CON-9-OT:RR:CTF:ER W231533/H006943 RFA
Port Director
Customs & Border Protection
555 Battery Street
San Francisco, CA 94111
Attn: I.S. Pat Chapman
RE: Internal Advice; Maxtor Corporation; Temporary Importation Under Bond (TIB); Subheading 9813.00.05
Dear Port Director:
This is in response to a request filed on August 21, 2006, by counsel on behalf of Maxtor Corporation (“Maxtor”) requesting that Customs and Border Protection (“CBP”) allow Maxtor’s alternative accounting method be approved to properly close out its temporary importation under bond (TIB) for goods entered under subheading 9813.00.0520, Harmonized Tariff Schedule of the United States (HTSUS). In reaching this decision, we also considered the information provided in counsel’s letters of June 29, 2006, December 22, 2006, March 8, 2007, March 20, 2007, April 26, 2007, March 17, 2008, and May 20, 2009.
FACTS:
Maxtor Corporation imported two types of aluminum substrates: “machined and ground” (MG) and “nickel-plated and polished” (NPP) under the TIB duty-free provision, subheading 9813.00.0520, HTSUS. Maxtor described the imported substrates as circular flat disks of alloy aluminum in standard sizes.
According to Maxtor, the two substrates are the same but are in different stages of processing at the time of importation. Maxtor tests sample lots from the total substrates imported on each TIB. If the sample lot is found to be defective, the entire lot is rejected prior to the manufacturing process. The MG substrates are the least finished of the two materials and must be further processed to the NPP stage. Prior to nickel-plating, the disks are tested and then cleaned. After nickel-plating, the disks are again cleaned and then polished. The disks then undergo a physical vapor deposition process in which a micro-thin coating of magnetic material is deposited onto the surface of the disk. Depending on the backlog, Maxtor exported some NPP substrates for polishing and then re-imported them under TIB so that they can be sputter-coated with magnetic materials. The magnetic sputter-coated disks were then cleaned, tested, and packaged for export to Maxtor’s disk drive manufacturing facilities overseas. Finished goods that fail inspection are scrapped. Waste material was weighed and collected by a metals recycling company, which recovered the metals from the scrap. The quantity of waste was reported to CBP and a consumption entry was filed.
According to Maxtor, the NPP substrates in most cases were processed into finished magnetic media. The finished disk drives would have various data capacities based on the finished media in the drive and the combined data storage capacity of the media disks (e.g., 40 to 80 gigabytes (GB) per disk) and different rotational speed of the disks incorporated into the drive (e.g., 7200 RPM vs. 5400 RPM). The imported substrates were identified by sizes such as 95 x 50 Mil or 95 x 25 x 1.75 Mil. The finished disks were identified by sizes such as 95 mm x 50 Mil or 95 mm x 1.75 mm or 95 mm x 1.27 mm. Another distinguishing feature was whether the disk was finished on one or both sides- single-sided disks (SSD) or double-sided disks (DSD). Single-sided disks would not be finished on one side, lowering the cost to produce the finished media.
Maxtor claims that these aluminum substrates are fungible items. Because of its inability to track these fungible materials, and because it is not possible to apply a first-in first-out (FIFO) accounting methods, Maxtor is seeking internal advice as to whether an alternative method, “Inventory Turnover” can be used to account for those aluminum substrates that entered under TIB entry provisions. Under the inventory turnover method of accounting, Maxtor claims that materials entered under TIB would have been processed and exported within an average of 68.7 days or less.
During the period between January 2005 and May 2006, Maxtor received 2.36 million finished disks into inventory (approximately 2% of the total units received during that time period). These finished disks were entered by means of consumption entries under heading 8523, HTSUS. Maxtor would test these finished disks. If they failed testing, then Maxtor scrapped them. If they passed testing, the finished disks were commingled with the disks finished by Maxtor for eventual exportation. According to Maxtor, out of the total 104 million substrates received during this time period, 98 million were MG disks, while 5.8 million were NPP disks. However, 56,660 finished disks were used internally within Maxtor domestic R&D and prototype production facilities.
