HQ 225228 - Request for Internal Advice concerning claim for drawback; 19 U.S.C. 1313(j)(2); possession of merchandise; fungibility; commercial interchangeability; Public law 103-182, Section 632 - United States International Trade Commision Rulings

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HQ 225228

December 23, 1994

DRA-4-CO:R:C:E 225228 SR

CATEGORY: DRAWBACK

Regional Director
Regulatory Audit Division
South Central Region
New Orleans, Louisiana 70130-2341

RE: Request for Internal Advice concerning claim for drawback; 19 U.S.C. 1313(j)(2); possession of merchandise; fungibility; commercial interchangeability; Public law 103-182, Section 632

Dear Sir:

This request for internal advice was initiated by a letter dated January 31, 1994, from Miller & Company P.C. on behalf of CITGO, concerning drawback.

FACTS:

During a Customs audit of Citgo's Lake Charles, Louisiana, refinery, Customs became aware that a drawback claim included two exports of No. 2 fuel oil. One of the exports was from Citgo's facilities at Lake Charles and the other from a Chevron Oil Company storage tank at Pascagoula, Mississippi. As a result of this audit, attorneys for the drawback claimant, CITGO, have requested this internal advice for a determination as to whether the fuel oil exported from the Chevron storage tank can be considered to be possessed by CITGO as required under 19 U.S.C. 1313(j)(2) for same condition substitution drawback.

Coastal Fuels Marketing, Inc., (Coastal) purchased 275,000 barrels of No. 2 fuel oil (the European designation for Gasoil) from CITGO. CITGO could not fill the order with stock from its own refinery at Lake Charles, Louisiana, so it purchased the balance of the order (223,111 barrels) from Chevron U.S.A., Inc. in Pascagoula, Mississippi, pursuant to a written contract. The shipping vessel, the MV URANUS was under charter to Coastal States Trading , Inc., the purchaser of the fuel oil. On January 22, 1991, 223,111 barrels of fuel oil were loaded directly on the MV URANUS from Chevron's Shore Tank No. 324 at Pascagoula, Mississippi. On January 26, 1991, 40,395 barrels of fuel oil were loaded directly on the MV URANUS from CITGO's Shore Tank No. 29 at Lake Charles, Louisiana. CITGO was the exporter of record
for the entire 275,000 barrels of fuel oil. Coastal paid CITGO for the entire cargo.

In the file there is a copy of a January 22, 1991 (time: 1659 hours), telex stated to confirm a January 17, 1991, agreement between the seller (Chevron U.S.A. Inc.) and the buyer (the drawback claimant, CITGO). Under the telex "[the seller] agrees to sell to CITGO petroleum products under the following terms and conditions [and the telex] shall serve as the formal contract between the parties in governing this transaction." The telex describes the product to be sold as 225,000 barrels (maximum) of No. 2 oil meeting provided specifications to be delivered into buyer-nominated vessel(s) during the delivery period of January 20-22, 1991, F.O.B. Pascagoula, Mississippi. The telex provides for quantity and quality determinations and/or inspections. The telex provides for payment by wire transfer of "immediately available Federal funds" within 2 working days after receipt of wired invoice and supporting documents. The telex requests confirmation by return wire of agreement or disagreement with the terms and conditions within 24 hours of receipt of the telex and states that failure to reply will be deemed to constitute acceptance of the terms of the agreement.

ISSUE:

Whether the claimant had possession of the exported fuel oil to meet the requirements for drawback under 19 U.S.C. 1313(j)(2).

LAW AND ANALYSIS:

Generally, under 19 U.S.C. 1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty-paid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise and if the following requirements are met. The other merchandise must be exported or destroyed within 3 years from the date of importation of the imported merchandise. Before the exportation or destruction, the other merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. For purposes of the possession requirement, possession is defined as "including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback." The party claiming drawback must be either the importer of the imported merchandise or have received from the person who imported and paid any duty due on the imported merchandise a certificate of delivery transferring to that party the imported merchandise, commercially interchangeable merchandise, or any combination thereof.

The drawback law was substantively amended by section 632, title VI - Customs Modernization, Public Law 103-182, the North American Free Trade Agreement Implementation Act (107 Stat. 2057), enacted December 8, 1993. The foregoing summary of section 1313(j)(2) is based on the law as amended by Public Law 103-182. Title VI of Public Law 103-182 took effect on the date of enactment of the Act (section 692 of the Act). According to the applicable legislative history, the amendments to the drawback law (19 U.S.C. 1313) are applicable to any drawback entry made on or after the date of enactment as well as to any drawback entry made before the date of enactment if the liquidation of the entry is not final on the date of enactment (H. Report 103-361, 103d Cong., 1st Sess., 132 (1993); see also provisions in the predecessors to title VI of the Act; H.R. 700, 103d Cong., 1st Sess., section 202(b); S. 106, 103d Cong., 1st Sess., section 202(b); and H.R. 5100, 102d Cong., 2d Sess., section 232(b).

Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also, Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) "We are dealing [in discussing drawback] with an exemption from duty, a statutory privilege due only when the enumerated conditions are met" (emphasis added)).

There is no information in the file as to whether the merchandise is commercially interchangeable. Under the new law commercial interchangeability replaces the standard of fungibility. Fungibility was the standard for substitution for drawback under 19 U.S.C. 1313(j)(2) before its amendment by Public Law 103-182. The intent of the change from fungibility as a standard for substitution to commercial interchangeability was to make the standard less restrictive (see House Report 103-361, supra, at page 131). Therefore, if the imported merchandise and the substituted merchandise have been found to be fungible they would meet the current requirement for commercial interchangeability. Since possession is the only issue before us we will assume that the other requirements for drawback under 19 U.S.C. 1313(j)(2) have been met.

As stated above, for purposes of the possession requirement, possession is defined as "including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback." House Report 103-361, supra, is helpful in interpreting this provision. According to the Report, "the Committee does not intend to create a 'market' for drawback rights" (H. Rep. 103-361, at 130) (see
also the Report Language on the "successorship" provision in 19 U.S.C. 1313(s): "In all cases, the value of the realty and personalty transferred must exceed the value of the drawback rights transferred to prevent pure sales of drawback rights."

In this case, according to documents submitted by the protestant, the exported merchandise claimed in the drawback claim (225,000 barrels of No. 2 fuel oil purchased from Chevron and loaded on the MV URANUS) was purchased by the protestant pursuant to a January 17, 1991, agreement, confirmed by a January 22, 1991, telex. The January 22, 1991, telex, by its terms, was to take effect within 24 hours of receipt by the protestant, in the absence of a return wire of confirmation or disagreeing with the terms and conditions of the telex. The protestant agreed, as a condition of the transaction, to transfer to the seller future No. 2 oil contracts on the New York Mercantile Exchange. Under the telex, the oil was to be delivered during January 20-22, 1991, into buyer-nominated vessel(s). The oil was, in fact, delivered on January 22, 1991, into the MV URANUS, a vessel chartered by the company buying the oil from the protestant.

Thus, according to the above, the protestant simultaneously agreed to purchase and sell the oil and delivery was from the seller (to the drawback claimant) directly to the purchaser (from the drawback claimant), into a vessel chartered by the purchaser of the oil. According to the telex confirming the agreement and stated to contain the terms and conditions of the agreement, the telex relating to the sale of the oil to the protestant was to take effect within 24 hours of receipt by the protestant of the telex (absent a return wire confirming or disagreeing with the telex; there is no evidence of such a return wire) and the telex relating to the sale of the oil from the protestant was to be effected prior to delivery.

In such a situation, we conclude that the protestant did not have possession of the exported merchandise. In fact, according to the documents in the file, the sale of the oil by the drawback claimant to the company which chartered the exporting vessel took effect before the purchase of the oil by the drawback claimant (i.e., the sale was to be effected prior to delivery into the vessel and the purchase agreement was to take effect at 1659 hours on January 23, 1991 (i.e., within 24 hours of the date of receipt of the telex, absent a return wire confirming or disagreeing with the telex)). At no time, according to the documents in the file, did the claimant have physical possession, or possession by bailment, in leased facilities, in transit, or by operational control, of the oil (i.e., because delivery was directly from the seller (to the drawback claimant) to the buyer

(from the drawback claimant) into the buyer's chartered vessel).

The transaction in this case is similar to the sort of transaction which was held not to constitute possession, for purposes of drawback under 19 U.S.C. 1313(j)(2) (before its amendment by Public Law 103-182, described above) in C.S.D. 85-52 ("trading [of] commercial paper ... between brokers or others in a commodity while that commodity wends its way across America by train or truck ... will not support drawback. * * * The question is: Does the legal person possess paper or the commodity itself?"); C.S.D. 87-18 (in which an arrangement under which the possessor of the imported merchandise "agrees to purchase merchandise [from the possessor of the exported merchandise] ... and exports the substituted merchandise to fulfill [the latter's] obligation to its foreign customer" was "considered a sham to create a climate for drawback where none exists"); and C.S.D. 89-108 (in which Customs was not satisfied that the possession requirement had been met when the protestant arranged for the shipment of the exported merchandise directly from grain elevators of the seller (to the protestant) to South America and did not take possession of the (exported merchandise)). Although the Court of International Trade in B.F. Goodrich v. United States, 794 F. Supp. 1148 (CIT 1992), enjoined Customs from enforcing its position on the requirement for possession of the imported merchandise under 19 U.S.C. 1313(j)(2), that decision did not affect our position on what constitutes possession. In view of the legislative history to the current law (H. Rep. 103-361, supra) in which it is stated that the creation of a "market" for drawback rights is not intended, we conclude that the above interpretations of the possession requirement, for exported merchandise under 19 U.S.C. 1313(j)(2), remain valid.

HOLDING:

The claimant did not have possession of the fuel oil exported from Chevron's storage tank, and therefore, is not eligible to receive drawback under 19 U.S.C. 1313(j)(2) for the claim based on this exportation.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and to the public
via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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