HQ 561058 - Internal Advice; crude oil; No. 2 Oil and Diesel Fuel; General Note 3(a)(iv), HTSUS; insular possession; U.S. Virgin Islands; Merchandise Processing Fee - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1998 HQ Rulings > HQ 561023 - HQ 957606 > HQ 561058

Previous Ruling Next Ruling
HQ 561058

July 20, 1998

CLA-2 RR:CR:SM 561058 MLR

CATEGORY: CLASSIFICATION

Port Director
U.S. Customs Service
#1 La Puntilla
San Juan, Puerto Rico 00901

RE: Internal Advice; crude oil; No. 2 Oil and Diesel Fuel; General Note 3(a)(iv), HTSUS; insular possession; U.S. Virgin Islands; Merchandise Processing Fee

Dear Sir:

This is in reference to your memorandum of June 8, 1998, forwarding a request for internal advice from Donohue and Donohue dated June 1, 1998, on behalf of Amerada Hess Corp. ("Hess"), concerning the applicability of the merchandise processing fee ("MPF") to No. 2 oil and diesel fuel imported from the U.S. Virgin Islands.

FACTS:

Counsel for Hess states that Hess Oil Virgin Islands Corp., a Hess subsidiary, produces petroleum products from imported foreign crude oil at its refinery in St. Croix, U.S. Virgin Islands. Two of the products that may result from the refining of crude oil are No. 2 heating oil and diesel fuel oil. Counsel states that because the properties of the crude oil vary widely, sometimes the imported crude undergoes one substantial transformation, while in other cases, a double substantial transformation occurs to result in No. 2 fuel oil or diesel fuel. Counsel asserts that when the crude oil undergoes a double substantial transformation, it is duty-free under General Note 3(a)(iv), HTSUS, per Headquarters Ruling Letter (HRL) 555032 dated September 23, 1988.

Because of tank and pipeline limitations at the refinery, it is stated that the "single-transformed" product generally must be stored in a tank holding "double-transformed" product. When shipments are made from such tanks, they hold a commingled mass of product, some of which, according to counsel, is duty-free under General Note 3(a)(iv), and some of which is dutiable. Counsel cites HRL 225891 dated February 23, 1996, where Customs approved the methodology proposed by Hess for determining and reporting the dutiable and non-dutiable portions of such commingled shipments.

It is stated that your office recently assessed a MPF on the dutiable portion of several shipments of commingled dutiable and non-dutiable No.2 oil. Counsel claims that since both the dutiable and non-dutiable portions of the shipment were produced in the U.S. insular possessions, they are exempt from the MPF under 19 U.S.C. 58c(b)(8)(B)(ii). Counsel states that it is his understanding that the computerized entry process only treats duty-free products as products of the U.S. Virgin Islands and exempt from MPF.

Counsel states that the imported crude oil is a mixture of hydrocarbons in a liquid state that has been produced from underground reservoirs, and that its principal use is a material to be refined into petroleum products. The crude is imported into St. Croix, sent to storage tanks, pumped from the storage tanks to a crude distillation unit where it undergoes distillation, which separates crude oils into "cuts" or "fractions" of different boiling ranges. The crude is heated to about 260ø F, processed through the desalter to remove salts and sediment, and then heated to 600ø F or higher. The products resulting from the crude distillation process, progressing from lightest to heaviest are stated to be: (1) light ends composed mainly of methane, ethane, propane, butane and pentane; (2) light straight-run naphtha; (3) light naphtha; (4) heavy naphtha; (5) kerosene; (6) light gas oil; (7) heavy atmospheric gas oil; and (8) resid. In some cases, products such as the light gas oil coming off the crude unit may possess the properties of marketable No. 2 fuel oil or marketable diesel fuel oil. Counsel states that these are the dutiable products covered by HRL 225891. The No. 2 fuel oil and diesel fuel are classifiable under heading 2710, HTSUS, and the crude oil is classifiable under heading 2709, HTSUS.

ISSUES:

I. Whether the No. 2 oil and diesel fuel are products of the U.S. Virgin Islands, and whether the fuel is entitled to duty-free treatment under General Headnote 3(a)(iv), HTSUS, when imported into the U.S.

