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HQ 223419

March 18, 1992

DRA-2-02 CO:R:C:E 223419 C

CATEGORY: DRAWBACK

Director, Commercial Operations
U.S. Customs Service
Southwest Region
Houston, Texas 77057

RE: Request for internal advice concerning 19 U.S.C. 1313(p) and the commingling of imported merchandise prior to initial receipt by the producer; substitution same condition drawback; LOOP; commingled storage; crude oil; petroleum; HRL 221794

Dear Sir:

This responds to your memorandum of August 19, 1991, regarding the referenced subject. We have reviewed the matter and our response follows.

Your inquiry concerns the following situation: An importer arranges for its imported crude oil to be discharged from the importing tanker into the Louisiana Offshore Oil Pipeline (LOOP); it is then transported via the LOOP into an underground salt dome (or salt domes) where it is commingled with other crudes of the same class (which are owned by other parties); later, a quantity of crude oil is taken from commingled storage in the salt dome, in place of the original imported input, and transported to the importer's refinery for processing.

The question is whether or not such commingling is permitted under the authority of 19 U.S.C. 1313(p). Section 1313(p) provides a system, based on monthly accounting records, to identify eligible drawback petroleum products which lost their identity by commingling in common storage with petroleum products that are not eligible for drawback. The provision is designed, in part, to simplify drawback and recordkeeping procedures for certain goods produced from crude petroleum or its derivatives.

You referred to a Headquarters internal advice memorandum, dated November 24, 1989, that addressed the same fact situation - our file 221794. Therein, we concluded that the substitution provision of the manufacturing drawback law, 19 U.S.C. 1313(b), did not encompass the above commingling process. More specifically, we concluded that the principle of same kind and quality (SKAQ) was inapplicable to the LOOP commingling process because this commingling takes place prior to receipt of the imported designated merchandise by the manufacturer/producer. The principle of SKAQ applies after receipt of the imported designated merchandise, when the manufacturer/producer is then required to use it in production, along with a SKAQ substitute, within the required time period. The statute unambiguously requires receipt and use of the imported duty-paid merchandise by the manufacturer/producer. The issue involved in 221794 was characterized as one involving proper identification and designation of the actual imported merchandise that will form the basis for drawback.

We agree with your view that 19 U.S.C. 1313(p) is not applicable to the LOOP commingling process as described above and considered in 221794. The commingling permitted by, and the recordkeeping procedure provided for under, section 1313(p) pertains to a stage in the petroleum production process that takes place after initial receipt of the imported merchandise by the manufacturer/producer. Moreover, drawback under section 1313(p) is paid on merchandise withdrawn from common storage for export. In the scenario of the instant case, merchandise is withdrawn from common storage in the LOOP for transport to the refinery and use in production. Section 1313(p) therefore does not affect the conclusion of 221794, nor does the Customs directive soon to be issued to assist the field in implementing section 1313(p).

If you have additional questions regarding the above, please contact this office.

Sincerely,

John Durant, Director

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