In support of its claims, counsel for Maxtor submitted the following exhibits with its submission dated May 20, 2009:
March 22, 2000 approval letter from CBP for MMC Technology (Maxtor’s affiliate) to engage in specific manufacturing drawback for similar types of aluminum substrates for manufacturing magnetic disc media;
Summary explanation of Maxtor’s flowchart, SAP processing screens and codes;
Spreadsheet listing each TIB by date, including invoice number, part number description, unit count and unit value;
Spreadsheet for each TIB for August 2005;
Spreadsheets for each TIB filed by Maxtor’s brokers;
Spreadsheet for Maxtor’s SAP inventory management showing receipt of goods into inventory;
TIB accounting closure reports and files for August 2005 TIB entries filed by Maxtor’s brokers;
Comparison of exports used to close TIB by brokers;
A binder containing copies of all 40 TIB entries filed by Maxtor for August 2005, along with the commercial invoice and packing list;
Export records from Maxtor’s brokers for closing the TIB entries made August 2005.
Evidence also indicates that Maxtor commingled finished media for export to close out the TIB entries from two separate sources- San Jose/Milpitas facilities and media it received back from its China or Singapore disk drive manufacturing facilities under heading 8523 using consumption entries. Counsel for Maxtor also submitted information to the Port of San Francisco dated March 20, 2007, indicating that Maxtor did not have sufficient records of exports of finished media to properly close all of the TIB imports made in 2006.
In its submission of June 29, 2006, counsel challenged the port’s requirement that Maxtor must identify on the air waybill the import TIB number to properly close out the TIBs. Counsel believes that there is no such requirement so long as Maxtor can establish that what was imported under the TIB was exported within the one year time frame period under its “inventory turnover” accounting methodology.
ISSUES:
I. Whether an alternative method, “Inventory Turnover” can be used to properly close out Maxtor’s temporary importation under bond (TIB) for goods entered under subheading 9813.00.0520, HTSUS?
II. Whether a TIB importer is required to put the TIB entry number on the export documents?
LAW AND ANALYSIS:
Whether “Inventory Turnover” methodology can be used to properly close out TIBs:
In Section XXII, SubChapter XIII titled “Articles Admitted Temporarily Free of Duty Under Bond”, subheading 9813.00.05, HTSUS [2005], provides for: “[a]rticles to be repaired, altered or processed (including processes which result in articles manufactured or produced in the United States) . . . . Articles to be processed into articles manufactured or produced in the United States . . .” U.S. Note 1(a) to SubChapter XIII of Section XXII, HTSUS, states in pertinent part that: [t]he articles described in the provisions of this subchapter, when not imported for sale or for sale on approval, may be admitted into the United States without the payment of duty, under bond for their exportation within 1 year from the date of importation, which period, in the discretion of the Secretary of the Treasury, may be extended, upon application, for one or more further periods which, when added to the initial 1 year, shall not exceed a total of 3 years”.
U.S. Note 2(b) to SubChapter XIII of Section XXII, HTSUS, provides that:
Merchandise may be admitted into the United States under heading 9813.00.05 only on condition that:
* * * *
(b) If any processing of such merchandise results in an article (other than an article described in (a) of this U.S. note) manufactured or produced in the United States:
(i) A complete accounting will be made to the Customs Service for all articles, wastes and irrecoverable losses resulting from such processing; and
(ii) All articles and valuable wastes resulting from such processing will be exported or destroyed under customs supervision within the bonded period; except that in lieu of the exportation or destruction of valuable wastes, duties may be tendered on such wastes at rates of duties in effect for such wastes at the time of importation.
Statistical Note 1 to SubChapter XIII of Section XXII, HTSUS, states that: “[f]or any article entered under statistical reporting number 9813.00.0520, the proper citation for statistical reporting shall consist of 9813.00.0520 followed by the statistical reporting number for the provision which would have applied if such article were not classifiable
in this subchapter and the unit of quantity to be reported is the unit shown for such article in such other provision.”
CBP has interpreted the TIB provisions as requiring direct identification of each particular article to show timely exportation. See e.g., HQ 224187, dated February 23, 1993. However, CBP has interpreted the requirement to permit identification of commingled fungible merchandise by use of accounting methods. The first-in first out (FIFO) accounting method has been employed by CBP as one such exception. See, e.g., HQ 224187; HQ 225566, dated August 7, 1995; HQ 229265, dated September 27, 2002.