II. Whether the dutiable portion of a commingled shipment is subject to the MPF assessed under 19 U.S.C.

LAW AND ANALYSIS:

I. General Note 3(a)(iv), HTSUS, provides that goods imported from a U.S. insular possession may enter the customs territory of the U.S. free of duty if the goods:

(1) are the growth or product of the possession;

(2) do not contain foreign materials which represent more than 70 percent of the goods' total value (or more than 50 percent with respect to goods described in section 213(b) of the Caribbean Basin Economic Recovery Act) (CBERA); and

(3) come directly to the customs territory of the U.S. from the possession.

The U.S. Virgin Islands is a U.S. insular possession. 19 CFR 7.2. Section 213(b), CBERA {19 U.S.C. 2703(b)}, includes petroleum, or any product derived from petroleum, provided for in headings 2709 and 2710 of the HTSUS. Therefore, in order for the No. 2 fuel and diesel fuel to be eligible for duty-free treatment under General Note 3(a)(iv), HTSUS, it must be a product of the U.S. Virgin Islands and it must not contain foreign materials which represent more than 50 percent of its total value.

Foreign materials imported into an insular possession become a "product of" the possession if they are substantially transformed there into a new and different article of commerce. A substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

Counsel claims that pursuant to 19 CFR 7.3(b), the dutiable portion of the commingled shipment is a product of the U.S. Virgin Islands because it is produced by the transformation of crude oil into a new and different article of commerce. Section 7.3(b), Customs Regulations {19 CFR 7.3(b)} provides that:

(b) For purposes of this section, goods shall be considered to be the growth or product of, or manufactured or produced in, an insular possession if:

(1) The goods are wholly the growth or product of the insular possession; or

(2) The goods became a new and different article of commerce as a result of production or manufacture performed in the insular possession.

Section 7.2(a) states that goods imported from an insular possession of the U.S. are subject to the rates of duty set forth in column 1 of the HTSUS except as otherwise provided in section 7.3 or in part 148 of the Customs Regulations.

In HRL 555032, Customs held that a distillation process performed on crude oil imported into the U.S. Virgin Islands in a primary distillation tower, created new properties with new names, characters and uses for purposes of General Note 3(a)(iv), HTSUS. The separation of crude petroleum into "primary cuts" or "fractions" such as naphthas, kerosene, gas oils and residuum, by means of a distillation process resulted in a substantial transformation of the crude petroleum into new and different articles of commerce with different chemical and physical characteristics as well as different uses. Additionally, HRL 555032 held that converting the primary distillation products into the final imported products, such as motor fuel, jet fuel, heating oil, catfeed, etc., resulted in a second substantial transformation of the imported crude petroleum. See also HRL 557180 dated December 23, 1993; and HRL 225891 dated February 23, 1996, where Customs issued a ruling to Hess concerning the entry of certain petroleum products. Noting HRL 555032 and HRL 557180, HRL 225891 acknowledged the fact that some products underwent only one substantial transformation and held that a proposed ratio method for separating the commingled products of a U.S. insular possession into dutiable and nondutiable categories was sufficient to constructively segregate under General Note 17, HTSUS.

Counsel claims that the imported crude oil is a raw material fed to the crude distillation unit which undergoes a change in name, since the result of the process is No. 2 heating oil and diesel fuel. A change in character is claimed when the crude oil is subjected to atmospheric distillation and No. 2 oil and diesel fuel result from the process. Counsel claims that changes are apparent by comparing the properties of crude oil with those of No. 2 fuel oil and diesel fuel, such as the flash point, Ramsbottom carbon level, viscosity, and 90 percent distillation temperature. It is stated that these differences prevent crude oil from meeting customer specifications for No. 2 oil and diesel fuel. A change in use is claimed because crude oil is a raw material whose principal use is as a refinery feedstock for producing various petroleum products, while No. 2 fuel oil is used principally for heating homes and in some cases as a fuel for gas turbine-driven electric power generators or blending stock in the manufacture of No. 4 and 6 fuel oils. Diesel fuel is stated to be used to fuel diesel engines. While counsel claims that the crude oil in this case is substantially transformed and becomes a product of the U.S. Virgin Islands, it is acknowledged that the No. 2 oil and diesel fuel produced are dutiable as they are produced through a single substantial transformation of foreign crude oil. It is acknowledged that the crude oil is still considered a "foreign material" for purposes of calculating the 50 percent value-content requirement under General Note 3(a)(iv), HTSUS.

