HQ 0224198 - Ruling request on the eligibility of duty-paid crude entered for consumption in privileged foreign status from a FTZ refinery to be designated as a basis for a substitution manufacturing drawback claim under 19 U.S.C. 1313(b); 19 U.S.C. 1313(b); 19 U.S.C. 81c; C.S.D. 83-85; C.S.D. 85-33; C.S.D. 85-49 - United States International Trade Commision Rulings

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HQ 224198

March 24, 1993

FOR-2-03/DRA-2-02-CO:R:C:E 224198 JRS

CATEGORY: MANUFACTURING DRAWBACK FOREIGN TRADE ZONE

Mr. David J. Tomcik
Chevron U.S.A. Inc.
225 Bush Street
San Francisco, California 94104-4289

RE: Ruling request on the eligibility of duty-paid crude entered for consumption in privileged foreign status from a FTZ refinery to be designated as a basis for a substitution manufacturing drawback claim under 19 U.S.C. 1313(b); 19 U.S.C. 1313(b); 19 U.S.C. 81c; C.S.D. 83-85; C.S.D. 85-33; C.S.D. 85-49

Dear Mr. Tomcik:

This is in response to your request for a ruling dated September 17, 1992 (File Ref.: USC.CUSA.05.00; .05.10; .45) on the above-referenced subject. Our decision follows.

FACTS:

Chevron U.S.A. Inc. (Chevron) imports crude petroleum and/or finished and unfinished product(s) for further processing and eventual sale. Typically, Chevron imports large quantities of foreign class III crude at its refineries at Pascagoula, Mississippi and Philadelphia, Pennsylvania, and in accordance with its substitution drawback contract (T.D. 89-89(1)), designates such duty-paid crude in substitution for other imported duty-paid, duty-free or domestic class III crude used to manufacture exported products.

Chevron is currently seeking FTZ status for its Pascagoula and Philadelphia refineries. Chevron proposes that crude petroleum will be admitted to the proposed FTZ's in privileged foreign status. The resulting products manufactured from such privileged foreign crude will be identified under customs approved accounting procedures. Upon transfer from the FTZ for domestic consumption, duty will be based on the crude content of such products in accordance with the accounting procedure. Chevron requests that such duty-paid crude from a FTZ refinery is eligible to be designated as the basis for drawback with the substitution provisions of 19 U.S.C. 1313(b) at a non-FTZ refinery where all other provisions of the claim are in accordance with the Customs regulations (19 CFR Part 191) and its approved drawback contract, T.D. 89-89(1).

ISSUE:

Whether the duty assessed on entry from a FTZ on an article that was produced in the zone with the use of privileged foreign merchandise is eligible for designation as a basis for drawback under 19 U.S.C. 1313(b) on exported articles manufactured with merchandise of the same kind and quality at a non-FTZ refinery of the same manufacturer?

LAW AND ANALYSIS:

In accordance with the Foreign-Trade Zones Act of 1934, as amended, 19 U.S.C. 81a-u, privileged foreign merchandise admitted in a foreign-trade zone is imported into the United States (see C.S.D. 83-21), and its use in manufacture or production therein constitutes use in the United States (see C.S.D. 81-44). C.S.D. 85-33 and C.S.D. 83-85.

Our response is limited to the privileged foreign status issue in accordance with Chevron's request for a ruling. As you probably are aware, the law (19 U.S.C. 81c) permits an importer the privilege to have the tariff classification, and rates of duty on foreign merchandise determined and fixed in its condition as sent into the zone rather than in its condition as sent into the Customs territory. The request for privilege status for foreign merchandise cannot be granted after the merchandise has been manipulated or manufactured so as to effect a change in the tariff classification of the merchandise. See C.S.D. 81-192 (copy enclosed).