In C.S.D. 86-16 [HQ 218370, dated December 9, 1985], TIBs were permitted to be canceled on a FIFO basis when fungible merchandise entered for consumption and merchandise entered under a TIB, under item 864.05, TSUS (presently subheading 9813.00.05, HTSUS), were commingled. Further, in HQ 225566, CBP held that "the FIFO method, as illustrated in Schedule X to the 19 CFR Part 181 Appendix, may be used to identify the goods when the finished products are manufactured from fungible domestic merchandise commingled with fungible TIB merchandise."
While Maxtor claims that the items are fungible, it does not provide any evidence to substantiate the claim. Further, even if the items are fungible, Maxtor has not explained why its accounting records cannot demonstrate that the goods were timely exported under the FIFO methodology. Instead, counsel for Maxtor seeks to apply inventory turnover methodology to close out the TIB entries. Section 191.14 of the CBP Regulations [19 C.F.R. § 191.14], which covers identification of commingled fungible articles for the purpose of duty refunds under the drawback laws, provides guidance with respect to duty exemptions under the duty-free temporary importation law as to the applicable criteria and principles. Section 191.14 provides that:
§ 191.14 Identification of merchandise or articles by accounting method.
(b) Conditions and criteria for identification by accounting method. Manufacturers, producers, claimants, or other appropriate persons may identify for drawback purposes lots of merchandise or articles under this section, subject to each of the following conditions and criteria:
(1) The lots of merchandise or articles to be so identified must be fungible (see §191.2(o) of this part);
(2) The person using the identification method must be able to establish that inventory records (for example, material control records), prepared and used in the ordinary course of business, account for the lots of merchandise or articles to be identified as being received into and withdrawn from the same inventory. Even if merchandise or articles are received or withdrawn at different geographical locations, if such inventory records treat receipts or withdrawals as being from the same inventory, those inventory records may be used to identify the merchandise or articles under this section, subject to the conditions of this section. If any such inventory records (that is, inventory records prepared and used in the ordinary course of business) treat receipts and withdrawals as being from different inventories, those inventory records must be used and receipts into or withdrawals from the different inventories may not be accounted for together. If units of merchandise or articles can be specifically identified (for example, by serial number), the merchandise or articles must be specifically identified and may not be identified by accounting method, unless it is established that inventory records, prepared and used in the ordinary course of business, treat the merchandise or articles to be identified as being received into and withdrawn from the same inventory (subject to the above conditions);
(3) Unless otherwise provided in this section or specifically approved by Customs (by a binding ruling under part 177 of this chapter), all receipts (or inputs) into and all withdrawals from the inventory must be recorded in the accounting record;
(4) The records which support any identification method under this section are subject to verification by Customs (see §191.61 of this part). If Customs requests such verification, the person using the identification method must be able to demonstrate how, under generally accepted accounting procedures, the records which support the identification method used account for all merchandise or articles in, and all receipts into and withdrawals from, the inventory, and the drawback per unit for each receipt and withdrawal; and
(5) Any accounting method which is used by a person for drawback purposes under this section must be used without variation with other methods for a period of at least one year, unless approval is given by Customs for a shorter period.
In T.D. 98-16, CBP clarified that 19 C.F.R. §191.14 is intended to establish the accounting methods which may be used to identify merchandise or articles for drawback purposes, and is intended to be consistent with T.D. 95-61. T.D. 95-61 specifically authorized the use of FIFO, and also set forth the criteria for accounting methods used for identification of merchandise, requiring that those methods be consistent with commercial accounting procedures, consistent with the accounting procedures generally used by the drawback claimant, and ease of administration and subject to verification. In addition, T.D. 95-61 permitted the authorization of accounting methods, other than those enumerated therein, so long as that method was revenue neutral or favorable to the Government.
In HQ 224628, dated January 10, 1994, CBP accepted the accounting method proposed in that case because it involved the facilitation of CBP compliance through consistency of recordkeeping for both CBP and general business purposes. The accounting method authorized by CBP was consistent with inventory records maintained by the airline for general business purposes.
