HQ 226538 - Internal Advice Request on the Issue of "Use" or Destruction of Certain Imported Materials; 19 U.S.C. 1313(j)(1); 19 U.S.C. 1313(j)(3); Agrolinz, Inc.; Destruction of Merchandise; Blending; Incineration. - United States International Trade Commision Rulings

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HQ 226538

June 18, 1997

DRA-4-RR:IT:EC 226538 SAJ

CATEGORY: DRAWBACK

Port Director of Customs
Drawback Branch
423 Canal Street, Room 303
New Orleans, LA 70130-2341

RE: Internal Advice Request on the Issue of "Use" or Destruction of Certain Imported Materials; 19 U.S.C. 1313(j)(1); 19 U.S.C. 1313(j)(3); Agrolinz, Inc.; Destruction of Merchandise; Blending; Incineration.

Dear Sir:

This is in response to your memorandum dated November 6, 1995 (your file number DRA-1-V:NO:DB GAE), requesting internal advice pursuant to 19 C.F.R. 177.11, on the issue of "use" of Lentagran. Specifically, you request guidance in determining whether drawback claims made by Agrolinz, Inc. (importer) should be granted.

FACTS:

Drawback entries were filed on behalf of importer, claiming drawback for Lentagran (merchandise) under 1313(j)(1) on February 3, 1995, April 13, 1995, and August 10, 1995. The drawback claims are based on the "destruction" of an imported, duty-paid merchandise, which was originally imported into the United States through the port of Savannah, Georgia. The merchandise was recalled as the result of a formula modification, which rendered the merchandise obsolete.

Customs Form (CF) 7501 reveals that under entry no. 413-xxxx277-0, which has a February 1, 1993 import date, the importer entered 37,100 kgs of the merchandise, described as "HERBICIDES, AROMATIC OR MOD ARO/9.7%" under 3808.30.1000 of the Harmonized Tariff Schedule of the United States. However, the file only has the first page of the CF 7501 for entry no. 413-xxxx277-0. The entry number (which is omitted) of another CF 7501 in the file has a February 8, 1993 import date and reflects that 149,400 kgs of the same merchandise was entered. Entry no. 413-xxxx418-0 has a February 15, 1993 import date on the CF 7501 and reflects that 111,680 kg of the merchandise was entered. Entry no. 413-xxxx703-5 has a March 15, 1993 import date on the CF 7501 and reflects that 111,560 kg of the merchandise was entered. It is important to note that because we have incomplete records in the file, your office should verify the amounts claimed by the importer.

The importer filed the following drawback entries with Customs:

1. Drawback entry no. 558-0005318-7, dated February 3, 1995 on CF 7539, reflects that 55,700 kgs of the merchandise was imported and 15,139.08 kgs was destroyed (CF 4607 records that 15,139.08 kgs were certified by a Customs officer);

2. Drawback entry no. 558-0005334-4, dated April 13, 1995 on CF 7539, reflects that 372,640 kgs of the merchandise was imported and 296,817 kgs was destroyed (there is a corrected CF 7539 for this entry no. which reflects that 100,290 kgs of the merchandise was destroyed); and

3. Drawback entry no. 558-0005348-4, dated August 10, 1995 on CF 7539, reflects that 372,640 kgs of the merchandise was imported and 213,899 kgs was destroyed. The imported figure is handwritten. However, no import entries are attached.

Under the Resource Conservation Recovery Act (RCRA), the importer was required to dispose of the merchandise at an EPA permitted facility and could not indiscriminately dispose of it. Every step of the process, from its classification as a hazardous waste through destruction phase, must be regulated under RCRA and/or Department of Transportation regulations. Because the merchandise is subject to Environmental Protection Agency (EPA) regulations and controls, the importer retained EPA permitted facilities.

The importer contracted a New Jersey firm authorized to dispose of hazardous waste. The New Jersey firm further arranged with a Louisiana firm to incinerate the merchandise. The Louisiana firm used the merchandise as a fuel to "destroy" the merchandise, in accordance with Louisiana Hazardous Waste Regulations and 40 C.F.R. 266. There is no relationship between the importer and the disposal firm. The merchandise was "destroyed" by incineration, in accordance with the United States Environmental Control regulations. The importer was charged a fee to incinerate the merchandise and received no payments or benefits.

The method of incineration was achieved by blending the merchandise with other ingredients to produce a fuel in the manufacture of the aggregate, which is not being exported from the United States. The importer was aware that the merchandise would be blended with an alternate fuel for incineration. However, the importer contends it was not aware that the Louisiana firm would use the captured energy to manufacture another merchandise. The importer also contracted with an Arkansas firm to complete the "destruction" of the merchandise. The importer was aware that the Arkansas firm would blend the merchandise with an alternative fuel and use the mixture to fire cement kilns. This method is also accepted under Federal, State, and local laws.

