OT:RR:CTF:EPDR H341220 ND
John M. Foote
Kelle Drye & Warren LLP
Washington Harbour, Suite 400
3050 K Street, NW
Washington, DC 20007
RE: Modification of HQ H326262
Dear Mr. Foote,
This is in response to the August 16, 2024, request for reconsideration of Headquarters Ruling Letter ("HQ") H326262, dated July 5, 2024. HQ H326262 was issued in response to a ruling request, filed by Comstock & Theakston, Inc. ("Comstock"), on behalf of [[ ]] (hereinafter "the Company"), regarding the calculation methodology for claiming drawback for certain exports from a foreign trade zone ("FTZ") pursuant to 19 U.S.C. 1313(j)(2). Based on the clarifications provided in the Company's request and for the reasons set forth below, this office is modifying HQ H326262 with respect to the permissibility of the requested calculation methodology for claiming unused substituted merchandise drawback discussed in the ruling.
On May 28, 2024, the Company sought confidential treatment of certain information submitted in connection with its ruling request. In consideration of the request and the sufficient justification presented pursuant to 19 C.F.R. 177.2(b)(7), this office will not identify any business confidential information provided to U.S. Customs and Border Protection ("CBP"). The instant request for reconsideration does not seek confidential treatment. Nevertheless, this office will consider the May 28, 2024, treatment request to be a standing request. The information contained within brackets in your request will not be released to the public and will be withheld from public published version of this ruling.
FACTS:
The Company produces merchandise in a FTZ that contains domestic and foreign status components. According to the Company, the foreign status components are previously imported and not duty paid, while the domestic status components are either domestically produced or previously imported and duty paid. The Company seeks to claim drawback with regard to the finished merchandise, classified under subheading 8507.60.00, Harmonized Tariff Schedule of the United States ("HTSUS"), which was manufactured with foreign status components classified under subheading 8507.60.00, HTSUS, and exported.
On July 15, 2022, the Company sought a ruling request, "regarding the drawback methodology of certain domestic status components that are entered into a FTZ to be claimed as refunds for drawback, per 19 U.S.C. 1313(j)(2)." More specifically, the Company raised two issues in its request. First, the Company "would like the opportunity to claim drawback based on the value of the exported [[ ]] that did not receive the FTZ benefit against duty-paid imports for the same 8-digit HTSUS," similar to the holding in HQ H305251 (Dec. 10, 2021) ("Mercedes"). Second, the Company sought clarity as to the holding of Mercedes because "the Mercedes ruling appears limited to calculating the drawback claim based upon the value alone. The ruling does not also address the need to decrement quantity as well as value for the drawback calculation."
On December 20, 2022, this office sought additional clarification via email with regard to terms used in the ruling request relating to the status of the materials in the FTZ and the nature of the ruling request. On February 22, 2023, the Company responded via email that their manufacturing scenario is identical to that outlined in the Mercedes ruling. The Company further clarified that,
"[w]e would like to deduct both (1) the value of all foreign status components from the total value of the finished and exported products [[ ]], as CBP found proper in the Mercedes ruling, and (2) extrapolate this concept to deduct the weight of all foreign status components from the total weight of the finished and exported products, arriving at the legally permissible value of the exported [[ ]] for purposes of 1313(j)(2) drawback."
Because the merchandise at issue is classified under subheading 8507.60.00, HTSUS, which requires the primary unit of measure to be reported as "No.," number, and the secondary unit of measure to be reported as "Kg.," kilograms, this office needed further clarity with regard to the Company's request.
On March 20, 2024, this office met with the Company over Microsoft Teams. The Company reiterated their position that drawback claimants should be able to deduct both value and weight of all foreign status components from the total weight of the finished and exported products from the FTZ. The Company asserted that the ruling request was not limited to the HTSUS subheadings at issue in the ruling and drawback claimants should be able to decrement both value and weight no matter the subheading of the merchandise at issue.