However, in HQ 230840, dated September 30, 2005, CBP rejected an accounting method which created an inventory and recordkeeping system that discriminates based on zone status for CBP purposes as it did not comport with generally accepted accounting procedures (GAAP), specifically with regard to consistency in recordkeeping. Further, CBP found that the documents submitted for review were inconclusive with respect to whether the record system kept by the zone users were the same for business and CBP records and were done in the ordinary course of business. CBP concluded if inventory records kept in the ordinary course of business treat receipts and withdrawals as being from the same inventory, those inventory records must be used, and receipts into or withdrawals from the same inventory may not be accounted for separately for CBP purposes.
The facts in the present situation are similar to the factual situation in HQ 230840. There is no evidence that the documents submitted for review in support of the inventory turnover methodology reflect the business inventory records maintained by Maxtor that were kept in the ordinary course of business such as for tax purposes. The documents submitted do not take into account the movement of the merchandise in and out of inventory. As noted above, Maxtor commingled media that it received back from its China or Singapore disk drive manufacturing facilities that was entered under heading 8523 using consumption entries, into its inventory. In examining the inventory records submitted, CBP was unable to trace a randomly selected entry, Entry No. 233-xxxxx21-5, dated August 5, 2005, through the inventory records to verify that the goods were exported.
Furthermore, Maxtor admits to not having sufficient records of exports of finished media to properly close all of the TIB imports made in 2006. Maxtor has been unable to identify the merchandise and track it through its inventory records to show that the goods were properly exported within the statutory timeframe. According to 19 C.F.R. §191.14(b)(2), “[t]he person using the identification method must be able to establish that inventory records (for example, material control records), prepared and used in the ordinary course of business, account for the lots of merchandise or articles to be identified as being received into and withdrawn from the same inventory”. As Maxtor has not been able to establish that inventory turnover records were prepared and used in the ordinary course of business as opposed to being generated for the sole reason of attempting to close out the TIB entries, CBP finds that the recordkeeping requirements have not been met.
Whether the TIB entry number is required on export documents:
CBP has published on its website a publication titled “Temporary Importation Under Bond Publication”. This publication complies with CBP’s obligations under Title VI (Customs Modernization), of the North American Free Trade Agreement Implementation Act (Pub. L. 103-182, 107 Stat. 2057) (hereinafter “Title VI”), which became effective on December 8, 1993. Title VI amended many sections of the Tariff Act of 1930, as amended, and related laws. Two new concepts which emerged from the law are “informed compliance” and “shared responsibility.” These concepts are premised on the idea that in order to maximize voluntary compliance with customs laws and regulations, the trade community needs to be clearly and completely informed of its legal obligations. Accordingly, the law imposes a greater obligation on CBP to provide the public with improved information concerning the trade community’s responsibilities and rights under the customs and related laws. In addition, both the trade and CBP share responsibility in carrying out import requirements.
The publication “Temporary Importation Under Bond” explains what a TIB is and what are the bond exportation requirements. CBP lists several items that must be included as part of the documentation required to properly close out a TIB. Importers are required to include a reference to the original entry number (line 1 of the CF 7501) and that the description of the item on the bill of lading should match the description of the item on the CF 7501 in all particulars, including serial numbers or other identifying factors.
The requirements listed in the publication provide importers with the proper guidance as to how to meet the export requirements under the TIB provisions. As stated above, CBP has interpreted the TIB provisions as requiring direct identification of each particular article to show timely exportation. CBP requires the reference to the original entry number so as to properly administer the closing of TIBs. Therefore, we find that the Port’s request for the TIB number on the export documents as part of the documentation to close out the TIBs was proper.
HOLDING:
The proposed accounting methodology does not use direct identification, nor does it export the oldest item of fungible merchandise first, and thus it is inconsistent with the definition of FIFO. Further, the proposed accounting methodology does not meet the criteria for alternative methods as described under 19 C.F.R. §191.14.
A TIB importer is required to put the TIB entry number on the export documents as part of the evidence that the merchandise covered under a particular TIB was properly exported within the statutory timeframe.
You are to mail this decision to the internal advice requester no later than 60 days from the date of the decision. At that time, Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director Commercial & Trade Facilitation Division