HQ 0222378 - Supply of Tax-Free Rum from Puerto Rico to Vessels and Aircraft in Foreign Trade from United States; Foreign Trade Zones; Bonded Warehouse; 19 U.S.C. 1309 - United States International Trade Commision Rulings

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HQ 222378

September 10, 1990

CON-13-02/FOR-2-01-CO:R:C:E 222378 PH

CATEGORY: FOREIGN TRADE ZONE

Ms. Mamie E. Pollock
District Director
U.S. Customs Service
Post Office Box 2112
San Juan, Puerto Rico 00903

RE: Supply of Tax-Free Rum from Puerto Rico to Vessels and Aircraft in Foreign Trade from United States; Foreign Trade Zones; Bonded Warehouse; 19 U.S.C. 1309

Dear Ms. Pollock:

With your May 9, 1990, memorandum (File: SPE-1-DD:CO EQA) you requested Internal Advice on the legality of the shipment of tax-free rum from Puerto Rico to a foreign trade zone (FTZ) in the United States and the subsequent transfer of the rum from the FTZ to a Customs bonded warehouse for storage before the rum is transferred to vessels and air carriers which service foreign countries from the continental United States. You enclosed a copy of a letter from Destileria Serralles, Inc. (the "inquirer"), of Mercedita, Puerto Rico, dated February 22, 1990, requesting information on such a procedure. Our ruling follows.

FACTS:

The inquirer states that it produces and bottles rum in Puerto Rico. It is interested in being able to supply tax-free rum to vessels and air carriers which service foreign countries from sites in the continental United States.

In response to an inquiry to the Bureau of Alcohol, Tobacco and Firearms (BATF) of the Department of the Treasury, the inquirer has been advised that the BATF is aware of no provision which would allow bottled spirits to be brought into the United States for transfer to a Customs bonded warehouse without the payment of taxes or which would allow the drawback of taxes on spirits which have been manufactured and bottled in Puerto Rico. The BATF suggested as an alternative the shipment of the bottled distilled spirits from Puerto Rico directly to an FTZ, stating that spirits so shipped to an FTZ would not come within the jurisdiction of the Internal Revenue Code and the federal excise tax would not be imposed. The BATF also suggested that the in- quirer might wish to examine the feasibility of transferring the distilled spirits shipped to the FTZ from the FTZ to a Customs bonded warehouse for storage pending lading for use on vessels or aircraft. The BATF suggested that the inquirer might wish to seek advice from Customs about this alternative. The inquirer's letter to Customs of February 22, 1990, seeks such advice.

ISSUES:

(1) May Puerto Rican rum upon which federal excise taxes have not been paid be admitted into an FTZ in the continental United States and subsequently be withdrawn from the FTZ free of duties and federal excise taxes for use as supplies by vessels and air carriers that service foreign countries from sites in the continental United States?

(2) May the Puerto Rican rum described in ISSUE (1) be transferred from the FTZ to a Customs bonded warehouse pending lading for use as supplies as described in ISSUE (1)?

LAW AND ANALYSIS:

Pursuant to section 309(a), Tariff Act of 1930, as amended (19 U.S.C. 1309(a)), "[a]rticles of foreign or domestic origin may be withdrawn ... from any [C]ustoms bonded warehouse ... or from [an FTZ] free of duty and internal-revenue tax" for supplies of foreign or United States vessels or aircraft "actually engaged in foreign trade or trade between the United States and any of its possessions, or between Hawaii and any other part of the United States or between Alaska and any other part of the United States." The inquirer may wish to examine section 1309 more closely, as it limits the kinds of supplies which may be withdrawn in certain cases and describes in more detail than the general description quoted above the vessels and aircraft which may qualify for treatment under its provisions (see also section 317, Tariff Act of 1930, as amended (19 U.S.C. 1317)). The Customs Regulations pertaining to sections 1309 and 1317 are found in 19 CFR 10.59 through 10.65.

Under the Foreign Trade Zones Act of 1934, as amended (48 Stat. 998; 19 U.S.C. 81a through 81u), Foreign Trade Zones are authorized to be established in the United States. The privilege of establishing, operating, and maintaining FTZ's is granted by the Foreign Trade Zones Board (see 19 U.S.C. 81b). We are enclosing a copy of the Customs pamphlet, Foreign Trade Zones, U.S. Customs Procedures and Requirements, for the general information of the inquirer.