After careful consideration of the facts before this office, we determined that the Company cannot deduct the value and weight of foreign status components from the finished exported merchandise classified under subheading 8507.60.00, HTSUS, for purposes of calculating its claim for unused merchandise drawback pursuant to 19 U.S.C. 1313(j)(2). In an attempt to honor the sensitivity of the nature of the Company's business confidential information, this office provided the Company with an opportunity to review the public version of HQ H326262 for purposes of reviewing the treatment of its confidential information. On June 5, 2024, the Company requested further time to review the public version of HQ H326262, which this office granted. However, the Company was specifically informed that the "review [was] limited to issues of confidentiality."
On June 20, 2024, the Company responded with a letter addressing several contentions with CBP's position in HQ H326262 (hereinafter "June 20 Letter"). The letter did not address confidentiality concerns. Rather, the Company stated that,
[w]e understand and accept that under the facts of this ruling, CBP has decided that a claimant "cannot deduct the value and weight of foreign status components from the finished exported merchandise . . . ." While we do not challenge that holding at this time, we are writing to urge CBP to reconsider a portion of the analysis that we believe rests on several mistakes of law and fact-a fundamental misunderstanding of the lawful interplay of the HTSUS and the duty drawback statute and regulations . . . .
After review of the Company's letter, this office agreed that in a statement that did not affect the reasoning or outcome of the holding, the ruling inadvertently mischaracterized the nature of ad valorem duty calculations. On July 5, 2024, this office issued a corrected ruling HQ H326262 to remove the mischaracterization and made a final attempt to seek confirmation from the Company that its confidentiality request had been honored. As the Company did not raise any confidentiality concerns, this office published HQ H326262 onto the Customs Rulings Online Search System ("CROSS"). Subsequently, the Company argued it had not been granted its right to a meeting in the event of a denial of its ruling request, despite no such meeting request being sought in its ruling request and despite the meeting held on March 20, 2024. Nevertheless, on August 7, 2024, this office met in person with the Company and confirmed that no issues of confidentiality existed. At that meeting, the Company made several clarifying statements with regard to its original ruling request. This office encouraged the Company to put those statements in writing and clarify whether it was seeking a reconsideration of HQ H326262.
On August 16, 2024, the Company submitted a formal request for reconsideration of HQ H326262. The Company's reconsideration request contains a section called "August 7 Meeting - Agreement in Principle." This section asserts that "common understanding" was reached on several points. For purposes of ensuring an accurate record, this office emphasizes that no such "common understanding" was reached and will, instead, fashion the "agreements" to be part and parcel of the reconsideration request.
The Company clarifies its ruling request in three ways. First, in seeking to use weight as a unit of measure for a drawback claim (as opposed to "number" or pieces), the unit of quantity for purposes of per unit averaging "must have been actually declared on the entry line within the import entry summary." Second, "after selecting the unit of quantity for this purpose on a given entry line, the importer must not thereafter change the unit of quantity." And third, the drawback claimant must be able to demonstrate the ability to track this selection and monitor its compliance in its systems of record. The Company also incorporated by reference its June 20 Letter and clarified that the Company does challenge the holding of HQ H326262.
The June 20 Letter stated that the holding of HQ H326262 was unjustified for five reasons. First, CBP can only limit per unit averaging for drawback purposes by revising the relevant regulation. Second, General Statistical Note 4(b) of the HTSUS should not limit per unit averaging for drawback purposes. Third, per unit averaging normalizes import price differences, stabilizes drawback claims and defines the unit of measure for designated import entry lines. Fourth, limiting the acceptable unit of measure for per unit averaging constitutes a significant departure from CBP practice. Fifth, there is no compelling rationale for limiting which declared unit of quantity can be used for designation of drawback claims and per unit averaging.
We address these arguments below.
ISSUES:
I. Whether the holding in HQ H305251 ("Mercedes") would similarly apply to the prospective drawback claims proposed in the ruling request.
II. Whether, for purposes of calculating substituted unused merchandise drawback, the claimant can choose the unit of measure used in the per unit averaging calculation.
LAW AND ANALYSIS:
I. Whether the holding in HQ H305251 ("Mercedes") would similarly apply to the prospective drawback claims proposed in the ruling request.
