported merchandise, or any combination of such imported merchandise and such other merchandise, directly or indirectly from the person who imported and paid any duties, taxes, and fees imposed under Federal law upon importation or entry and due on the imported merchandise (and any such transferred merchandise, regardless of its origin, will be treated as the imported merchandise and any retained merchandise will be treated as domestic merchandise). Eligibility for substitution drawback is additionally conditioned by the terms of 19 U.S.C. § 1313(u), which prohibits imported merchandise “that has not been regularly entered or withdrawn for consumption [from] satisfy[ing] any requirement for use, exportation, or destruction under” the statutory drawback provisions. Hence, at issue here are the foreign status components that are not entered and used to build the exported vehicles in the FTZ. The legislative policy underlying prohibition under 19 U.S.C. § 1313(u) is prevention of “‘piggybacking’ other duty exemption benefits ([provided by] FTZs, bonded warehouses and duty-free temporary importation) onto [] drawback benefits.” Senate Report 103-189, 84 (Nov. 18, 1993). Foreign status merchandise admitted into an FTZ is afforded a benefit, i.e., duty is deferred until the goods are withdrawn from the zone. The prevention of “‘piggybacking’ prohibits the accumulation of other duty exemption benefits like drawback on goods that have already received the benefit of one duty exemption like foreign status merchandise admitted into an FTZ. U.S. Customs and Border Protection (“CBP”) has explained that, to effect the legislative policy underlying 19 U.S.C. § 1313(u), imported merchandise, i.e., foreign status merchandise “withdrawn and exported from an FTZ … is not considered regularly entered or withdrawn for consumption for purposes of drawback. Therefore, the subject merchandise would not be [considered] exported as required under section 1313(j)(2) and thus, receive the duty deferral benefit of foreign status goods admitted into an FTZ and duty drawback. Consequently, this merchandise may not be used as the basis for drawback claims.” HQ 224997 (Feb. 18, 1994); HQ 228008 (April 30, 1999) (“foreign merchandise in a zone [i]s not eligible to be an exportation for drawback purposes … consistent with Congressional intent”) (citing C.S.D. 85-49 (July 19, 1985)). The policy of preventing “piggybacking” duty exemptions prohibits drawback claims based on exported merchandise that is manufactured within an FTZ from foreign status components, meaning imported but non-duty-paid articles that have not been released from customs custody. 19 C.F.R. § 146.1. CBP has cautioned that “[b]ecause foreign merchandise admitted to an FTZ is exempt from duty until it is entered into the U.S. ... no drawback of duty is permitted upon … goods manufactured with that foreign merchandise and exported.” HQ 230591 (Feb. 17, 2005) (quoting C.S.D. 85-49 (“While in a foreign-trade zone exempt from the payment of duty, privileged foreign or nonprivileged foreign merchandise does not thereby constitute duty-free merchandise within the meaning of the substitution manufacturing drawback law … and, hence, an article manufactured therefrom, and then exported, may not be the subject of a claim for drawback.”). Granting drawback on exports comprised of foreign status components would result in the “piggybacking” of a duty-refund benefit onto duty-exempt merchandise, contrary to Congressional intent in enacting 19 U.S.C. § 1313(u). Id.; HQ 228008. MBUSA contends that by manufacturing vehicles within an FTZ located geographically in the United States, the vehicles qualify as “domestic” merchandise for drawback purposes because they are “substantially transformed” into products originating within the United States. MBUSA concludes that any foreign status components utilized during manufacture are therefore exempt from the requirement of being regularly entered and duty paid under 19 U.S.C. § 1313(u). MBUSA asserts that exports of such vehicles are thus eligible for substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2). MBUSA confuses the factual conclusion that vehicles manufactured in an FTZ located within the United States using foreign status components yield products manufactured in the United States with the erroneous legal conclusion that such vehicles are legally “domestic status” merchandise. Domestic status means: (1) articles grown, manufactured, or produced in the United States on which any internal revenue taxes owed have been paid; (2) imported and duty-paid articles; and (3) articles entered into customs territory as duty and tax free. 19 C.F.R. § 146.43(a)(1)-(3). CBP has clarified that the statutory prohibition under 19 U.S.C. 1313(u) applies only to imported merchandise which has not been entered. HQ 230591; Nat'l Ass'n of Mfrs. v. United States Dep't of Treasury, 427 F. Supp. 3d 1362, 1372 (Ct. Int’l Trade 2020). Consequently, exports manufactured from only domestic status components may be substituted for imported duty-paid goods and drawback paid because merchandise