HQ 0222874 - Request for binding ruling relative to payment of duties on merchandise admitted into a foreign trade zone - United States International Trade Commision Rulings

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HQ 222874

March 12, 1991

FOR-2-01-CO:R:C:E 222874 CB

CATEGORY: ENTRY

David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
New York, New York 10279

RE: Request for binding ruling relative to payment of duties on merchandise admitted into a foreign trade zone

Dear Mr. Ostheimer:

This is in response to your letter of December 7, 1990, on behalf of Trade Zone Operations, Inc., wherein you requested a binding ruling clarifying the time at which duties must be deposited on merchandise admitted into a General Purpose Foreign Trade Zone (FTZ).

FACTS:

General Purpose FTZ #9 is presently comprised of three separate sites, one of which is known as the Campbell Industrial Park. Your client has been designated the FTZ Operator for this FTZ. At the present time, your client wishes to activate a specific area within the Campbell Industrial Park. The area for which activation is being requested is leased to AES Barbers Point (AES-BP). AES-BP plans to operate a co-generation facility at this site which will ultimately convert chemical energy in the form of coal into electricity to be sold to the Hawaiian Electric Company for use by its customers on Oahu. AES-BP will be purchasing, from various vendors, imported foreign status merchandise (such as a turbine-generator) which needs to be assembled and tested prior to its utilization as production equipment at the co-generation facility. The imported foreign status merchandise will be arriving at the General Purpose FTZ in shipments over an extended period of time. You have stated that the merchandise will be stored and assembled by AES-BP's vendors within the General Purpose FTZ and must, prior to its actual use as production equipment, be tested for the purpose of determining its suitability for use as production equipment.

Subsequent to your initial ruling request, a conference was held on January 28, 1991, to discuss the timing of the payment of customs duties. During the course of the meeting, you introduced
the concept of constructive transfer of the equipment once it is installed. It is your position that 19 CFR 146.52 requires the filing of a Customs Form (CF) 216 with the District Director requesting permission to commence the intended activity. Thus, prior to actually utilizing any of the foreign status merchandise as production machinery or capital equipment, a CF 216 must be signed by both the Zone Operator and the Grantee and must be approved by Customs, thereby assuring that all parties will be placed on notice prior to utilization of the equipment. Furthermore, prior to approving the CF 216 Customs can require the filing of a consumption entry which would constructively transfer the capital equipment into the customs territory.

ISSUE:

When must duties be deposited on imported articles admitted into a General Purpose FTZ, when such articles are to be used as production equipment within the General Purpose FTZ?

LAW AND ANALYSIS:

The statute governing the creation and operation of foreign trade zones is the Foreign Trade Zones Act of 1934, as amended (48 Stat. 998; 19 U.S.C. 81a through 81u). Pursuant to the provisions of section 3 of the Foreign Trade Zones Act, as amended (19 U.S.C. 81c), merchandise of every description may be brought into a zone without being subject to the Customs laws for the purposes set forth in the statute. Merchandise may "be brought into a zone 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...." 19 U.S.C. 81c (1982).

It is your opinion that the storage, assembly and testing of foreign status merchandise which subsequently becomes production machinery or capital equipment are activities clearly delineated and permitted under the FTZ Act. Moreover, that the merchandise does not become subject to the deposit of customs duties until such time as it is determined to be suitable for its intended use and is actually used.

In C.S.D. 79-418 the Customs Service ruled that foreign production equipment may not be brought into a zone for use as production equipment. This ruling was issued by the Customs Service notwithstanding the decision in Hawaiian Independent Refinery v. U.S., 81 Cust. Ct. 117, CD 4777 (1978), appeal dismissed 66 C.C.P.A. 135 (1979), wherein the Court of International Trade held that merchandise which does not
actually enter the customs territory of the United States is not dutiable. C.S.D. 79-418 was based on the premise that production equipment is not merchandise as that term is used in the Foreign Trade Zones Act. It was concluded that "[g]iven the common understanding of the term 'merchandise', we believe that Congress deliberately used that more limited term in the Foreign Trade Zones Act to avoid this very conduct."

The issue of the importation of production equipment into an FTZ was most recently addressed by the Court of International Trade in Nissan Motor Mfg. Corp., U.S.A. v. United States, Slip Op. 88-108 (CIT), 22 Cust. Bull., No. 39, p. 27. In the Nissan case the court held, under facts similar to the instant case, that production equipment is not "merchandise" entitled to the duty exemption of Section 3 of the Tariff Act of 1930 (the Act). The court based its decision on the exclusive language of the statute (19 U.S.C. 81c) and its legislative history. The court was not persuaded to the view that Hawaiian Independent Refinery was relevant to the facts then in question. In affirming the lower court's decision, the United States Court of Appeals for the Federal Circuit reached the same conclusion. Nissan Motor Mfg. Corp. USA v. United States, Appeal No. 89-1040, 23 Cust. Bull., No. 39, p. 3. The Nissan opinion is directly applicable to the instant set of facts.

Based on the Nissan opinion, Customs issued a General Notice revoking C.S.D. 82-103 which had held that the payment of duty could be deferred until production equipment introduced into a FTZ became operational. It is your position that Customs interpretation of the Nissan decision is incorrect and that there was no need to revoke C.S.D. 82-103. You read the Nissan holding as standing solely for the proposition that production equipment used in an FTZ is ultimately subject to duty. You do not read the decision as requiring the deposit of duties at the time of importation of an article into a FTZ.