In HQ H305251 (Dec. 10, 2021), CBP evaluated the drawback eligibility of vehicles manufactured within a FTZ with foreign and domestic status components. CBP concluded that when such vehicles are exported directly from a FTZ, given that only the domestic status components are eligible for drawback, "[t]he 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." HQ H305251 (Dec. 10, 2021) (citing 19 C.F.R. 190.51(a)(2)(vii)). Consequently, a drawback claim on such vehicles required "the deduction of all foreign status components from the value of the manufactured and exported vehicles." Id.
The Company produces merchandise in a FTZ that contains domestic and foreign status components. According to the Company, the foreign status components are previously imported and not duty paid, while the domestic status components are either domestically produced or previously imported and duty paid. The Company seeks to claim drawback on the finished merchandise, classified under subheading 8507.60.00, HTSUS, which is withdrawn for exportation and was manufactured with foreign status components classified under subheading 8507.60.00, HTSUS. The Company does not challenge the need to deduct the value of all foreign status components from the total value of the finished and exported merchandise for purposes of properly calculating its drawback claim. Accordingly, under the facts as presented, the holding of Mercedes would similarly apply to the prospective drawback claims proposed by the Company.
II. Whether, for purposes of calculating substituted unused merchandise drawback, the claimant can choose the unit of measure used in the per unit averaging calculation.
Understanding the Company's request requires a comprehensive understanding of unused merchandise substitution drawback claims pursuant to 19 U.S.C. 1313(j)(2), and specifically, how such claims are calculated. Generally, unused merchandise drawback may be claimed on imported merchandise that was exported or destroyed without having been used within the United States (direct identification unused merchandise drawback) as well as on goods that were exported or destroyed without being used that were substituted for imported merchandise meeting the appropriate criteria (substitution unused merchandise drawback). See 19 U.S.C. 1313(j)(1) and (2).
On February 24, 2016, the Trade Facilitation and Trade Enforcement Act of 2015 ("TFTEA") was signed into law. Pub. L. 114-125, 130 Stat. 122 (Feb. 24, 2016). Section 906 of TFTEA, Drawback and Refunds, made significant changes to the drawback laws including liberalizing the standards for substituting merchandise and requiring the electronic filing of drawback claims. TFTEA provided a new standard for determining which merchandise may be substituted for imported merchandise as the basis for a substitution claim. This standard generally requires that both the imported merchandise and the exported merchandise be classified or classifiable within the same 8-digit number in the HTSUS classification.
In conjunction with this liberalized substitution standard, however, TFTEA implemented restrictions as a safeguard to ensure that the revenue was protected in light of the liberalization and simplification of the standards for substitution drawback claims. For example, substitution drawback claims are generally subject to a "lesser of" rule regarding the amount of duties, taxes, and fees to be refunded where the amount to be refunded will be equal to 99 percent of the lesser of (1) the amount of duties, taxes, and fees paid with respect to imported merchandise; or (2) the amount of duties, taxes, and fees that would apply to the substituted merchandise if the substituted merchandise were imported. 19 U.S.C. 1313(l)(2)(B). Drawback claimants must provide the comparative value (i.e., the "lesser of" comparison) as part of a substitution claim. 19 C.F.R. 190.51(b)(1)(ii).
TFTEA also authorized CBP for substitution claim refunds to calculate refunds based upon the per unit average of the duties, taxes, and fees reported on the entry summary line item that covered the designated imported merchandise if this method would result in the simplification of the drawback claims process for CBP without posing a risk to the revenue of the United States. Per unit averaging requires that the drawback claimant calculate the per unit average value of the designated imported merchandise (i.e., the entered value for the applicable entry summary line item apportioned equally over each unit covered by the line item) and request a refund of 99% of the amount of duties, taxes and fees applicable thereto. In this method, the ratio of the total value of imported units as reported on a line item divided by the total quantity of imported units reported on a line item is to be multiplied by the quantity of units designated as the basis for the drawback claim to determine the average per unit value. The refund per unit of the designated imported merchandise is to be 99% of the duties, taxes, and fees applicable to the average per unit value and this amount is calculated to two decimal places and is subject to the "lesser of" rule. See Modernized Drawback, 83 Fed. Reg. 37,886, 37,891 (Aug. 2, 2018) (providing examples of calculating substitution unused merchandise drawback claims).