in domestic status was previously entered, or never imported. Domestic status merchandise is thus not accorded the duty deferral or exemption benefits granted to foreign status merchandise within an FTZ and no previous duty deferral benefit is aggregated when drawback is paid upon this merchandise. Drawback benefits under 19 U.S.C. § 1313(j)(2) may therefore properly be accorded to domestic status exports substituted for duty-paid imports consistent with the statutory language and legislative policy underlying 19 U.S.C. § 1313(u). MBUSA argues that foreign status components, which are by definition imported and not released from CBP custody because no entry nor duty-payment has occurred, should be considered “domestic” merchandise that qualifies for drawback upon “substantial transformation” within an FTZ. 19 C.F.R. § 146.1. In support of its argument, MBUSA cites C.S.D. 81-44 (Aug. 4, 1980). In the cited decision, CBP addressed whether manufacturing performed within an FTZ constituted a manufacture occurring within the United States for drawback purposes. CBP decided that any manufacture occurring geographically within the United States resulted in a good that was manufactured within the United States. However, this is an inescapable factual conclusion and not a legal conclusion. CBP’s decision reflects this well-established factual conclusion that is not at issue in this ruling. We agree with MBUSA that, as a matter of fact, a manufacture of vehicles has occurred within the United States under the facts presented, but that conclusion has no effect on the outstanding legal issue. That legal issue is whether the act of combining foreign and domestic status components during manufacture in an FTZ within the United States confers domestic status on the finished product, such that a “substantial transformation” occurs of the foreign status components and the finished product avoids the prohibition under 19 U.S.C. § 1313(u). MBUSA’s argument concerning substantial transformation stems from the marking requirements under Part 134 of Customs Regulations. A product’s country of origin, for purposes of marking: is determined from the status of the merchandise at the time of importation, unless the merchandise is substantially transformed, to allow a change in its origin status. …. [A] substantial transformation occurs when articles lose their identity and become new articles having a new name, character or use .... CBP rulings [] allow for the admittance of merchandise into an FTZ to facilitate ... the manipulation or manufacture which may result in a substantial transformation. HQ H275567 (May 8, 2018). Substantial transformation is, therefore, a legal designation derived from a process by which articles originating abroad are manipulated or manufactured within the United Sates in order to be deemed originating within the United States for country of origin marking purposes. MBUSA attempts to make this marking rule apply for duty purposes. MBUSA asserts that if a product manufactured within an FTZ in the United States can be deemed originating in the United States for marking purposes, the product should be deemed “domestic” for drawback purposes and no longer constitute an imported article requiring entry under 19 U.S.C. § 1313(u). MBUSA’s assertion is without any legal or precedential merit, attempting to superimpose the legal framework governing marking onto the intersecting legal frameworks governing dutiability, FTZs, and drawback. Articles originating within the United States are referred to as domestic articles but “substantial transformation” does not, under these circumstances, confer domestic status for purposes of duty assessment. CBP’s long-standing position for duty assessment is that goods produced in an FTZ from both domestic and foreign status components are not considered originating in the United States “unless duty has been paid on the value of the foreign components when exported from the zone.” HQ 559454 (Jan. 14, 1997) (emphasis added). To illustrate, in HQ 559454, a duty exemption was claimed for vehicles assembled within an FTZ utilizing both domestic and foreign status parts. The duty exemption sought arose under Chapter 98 of the Harmonized Tariff Schedule of the United States (“HTSUS”) and is available to products of the United States which are exported and returned to the United States without having been advanced in value or improved in condition while abroad. The vehicles at issue were exported from an FTZ to Canada post-assembly for use as rental vehicles, then imported to the United States for sale. CBP held that the vehicles did not qualify for the duty exemption because duties were never paid on the foreign status parts, precluding the vehicles from qualifying as products of the United States upon exportation. Upon re-importation of the vehicles, duties were owed on the foreign parts. Although MBUSA seeks a duty refund under 19 U.S.C. § 1313(j)(2), instead of the Chapter 98 duty exemption in HQ 559454, in both cases a duty benefit is claimed on vehicles manufactured with imported components in foreign status that