The importer's consultant, in a letter dated February 22, 1996, claims that "destruction" of the merchandise by incineration is probably the safest and most effective under approved EPA procedures. Moreover, the importer's consultant also states that the merchandise could not be incinerated alone, but required blending with an alternate fuel to effectively destroy the hazardous material.

In a letter dated May 6, 1997, the importer's consultant provided documentation that the method of destruction of the merchandise used is required under RCRA, 42 U.S.C. 6901. Because the merchandise is in liquid form, the only approved method of destruction is by incineration.

The file also contains the following documentation:

1. Three letters dated January 13, 1995, transferring ownership of the stored merchandise to the importer;

2. Copies of representative storage records and records reflecting consolidation;

3. A letter dated March 10, 1995 from the State of Arkansas Department of Pollution Control and Ecology to Commercial Warehouse Company, reflecting issuance of an EPA permit;

4. The importer's contract with a waste disposal company dated August 3, 1995;

5. Certificates of destruction of the merchandise dated September 12, 1995, documenting the disposal of the merchandise;

6. A letter dated September 29, 1995 from the Georgia Department of Natural Resources to the importer, determining no violations of the EPA rules were observed;

7. Copies of accounting expenditures in connection with the disposal of the merchandise incurred between January 1995 through September 1995;

8. A letter dated February 2, 1996 from the importer to the Georgia Department of Natural Resources requesting cancellation of the EPA permit;

9. A letter dated February 5, 1996 from the importer to the State of Arkansas Department of Pollution Control and Ecology, requesting cancellation of the
EPA permit;

10. Copies of representative storage records reflecting transfer to disposal sites;

11. A contract between the importer and a hazardous waste management company involving the disposal of the merchandise;

12. Copies of representative records reflecting subcontractor's billings to contractor and contractor's billings to the importer;

13. The importer's report reflecting the status of the merchandise in importer's company books;

14. Agrolinz's EPA approved "Material Safety Data Sheet"; and

15. Agrolinz's EPA Federal Insecticide Fungicide, and Rodenticide Act (FIFRA) registration and approval for the sale and use of the merchandise in the commerce of the United States.

ISSUE:

Whether blending and incineration of merchandise constitute a destruction for drawback purposes, or whether it is considered a "use" of the merchandise.

LAW AND ANALYSIS:

Generally, under 19 U.S.C. 1313(j)(1), as amended, drawback may be granted if imported duty-paid merchandise is exported or destroyed under Customs supervision within 3 years from the date of importation. The imported duty-paid merchandise may not have been used in the United States. The exporter (or destroyer) of the merchandise may claim drawback, or may endorse the right to claim drawback to the importer or any intermediate party.

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 summaries of sections 1313(j)(1) are 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). Except for 19 U.S.C. 1313(p), according to the applicable legislative history, these 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 232(b)). Since the drawback entries have not been liquidated, the amendments to the drawback law are applicable.

Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (Chrysler Motors Corp. v. United States, 14 CIT 807, 816, 755 F. Supp. 388, aff'd, 945 F.2d 1187 (Fed. Cir. 1991), in which the Court stated: "The Supreme Court held in Swan & Finch Co. v. United States, 190 U.S. 143, 146 (1903) that the right to drawback is a privilege granted by the government and any doubt as to the construction of the statute must be resolved in favor of the government. Over the years, the courts have held that the allowance of drawback is a privilege and compliance with the regulations is a prerequisite to securing it where the regulations are authorized and reasonable"; see also 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 (1976); Guess?, Inc. v. United States, 9 Fed. Cir. (T) 111, 115, 944 F. 2d 855 (1991) "'[w]e are not dealing here with a question of whether a party has satisfied a commercial contract' ... We are dealing instead with an exemption from duty, a statutory privilege due only when the enumerated conditions are met. 'Such a claim is within the general principle that exemptions must be strictly construed, and that doubt must be resolved against the one asserting the exemption'" (emphasis added)).

The provision, now in section 191.61 of the Customs Regulations, was enacted into law by Public Law 103-182 (with the addition of a conforming provision for destruction). Under 19 U.S.C. 1313(r)(1), as added by section 232 of Public Law 103-182 (and effective as to this protest, see above):

A drawback entry and all documents necessary to complete a drawback claim, including those issued by the Customs Service, shall be filed or applied for, as applicable, within 3 years after the date of exportation or destruction of the articles on which drawback is claimed .... Claims not completed within the 3-year period shall be considered abandoned. No extension will be granted unless it is established that the Customs Service was responsible for the untimely filing.

