HQ 225891 - Entry of commingled petroleum products; General Note 17, HTSUS, use of an average inventory method to constructively segregate nondutiable and dutiable goods - United States International Trade Commision Rulings

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HQ 225891

February 23, 1996

ENT-1-RR:IT:EC 225891 CC

CATEGORY: ENTRY

Joseph F. Donohue, Jr., Esq.
Donohue and Donohue
26 Broadway
New York, NY 10004

RE: Entry of commingled petroleum products; General Note 17, HTSUS, use of an average inventory method to constructively segregate nondutiable and dutiable goods

Dear Mr. Donohue:

This is in response to your request of December 16, 1994, on behalf of Amerada Hess Corporation (Hess), concerning the entry of certain petroleum products.

FACTS:

You state that Hess imports various petroleum products produced by its wholly owned subsidiary, Hess Oil Virgin Islands Corp. (HOVIC), in accordance with two Headquarters rulings, HQ 555032 of September 23, 1988 and HQ 557180 of December 23, 1993). Those rulings hold that such products qualify for duty-free treatment under General Note 3(a)(iv) of the Harmonized Tariff Schedule of the United States (HTSUS) because the foreign materials used in their production have undergone a double substantial transformation and the products do not contain foreign materials that exceed 50 percent in value. Among the products covered are No. 2 fuel oil and diesel fuel.

HOVIC anticipates producing some No. 2 oil with materials that will require only one transformation. Such product will not be covered by either of the above rulings and will be subject to duty. Due to storage limitations at the refinery, dutiable No. 2 oil will be commingled with duty-free No. 2 oil in storage tanks prior to shipment. Similarly, dutiable diesel fuel will be commingled with duty-free diesel fuel. You request a ruling finding that commingled No. 2 oil or diesel fuel may be entered as commingled merchandise pursuant to General Note 17, HTSUS, segregating the dutiable and nondutiable portions of each shipment by a recognized accounting method. In addition, you request that we rule on what documents must be filed with the entry to report dutiable and nondutiable quantities.

You request to account for the commingled inventory using a "ratio methodology," which you state is consistent with the "average method" for inventory management permitted by Customs in the North American Free Trade Agreement (NAFTA) regulations. See 19 CFR ? 181, Appendix to Rules of Origin, Part IV, Section 7, subsection (14) and Schedule X (Inventory Management Methods) Part II, Section 14 (Average Method). Hess wishes to use this method on a daily basis, and you have submitted the following example to illustrate your request:

Assume that refinery records show that 80,000 barrels of nondutiable and 20,000 barrels of dutiable No. 2 oil are in Tank No. 123 on March 1. On March 2, 50,000 barrels are withdrawn for shipment to the United States. Hess proposes to enter 40,000 barrels as nondutiable and 10,000 barrels as dutiable, based on the 4 to 1 ratio shown in its daily records. Of the 50,000 barrels remaining in storage, 40,000 would be considered nondutiable and 10,000 dutiable. Assume that refinery records show that 20,000 barrels of nondutiable No. 2 oil are added to Tank 123 on March 5, 20,000 barrels of dutiable No. 2 oil are added on March 6, and 15,000 barrels are withdrawn on March 7. Of that withdrawal, 10,000 barrels would be entered as nondutiable and 5,000 barrels as dutiable, based on the 2 to 1 ratio for that date. In sum, each day that product is withdrawn, its dutiable and nondutiable portion will be based on the dutiable/nondutiable ratio reflected on the company's records for that day.

Concerning the entry documents in supporting its claims, Hess proposes to file pro-forma invoices when the goods arrive, with the commercial invoices arriving after the entry has been made. Specifically, based on the refinery records described above, HOVIC will advise Hess at the time of shipment of the dutiable and nondutiable portions of the cargo, and the respective quantity of each will be shown on the proforma invoice (or addendum thereto) filed at the time of arrival and on the commercial invoice filed subsequent to arrival. Since duty is ultimately assessed on the discharged quantity, which can vary slightly from invoice quantity, when the entry summary is filed, duty will be calculated by applying the dutiable/nondutiable ratios to the discharged quantity.

