RR:CTF:VS H308129 AP
John P. Donohue, Esq.
Neville Peterson LLP
Two Logan Square
100 N. 18th Street, Suite 333
Philadelphia, PA 19103
RE: Petroleum products; U.S. Virgin Islands; insular possession; CBERA; CBTPA; duty-free treatment; General Notes 3(a)(iv)(D) and 12(t), HTSUS; “NAFTA parity” provision; inventory management system
Dear Mr. Donohue:
This is in response to your November 11, 2019 ruling request, supplemented on May 27, 2020, on behalf of Limetree Bay Refining LCC (“LBR”), regarding whether certain petroleum products, which will be produced from originating materials and from non-originating blendstocks and additives at the company’s refinery in the U.S. Virgin Islands for shipment to the customs territory of the United States, will qualify for duty-free treatment under Section 213 of the Caribbean Basin Economic Recovery Act (“CBERA”), as applied to the U.S. Virgin Islands under General Note (“GN”) 3(a)(iv)(D), Harmonized Tariff Schedule of the United States (“HTSUS”).
FACTS:
LBR owns petroleum refinery assets in the U.S. Virgin Islands. LBR’s refinery facilities are currently inoperative. The company is in the process of rehabilitating its petroleum refinery and expects to produce conventional gasoline, gasoline blendstocks, RBOB/CBOB/CARBOB, jet fuel, diesel fuels, residual fuel oils, and gas oils, of heading 2710, HTSUS. The company’s refinery contains atmospheric distillation units, a vacuum distillation unit, catalytic hydrotreating units, a catalytic reformer, a delayed coking unit, an isomerization unit, liquid propane gas fractionation unit, and a utility fractionation unit. The principal feedstock used in the production will be imported foreign and U.S. origin crude oil.
The imported foreign and U.S. origin crude oil will be stored and subjected to a “desalting” process by which inorganic salts are removed. After desalting, the crude oil will be fed to an atmospheric distillation unit where, through the application of heat, the crude oil will be separated into light ends, heavy naphtha, kerosene, diesel fuel, heavy atmospheric gas oil, and resid. In some cases, fuel oil or resid will be imported for use as feedstock to the atmospheric distillation unit and will be used in the same manner as crude oil.
The light ends will be sent to a light-ends treating unit to be further separated into light and heavy naphta and a light-end fraction. The light naphta will be sent to a light naphta catalytic hydrotreater and the heavy naphta will be sent to a heavy naphta catalytic hydrotreater, where unwanted sulfur and other contaminants will be removed. The hydrotreated light naphta will be converted into a gasoline blending stock used in the blending of gasoline.
The hydrotreated heavy naphta will be converted into a high-octane gasoline blending stock. The remaining light ends fraction off the light ends treating unit will be sent to a liquid propane gas fractionation unit where it will be separated into plant fuel gas (methane and ethane), propane, and butanes. The fuel gas and propane will be used as fuel for the utilities at the refinery and will not be used in further production or exported The butane may be used as fuel for the utilities, as a blendstock in gasoline blending, or in RBOB/CBOB/CARBOB blending.
LBR may import butane that will be blended with the butane off the liquid propane gas fractionator or will be sent to gasoline blending or RBOB/CBOB/CARBOB blending. Light naphta may be imported and sent to the light ends treating unit, followed by treatment in the light naphta catalytic hydrotreater and isomerization unit, or sent directly to gasoline blending or RBOB/CBOB/CARBOB blending.
Heavy naphta and a mixture of light and heavy naphta may also be imported and sent to the heavy catalytic naphta hydrotreater for desulfurizing and then sent to the reformer to be processed into reformate. In the alternative, some heavy naphta or a mixture of light and heavy naphta may be sent directly to gasoline blending or RBOB/CBOB/CARBOB blending.
The kerosene off the atmospheric distillation unit will be sent to a catalytic hydrotreater where sulfur will be removed and the resulting product will be marketable jet fuel. The heavy atmospheric gas oil off the atmospheric distillation unit will be sent to the gas oil catalytic hydrotreater where the sulfur will be removed resulting in marketable gas oil or it may bypass the hydrotreater and be blended with other gas oil streams to produce high sulfur gas oil.