The legislative history of TFTEA clarifies that CBP was authorized to utilize per unit averaging solely to allow for the simplification of drawback claims and CBP is not to allow for the "manipulation of claims in order to maximize refunds to the detriment of the revenue of the United States." H.R. Rep. No. 1140376, at 221 (2015). Per unit averaging facilitates verification of the amount of drawback refunds claimed. CBP does not receive invoice data that is usefully searchable electronically. By moving to the per unit averaging calculation methodology for substitution claims that is based on entry summary line data, CBP gained the ability to automate validations of refund calculations made by the claimant. These efficiencies are gained, however, through the use of entry summary line-item data.
TFTEA provided for a one-year transition period, to begin on February 24, 2018, wherein drawback claimants would have the choice between filing claims under pre-TFTEA law or under the amended statute. However, because the implementing regulations were not going to be in place in time for the beginning of the transition period, CBP developed interim procedures for accepting TFTEA drawback claims. Drawback: Interim Guidance for Filing TFTEA Drawback Claims (Interim Guidance), available at https://www.cbp.gov/sites/default/files/assets/documents/2018-Mar/ACE%20Drawback%20Interim%20Guidance%20%2803-26-2018%29_0.pdf (last visited Aug. 21, 2024) ("Interim Guidance").
One of the transitional issues noted in the Interim Guidance was the fact that for certain subheadings in the HTSUS the unit of measure was not mandated. Under those circumstances, CBP noted that the Automated Commercial Environment ("ACE") "will accept the quantity specified by the claimant for the imported merchandise." This issue was resolved as of January 1, 2019, when all HTSUS provisions were assigned a unit of quantity. Additionally, the Interim Guidance remained in effect until the Modernized Drawback Final Rule became effective on December 17, 2018. See 83 Fed. Reg. 64,942 (Dec. 18, 2018). The regulations promulgated by the Modernized Drawback Final Rule are found in Part 190 (as opposed to the pre-TFTEA drawback regulations found under Part 191). Accordingly, Part 190 governs the inquiry at issue.
The Company originally fashioned its ruling request as to whether the Company could "decrement quantity as well as value for the drawback calculation." Through email correspondence, the Company stated that "[w]e would like to deduct both (1) the value of all foreign status components from the total value of the finished and exported products [[ ]], as CBP found proper in the Mercedes ruling, and (2) extrapolate this concept to deduct the weight of all foreign status components from the total weight of the finished and exported products, arriving at the legally permissible value of the exported [[ ]] for purposes of (j)(2) drawback." This was further refined to, "[w]e are seeking a ruling assessing whether our proposed drawback calculation, based on deducting the weight of foreign status components from the weight of the overall exported article is legally acceptable."
Although the request is fashioned to seek clarity as to whether value and quantity can be "decremented" or used to calculate the amount of an export from a FTZ for which drawback can be claimed when the export contains both foreign status components and domestic status components, such clarity with regard to quantity and the unit of measure necessarily implicates the unit of measure for purposes of per unit averaging. This is because the same unit of measure that was used to report the quantity for the imported merchandise must also be used to report the quantity for the substituted drawback-eligible merchandise. See Interim Guidance; see also CBP and Trade Automated Interface Requirements, available at https://www.cbp.gov/document/guidance/ace-drawback-catair-guidelines (last visited Aug. 22, 2024).
The regulations in 19 C.F.R. 190.51(b)(1)(ii) provide that the eligible drawback amount "is determined by per unit averaging, as defined in 190.2." Per unit averaging "means the equal apportionment of the amount of duties, taxes, and fees eligible for drawback for all units covered by a single line item on an entry summary to each unit of merchandise." 19 C.F.R. 190.2. Additionally, among other data elements, a complete drawback claim must include:
For each designated import entry line item, the entry number and the line item number designating the merchandise, a description of the merchandise, a unique import tracing identification number(s) (ITIN) . . . as well as the following information for the merchandise designated as the basis for the drawback claim: The 10-digit HTSUS classification, amount of duties paid, applicable entered value . . . quantity, and unit of measure (using the unit(s) of measure required under the HTSUS for substitution manufacturing and substitution unused merchandise drawback claims), as well as the types and amounts of any other duties, taxes, or fees for which a refund is requested . . . .
