HQ 0222059 - 19 U.S.C. 1313(j)(1); same condition drawback; whether reduction in value of imported merchandise changes its condition - United States International Trade Commision Rulings

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HQ 222059

December 17, 1990

DRA-4-CO:R:C:E 222059 C

CATEGORY: DRAWBACK

Alan P. Rodgers
Senior Vice President
National Customs Brokers and Forwarders Association 245 Woodport Road
Sparta, New Jersey 07871-2644

RE: 19 U.S.C. 1313(j)(1); same condition drawback; whether reduction in value of imported merchandise changes its condition

Dear Mr. Rodgers:

This responds to your letters of January 10, 1990, and November 27, 1990, submitted on behalf of your client who engages in the importation of the below described merchandise.

FACTS:

The importer in question imports diaries, appointment books, and other stationary items that are printed for a given calendar year. Naturally, these items lose their appeal, and thus much of their commercial value, after the year for which they were printed has passed. The importer desires to destroy this merchandise and obtain a drawback under the same condition drawback provision.

ISSUE:

The issue in this case is whether or not same condition drawback, under 19 U.S.C. 1313(j)(1), should be prohibited when the imported merchandise in question is in the same condition as when imported in every respect except one: the value of the merchandise is not the same as it was when imported.

LAW AND ANALYSIS:

Senate Report No. 999, 96th Cong., 2d Sess.(1980), stated the following regarding the then proposed same condition drawback provision:

Present law provides for drawback of duties in very limited circumstances. Additionally, the alternatives to drawback, such as TIB's, customs bonded warehouses, or foreign trade zones, all have substantial limitations associated with their use. . . . [The same condition drawback provision] would give U.S. firms more flexibility in meeting customer demands, without having to pay nonrefundable duties on merchandise that is not used in the United States. It would be beneficial for U.S. exporters in such ways as increasing their capability for distribution of products to all markets, assuring uniform testing of a company's products, and giving maximum flexibility with cargo in order to meet deadlines or emergency orders. Importers would receive drawback in those instances in which the merchandise imported was not used, and they were unable to anticipate the need to export [or destroy]. Such would be the case when the importer discovers that there is little domestic demand for the imported product, that the merchandise cannot be disposed of commercially without financial loss, and that [it] is desirable to return the merchandise to the foreign source or sell it in a foreign country [or destroy it if that is the appropriate business choice]. This provision would be particularly helpful in preventing 'distress' sales of imported merchandise, which could have a disruptive effect on U.S. markets. (Emphasis added.)

Id. at 23, 24.

The underlined language above indicates that Congress envisioned that the provision would apply to importers who, after importation, discern a need to export. The highlighted language, added by us, makes explicit what we believe the Congress intended to convey but, by simple, unwitting omission, failed so to do. That is that there is no legal significance in the choice between exporting or destroying merchandise. So long as merchandise otherwise qualifies for same condition drawback - being in the same physical condition as when imported and not having been used in the United States - the choice to export or destroy is to be freely made by the importer without consequence.

We believe that the Congress intended to have the law cover situations of the instant kind. First, as above, the provision was intended to be an expansion of what the Congress viewed to be a limited drawback law. Second, it was designed to obviate more complicated transactions, or transactions that carried with them more onerous and costly procedural requirements, such as the temporary importation under bond provision which requires that merchandise be imported for other than a commercial purpose and that it be exported within a limited period of time, requiring further application to Customs for extensions of that period. Subchapter XIII, Chapter 98, Harmonized Tariff Schedule of the United States, 19 CFR 10.31-41b. Similarly, bonded warehouse and foreign trade zone provisions impose limitations and costs on importers who operate under them. 19 U.S.C. 1557, 19 CFR Part 144 and 19 U.S.C. 81a-u, 19 CFR Part 146, respectively. Obviously, the Congress believed that for the particular context that the same condition drawback law was intended to address, fewer procedural burdens and greater flexibility for importers were beneficial goals. The context referred to is the commercial practice of importing merchandise for other than manufacturing or manipulation purposes; for further sale appears to be the primary purpose envisioned by the Congress. The basic idea was to limit costs and provide greater flexibility for U.S. firms.

The purpose of the same condition drawback provision is served when an importer decides that imported merchandise, in the same condition as when imported and (which was) not used in the United States, should be exported. The recovery of duties upon exportation of such merchandise, and the freedom to economically so dispose of merchandise that was either ordered in greater quantities than needed or was victim of a flat to non-existent market, are two genuine benefits to U.S. firms.