The detailed refinery records supporting the dutiable and nondutiable quantities will be maintained by Hess. Hess, the importer, acknowledges that it is the responsible entity for the submission of those production records of its subsidiary and that Hess is responsible for the accuracy of those records. Hess acknowledges that those refinery production records are within the scope of 19 U.S.C. 1508(a) and 1509(f). You state that since such documentation will consist of daily production, storage and shipment records, which collectively will constitute considerable paperwork, Hess proposes not to file such records with each entry, but to ensure that they are available for review by Customs in the event such review is desired. You state that Hess recognizes that a Customs officer at any port of entry could request such records on a particular shipment at any time, and it would, of course, supply them.

ISSUE:

May the proposed average inventory method be used to constructively segregate commingled dutiable and nondutiable No. 2 oil or diesel fuel, pursuant to General Note 17, HTSUS?

LAW AND ANALYSIS:

General Note 17, HTSUS, provides for the commingling of goods. This note states, it pertinent part, the following:

(a) Whenever goods subject to different rates of duty are so packed together or mingled that the quantity or value of each class of goods cannot be readily ascertained by customs officers (without physical segregation of the shipment or the contents of any entire package thereof), by one or more of the following means:

(i) sampling,

(ii) verification of packing lists or other documents filed at the time of entry, or

(iii) evidence showing performance of commercial settlement tests generally accepted in the trade and filed in such time and manner as may be prescribed by regulations of the Secretary of the Treasury,
the commingled goods shall be subject to the highest rate of duty applicable to any part thereof unless the consignee or his agent segregates the goods pursuant to subparagraph (b) hereof.

Clearly, the imported merchandise consists of dutiable and nondutiable merchandise commingled in which the quantity of each is not readily ascertainable. The imported merchandise, therefore, will be subject to the highest rate of duty applicable, which in this case is the dutiable merchandise, unless one of the three means listed for constructively segregating the merchandise applies. You claim that the quantities of dutiable and nondutiable merchandise can be determined by (ii) the verification of packing lists or other documents filed at the time of entry.

In Coastal States Marketing, Inc. v. United States, 10 CIT 613, 646 F.Supp. 255 (1986), aff'd 818 F.2d 860 (CAFC 1987), oil was loaded into a oil tanker in the Soviet Union. The tanker continued to Italy where more oil was loaded. When the tanker reached the United States, Customs treated the merchandise as commingled articles under General Headnote 7, Tariff Schedules of the United States (TSUS) (currently General Note 17, HTSUS). Documentation provided at entry enabled Customs to determine the precise amounts of oil originating from the two countries. Consequently, Customs assessed duties on the oil of Soviet origin separately from the oil of Italian origin. The court found that Customs properly applied Headnote 7(a) for commingled merchandise.

In HQ 955203, dated June 2, 1994, we discussed Coastal States Marketing, supra, and the application of the note for commingled goods (currently General Note 17, HTSUS), stating the following:

In the event that Customs cannot readily ascertain the quantity of each commingled good by verification of documents presented at entry, the applicable rate of duty is the highest rate applicable to any of the commingled goods. Clearly, Customs has the authority to determine what method or methods will be considered sufficient for this purpose and what information will be necessary to verify the documents filed at the time of entry.

The issue that you raise is whether the average inventory method you propose, contained in the facts portion of this ruling, is sufficient to constructively segregate the commingled petroleum for purposes of General Note 17, HTSUS.

The method you propose, which you call the "ratio method" is not specifically contained in the NAFTA regulations for inventory management. The "ratio method" essentially accounts for the quantity of nondutiable and dutiable goods withdrawn from a tank (and subsequently imported into the U.S.) based on the average of the nondutiable and dutiable portions deposited in a tank. This average is calculated on a daily basis.