19 C.F.R. 190.51(a)(2)(viii) (emphasis added).
Accordingly, at a minimum, the "unit" used by a drawback claimant in its per unit averaging calculation must be one that was declared on the entry summary line. And as such, the same unit of measure must also be used to report the quantity for the drawback-eligible merchandise. The unit of merchandise declared on the entry summary is dictated by the subheading in the HTSUS. When there is only one unit of measure required by the HTSUS under a particular subheading, there is no choice but to use that unit of measure for purposes of calculating a drawback claim.
The Company has now clarified that it does not seek to use weight as a unit of measure under any HTSUS subheading, nor does it allege that any unit of measure is permissible for purposes of accounting for drawback eligibility. Rather, the Company seeks to be able to choose which unit of measure it uses for purposes of calculating its drawback claim when the HTSUS subheading of the imported entered merchandise requires the reporting of more than one unit of measure on the entry summary line. Thus, the Company's proposed accounting methodology presupposes and is dependent on the HTSUS requiring more than one unit of measure on the entry summary. For example, according to the HTSUS, imports classified under subheading 8507.60.00, HTSUS, are subject to a duty rate of 3.4 percent ad valorem plus additional duties assessed pursuant to Section 301 of the Trade Act of 1974 ("Section 301"). The "Unit of Quantity" for the two 10-digit subheadings (8507.60.0010 and 8507.60.0020, Harmonized Tariff Schedule of the United States Annotated ("HTSUSA")), indicate that both numerical quantity ("No.") and weight ("kg") should be reported on the entry summary (CBP Form 7501). Accordingly, the Company seeks to be able to conduct per unit averaging for its drawback claim using either the numerical quantity ("No.") or weight, which is kilograms under this subheading.
The Company represents that under such circumstances, once it has selected a unit of quantity for this purpose on a given entry summary line, it will not change the unit of quantity for purposes of future drawback claims "against" that entry summary line. Additionally, the Company asserts that it can track this selection and monitor its compliance to the entry line level in its systems of record.
These representations are familiar to CBP and drawback claimants because similar restrictions exist in the context of the "first-filed" rule. See 19 C.F.R. 190.51(a)(3). A consequence of using per unit averaging for substitution claims under TFTEA-drawback is that a single entry summary line item cannot be used for both direct identification and substitution drawback claims. Therefore, all associated imported merchandise on that line may only be designated as the basis for either a direct identification or substitution claim. If both types of claims were allowed on a single line on an entry summary, CBP would be unable to issue full refunds for all drawback claims that could lawfully be made against a specific entry summary line item in some situations. As noted by the "Notice of Proposed Rulemaking" for Modernized Drawback, "in some situations where substitution claims using the per unit average of the line item were to be claimed prior to a direct identification claim, the total amount of drawback remaining on the line may not be sufficient to pay the proper amount of drawback tied to the high value goods." 83 Fed. Reg. 37,891 (Aug. 2, 2018). The efficiencies gained by both claimants and CBP with regard to calculating and verifying refunds outweighed the limitations imposed by this policy and the requirement that importers and drawback claimants be aware of the limitation on line item designations prior to importing merchandise or receiving transferred merchandise, because the first filed claim on a line will dictate the type of claim available for any remaining merchandise of the same line. Id.
In the HQ H326262 ruling, this office laid out the statutory and regulatory requirements that the unit of measure be declared on the entry summary and stated concerns about the proposed methodology resulting in the over-refunding of drawback claims. With the limitations represented by the Company, however, this office finds the proposed methodology permissible under the applicable statutory and regulatory framework.