Section 3 of the Foreign Trade Zone Act of 1934, as amended (19 U.S.C. 81c), provides in pertinent part that:

Foreign and domestic merchandise of every description, except such as is prohibited by law, may, without being subject to the [C]ustoms laws of the United States, except as otherwise provided in this chapter, be brought into [an FTZ] and may be stored, sold, exhibited, broken up, repacked, assembled, distributed, sorted, graded, cleaned, mixed with foreign or domestic merchandise, or otherwise manipulated, or be manufactured except as otherwise provided in this chapter, and be exported, destroyed, or sent into [C]ustoms territory of the United States therefrom, in the original package or otherwise; but when foreign merchandise is so sent from [an FTZ] into [C]ustoms territory of the United States it shall be subject to the laws and regulations of the United States affecting imported merchandise;

The fourth proviso to 46 U.S.C. 81c provides, in pertinent part, that:

... under the rules and regulations of the controlling Federal agencies, articles which have been taken into a zone from [C]ustoms territory for the sole purpose of exportation, destruction ..., or storage shall be considered to be exported for the purpose of--

(2) the statutes and bonds exacted for the payment of draw-back, refund, or exemption from liability for internal- revenue taxes and for the purposes of the internal-revenue laws generally and the regulations thereunder.

... Such articles may not be returned to
[C]ustoms territory for domestic consumption except where the [FTZ] Board deems such return to be in the public interest ....

The Customs Regulations which provide for the administration and interpretation of this and other laws relating to FTZ's are found in 19 CFR Part 146. Under 19 CFR 146.31, "[m]erchandise of every description may be admitted into [an FTZ] unless prohibited by law." The procedures for applying for admission of merchandise into an FTZ are found in 19 CFR 146.32.

The status of merchandise in an FTZ is governed by 19 CFR Part 146, Subpart D. Under 19 CFR 146.43(a), domestic status may be granted to merchandise upon which, in addition to certain other requirements, "all internal-revenue taxes, if applicable, have been paid." Pursuant to 19 CFR 146.44(a) in this Subpart:

[m]erchandise taken into [an FTZ] for the sole purpose of exportation, destruction ..., or storage will be given zone-restricted status on proper application. That status may be requested at any time the merchandise is located in [an FTZ] but cannot be abandoned once granted. Merchandise in zone-restricted status may not be removed to Customs territory for domestic consumption except where the [FTZ] Board determines the return to be in the public interest.

The procedures for applying for zone-restricted status are found in 19 CFR 146.44(b).

The transfer of merchandise from an FTZ is governed by 19 CFR Part 146, Subpart F. Under section 146.67, "[a]ny merchandise in [an FTZ] may be exported directly therefrom (without transfer into Customs territory) upon compliance with the procedures of [19 CFR 146.67(b)]." Merchandise in an FTZ may also be transferred to Customs territory for transportation to and exportation from a different port (see 19 CFR 146.67(c)). It is specifically provided in 19 CFR 146.69 that "[a]ny merchandise which may be withdrawn duty and tax free in Customs territory under [19 U.S.C. 1309 or 1317 and 19 CFR 10.59 through 10.65] may similarly be transferred from [an FTZ], regardless of its zone status, under those statutes and regulations." Section 146.69 provides the procedures for transfer of merchandise from an FTZ to a qualified vessel or aircraft either for lading in the FTZ or for transportation through Customs territory to the qualified vessel or aircraft. Under 19 CFR 146.70(c), "[z]one restricted merchandise may be transferred from [an FTZ] to a Customs bonded warehouse for storage pending exportation." The procedures for such a transfer are also provided for in section 146.70(c).

The statutory authority for the establishment of Customs bonded warehouses is found in section 555, Tariff Act of 1930, as amended (19 U.S.C. 1555). This statute provides, in part, that "[e]xcept as otherwise provided ..., bonded warehouses shall be used solely for the storage of imported merchandise ...." Section 557, Tariff Act of 1930, as amended (19 U.S.C. 1557), which concerns the entry of merchandise for warehouse, provides, in part, that:

[a]ny merchandise subject to duty, with [certain exceptions irrelevant in this case,] may be entered for warehousing and be deposited in a bonded warehouse at the expense and risk of the owner, importer, or consignee. Such merchandise may be withdrawn, at any time within 5 years from the date of importation, for consumption upon payment of the duties and charges accruing thereon at the rate of duty imposed by law upon such merchandise at the date of withdrawal; or may be withdrawn for exportation or for transportation and exportation to a foreign country ... without the payment of duties ....

