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HQ 000608


September 29, 1993

CLA-2 CO:R:I 000608 RFC

CATEGORY: CLASSIFICATION ENTRY MARKING

TARIFF NO.: 2905.11.10; 2905.11.20

Mr. William V. Alexander
McAuliffe, Kelly & Raffaelli
1341 G Street, N.W., Suite 200
Washington, D.C. 20005

RE: Methanol; Methyl Alcohol; Natural Gas; Country of Origin; Marking.

Dear Mr. Alexander:

This ruling letter is in response to your request of September 8, 1993, on behalf of Yankee Energy Corporation, concerning the country of origin, required entry, dutiability, and classification of certain potential importations of methanol (methyl alcohol).

FACTS:
Our understanding of the facts is as follows: An oil rig located approximately 20 to 25 miles off the shore of a foreign country will be extracting oil and natural gas from the sea bed. The oil rig will probably be owned by a U.S. oil company. The natural gas and oil will be separated at the wellhead. The gas will then be transferred to a barge-mounted methanol facility also located 20 to 25 miles off the shore of the same foreign country. The natural gas will be converted to methanol aboard the barge.

The barge will be a U.S.-flag vessel. The gas will be purchased from (1) a U.S. oil company that has mineral rights to the field from which the gas is extracted (presumably granted by the government of the foreign country), (2) directly from the government of the foreign country, or (3) a joint-venture entity between the government of the foreign country and the U.S. oil company.

The processed methanol will then be shipped to the United States (by a ship that may or may not be a U.S.-flag vessel) for sale to commodity methanol distributors.

ISSUES:

1. What is the country of origin of natural gas extracted by a U.S.-owned oil company from a well located offshore and beyond the territorial sea of a foreign country under agreement with the government of the foreign country? Additionally, if the natural gas is converted to methanol aboard a U.S.-flag vessel, what is the country of origin of the methanol?

2. If the methanol is found to be of U.S. origin, what benefits will a U.S. importer of the methanol receive?

3. Does the methanol have to be entered when imported into the United States?

4. If entry is required, is the methanol subject to duty and where is the methanol classified in the Harmonized Tariff Schedule of the United States ("HTSUS")?

LAW AND ANALYSIS:

Under customary international law which the United States recognizes, a country has certain exclusive rights with respect to minerals and other non-living resources located beyond and adjacent to its territorial sea.n1 Those rights extend up to 200 nautical miles and, in some instances, even further.n2 The rights are based on an exclusive economic zone regime and a continental shelf regime. In addition to the above-mentioned rights, under the exclusive economic zone regime, a coastal state has jurisdiction with regard to the establishment and use of artificial islands, installations, and structures within that zone.n3 Moreover,
n1. See Pres. Proc. 5030 (March 10, 1983), 48 Fed. Reg. 10,605; United States Ocean Policy, Statement by. the President, 10 Weekly Comp. Pres. Doc. 383 (March 10, 1983); United Nations, The Law of the Sea: United Nations Convention on the Law of the Sea, Parts V and VI, U.N. Pub. No.E.83.V-5 (1983). See. also James L. Martin, "Freedom and Opportunity: Foundation for a Dynamic Oceans Policy," Department of State Bulletin. (December 1984); James E. Bailey, III, "The Exclusive Economic Zone: Its Development and Future in International and Domestic Law," 45 La. L. Rev. 1269 (1985); 2 Restatement of the Law of the Foreign Relations Law of the United States 514-515.
n2. Id.
n3. Id.
under the continental shelf regime, a coastal state has an exclusive right to authorize and regulate drilling on its continental shelf for all purposes.n4 In the instant case, the natural gas is extracted from within both the exclusive economic zone and the continental shelf of a foreign coastal state. Moreover, it is done through a contractual arrangement with the government of the foreign coastal state, and the gas is purchased either directly or indirectly from the government of that same foreign coastal state. Thus, the gas may be said to be produced from an area of the sea bed within the jurisdiction and control of that foreign coastal state and not of the United States.

Although the natural gas may be considered a product of a foreign country, the conversion of the natural gas into methanol may render the methanol a product of the United States. That is, under both U.S- case law and customary international law, a ship is considered to be a floating part of the territory whose flag it flies (i.e., the flag state).n5 That rule applies whether the ship is on the high seas or within the territorial waters of another sovereign state.n6 Under this rule, a product not of U.S. origin that was "substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed" on a U.S.-flag vessel (whether on the high seas or elsewhere) would be considered a product of U.S. origin.n7

In the instant case, based on the information provided, we believe that a substantial transformation occurs when the natural gas is converted (through a multi-stage chemical process) into methanol: Natural gas and methanol are different articles of commerce because the two products have different names, characters (i.e., natural gas and methanol belong to different organic chemical classes), and uses (i.e., natural gas and methanol are used for different purposes). The only benefits, however, available to an importer of the methanol would be as follows: First, the
n4. Id.
n5. See Koru North America v. United States, 12 CIT 1120, 1122-23 (1988); Lauritzen v. Larsen, 345 U.S. 571, 585 (1953); United States v. Flores, 289 U.S. 137,155-59 (1933); Thompson v. Lucas, 252 U.S. 358,361 (1920). See also 2 Restatement of the Law of the Foreign Relations Law of the United States 502, Reporters' Note 3 at 22.
n6. Id.
n7. See 19 U.S.C 2518(4)(B).
methanol would not need to be marked as to its country of origin (as it would not be considered an article of foreign origin within the meaning of section 304 of the Tariff Act of 1930, as amended).n8 Second, the methanol would qualify for the general subcolumn of column 1 rate of duty in the HTSUS.n9