The heaviest product resulting from the atmospheric distillation process will be resid. When resid is produced from low sulfur crude oil, it may be sent directly to a storage tank ready for sale. More often, however, it will be sent to a vacuum distillation unit where it will be subjected to further distillation resulting in its separation into vacuum gas oil and a heavy material known as “vacuum tower bottoms” or “pitch.” The gas oil will be sent to a gas oil catalytic hydrotreater where the sulfur will be removed rendering it ready for sale as vacuum gas oil or for blending with other gas oils.
In addition to the resid coming off the crude unit, the company may import resid and fuel oil to be used as feed for the vaccum distillation unit. Some of the LBR-produced resid and the imported resid and fuel oil may be sent to the utility franctionator to be separated into a kerosene fraction and a diesel fuel fraction. The heaviest product off the vacuum unit and the heaviest product off the utility fractionator, which exit the bottom of each unit, will be used as feedstock for the delayed coker unit.
The coking process, which takes place in the delayed coker, is a thermal cracking process that converts heavy low-grade products into lighter products. The naphta leaving the coker is sent to one of the hydrotreaters to remove unwanted sulfur. The gas oil is either sent to the gas oil hydrotreater to remove unwanted sulfur or moved directly to storage. The diesel fuel off the coker unit is routed to the diesel hydrotreater to remove sulfur and then sent to storage for sale.
LBR will produce conventional gasoline (regular and premium grades) for sale in the U.S. Virgin Islands, Puerto Rico and other Caribbean countries, and blendstock for oxygenate blending (“BOB”) consisting of RBOB/CBOB/CARBOB, for sale in the U.S. Conventional gasoline is ready for use in motor vehicles in its condition as it leaves the refinery. BOBs must be blended with renewable biofuel oxygenate before being distributed to gas stations.
BOBs are produced using the same production process and materials as conventional gasoline. BOBs are a blend of several blendstocks mixed in certain volume and ratios to meet certain specifications. LBR will produce BOBs for shipment to gasoline terminals in the U.S. where the proper amount of ethanol will be blended into the BOB to produce finished gasoline, which will then be loaded into trucks and delivered to retail gasoline stations.
BOBs are produced in regular and premium grades. The blendstocks under consideration here include butanes, alkylate, light naphta, heavy naphta, full-range naphta, isomerate, and reformate. Often four or more blendstocks will be needed in blending a BOB. One or more imported foreign or U.S. origin blendstocks may be included in LBR’s blending pool. Any one batch of gasoline may not contain all the blendstocks. The gasoline that results from blending must meet industry standards and specifications such as vapor pressure, distillation points, sulfur content, vapor lock index, octane, and other properties.
In producing the BOBs and the conventional gasoline, LBR will often only use the blendstocks that it produces at its refinery. However, it may include one or more imported foreign or U.S. origin blendstocks in its blending pool such as butane, low sulfur light, heavy and full range naphtas, and a high-octane gasoline blendstock. The company will be able to track the amount of foreign blendstock used in the blending operation and contained in the final product.
On occasion, additives may be used in small quantities towards the end of the refining or blending process, or in storage. You explain that non-originating additives, such as NACE, H2S, cetane improver, pour point depressant, lubricity improver, conductivity improver, dehazer, anti-oxidant, anti-static, H2S, are introduced into the refining or blending process.
GN 12, HTSUS, implements the North American Free Trade Agreement (“NAFTA”). You claim that the subject petroleum products produced in the U.S. Virgin Islands, as described above, from originating materials and from non-originating blendstocks, and additives meet one or more of the production processes identified in GN 12(t), Chapter 27, Heading Rule 4(A), (B) or (C), HTSUS, for goods of heading 2710, HTSUS. Thus, you claim these petroleum products qualify for duty-free treatment under the CBERA, pursuant to GN 3(a)(iv)(D), HTSUS, because of the “NAFTA parity” provisions within the Caribbean Basin Trade Partnership Act (“CBTPA”) which is part of the CBERA. You claim that after July 1, 2020, all issues of eligibility for duty-free treatment under the “NAFTA parity” rules will be resolved by the application of the United States-Mexico-Canada Agreement (“USMCA”).