The statute, 19 U.S.C. 1313(l)(2)(B), provides CBP with the statutory authority to determine how drawback refund claims are to be calculated and that averaging duties, taxes, and fees, "as reported on the entry summary line item," is permissible. CBP regulations require per unit averaging for unused substitution drawback claims and defines per unit averaging as "the equal apportionment of duties, taxes and fees eligible for drawback for all units covered by a single line item on an entry summary to each unit of merchandise." 19 C.F.R. 190.51(b)(1) & 190.2. The unit of measure required is that "required under the HTSUS." 19 C.F.R. 190.51(a)(2)(viii). We note that 190.51(a)(2)(viii), states "unit(s) of measure." While this reference could arguably refer to compound rates, we find that it does contemplate that more than one unit of measure could be at issue under a given HTSUS subheading. Further, 190.11(a)(2) states that, "[t]he value of the designated imported merchandise is the per unit average value, which is the entered value for the applicable entry summary line item apportioned equally over each unit covered by the line item." Accordingly, the relevant statutory and regulatory provisions require that the "unit" used in per unit averaging for purposes of a substitution unused drawback claim must be a unit of measure required under the HTSUS subheading to be reported on the entry summary line.
This requirement provides the basis, as discussed above, for CBP to validate drawback claims electronically in ACE, thereby providing electronic safeguards that otherwise would require manual review to ensure the protection of the revenue of the United States. Without the limitations clarified by the Company in this instant request, however, there would still be significant concerns regarding the protection of the revenue. If, for example, a claimant made an initial drawback claim using one unit of measure (e.g., piece number) and a second drawback claim using weight (e.g., kilograms), the potential exists for the "manipulation of claims in order to maximize refunds to the detriment of the revenue of the United States" as Congress warned against in promulgating TFTEA and the per unit averaging standards. H.R. Rep. No. 114-376, at 221 (2015).
This concern, however, is ameliorated by the Company's representations that once it has selected a unit of quantity for this purpose on a given entry summary line, it will not change the unit of quantity for purposes of future drawback claims "against" that entry summary line. Additionally, the Company will track this selection and monitor its compliance to the entry line level in its systems of record kept in the ordinary course of business. Accordingly, with the limitations represented by the Company, this office finds the proposed methodology permissible under the applicable statutory and regulatory framework.
The Company, in its reconsideration request, also incorporated by reference its June 20 Letter stating that the holding of HQ H326262 was unjustified for five reasons.
First, the Company argued that CBP can only limit per unit averaging for drawback purposes by revising the relevant regulation. The Company asserted that the "modernized drawback regulations do not impose any limitation on which units are the appropriate units to utilize for purposes of per unit averaging." We agree with the Company's statement to the extent that it recognizes that the only units of measure at issue are those that are required by the HTSUS subheading to be reported on the entry summary line. Upon meeting with the Company on March 20, 2024, this office asked if the request was limited to the HTSUS used as an example in the ruling request. The response was "no," and that the request should apply to any HTSUS subheading. HQ H326262 responded to the request as presented. The statutory and regulatory provisions limit per unit averaging for drawback purposes to the unit of measure as reported on the entry summary line and as required to be reported by the applicable HTSUS subheading. Accordingly, revision of the relevant regulations is not required to so limit per unit averaging for drawback purposes.
Second, the Company asserted that General Statistical Note 4(b) should not limit per unit averaging for drawback purposes because statistical notes are not statutory law. This office agrees that general statistical notes are non-statutory elements of the HTSUS. In HQ H326262, we did not rely on the General Statistical Noe as a basis for the holding. As discussed above, we relied on our statutory authority to dictate how drawback claims must be calculated in the context of unused substituted merchandise claims. We relied on our regulations that invoke the statutory authority to require that the unit of measure must be that declared on the entry summary. Our use of the General Statistical Note was to provide context and support for the fact that when two units of measure are required to be reported, the second is for statistical purposes and value is calculated using the first unless a "v" is indicated.
Third, the Company argued that per unit averaging, no matter which unit is used, normalizes price differences and controls for any concerns of over refunding drawback claims. This argument is only true if the unit of measure remains consistent on a given entry summary line from one drawback claim to the next. The concern of over-refunding addressed in HQ H326262 is not "normalized" by per unit averaging for the same over-refunding concerns addressed by the first-filed rule. Accordingly, the Company's subsequent clarification that once it has selected a unit of quantity for this purpose on a given entry summary line, it will not change the unit of quantity for purposes of future drawback claims "against" that entry summary line provides the controls necessary to protect the revenue of the United States.