In this case, as in HRL 555032, we find that the imported crude oil undergoes a substantial transformation when it is separated into "cuts" or "fractions" and processed into No. 2 fuel oil or diesel fuel. Therefore, the first element of General Note 3(a)(iv), HTSUS, is satisfied, that the imported crude oil from the U.S. Virgin Islands becomes a product of the possession. However, according to counsel, there will be no double substantial transformation of the imported crude oil. Therefore, the crude oil imported into the U.S. Virgin Islands will still be considered a "foreign material" for purposes of calculating the 50 percent maximum foreign materials value limitation and only if the foreign materials in the No. 2 fuel oil or diesel oil imported into the U.S. is no more than 50 percent of the value of the No. 2 fuel oil or diesel fuel will these products be eligible for duty-free treatment under General Note 3(a)(iv), HTSUS.

II. Since the No. 2 fuel oil and diesel oil are products of the U.S. Virgin Islands, the next question is whether they are subject to the MPF assessed under 19 U.S.C. 58c(a)(9)(A). The MPF is imposed under 19 U.S.C. 58c, which provides in relevant part:

(a) In addition to any other fee authorized by law, the Secretary of the Treasury shall charge and collect the following fees for the provision of customs services in connection with the following:

(9)(A) For the processing of merchandise that is formally entered or released during any fiscal year, a fee in an amount equal to 0.21 percent ad valorem, unless adjusted under subparagraph (B).

(b)(8)(B) No fee may be charged under subsection (a)(9) or (10) of this section for the processing of any article that is--

(ii) a product of an insular possession of the United States, or....

In HRL 557379 dated September 13, 1993, Customs stated that merchandise which is substantially transformed in a U.S. insular possession, a least-developed beneficiary developing country (see General Note 4(b)(i)}, or in a beneficiary developing country {see General Note 4(a)}, and therefore is considered a "product of" one of those designated countries, is not subject to the MPF. See 19

In HRL 556573 dated February 23, 1993, Customs considered whether the MPF should be assessed on capacitors produced in El Salvador and imported duty-free under U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS. It was determined that the U.S. origin materials and components underwent a substantial transformation in El Salvador, and accordingly since the capacitors were "products of" El Salvador, they were exempt from assessment of the MPF pursuant to 19 U.S.C. 58c(b)(8)(B)(iii). See also dated HRL 224853 April 6, 1994; HRL 223842 dated July 14, 1992; HRL 224852 dated April 6, 1994; and HRL 953326 dated April 27,1993.

In this case, we have determined that the imported crude oil undergoes a substantial transformation in the U.S. Virgin Islands, such that the No. 2 fuel oil and diesel fuel may be considered a "product of" the U.S. Virgin Islands. Accordingly, as a product of an insular possession, the No. 2 fuel oil and diesel oil will not be subject to the MPF pursuant to 19 U.S.C. 58c(b)(8)(B)(ii).

HOLDING:

On the basis of the information submitted, the imported crude oil undergoes a substantial transformation in the U.S. Virgin Islands, such that the No. 2 fuel oil and diesel fuel may be considered a "product of" the U.S. Virgin Islands. However, only if the crude oil undergoes a double substantial transformation may it not be considered a "foreign material" for purposes of calculating the 50 percent maximum foreign materials value limitation, and only if the foreign materials in the No. 2 fuel oil or diesel oil imported into the U.S. is no more than 50 percent of the value of the No. 2 fuel oil or diesel fuel will these products be eligible for duty-free treatment under General Note 3(a)(iv), HTSUS. Accordingly, as a product of an insular possession, the No. 2 fuel oil and diesel oil will not be subject to the MPF pursuant to 19 U.S.C.

Sincerely,

John Durant, Director

Previous Ruling Next Ruling