were never entered into customs territory and duty paid. In neither case does the fact that manufacture occurs geographically within the United States have any bearing on the zone status or dutiability of the components within the exported vehicle, nor does the vehicle qualify as a domestic product. The controlling fact is that without filing a consumption entry and paying the duties owed on foreign status components, prior to exportation of the finished vehicle from an FTZ, the imported components preclude the vehicle from qualifying as domestic merchandise. The imported components cannot be “substantially transformed” into a domestic product for drawback purposes regardless of the type of manufacture or manipulation to which they are subjected within an FTZ. This is because there exists no process capable of producing a domestic product from foreign status components in the legal frameworks governing dutiability and drawback other than filing a consumption entry and tendering duties owed. In HQ 559454, failure to effect entry and duty payment resulted in the exported vehicles not qualifying as products of the United States under Chapter 98 of the HTSUS. In this case, the same failure to affect entry and duty payment results in MBUSA’s imported components in foreign status explicitly prohibited from drawback eligibility under 19 U.S.C. § 1313(u). Pursuant to General Note 1 of the Harmonized Tariff Schedule of the United States, all merchandise imported into the United States is subject to duty unless specifically exempted. Foreign status components manufactured in the United States into a finished product may be substantially transformed into a product of the United States for purposes of marking but are not exempted from payment of duties owed upon the finished product’s entry for consumption. As explained in HQ H183474 (Jan. 27, 2012), “CBP has held that when a nonprivileged [foreign] good is substantially transformed in an FTZ, it becomes a product of the United States ... that … upon withdrawal from the FTZ for consumption in the United States is subject to the rate of duty of the finished product.” A foreign status component therefore remains an imported and dutiable good even if manufactured into a finished product capable of being marked a product of the United States under Part 134 of Customs Regulations. We reiterate that only entry and duty payment can confer domestic status to components admitted into an FTZ in foreign status – not manufacture or commingling with domestic status parts. See e.g., 19 C.F.R. § 146.43(a). MBUSA cites to HQ 230591 (Feb. 17, 2005) to evidence that commingling of domestic and foreign status components within an FTZ in the United States is capable of producing a “domestic” product under the legal framework governing drawback. In HQ 230591, CBP addressed 19 U.S.C. § 1313(u) in the context of MTBE, a type of petrochemical manufactured within an FTZ from domestic status feedstocks. Drawback was claimed on MTBE that was exported from the FTZ without being entered for duty payment. The Port of Houston denied the claim on the basis that 19 U.S.C. § 1313(u) precluded drawback eligibility for merchandise which had not been regularly entered. CBP determined the terms of the statute only prohibited drawback on “the exportation, use or destruction of foreign goods upon which no duty had been paid by, among others, virtue of their admission to an FTZ in privileged or nonprivileged foreign status.” Since the MTBE had been manufactured exclusively from feedstocks in domestic status, CBP concluded the finished product qualified as a domestic good lacking any foreign components which were precluded from drawback under 19 U.S.C. § 1313(u). CBP’s conclusion is in accordance with the regulatory definition of domestic status, meaning: a domestic manufacture on which any internal revenue taxes owed were paid, or, imported and entered merchandise on which any duties owed were paid. 19 C.F.R. § 146.43(a)(1)-(3). Such domestic status components are therefore not imported, or were previously imported and regularly entered, rendering the terms of 19 U.S.C. § 1313(u) inapplicable. MBUSA’s reliance on HQ 230591 is therefore improper because the facts of HQ 230591 are fundamentally distinct from those presented by MBUSA. CBP’s conclusion in HQ 230591, that MTBE manufactured within the United States from domestic feedstocks yielded a domestic good, was premised on all of the components used during manufacture being in domestic status. MBUSA instead seeks to claim drawback on vehicles manufactured from both domestic status components and foreign status components that were never entered nor duty-paid. CBP’s analysis in HQ 230591 is thus of no support to MBUSA’s assertion that the geographic location of a manufacture occurring within an FTZ has any bearing on whether a foreign or domestic finished product is produced. MBUSA has not identified any legal basis for merchandise manufactured from both domestic and foreign status components to be deemed a domestic product exempt from the requirement of importation and entry under 19 U.S.C. § 