As to the issue of whether the methanol must be entered when imported or brought into the United States, U.S. law requires that all merchandise imported or brought into the United States must be entered unless otherwise exempt.n10 An importation is defined as the bringing of goods (or merchandise) within the jurisdictional limits of the United States with the intent to discharge or unladen them.n11

In the instant case, if the methanol is shipped to the United States for sale to commodity methanol distributors, it would be considered an importation, and thus subject to entry, because it would have been brought into the United States for the purpose as described above. This would be the case whether the methanol was the product of a substantial transformation or was shipped to the United States aboard a U.S.-flag vessel considered to be a part of the United States, because the methanol itself would still have been brought into the United States for the purpose as described above.

The above interpretation of the law is supported by the requirement that other products obtained or processed aboard a U.S.-flag vessel located on the high seas or elsewhere must be entered: Fish (with a few exceptions) landed or processed aboard a U.S.-flag vessel on the high seas or in foreign waters in which such a vessel has the right, by treaty or otherwise, to take fish or other marine products must be entered (and classified in the core chapters of the HTSUS, i.e., 1 to 97) although considered to be a product of American fisheries and having a free rate of duty.n12
n8. See 19 U.S.C. 1304; 19 C.F.R. 134. See also Koru North America v. United States, 12 CIT 1120, 1125-28 (1988).
n9. See General Note 3(a)(ii) to the HTSUS.
n10. 19 U.S.C. 1484(a); 19 C.F.R. 141.4. See also United States v. Kusher, 135 F.2d 668 (2d Cir. 1943); Sheldon & Co. v. United States, 8 Ct. Cust. Appls. 215 (1917); National Zinc Co. v. United States, 7 Ct. Cust. Appls. 145 (1916).
n11. See United States v. Commodities Export Co. and Old Republic Insurance Co., 14 CIT 166, 169-71 (1990); Henry Hollander Co. v. United States, 22 CCPA 645, 648, T.D. 47632 (1935) .
n12. See Heading 9815 to section XV to chapter 98 to the HTSUS.

A review of the applicable law shows that no entry exceptions or exemptions exist for methanol imported or brought into the United States.n13 Therefore, the above-mentioned methanol must be entered if so imported.

In regard to the dutiability of the methanol, general note 1 to the HTSUS states that:

All goods provided for in this schedule and imported into the customs territory of the United States from outside thereof are subject to duty or exempt therefrom as prescribed in general notes 3 and 4.

Neither general note 3 nor general note 4 has any application to the present analysis. As concerns the terminology "customs territory of the United States," general note 2 to the HTSUS states that:
The term "customs territory of the United States," as used in the tariff schedule, includes only the states, the District of Columbia and Puerto Rico.

In light of the above, the methanol is subject to duty. The rate of duty depends on its classification in the HTSUS.n14

In the HTSUS, the methanol is classified ,as follows: If imported only for use in producing synthetic natural gas ("SNG") or for direct use as a fuel, the methanol is classified in subheading 2905.11.10 (which is an actual-use provision). It can be entered free of duty under the general subcolumn of column 1 of the HTSUS for that subheading. On the other hand, if the methanol is
n13. See supra note 10.
n14. Merchandise imported into the customs territory of the United States from outside thereof is classified under the Harmonized Tariff Schedule of the United States ("HTSUS"). The tariff classification-of merchandise under the HTSUS is governed by the principles set forth in the General Rules of Interpretation ("GRIs") and, in the absence of special language or context which otherwise requires, by the Additional U.S. Rules of Interpretation. The GRIs and the Additional U.S. Rules of Interpretation are part of the HTSUS and are to be considered statutory provisions of law for all purposes. See Sections 1204(a) and 1204(c) of the Omnibus Trade and Competitiveness Act of 1988 (19 U.S.C 1204(a) and 1204(c)).
imported for other than for use in producing synthetic natural gas or for direct use as a fuel, then it is classified in subheading 2905.11.20. It will be subject to an 18 percent ad valorem rate of duty as set forth in the general subcolumn of column 1 of the HTSUS for that subheading.

CONCLUSION:

In light of the above, the above-discussed methanol, if imported into the customs territory of the United States, must be entered and has a free rate of duty only if imported for a fuel- related use as discussed above and satisfies all the requirements for an actual-use provision.n15 Nothing in the HTSUS or elsewhere in the law provides for the methanol to otherwise enter free of duty. In order to enter the above-mentioned methanol under a free rate of duty under the general subcolumn of column 1 of the HTSUS for a non-fuel purpose, a statutory amendment providing for same would be necessary.
n15. See Additional Rule of Interpretation l(b) to the HTSUS and 19 C.F.R 10.131-39.

Sincerely,

Harvey B. Fox, Director
Office of Regulations and Rulings

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