The provisions of 19 U.S.C. 1313(b) provide, in pertinent part, for the allowance of drawback on exported articles manufactured or produced in the United States with the use of imported duty-paid, duty-free, or domestic merchandise of the same kind and quality. As set forth in the Foreign-Trade Zones Act (19 U.S.C. 81c), foreign merchandise in a zone is, except as otherwise provided therein, exempt from the Customs laws of the United States affecting imported merchandise; therefore, while in a FTZ such merchandise is exempt from the payment of duty. The fact that duty on privileged foreign status merchandise used in the manufacture of an article in a zone is not paid before the manufacture occurs does not bar drawback under 19 U.S.C. 1313(a). See C.S.D. 83-85. Although C.S.D. 83-85 addressed only direct identification manufacturing drawback under 19 U.S.C. 1313(a), it is equally applicable to substitution manufacturing drawback under 19 U.S.C. 1313(b).

C.S.D. 85-49 clearly explains that when privileged foreign or nonprivileged foreign status merchandise is in a foreign trade zone, it is considered "conditionally free" merchandise until it enters the domestic market. For that reason, Customs held in C.S.D. 85-49 that the drawback claim was properly denied since the articles manufactured from the privileged foreign and nonprivileged foreign status merchandise and exported from the zone did not meet the plain language of the substitution manufacturing drawback law of 19 U.S.C. 1313(b).

Chevron plans to enter the articles manufactured in the FTZ with the use of privileged foreign status merchandise and designate those import entries against the exported articles which were manufactured in the Customs territory pursuant to its drawback contract for petroleum. It is clear that when duty is paid on privileged foreign status merchandise upon entry into the U.S. Customs territory, it becomes "imported duty-paid merchandise" and thus eligible for designation as "imported duty- paid" merchandise for drawback under 19 U.S.C. 1313(b). C.S.D. 85-49; see also C.S.D. 83-85; C.S.D. 85-33; C.S.D. 79-464. However, the date of receipt by Chevron must be the date of admission into Chevron's subzone. The 3-year period for use of both the imported, duty-paid merchandise and the substituted merchandise would start on that same date. Because there would be no duty-paid entry against which to base a claim of drawback, the exportation of the articles manufactured at the non-FTZ refinery would have to be subsequent to the date that the privileged foreign status merchandise is entered into Customs territory from the subzone.

We find no bar in permitting the duty-paid articles entered from the FTZ to qualify as the basis of a drawback claim as "imported duty-paid merchandise" for the exported goods manufactured under a section 1313(b) drawback contract at a non- FTZ refinery, assuming compliance with applicable drawback statutory and regulatory requirements including same kind and quality and time limitations.

A drawback claimant must establish, through recordkeeping and reporting, that the articles which were manufactured in the foreign trade zone with the use of privileged foreign status merchandise are, in fact, entered into the Customs territory with the payment of duty in order to be eligible for drawback designation under 19 U.S.C. 1313(b). Further, a drawback contract should clearly set forth the recordkeeping procedures that will be maintained to establish compliance with the applicable law, regulations, and this interpretive ruling.

Of course, drawback would be precluded if these articles were exported from the FTZ rather than entered for consumption because no import entries would exist which could be designated. Articles manufactured in the FTZ with the use of substituted (privileged foreign status) merchandise are not eligible for drawback when exported unless the substituted merchandise consists of imported duty-paid or duty-free merchandise. As stated above, merchandise admitted in the FTZ in privileged foreign status is conditionally free, not imported duty-paid or duty-free. See the enclosed copy of C.S.D. 85-49.

HOLDING:

Imported articles in privileged foreign status used to make new articles in a foreign trade zone that are entered into the Customs territory with payment of duty are eligible for designation of the payment of drawback upon the exportation of other articles made in the Customs territory with the use of substituted merchandise upon compliance with the applicable laws (19 U.S.C. 1313(b)) and regulations (19 CFR Part 191).

EFFECT ON OTHER RULINGS:

This ruling extends the application of C.S.D. 83-85 from 19 U.S.C. 1313(a) to 19 U.S.C. 1313(b).

Sincerely,

John Durant, Director

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