HQ 0222782 - Application for further review of Protest #3201-9-100140 concerning duties paid on barrels of crude oil subject to volumetric expansion - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1993 HQ Rulings > HQ 0221393 - HQ 0222782 > HQ 0222782

HQ 222782

May 2, 1991

FOR-2-05 CO:R:C:E 222782 TLS

CATEGORY: ENTRY PROTEST

District Director
U.S. Customs Service
P.O. Box 1641
Honolulu, Hawaii 96813

RE: Application for further review of Protest #3201-9-100140 concerning duties paid on barrels of crude oil subject to volumetric expansion

Dear Sir:

We have received your memorandum dated August 2, 1990, requesting further review of the above-mentioned protest. We have considered the points you have raised as well as those of the importer. Our comments are detailed below.

FACTS:

The protestant operates a foreign-trade subzone (FTZ) in Hawaii. It admits, among other things, barrels of crude oil into the zone under privileged foreign (PF) status. The crude oil is processed into various petroleum products once admitted to the FTZ. Some of the oil is vulnerable to volumetric expansion due to the refining process used in those cases. Volumetric expansion or shrinkage is a commonly-known phenomenon that occurs when the molecular structure of a petroleum product changes, causing that product to increase (or decrease) in volume while maintaining the same weight.

The Honolulu district has maintained a policy of charging duties on the petroleum products after factoring in the increase in volume due to volumetric expansion or shrinkage. This results in the protestant paying duties on a volume measurement beyond that originally posted for the petroleum as it is admitted into the zone if expansion occurs. Customs Honolulu claims that the accounting method used for the Hawaiian Independent Refinery, Inc. (HIRI) accounts for petroleum in volume, which tends to expand (or shrink), rather than by weight, which remains constant. The protestant argues that the volume measurement of the crude oil as it is admitted into zone should be determinative of how much duties are paid on the entry.

ISSUE:

Whether petroleum that is vulnerable to volumetric expansion during processing should be dutiable at its volume measurement at the time it is admitted to a foreign trade zone under privileged foreign status or at its measurement after expansion (or shrinkage) might have occurred.

LAW AND ANALYSIS:

The Foreign Trade Zone Act (19 U.S.C. 81 et. seq.) is the controlling statute for FTZ operations. Section 81c of the Tariff Act of 1930 provides, in part, the following;

...whenever [foreign] privilege (status) shall be requested and there has been no manipulation or manufacture effecting a change in tariff classification, the appropriate customs officer shall take under supervision any lot or part of a lot of the foreign merchandise and cause it to be appraised and taxes determined and duties liquidated thereon. 19 U.S.C. 81c (1990). (emphasis added.)

Section 146.65 of the Customs Regulations provides that privileged foreign merchandise will be subject to classification according to, inter alia, quantity, at the rate of duty in force on the date of filing for the status. It further states that dutiable value shall be determined by the transaction price of the merchandise leading to the admittance of the goods to the zone. 19 CFR 146.65(b)(2) (1990). These provisions establish the authority of the appropriate customs officials to appraise and account for the admitted goods so that duty might be charged. They also seem to establish that the duties should be based on the status of the merchandise at the time it is admitted to the zone. At any rate, they do not indicate an accounting for a possible change in status after admittance. In fact, 19 CFR 146.41(e) provides that merchandise under privileged foreign status remains under that designation even if physical changes have occurred through the manufacturing process.

In the present case, the changes that sometimes occur do so as a result of the refining process that takes place in the zone. The process could lead to a higher net volume than that originally documented in the zone operator's original application for admittance. This does not take place until after the privileged foreign status has been placed on the merchandise, however. To the extent that such status is unconditional and cannot be changed under these circumstances, the question is whether all other determinations, rate of duty in particular, is fixed consistent with the status.

Customs has addressed this issue before. A 1979 Customs Service Decision held that foreign merchandise taken into an FTZ and given the status of foreign privileged merchandise is dutiable at the rate effective on the date of application for status. C.S.D. 79-464 (June 5, 1979). The Service further held that this is true even if the merchandise is changed in form by manipulation or manufacture while in the zone. Id. The only exception to this rule is waste from privileged foreign merchandise is considered nonprivileged foreign merchandise under 19 CFR 146.42(b). This provision is outlined under section 146.41(e) of the Customs Regulations as discussed above.

In the present case, the merchandise, crude oil, was admitted to the zone upon application and received privileged foreign status. The crude is to be refined while in the zone and several petroleum products are to be produced from the refining process. The protestant contends that the crude oil is vulnerable to a phenomenon called "volumetric expansion," in which the process used to refine the oil into petroleum products causes the total volume of the sum of all the products combined to expand from the original volume of the crude oil. For example, 100 gallons of crude oil could produce 110 gallons of petroleum products because of volumetric expansion. The validity of this fact is corroborated by a technical report published by the American Petroleum Institute. The report reads in pertinent part as follows:

Processing Gain- the volumetric amount by which total output is greater than input. This difference is due to the processing of crude oil into products which, in total, have a lower specific gravity than the crude oil processed. Therefore, in terms of volume (barrels), the total output of products is greater than input. American Petroleum Institute, Standard Definitions for Petroleum Statistics, Technical Report No. 1 (4th ed. 1988).

Your office contends that the duty charged in this case should be based upon the total volume of the products that are produced from the crude oil rather than from the volume of the crude oil itself. We disagree.

The law is well stated on this issue. Both section 146.65 and 146.41 of the Customs Regulations provide in plain terms that merchandise admitted to an FTZ under privileged foreign status is dutiable at the rate applicable at the time of application for status and such status cannot be changed once designated except for one provision under section 146.42. That exception, concerning waste from manipulation or manufacture of privileged foreign merchandise in a zone, does not apply in this case. There is no waste involved here. Furthermore, C.S.D. 79-464 follows the letter of the stated law and finds no other exceptions or qualifications. We find none applicable to the present case as well. Therefore, we must find that the crude oil in this case is dutiable on the quantity admitted into the foreign trade zone at the rate effective on the date of application to the zone. Such rate cannot be changed once foreign privileged status is designated.

We understand the concern for maintaining a true and accurate accounting system for the FTZs. To the extent that your office wishes to ensure the accuracy of the system under these circumstances, the actual physical amounts leaving the zone after processing can be checked against the corresponding amounts admitted to the zone through conversion tables. Relative value calculations should be adhered to when checking the total volume of the end products against the volume of the crude from which it was derived.

HOLDING:

The crude oil admitted to the foreign trade zone under privileged foreign status is dutiable at the rate in effect on the date of application for such status and cannot be changed after the status has been designated. This remains true even if the volume of the crude oil is changed through manipulation or manufacture while in the zone. You are instructed to allow this protest in full.

Sincerely,

John Durant, Director

Previous Ruling Next Ruling