Fourth, the Company argued that limiting the acceptable unit of measure for per unit averaging constituted a significant departure from CBP practice. The Company stated that "since the modernized drawback regulations took effect, claimants have been authorized to select any declared unit of quantity as the basis of per unit averaging." This office disagrees with this unsupported statement. As discussed above, the Interim Guidance provided a methodology for claimants with merchandise falling under HTSUS subheadings that, at the time, did not designate a unit of measure to be declared on the entry summary line. As of January 1, 2019, that issue no longer exists within the HTSUS as all subheadings have a designated unit of measure to report on the entry summary. Additionally, the Interim Guidance was no longer in effect as of the effective date of the Final Rule of the Modernized Regulations, specifically, December 17, 2018. Moreover, the Company asserted that its request was prospective in nature and intended to apply to future drawback claims as the requested calculation was not previously considered or permitted by CBP. Finally, since February 2019, validations in ACE do not allow drawback claimants to select any unit of quantity of their choosing as the basis of per unit averaging. Accordingly, HQ H326262 did not constitute a significant departure from a CBP practice.
Fifth, and finally, the Company asserts that there is no compelling rational for limiting which declared unit of quantity can be used for designation of drawback claims and per unit averaging. As discussed at length above, the legislative history indicates a different view. In the context of the first-filed rule, legislative history spoke directly to the fact that CBP is to protect the revenue not only with the limits of duties, taxes, and fees paid upon import and eligible for drawback, but also under the limit. CBP is not to allow for the manipulation of claims in order to maximize refunds. H.R. Rep. No. 114-376, at 221 (2015). To this end, CBP has to respond to this mandate in the context of audits. See e.g., United States Government Accountability Office, Report to Congressional Committees, Customs and Border Protection, Risk Management for Tariff Refunds Should Be Improved, available at https://www.gao.gov/assets/gao-20-182.pdf (last visited Aug. 21, 2024).
With the limitations represented by the Company, however, this office finds that the Company's proposed methodology of using a unit of measure that is reported on the entry summary line as required by the applicable HTSUS subheading to be permissible under the applicable statutory and regulatory framework. Specifically, once the Company has selected a unit of quantity on a given entry summary line, it will not change the unit of quantity for purposes of future drawback claims "against" that entry summary line. Additionally, the Company will track this selection and monitor its compliance to the entry line level in its systems of record used in the ordinary course of business. As discussed above, the same unit of measure that was used to report the quantity for the imported merchandise must also be used to report the quantity for the substituted drawback-eligible merchandise. Thus, the same unit of measure must be used for purposes of calculating drawback-eligible merchandise in the FTZ context. 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).
HOLDING:
Based on the above, for purposes of substituted unused merchandise drawback claims, claimants can use a unit of measure for purposes of calculating per unit averaging so long as it is a unit of measure required by the applicable HTSUS subheading to be reported on the entry summary line and so long as the claimant tracks the selection of its unit of measure and does not change the unit of measure for purposes of subsequent drawback claims against that entry summary line.
EFFECT ON OTHER RULINGS:
HQ H326262, dated July 5, 2024, is hereby MODIFIED to allow, for purposes of per unit averaging in calculating substituted unused merchandise drawback, the use of a unit of measure that is reported on the entry summary line as required by the applicable HTSUS subheading, so long as the claimant will not change the unit of quantity for purposes of future drawback claims against that entry summary line and so long as the claimant will track this selection and monitor its compliance to the entry line level in its systems of record used in the ordinary course of business. Because the same unit of measure that is used to report the quantity for the imported merchandise must also be used to report the quantity for the substituted drawback eligible merchandise, the same unit of measure must be used for purposes of calculating drawback eligible merchandise in the FTZ context.
This modification of treatment is not subject to the notice and comment provisions of 19 U.S.C. 1625(c) because HQ H326262 was in effect for less than 60 days. See 19 C.F.R. 117.12(b).
Sincerely,
Yuliya A. Gulis, Director
Commercial and Trade Facilitation Division