Schedule X, 19 CFR ? 181, Appendix to Rules of Origin, NAFTA, provides inventory management methods for fungible materials and fungible goods. For fungible materials, the average method calculates the origin of materials withdrawn from materials inventory based on the ratio of originating and non-originating material placed into inventory. An example illustrating the average method for materials is contained in Addendum A, Example 3. In that example, the average is calculated on a daily basis, that is the average on the date of withdrawal is used. This method also calculates the value of originating and non-originating material withdrawn based on the average cost of the material in inventory. Therefore, this method could be described as the "moving average method." See, e.g., Miller's Comprehensive GAAP Guide (1985), page 24.08.

The situation you describe entails placing the same kind of petroleum into tanks for storage. No blending or production of the petroleum takes place in these tanks. Under NAFTA, therefore, the petroleum would be considered "goods" as opposed to "materials." Consequently, if your request were made pursuant to NAFTA, the average inventory method for materials described above could not apply.

For fungible goods under Schedule X, 19 CFR ? 181, Appendix to Rules of Origin, NAFTA, the average method calculates the origin of fungible goods withdrawn from finished goods inventory based on the ratio of originating and non-originating goods placed into finished goods inventory. An example illustrating the average method for goods is contained in Addendum B, Example 3. That example is consistent with your example in that only the quantity of the two types of goods (for NAFTA, originating and non-originating; in your proposal, dutiable and nondutiable) is considered; the value of the goods is not considered. The major difference in the two is that for the NAFTA average method, the calculation of originating and non-originating goods is based on the ratio in inventory at the beginning of the preceding one-month or three-month period. In your ratio method, the calculation of dutiable and nondutiable goods is based on ratio in inventory on the date of withdrawal.

Since the average method for goods described in NAFTA relies on calculating the ratio based on the preceding one month or three-month period, we could not accept that method for the factual situation you pose. Your situation contemplates entering commingled petroleum under General Note 17, HTSUS, in which it is necessary to constructively segregate the dutiable and nondutiable portions for particular entries. Calculating the dutiable and nondutiable portions of an entry based on the ratio of those portions contained in inventory in the previous month would not necessarily reflect what is being withdrawn and entered for purposes of General Note 17, HTSUS. Calculating the ratio contained in inventory on the date of withdrawal is a way to accurately show the quantity of dutiable and nondutiable petroleum which is subsequently entered. Consequently, the ratio method you propose would be an acceptable method to constructively segregate the quantities of dutiable and nondutiable petroleum which is entered.

Although the ratio method you propose is not specifically contained in the NAFTA regulations for goods, your request is not made pursuant to NAFTA. In addition, as stated above, we have the authority to determine what method or methods will be considered sufficient for purposes of General Note 17, HTSUS. Consequently, we conclude, based on the foregoing discussion, that the ratio method you propose is sufficient to constructively segregate dutiable from nondutiable commingled petroleum in the factual situation you have presented.

Concerning entry documentation, your proposal concerning entry documentation is sufficient, if the refinery records are made available to Customs by Hess upon request and the following information is contained in the invoices: statement or certification by Hess that an average inventory method, described in this ruling, is being utilized to constructively segregate the dutiable and nondutiable petroleum; ratio or percentage of nondutiable and dutiable petroleum; quantities of dutiable and nondutiable petroleum based on the above percentage or ratio; and a statement by Hess that the detailed refinery records supporting the entry, which include daily production, storage, and shipment records, are available to Customs upon request.

HOLDING:

The ratio method for separating commingled products of a U.S. insular possession into dutiable and nondutiable categories is sufficient to constructively segregate under General Note 17, HTSUS, so long as the importer is responsible for the accuracy of those entry records and is responsible for their submission to Customs in accordance with 19 U.S.C. 1508 and 1509.

Sincerely,

Director, International Trade

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