We disagree with your interpretation. As stated by the Court of Appeals in Nissan, Congress "signalled its intention to make the imposition of immediate duties dependent on the operations that occur in a foreign trade zone when it listed the activities that could be performed on merchandise brought into a zone. The fact that a comprehensive listing is set forth in the statute indicates that Congress did not intend a blanket exclusion from Customs duties irrespective of what is done with the imported merchandise." 23 Cust. Bull. 39, at page 6. In its decision, the court affirmed Customs interpretation of the Foreign Trade Zones Act as published in C.S.D. 79-418. The court concluded that "[u]nder the plain language of the 1950 amendment to the Act and the legislative history of that amendment, and

Customs' published decision interpreting the Act as amended, such a use does not entitle the equipment to exemption from Customs duties." 23 Cust. Bull. 39, at page 7. It is the Customs Service opinion that the court's holding has resolved the question of production equipment in foreign trade zones. The Nissan appellate court found that certain operations were outside any benefits conferred by the Foreign Trade Zones statute. The court expressly found that there was no authority to allow imported articles to be "installed," "used," "operated," or "consumed." The Customs position that production equipment, supplies, and building materials were dutiable upon entry and were not entitled to be considered as merchandise was developed in accordance with public notice and comment. Even if Customs believed its position was wrong despite the favorable court decisions, any reversal of that position could only be accomplished by adherence to that same procedure.

Regarding your contention that the obligation to deposit customs duties does not arise until such time as the equipment is put to its intended use, it is the Customs Service position that the intended use is established at the time of importation. Therefore, the requirement to deposit customs duties must be satisfied at such time. The post-importation use of an article must be considered if that use has a bearing on its tariff treatment. Vandegrift & Co. v. United States, 15 Ct. Cust. Appls. 165, T.D. 42221 (1927); Leonard Levin Co. v. United States, 27 C.C.P.A. 101, CAD 69 (1939). An analogy may be drawn between the instant facts and a temporary importation under bond (TIB). The Customs Regulations provide that the entry summary for articles brought into the United States under a TIB must include a declaration that the goods are not imported for sale or sale upon approval. Furthermore, the Harmonized Tariff Schedule (HTSUSA), Subchapter XIII, U.S. Note 1(a) speaks to the intent of the importer at the time the entry is filed. There must be a definite intent on the part of the importer at the time of importation that the articles shall be used in a manner contemplated by the provision of law under which entry is claimed and that the articles shall be exported within the bond period. If a sale was intended before entry the entry would be in violation of section 592 of the Tariff Act of 1930. In the instant case, you intend to use the articles as production equipment once it is installed. The use to which the articles will be put is not in question. The articles are imported as capital or production equipment and will be used as such. Hence, the articles must be imported as capital or production equipment and estimated duties must be deposited at the time of entry. "Duties and the liability for their payment accrue upon imported merchandise on arrival of the importing vessel..., unless otherwise specially provided for by law." 19 CFR 141.1.

A construction which ignores the adjectives "production" and "building" with respect to equipment or materials that are imported with the intent to be installed in a zone and then used in that zone would be contrary to that principle and the courts' findings in the Nissan litigation. That court concluded that Customs lacked authority to put conditions in a zone grant that were not imposed by the Foreign Trade Zones Board.

Concerning your constructive transfer proposal, you cite 19 CFR 146.61 to indicate that the Customs regulations provide for the constructive transfer of merchandise which remains physically in the zone. However, section 146.61 falls under Subpart F "Transfer of Merchandise from a Zone." Subpart F sets forth the procedure for the entry of merchandise which is to be transferred from a zone, or removed from a zone for exportation or transportation to another port, for consumption or warehouse. In the instant case, the production equipment will always physically remain in the zone. There is no intention of transferring the equipment into the Customs territory. The concept of constructive transfer was adopted by the Customs Service "to provide relief in those instances where merchandise was expressly intended to be physically moved into Customs territory and not as to merchandise which could not be, and was never intended to be, physically moved [into the Customs territory]...." See P.R.D. 75-5; 9 Cust. Bull. 746, 749 (1975). The court in Hawaiian Independent Refinery rejected the argument that foreign merchandise that is "consumed" in a zone can be considered to have been "constructively transferred" to the Customs territory. It held that no authority is anywhere conferred upon Customs to require the involuntary constructive transfer of merchandise which is never intended to, and which does not actually enter, the Customs territory from a zone. 81 Cust. Ct. 117, 125.

It is not within the Customs Service authority to grant a postponement or deferment of the statutorily required deposit of estimated duties. However, you may wish to explore the possibility of petitioning the Foreign Trade Zones Board to allow the entry of the articles as privileged foreign merchandise and, thereby, locking into a tariff classification and rate of duty. The Board can place a restriction on the zone grant that duties must be paid before the co-generation facility is activated. Payment of duties will be postponed until such time as the production equipment is actually put to its intended use.

HOLDING:

All merchandise is subject to duty upon importation except if covered by an exemption. The Nissan decisions held that
production equipment does not fall within any of the Foreign Trade Zones Act exemptions. Therefore, production equipment is subject to duty upon its importation and before it is admitted into a FTZ.

Sincerely,

John Durant, Director

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