House Report 103-361 (supra, at p. 130) explains this provision as "set[ting] a period of 3 years from the date of exportation or destruction in which to file a complete claim."

Senate Report No. 999, 96th Cong., 2d Sess. (1980), stated the following regarding the then proposed same condition drawback provision:

Present law provides for drawback of duties in very limited circumstances. [The same condition drawback provision] would give U.S. firms more flexibility in meeting customer demands, without having to pay non-refundable duties on merchandise that is not used in the United States. Importers would receive drawback in those instances in which the merchandise imported was not used, and they were unable to anticipate the need to export or destroy. Id. at 23,24.

The language above indicates that Congress envisioned that the provision would apply to importers who, after importation, discern a need to export or to destroy. So long as the merchandise otherwise qualifies for unused merchandise drawback (i.e. not having been "used" in the United States) the choice to export or destroy is to be freely made by the importer without consequence. See Headquarters Ruling (HQ) 222059 (December 17, 1990).

Here, we must determine whether the merchandise in question was "used" in the United States, and whether the merchandise was "destroyed".

DESTRUCTION ISSUE

The statutory provision governing unused merchandise drawback under 19 U.S.C. 1313(j), as amended, expressly authorizes destruction of merchandise under Customs' supervision in lieu of its exportation. In the case at hand, the importer claims that the merchandise was recalled from the marketplace due to a modification in the formula, which renders the merchandise obsolete. Therefore, the importer chose to destroy the merchandise, and provided Customs with the requisite notice by filing Customs Form (CF) 3499 indicating the intended destruction.

However, the issue here is whether proper destruction has taken place. In American Gas Accumulator Co. v. United States, T.D. 43642, 56 Treasury Decision 368 (1929), the following was ruled:

Destruction [in the context of same condition drawback] means destruction as an article of commerce. In other words, if articles were destroyed to such an extent that they were only valuable in commerce as old scrap they still would be articles of commerce to which duty attaches upon importation, and therefore could not be said to have been destroyed.

See also T.D. 54899(1). These guidelines have been adopted for the purposes of describing destruction under the same condition drawback law. American Gas has been followed by HQ 221050 (September 20, 1989), where it was ruled that complete destruction in required in these cases to satisfy the alternative to exportation. Thus, if something of commercial value is left over from the destruction process, the destruction is incomplete. See also HQ 221571 (February 4, 1991) and HQ 220205 (June 22, 1988).

That an imported merchandise is unsuitable for its intended purposes does not alone result in destruction. Thus, an article is not totally destroyed unless it is left with no commercial value. For instance, in HQ 222975 (September 4, 1991), metal scrap remaining from the dismantling of spare machine parts had value, because the remainings could be bought or sold as an article of commerce. Consequently, HQ 222975 held that the machine parts were not destroyed for drawback purposes when they were dismantled for scrap, despite the fact that they could no longer be used for their intended purpose. Similarly, in HQ 222742 (December 11, 1991), Customs examined whether the term "destruction", as applied under 19 C.F.R. 191.141(h)(2), provides for the allowance of drawback when any valuable residue remains from destroyed merchandise that cannot be disposed of legally.

In the instant case, the importer retained a New Jersey firm authorized to dispose of hazardous waste to "destroy" the merchandise. The retained firm further arranged with a Louisiana firm to incinerate the recalled merchandise. It is immaterial that the importer surrendered ownership and control of the merchandise to the disposal companies. The crucial factor which leads to the denial of drawback is that articles of commerce, in the form of valuable articles of commerce, exist. It is well-established law that complete destruction must occur. Discovery that destruction was incomplete provides Customs with sufficient justification to deny drawback.

The Louisiana firm tends to use, reuse, and recycle various waste materials as ingredients and fuels to manufacture aggregates under the authority of the Louisiana Solid Waste Regulations, the Louisiana Hazardous Waste Regulations and 40 C.F.R. 266. For the merchandise in issue, the Louisiana firm "used" the merchandise as a fuel. In a letter dated February 22, 1996, the importer's consultant explained that this merchandise could not be incinerated alone, but required blending with an alternate fuel to effectively destroy the hazardous materials.

Thus, while the merchandise was blended with other components to produce a fuel, the importer asserts that the sole purpose for doing so was to comply with environmental laws governing the disposal of hazardous waste. In a letter dated May 6, 1997, the importer's consultant confirmed that the proper method of destruction was by incineration since the material is in liquid form (as opposed to a solid material which could be buried in a hazardous waste landfill.)