The Customs Regulations governing the entry into, and the withdrawal of merchandise from a Customs bonded warehouse are found in 19 CFR Part 144. The requirements and procedures relating to entry of merchandise into a Customs bonded warehouse are in found in Subpart B of that Part. Under 19 CFR 144.35, the procedures for the withdrawal from a Customs bonded warehouse of supplies and equipment for vessels and aircraft are set forth in Subpart D of Part 144 and 19 CFR 10.59 - 10.65. We are enclosing a copy of the Customs pamphlet, U.S. Customs Bonded Warehouse, for the general information of the inquirer.

For Customs purposes, Puerto Rico is a part of the Customs territory of the United States (see General Note 2, Harmonized Tariff Schedule of the United States Annotated (HTSUSA), and 19 CFR 101.1(e)). Thus, merchandise brought to the continental United States from Puerto Rico is not considered to be imported into the United States for Customs purposes.

With an exception not relevant in this case, 26 U.S.C. 7652(a)(1) provides that:

... articles of merchandise of Puerto Rican manufacture coming into the United States and withdrawn for consumption or sale shall be subject to a tax equal to the internal revenue tax imposed in the United States upon the like articles of merchandise of domestic manufacture.

Customs has held, in Legal Determination 80-0072 (publishing Ruling 712315, dated February 7, 1980), that "Puerto Rican rum brought to the United States to be withdrawn as vessel supplies under [19 U.S.C. 1309] may be entered in a Customs bonded ware- house." The basis for this holding was that "such merchandise by its importation to the United States is subject to internal revenue tax." The Legal Determination distinguished Customs Service Decision (C.S.D.) 79-420, which held that Puerto Rican rum could not be stored in a Customs bonded warehouse, because the rum which was the subject of the C.S.D. was not subject to U.S. internal revenue taxes or U.S. duty and the rum which was considered in the Legal Determination was subject to the internal revenue tax.

On the basis of the foregoing, we conclude that rum from Puerto Rico may be admitted into an FTZ in the continental United States. We understand that the BATF has stated that bottled distilled spirits, which would include rum, shipped from Puerto Rico directly to an FTZ would not come within the jurisdiction of the Internal Revenue and federal excise taxes would not be imposed. Because internal revenue taxes would not have been paid on the rum it would be given zone-restricted status in the FTZ (see 19 CFR 146.43). The rum could be withdrawn from the FTZ free of any duties or internal revenue taxes to be used as supplies of qualified United States and foreign vessels and aircraft engaged in the trades described in 19 U.S.C. 1309 (including foreign trade and certain trade between the United States and its possessions, Alaska, or Hawaii) (see 19 U.S.C. 1309 and 19 CFR 10.59-10.65). The rum could be laded on a qualified vessel or aircraft directly from the FTZ or it could be transported from the FTZ by a bonded cartman, lighterman, or carrier through Customs territory to be laded on a qualified vessel or aircraft (19 CFR 146.69). The rum could also be transferred to a Customs bonded warehouse for storage pending exportation (19 CFR 146.70 and Legal Determination 80-0072). After transfer to the Customs bonded warehouse, the rum could be withdrawn therefrom free of any duties or internal revenue taxes to be used as supplies of qualified United States and foreign aircraft engaged the trades described in 19 U.S.C. 1309 (see above).

With regard to shipment of the rum from Puerto Rico to an FTZ in the United States, the inquirer should be made aware that Customs has taken the position that an entry for transportation and exportation (see 19 CFR 1826) is not appropriate because merchandise sent from Puerto Rico to the United States is not considered to be imported and is not subject to the requirement to entry. We believe that jurisdiction over the procedures applicable to shipment of the rum from Puerto Rico to the FTZ is within the BATF and we defer to that Bureau in this regard.

HOLDINGS:

(1) Puerto Rican rum upon which federal excise taxes have not been paid may be admitted into an FTZ in the continental United States and subsequently withdrawn from the FTZ free of duties and federal excise taxes for use as supplies by qualified United States and foreign vessels and aircraft which are actually engaged in foreign trade or in certain trade between the United States and its possessions, Alaska, or Hawaii. The rum could be laded on a qualified vessel or aircraft directly from the FTZ or it could be transported from the FTZ by a bonded cartman, lighterman, or carrier through Customs territory to be laded on a qualified vessel or aircraft.

(2) The Puerto Rican rum described in ISSUE (1) may be transferred from the FTZ to a Customs bonded warehouse and, after transfer to the warehouse, may be withdrawn therefrom free of duties and federal excise taxes for use as supplies by qualified United States and foreign vessels and aircraft which are actually engaged in foreign trade or in certain trade between the United States and its possessions, Alaska, or Hawaii.

Sincerely,

John Durant, Director

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