Further, LBR proposes to account for inventory of raw materials in production on a daily basis, not monthly. In terms of accounting for close-to-zero percentages of non-originating materials in inventory, LBR plans to zero out non-originating content below 0.5 percent and to discontinue tracking until the next replenishing shipment of non-originating material increases the percentage.
ISSUES:
Whether the subject conventional gasoline; RBOB, CBOB and CARBOB; gasoline blendstocks; jet fuel; diesel fuel; gas oils; and residual fuel oil produced in the U.S. Virgin Islands from originating materials and from non-originating blendstocks and additives through one of the production processes identified in GN 12(t), Chapter 27, Heading Rule 4(A), (B) or (C), HTSUS, are entitled to duty-free treatment upon entry into the U.S. under the CBERA pursuant to GN 3(a)(iv)(D), HTSUS.
Whether in accounting for inventory of originating and non-originating materials used in production in LBR’s facility, a daily averaging of such materials is acceptable and whether amounts in storage of less than 0.5 percent of non-originating volumes may be treated as no materials.
LAW AND ANALYSIS:
Eligibility for duty-free treatment under the CBERA pursuant to GN 3(a)(iv)(D)
The U.S. Virgin Islands are among the insular possessions of the United States. See 48 U.S.C. § 1541(a); 19 C.F.R. § 7.2. GN 3(a)(iv)(D) provides that products of U.S. insular possessions may receive tariff status no less favorable than that afforded to beneficiary countries under CBERA. Pursuant to Section 213(b) of CBERA, as amended by CBTPA, the tariff treatment accorded to a CBTPA originating good shall be identical to the tariff treatment that is accorded at such time under Annex 302.2 of the NAFTA to an article described in the same 8-digit subheading of the HTSUS that is a good of Mexico and is imported into the U.S.
See Section 213(b)(3)(A) of CBERA, as amended (codified at 19 U.S.C. § 2703(b)(3)(A)). Therefore, petroleum products classified under heading 2710, HTSUS that originate in a CBTPA beneficiary country are entitled to the same preferential treatment accorded to such products when imported into the U.S. from Mexico under NAFTA.
A “CBTPA originating good” is defined as a good that meets the rules of origin for a good as set forth in GN 12, HTSUS (19 U.S.C. §1202) and the NAFTA Rules of Origin Regulations in the Appendix to 19 C.F.R. Part 181, as applied under 19 C.F.R. § 10.233(b). See CBERA § 213(b)(3); 19 U.S.C. § 2703(b)(3); 19 C.F.R. §10.232(a). Therefore, in order to decide whether a petroleum product from the U.S. Virgin Islands is eligible for preferential tariff treatment under GN 3(a)(iv)(D), we must first determine the staged duty rate under Annex 302.2, which is determined by examining whether the goods are considered “NAFTA originating.”
You state that each of the petroleum products at issue is classifiable under heading 2710, HTSUS, and results from one or more of the NAFTA origin-conferring processes identified in GN 12(t), Chapter 27, Heading Rule 4(A)-(C), and will qualify for duty-free treatment under the CBERA, as applied to the U.S. Virgin Islands under GN 3(a)(iv)(D).
GN 12(t), Chapter 27, Heading Rule 4(A)-(C), HTSUS, provides:
For the purposes of heading 2710, the term direct blending is defined as a refinery process whereby various petroleum streams from processing units and petroleum components from holding/storage tanks combine to create a finished product, with pre-determined parameters, classified under heading 2710, provided that the non-originating material constitutes no more than 25 percent by volume of the good.
4. (A) A change to heading 2710 from any other heading, except from headings 2711 through 2715;
(B) Production of any good of heading 2710 as the result of atmospheric distillation, vacuum distillation, catalytic hydroprocessing, catalytic reforming, alkylation, catalytic cracking, thermal cracking, coking or isomerization; or
(C) Production of any good of heading 2710 as the result of direct blending, provided that (1) the non-originating material is classified in chapter 27, (2) no component of that non-originating material is classified under heading 2207, and (3) the non-originating material constitutes no more than 25 percent by volume of the good.