By inference, Customs' insistence on complete destruction of the merchandise violates the spirit of these laws, and in this particular instance would prevent the importer, who has to abide by state law, from taking advantage of a privilege conferred by federal law. While we recognize the importer's dilemma, Customs nevertheless must follow the established legal precedent. Public Law 96-609, in which the same condition drawback first appeared, made provision for the cancellation of temporary importation bonds upon a tender of duty on valuable wastes left over from the alteration or processing of imported merchandise, but made no provision for the allowance upon the payment of duty on valuable wastes left over from a destruction under 19 U.S.C. 1313(j). HQ 226184 (May 28, 1996) held that despite a possible conflict with federal, state, and local environmental laws governing the disposal of waste, Customs must follow American Gas Accumulator and require complete destruction of a merchandise to qualify for drawback. In the case at hand, we find that the subject merchandise was completely destroyed by incineration.

USE ISSUE

Under section 1313(j)(1), no substitution is permitted and "direct identification" is required (the imported merchandise must be exported). Even with the use of an accounting method (e.g., first-in, first-out (FIFO)), the merchandise must actually be commingled and it must be fungible with the commingled merchandise. See 19 C.F.R. 191.22(c).

Section 692 of the North American Free Trade Implementation Act requires the following under the amended section 1313(j)(1) (direct identification unused merchandise drawback):

1. The merchandise on which drawback is claimed must have been imported;

2. A duty, tax, or fee imposed by Federal law because of the importation of the imported merchandise must have been paid;

3. The exporter (or destroyer) has the right to claim drawback but may endorse that right to the importer or any intermediate party;

4. The merchandise on which drawback is claimed must have been exported or destroyed under Customs supervision within 3 years of the date of importation; and

5. The merchandise on which drawback is claimed must not have been used (except as permitted under section 1313(j)(3) in the United States before the exportation or destruction.

The law no longer requires that the merchandise be in the same condition as when imported. A Senate Joint Report, Senate Report 103-189 (1993) at p. 82, discusses unused merchandise drawback as follows:

Section 632 renames the same condition drawback provision "Unused Merchandise Drawback", and amends the provision in several ways. The provision will allow exporters to claim drawback on imported merchandise, or other domestic or imported merchandise that is substituted for the imported merchandise, that is not used within the United States before exportation or destruction, while removing the requirement that the merchandise be in the same condition. This allows for the possibility that drawback may be claimed on exported or destroyed unused merchandise that has physically deteriorated.

A definition of the term "unused merchandise" was not provided in the language of the new act. Cases interpreting the "use" provision generally determine what activities constitute use under the statute. See, e.g., Customs Service Decision (C.S.D.) 83-23 (July 15, 1982); C.S.D. 81-222 (May 27, 1981). In C.S.D. 81-222 and C.S.D. 82-135, however, it was found that an article is used when it is employed for the purpose for which it was manufactured and intended. An article is also considered used when it is used in the manufacture or production of another article. C.S.D. 81-179. In addition, 19 U.S.C. 1313(j)(3), as amended, provides that the performance of certain "incidental operations" (such as testing, cleaning, and inspecting) on the imported item, not amounting to a manufacture or production, is not treated as a use of the merchandise.

In this case, the merchandise was rendered obsolete. Importer requested for its destruction. The "destruction" of the merchandise was achieved by incineration and blending. It is therefore important to determine whether the merchandise was "used" while undergoing this process. If the merchandise were considered to be used, 19 U.S.C. 1313(j)(1) would be inapplicable. 19 U.S.C. 1313(j)(3) provides:

The performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes under the preceding provisions of this section on -
(A) the importer merchandise itself in cases to which paragraph (1) applies, or
(B) the commercial interchangeable merchandise in cases to which paragraph (2) applies, shall not be treated as a use of that merchandise for purposes of applying paragraph 1(B) or 2(C).

The incineration of the merchandise required a "blending" of other materials. It is therefore not a manufacture or production for drawback purposes. Thus, we find that 19 U.S.C. 1313(j)(3) applies, and the eligibility under 19 U.S.C. 1313(j)(1) is not eliminated merely by reason of the blending of the merchandise to produce a fuel.
Moreover, the merchandise at hand was not used for its intended purpose. The energy generated by the incineration was simply utilized for a useful purpose.

HOLDING:

The blending of the subject merchandise was an incidental operation not amounting to a manufacture or production and therefore was not used for 1313(j)(1) purposes. The blending and incineration of the subject merchandise as described in the FACTS portion of this ruling constitutes a destruction for drawback purposes. Upon verification of the claimed amounts, the drawback claims made by the importer should therefore be granted.

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, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

Director, International Trade

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