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HQ 225353





July 15, 1994

DRA-4-CO:R:C:E 225353 PH

CATEGORY: DRAWBACK

Mr. J. W. Brown
Gulf Coast Drawback Services, Inc.
20501 Katy Freeway, Suite 214
Katy, Texas 77450

RE: North American Free Trade Agreement Act (NAFTA); Same Condition Drawback; Unused Merchandise Drawback; Accounting Procedures to Determine Origin of Fungible Goods; 19 U.S.C. 1313(j)(4); 19 U.S.C. 3333; Section 203, Public Law 103-182; 19 CFR 181.45(b); 19 CFR Part 181, Appendix, Schedule X

Dear Mr. Brown:

In your letter of April 14, 1994, you request a ruling on the applicability of the inventory methods provided for in the Appendix to Part 181 of the Customs Regulations as they relate to drawback under 19 U.S.C. 1313(j). Our ruling follows. (As I understand you have been advised by the Chief of the Entry Rulings Branch, Mr. William G. Rosoff, this is not a NAFTA advance ruling (see 19 CFR Part 181, Subpart I, and in particular, 19 CFR 181.92(b)(6)).)

FACTS:

You cite section 181.45(b) of the Customs Regulations (19 CFR 181.45(b)) and the Appendix to Part 181 of the Customs Regulations, Addendum B of Part II of Schedule X. You ask that we address the question of whether the inventory methods provided for in these provisions are to be applied to "a company-wide inventory of all like products" or to "individual inventory location(s)".

ISSUE:

For purposes of drawback under 19 CFR 181.45(b), do the inventory methods provided for in the Appendix to Part 181, Schedule X, apply to a company-wide inventory of all like products or to individual inventory locations? LAW AND ANALYSIS:

Section 203 of the North American Free Trade Agreement (NAFTA) Act (Public Law 103-182; 107 Stat. 2057, 2086; 19 U.S.C. 3333), provides for the treatment of goods subject to NAFTA drawback. Under section 203(a), such goods do not include, among other things--

(2) A good exported to a NAFTA country in the same condition as when imported into the United States. For purposes of this paragraph--

(A) processes such as testing, cleaning, repacking, or inspecting a good, or preserving it in its same condition, shall not be considered to change the condition of the good, and

(B) except for a good referred to in paragraph 12 of section A of Annex 703.2 of the Agreement [i.e., certain agricultural goods; this exception is assumed not to be applicable to the goods under consideration] that is exported to Mexico, if a good described in the first sentence of this paragraph is commingled with fungible goods and exported in the same condition, the origin of the good may be determined on the basis of the inventory methods provided for in the regulations implementing this title.

Section 203(c) of the NAFTA Act amended 19 U.S.C. 1313(j) by the addition of a new paragraph (4) providing that:

Effective upon the entry into force of the [NAFTA], the exportation to a NAFTA country ... of merchandise that is fungible with and substituted for imported merchandise, other than merchandise described in paragraphs (a) through (8) of section 203(a) of that Act, shall not constitute an exportation for purposes of paragraph (2) [i.e., section 1313(j)(2), providing for substitution unused merchandise (formerly same condition) drawback].

The Customs Regulations issued under the authority of the NAFTA Act were promulgated by Treasury Decision (T.D.) 94-1, published in the Federal Register on December 30, 1993 (58 FR 69460). Subpart E of Part 181 of the Customs Regulations (19 CFR Part 181, Subpart E) provides for drawback and other duty- deferral programs under NAFTA. Section 181.45(b) provides for claims under 19 U.S.C. 1313(j)(1) and provides, in part, as follows:

(b) Claims under 19 U.S.C. 1313(j)(1) for goods in same condition. ...

(2) Commingling of fungible goods.

(i) General. Commingling of completely fungible goods in inventory, such as parts, is permissible (see ? 191.141(e) of this chapter) but one must identify entries for designation for same condition drawback; the origin of the goods shall be determined on the basis of the inventory methods set forth in the appendix to this part.

The inventory management methods referred to in the above provision are found in Schedule X of the Appendix to Part 181. Except as described below, Schedule X does not specifically address the issue raised in this case.

One of the approved methods of inventory management is the specific identification method, under which the person involved is required to physically segregate, in materials or finished goods inventory, the originating materials that are fungible materials from non-originating materials that are fungible materials, or the originating goods that are fungible goods from non-originating goods that are fungible goods. This indicates that in the other authorized inventory management methods (FIFO, LIFO, and average), the materials or finished goods are not physically segregated (i.e., they are commingled). The provision cited by the inquirer (Addendum B of Part II of Schedule X) does specifically address the issue under consideration. The introduction to the examples set forth in this Addendum states:

The following "examples" are based on the figures set out in the table below and on the assumption that Exporter A acquires originating Good A and non-originating Good A that are fungible goods and physically combines or mixes Good A before exporting those goods to the buyer of those goods. [Emphasis added.]

Thus, these examples are clearly conditioned on the physical commingling of the goods in inventory.

The applicable statutory provision (section 203(a)(2)(B) of the NAFTA Act) explicitly requires goods to be commingled as a condition precedent to determining the origin of the goods on the basis of the authorized inventory methods. The Customs Regulations issued under this statutory provision (19 CFR 181.45(b)(2)(i)) explicitly condition the use of the authorized inventory methods to determine the origin of goods upon the commingling of the goods. The examples in Schedule X of the Appendix which you cite specifically assume the physical combination or mixing of originating and non-originating goods. "Commingle" is defined as "to mix or mingle together; combine" (The Random House Dictionary of the English Language (1973), p. 296; see also, Webster's New World Dictionary, Third College Edition (1988), p. 280).

Accordingly, the answer to the issue raised is clear. For purposes of drawback under 19 CFR 181.45(b), the inventory methods provided for in the Appendix to Part 181, Schedule X, require that the goods which are to be identified by those methods must be commingled (i.e., they apply on the basis of individual inventory locations and not to a company-wide inventory of all like products at different locations). This is so because in the latter case (i.e., that involving the company- wide inventory of all like products at different locations) the goods, by definition, are not commingled which, as shown above, is a condition precedent to the use of the described inventory methods.

HOLDING:

For purposes of drawback under 19 CFR 181.45(b), the inventory methods provided for in the Appendix to Part 181, Schedule X, require that the goods which are to be identified by those methods must be commingled (i.e., they apply to individual inventory locations and not to a company-wide inventory of all like products at different locations).

The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

John Durant, Director

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