Likewise, the same condition drawback provision is served when an importer decides that imported merchandise should be destroyed, rather than exported. The same monetary savings (recovered duties) and flexibility in decision making that benefit importers who choose to export merchandise are available to those who choose to destroy it. Whether or not to export or destroy is a business decision which will be made on the basis of costs, both monetary and operational. This decision will include consideration of the value of the merchandise.

The question in this case asks whether or not the law contemplates a distinction between merchandise that is less valuable to the importer at the time of exportation/destruction than it was at importation and merchandise that holds the same value at the time of exportation/destruction as it held at importation. To put it another way, is merchandise that has lost value since importation, but is otherwise unused and unchanged (in condition), ineligible for same condition drawback on the theory that it is not in the same condition because it no longer holds the same value?

Given the aforementioned purpose of the same condition drawback provision, it is hard to put forward a reason why merchandise of the kind in question should not qualify for drawback treatment. If the Congress intended to draw the above distinction, we think it of such a critical nature that Congress would have explicitly spelled it out, either, and most appropriately, in the statute itself or, at least, in the language of its recorded discussions. Each of the aforementioned reasons for providing same condition drawback apply to the export or destruction of the instant kind of merchandise. The purpose of the statute is eminently fulfilled by exportation or destruction of merchandise that has lost its value or is less valuable than it was at importation. In the expansive world of commercial transactions, it is probably the case every day that firms face decisions involving such merchandise. It is difficult to conceive of a situation that is more suited to same condition drawback consideration than the instant one.

The merchandise in question was not used in the United States. It is in fact - that is, literally - in the same physical condition it was in when imported. The importer is the quintessential beneficiary of the same condition drawback provision's intent. He enjoyed the flexibility of ordering enough merchandise to meet customer demand without worrying excessively about ordering a greater quantity than was needed. This freed him from making the difficult projection of just how much merchandise he would be able to sell. It freed him from the consequences he would suffer if merchandise was over-ordered - unrecoverable excessive duties. In turn, he was free to over- order to a measured extent in order to avoid the problem of an insufficient inventory. Even a prudent businessman may over- order. With the same condition drawback law, any consequent losses can be reduced. The same is true where the market for imported goods is less than expected.

The statute provides importers the choice to either export or destroy imported merchandise. That choice envisions an importer's decision to choose one or the other for reasons that make sound business sense. If undisposed of imported merchandise has value, such that exportation is the correct business choice, that choice will likely be made. If the value of such merchandise is sufficiently low, such that exportation will be a losing proposition, destruction will be the likely choice. We think this is the limit of the statute's contemplation. To read into it an intent to limit the destruction option to merchandise that retains its original value is, in this case, to exceed the limits of statutory interpretation. The fact that merchandise has lost its value - some, most, or all of it - is a primary reason for either exporting or destroying it. Indeed, it is fairly certain that Congress included the destruction option for just such situations. Giving importers that kind of cost saving flexibility is the purpose of the same condition drawback provision.

We believe that the merchandise in question is entitled to same condition drawback for three reasons: 1) the merchandise is literally in the same physical condition as when imported; 2) drawback on these facts falls well within the purpose and intent of the statute; and 3) there is virtually nothing in the law, the regulations, or the legislative history to recommend against the applicability of the law in the instant case. This interpretation of the same condition drawback provision is to be distinguished from that applied to situations where imported merchandise becomes damaged or defective after importation, such as where perishable goods deteriorate. In these cases, there is a literal change in condition in the merchandise. Even with merchandise of the instant kind, paper products, if the merchandise were to deteriorate, due to natural aging or some other force or event, it would be ineligible for same condition drawback because it would no longer be in the same condition. This ruling holds only that merchandise which has lost value, but is otherwise in the same condition, is eligible for same condition drawback if it otherwise qualifies under the law and regulations.

HOLDING:

Imported merchandise which is, at the time of exportation or destruction, in the same physical condition as it was upon importation qualifies for same condition drawback despite the fact that its commercial value has diminished since importation. A reduction in the commercial value of merchandise, by itself, is immaterial to the same condition determination. If such reduction is caused by deterioration or some other change in physical condition, drawback is precluded.

Sincerely,

John Durant, Director

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