The processes that confer origin set forth in GN 12(t), Chapter 27, Heading Rule 4(B) above are described in detail in the Chapter Rule (a)-(h) to Chapter 27, HTSUS, as follows:
(a) Atmospheric distillation–a separation process in which petroleum oils are converted, in a distillation tower, into fractions according to boiling point and the vapor then condensed into different liquefied fractions. Liquefied petroleum gas, naphtha, gasoline, kerosene, diesel/heating oil, light gas oils and lubricating oil are produced from petroleum distillation;
(b) Vacuum distillation–distillation at a pressure below atmospheric but not so low that it would be classed as molecular distillation. Vacuum distillation is useful for distilling high-boiling and heat-sensitive materials such as heavy distillates in petroleum oils to produce light to heavy vacuum gas oils and residuum. In some refineries gas oils may be further processed into lubricating oils;
(c) Catalytic hydroprocessing–the cracking and/or treating of petroleum oils with hydrogen at high temperature and under pressure, in the presence of special catalysts. Catalytic hydroprocessing includes hydrocracking and hydrotreating;
(d) Reforming (catalytic reforming)–the rearrangement of molecules in a naphtha boiling range material to form higher octane aromatics (i.e., improved antiknock quality at the expense of gasoline yield). A main product is catalytic reformate, a blend component for gasoline. Hydrogen is another by-product;
(e) Alkylation–a process whereby a high-octane blending component for gasolines is derived from catalytic combination of an isoparaffin and an olefin;
Cracking–a refining process involving decomposition and molecular recombination of organic compounds, especially hydrocarbons obtained by means of heat, to form molecules suitable for motor fuels, monomers, petrochemicals, etc.:
Thermal cracking–exposes the distillate to temperatures of approximately 540o C to 650o C for varying periods of time. Process produces modest yields of gasoline and higher yields of residual products for fuel oil blending;
Catalytic cracking–hydrocarbon vapors are passed at approximately 400o C over a metallic catalyst (e.g., silica-alumina or platinum); the complex recombinations (alkylation, polymerization, isomerization, etc.) occur within seconds to yield high-octane gasoline. Process yields less residual oils and light gases than thermal cracking;
Coking–a thermal cracking process for the conversion of heavy low-grade products, such as reduced crude, straight run pitch, cracked tars and shale oil, into solid coke (carbon) and lower boiling hydrocarbon products which are suitable as feed for other refinery units for conversion into lighter products; or
Isomerization–the refinery process of converting petroleum compounds into their isomers.
In sum, under the NAFTA rules applicable to heading 2710, HTSUS petroleum goods, NAFTA origin may be conferred by meeting the requisite tariff shift in GN 12(t), Chapter 27, Heading Rule 4(A), HTSUS; one of the specified processing operations in GN 12(t), Chapter 27, Heading Rule 4(B), HTSUS; or “direct blending” of materials in GN 12(t), Chapter 27, Heading Rule 4(C), HTSUS, subject to the 25 percent limitation.
Gasoline and RBOB/CBOB/CARBOB products containing no imported foreign blendstock will result from the NAFTA origin processes in GN 12(t), Chapter 27, Chapter
Rule (a)-(h) and GN 12(t), Chapter 27, Heading Rule 4(B). Therefore, such petroleum products are eligible for duty-free treatment under the “NAFTA parity” provision as applied to the U.S. Virgin Islands under GN 3(a)(iv)(D), HTSUS.
LBR-produced gasoline and RBOB/CBOB/CARBOB blended from imported U.S. origin or foreign origin blendstocks that do not constitute more than 25 percent by volume of the gasoline or RBOB, and blended together with LBR-produced blendstocks meet the origin rule in GN 12(t), Chapter 27, Heading Rule 4(C) (non-originating blendstock used) and are eligible for duty-free treatment under the “NAFTA parity” rule as it applies to imports from the U.S. Virgin Islands under GN 3(a)(iv)(D), HTSUS.
You state that non-originating blendstocks, such as naphta, butane and alkylate, are classified under subheading 2710.12.18, HTSUS, as motor fuel blending stock and that no component of the non-originating blendstocks is classified under heading 2207, HTSUS, which covers ethyl alcohol and other denatured spirits. You further state that LBR will be using self-produced blendstock and non-originating blendstock, and will ensure that any gasoline or RBOB/CBOB/CARBOB as to which it seeks NAFTA originating status will not contain non-originating blendstock that constitutes more than 25 percent by volume of the resultant gasoline or RBOB/CBOB/CARBOB. The blending as described will meet the definition of “direct blending” in GN 12(t), Chapter 27, Heading Rule 4(C). Thus, where LBR uses non-originating blendstock together with LBR-produced blendstocks in its blending operations to produce gasoline or RBOB/CBOB/CARBOB, the blended product will meet the requirements of
GN 12(t), Chapter 27, Heading Rule 4(C) and will qualify as NAFTA originating.