1313(u). The foreign status components within the finished vehicles manufactured by MBUSA are by definition imported and not regularly entered, precluding them from drawback eligibility under 19 U.S.C. § 1313(u). See 19 C.F.R. §§§ 146.1; 146.41(a); 146.42(a). No act of manufacture, or commingling with domestic status components, transforms the foreign status components into a “domestic” finished product. Consequently, to prevent “piggybacking” duty exemptions derived from FTZs onto drawback benefits, we find that only the domestic status components within the vehicles exported by MBUSA are eligible for substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2). The amount of duty refund claimed upon the submission of a drawback entry must therefore be limited to the value of the domestic status components within the exported vehicles. 19 C.F.R. § 190.51(a)(2)(vii). The foreign status components within the exported vehicles remain ineligible to constitute an exportation for drawback purposes under 19 U.S.C. § 1313(u). Accordingly, careful inventory control and recordkeeping is required of MBUSA to delineate the domestic status components from the foreign status components combined during the manufacture of vehicles. Id.; 19 C.F.R. § 146.21(a)(1). Such careful delineation is critical because the dutiability of the finished and exported vehicle is based upon the classification and value of the components therein. 19 C.F.R. § 146.65(a); C.S.D. 85-33 (Feb. 4, 1985). Nonprivileged foreign parts are classifiable by their character, condition, and quantity at the time of entry, pursuant to the classification of the finished vehicle. 19 C.F.R. § 146.65(a)(2); HQ 228969 (Sept. 27, 2002) (explaining that nonprivileged foreign materials were “dutiable ... as the finished products”). Privileged foreign parts are classifiable by their character, condition, and quantity upon application for privileged status, regardless of the classification of the finished vehicle. 19 C.F.R. § 146.65(a)(1); HQ 228969 (“when privileged foreign merchandise has been subject to manufacture or manipulation duty is owed on the amount of [privileged foreign] merchandise used in the manufacture of the [finished] entered merchandise”). The zone status and classification of each component within a vehicle exported by MBUSA, and the classification of the finished vehicle, is thus necessary to calculate the duty refund amount due on a drawback claim. The value of all domestic status components must be deducted from the total value of the finished and exported vehicles. We note that CBP is required to verify the accuracy of all drawback claims, which includes “examination of all records relating to the transaction(s)” as needed. 19 C.F.R. § 190.61(b). For MBUSA to substantiate the accuracy of the refund amount claimed, a drawback entry must include supporting documents such as a spreadsheet demonstrating the deduction of all foreign status components from the value of the manufactured and exported vehicles. Upon submission of a drawback entry and supporting documents, MBUSA must certify that no part of its drawback claim is based upon the value of foreign status components utilized in the manufacture of an exported vehicle. 19 C.F.R. § 190.61(e)(1)(i). For each designated import line item on the drawback entry, in addition to satisfying the requirements under 19 C.F.R. § 190.51, MBUSA should include: the amount of duties, taxes, and fees paid on the value of the imported and entered vehicle; the amount of duties, taxes, and fees that would have been paid on the value of the domestic status components of the manufactured and substituted vehicle had it been regularly entered prior to exportation; total value of the domestic status components within the exported vehicle; total value of the foreign status components within the exported vehicle; and the drawback sum claimed. 19 C.F.R. § 190.51(a)(2)(viii). The drawback sum for the claim can be computed by multiplying the lesser amount of the duties, taxes, and fees paid on either the value of the imported and entered vehicle, or the value of the domestic status components within the substituted and exported vehicle, times the 99% drawback rate. 19 C.F.R. §§ 190.22(a)(1)(ii)(A); 190.51(b)(1). We additionally note that as a zone operator, MBUSA must maintain an audit trail of all components within an exported vehicle from admission through manufacture and exportation, clearly identifying the zone status of each component. 19 C.F.R. § 146.21(a)(5). CBP may consult such inventory records from an FTZ in the course of verifying a drawback claim, to ensure that no duty refund is paid on foreign status components in accordance with 19 § 1313(u).HOLDING: Based on the above, we find that when vehicles are produced within an FTZ from domestic and foreign status components and exported without being entered for consumption, only the domestic status components are eligible for drawback under 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 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,

Gail G. Kan, Chief
Entry Process & Duty Refunds