Lastly, in cases where non-originating additives are introduced into the refining or blending process, the tariff shift provided for in GN 12(t), Chapter 27, Heading Rule 4(A) will occur. Petroleum additives fall under heading 3911, HTSUS, and the petroleum products covered here are classified under heading 2710, HTSUS. Heading Rule 4(A) provides that the requisite tariff shift will occur with respect to the production of heading 2710 goods from non-originating materials falling under any other heading except headings 2711 through 2715. Thus, when heading 3811 additives are used in the production of any heading 2710 products, the requisite tariff shift provided for in GN 12(t), Chapter 27, Heading Rule 4(A) will be met.
Accordingly, the instant petroleum products produced in the U.S. Virgin Islands from originating materials, and from non-originating blendstocks, and additives are entitled to duty-free treatment under the CBERA as applied to the U.S. Virgin Islands under GN 3(a)(iv)(D), HTSUS.
Even though the USMCA came into effect on July 1, 2020, the references to NAFTA in 19 U.S.C. § 2703 still have not been replaced with the USMCA. While Section 601 of the USMCA Implementation Act repealed the NAFTA Implementation Act, Section 102(a)(2) provides that, “Nothing in this Act shall be construed – (A) to amend or modify any law of the United States, … unless specifically provided for in this Act.” The USMCA Implementation Act does not mention 19 U.S.C. § 2703. Since 19 U.S.C. § 2703 has not been amended or modified, whether a good is a “CBTPA originating good” continues to be determined by applying the treatment it receives by reference to the NAFTA rules. Nonetheless assuming arguendo that the NAFTA is repealed for purposes of application of 19 U.S.C. § 2703, we note that the outcome would still be the same, since the USMCA rules of origin to determine a “CBTPA originating good” are the same as under NAFTA, and the USMCA rules replaced the NAFTA rules. We further note that the CBTPA will expire on September 30, 2020, unless it is extended by U.S. Congress.
Inventory accounting
LBR proposes to account for inventory of raw materials in production on a daily basis and to zero out and discontinue tracking non-originating content below 0.5 percent until the next replenishing shipment of non-originating material increases the percentage.
As discussed above, CBTPA originating goods should receive the same treatment as goods of Mexico under NAFTA. See Section 213(b)(3)(A) of CBERA, as amended (codified at 19 U.S.C. § 2703(b)(3)(A)). NAFTA sets forth inventory management rules, and, for example,
Addendum A, Example 3 to Schedule X of the Appendix to Part 181 of NAFTA illustrates an inventory accounting of materials on a daily basis. Further, under the de minimis rule of
GN 12(f), HTSUS, the value of the non-originating content may not exceed 7 percent of the transaction value of the petroleum products. See also HQ 562344, dated Sept. 9, 2002 (the ratio of non-originating materials calculated at 5.245 was less than 7 percent and was disregarded).
Therefore, LBR may follow a similar inventory management calculation for inventory of raw materials in production on a daily basis and may zero out the non-originating content below 0.5 percent. However, GN 3(a)(iv)(D), HTSUS, indicates that products of U.S. insular possessions should receive tariff status no less favorable than that afforded to beneficiary countries under CBERA. Accordingly, any inventory management calculation that is in compliance with the Generally Accepted Accounting Principles (“GAAP”) should be acceptable.
HOLDING:
Based on the facts presented, we find that the subject petroleum products that are produced in the U.S. Virgin Islands from originating materials and from non-originating blendstocks and additives are eligible for duty-free preferential treatment under GN 3(a)(iv)(D), HTSUS, and § 213(b)(3) of the CBERA provided all other applicable requirements are met.
As explained above, LBR may account for inventory of raw materials in production on a daily basis and may zero out any non-originating content below 0.5 percent provided it is in compliance with the GAAP.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch