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HQ 115281

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July 20, 2001

VES-3-17-RR:IT:EC 115281 GEV

CATEGORY: CARRIER

Rolf Marshall, Esq.
Preston Gates Ellis & Rouvelas Meeds LLP
1735 New York Avenue, N.W.
Suite 500
Washington, D.C. 20006-5209

RE: Coastwise Trade; Wheat Blending; 46 U.S.C. App. § 883

Dear Mr. Marshall:

This is in response to your letter dated January 23, 2001, on behalf of your client, Pendleton Flour Mills (“Pendleton”), requesting reconsideration of Customs ruling letter 114983, dated July 19, 2000, issued in response to Pendleton’s request of March 3, 2000. Your request for reconsideration includes supplementary information. Upon reviewing your submission in its entirety, our position in this matter is set forth below.

FACTS:

Pendleton proposes to use a non-coastwise-qualified vessel for a segment of the proposed transportation of wheat products purchased in the contiguous United States to Hawaii via an intermediate foreign location (Vancouver, B.C., Canada) where the products will undergo a blending procedure. The final blended product will subsequently be transported from Vancouver to Hawaii by the aforementioned vessel.

In regard to the blending of wheat, at the outset it should be noted that the information submitted indicates that U.S. Department of Agriculture (USDAG) recognizes six classes of wheat: Durum Wheat; Hard Red Spring Wheat; Hard Red Winter Wheat; Soft Red Winter Wheat; Hard White Wheat; Soft White Wheat. In addition, the USDAG also recognizes two other categories of wheat: Unclassed Wheat; and

Mixed Wheat which is a designation denoting a wheat blend that cannot be placed in any of the wheat classes or sub-classes. Three of the classes are divided into subclasses, e.g., Soft White Wheat is divided into three subclasses-Soft White Wheat, White Club Wheat, and Western White Wheat.

The first blending operation under consideration involves two classes of Hard Red Wheat (Hard Red Winter and Hard Red Spring), which will be purchased from Montana farm storage or country grain elevators. These wheat products will be transported by land, first to a rail shipping elevator in Sweetgrass, Montana, and then by rail to an export facility in Vancouver. Throughout this phase of the transportation, the products’ separate and distinct identities will be preserved by class and protein percentages, employing separate trucks and rail cars by product and segregated storage at the respective elevators and at the export facility. The subsequent blending of the Hard Red Winter Wheat and the Hard Red Spring Wheat (both of which are separate classes) at Vancouver would result in the production of Mixed Wheat which will be transported by vessel to Hawaii.

The second blending operation involves two subclasses of Soft White Wheat (Soft White Wheat and White Club Wheat), which will be purchased from Eastern Washington farm storage or country grain elevators. These products will be shipped by rail to the designated export facility in Vancouver, crossing the U.S.-Canada border at either Blaine, Washington, or Eastport, Idaho, depending on the rail car used. As with the Hard Red products discussed above, these products’ separate and distinct identities will be preserved by class and protein percentages throughout this transportation, employing separate trucks and rail cars by product and segregated storage at the respective elevators and at the export facility. The blending of Soft White Wheat and White Club Wheat (both of which are subclasses of Soft White Wheat) results in Western White Wheat, which is the third subclass of Soft White Wheat and constitutes the final blended product which will be transported to Hawaii.

It is Pendleton’s position that as a direct result of the processing to take place at Vancouver, the wheat products transported to that point would, based on applicable industry and U.S. Government standards, be transformed into “new and different products” (U.S. No. 1 Mixed Wheat and U.S. No. 1 Western White Wheat), within the scope of 19 CFR § 4.80b(a) so as to render inapplicable the prohibition against the use of non-coastwise-qualified vessels set forth in 46 U.S.C. App.

§ 883. This position was extensively discussed in a meeting between counsel, the president of Pendleton, the Executive Director of LSS, and members of this office at Customs Headquarters on April 20, 2000.

As noted above, pursuant to Customs ruling letter 114983, Customs was not in accord with Pendleton’s position. Hence, Pendleton’s request for reconsideration.

ISSUE:

Whether the proposed blending operations would result in the creation of a “new and different product” within the meaning of 19 CFR § 4.80b(a) so as to render inapplicable the prohibition against non-coastwise-qualified vessels set forth in 46 U.S.C. App. § 883.

LAW AND ANALYSIS:

The coastwise law pertaining to the transportation of merchandise, § 27 of the Act of June 5, 1920, as amended (41 Stat. 999; 46 U.S.C. App. § 883, often called the “Jones Act”), provides, in pertinent part, that::

No merchandise,... shall be transported by water, or by land and water,between points in the United States...embraced within the coastwise laws, either directly or via a foreign port, or for any part of the transportation, in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States...

Section 4.80b(a), Customs Regulations, promulgated pursuant to 46 U.S.C. App. § 883, provides, in part, that:

A coastwise transportation of merchandise takes place, within the meaning of the coastwise laws, when merchandise laden at a point embraced within the coastwise laws ("coastwise point") is unladen at another coastwise point, regardless of the origin or ultimate destination of the merchandise. However, merchandise is not transported coastwise if at an intermediate port or place other than a coastwise point (that is, at a foreign port or place, or at a port or place in a territory or posses-
sion of the U.S. not subject to the coastwise laws), it is manufactured or processed into a new and different product, and the new and different product thereafter is transported to a coastwise point. (Emphasis added)

The navigation laws and regulations administered by Customs, including 46 U.S.C. App. § 883 and 19 CFR § 4.80b(a), apply to points in the territorial sea, defined as the belt, three nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline, in cases where the baseline and the coastline differ.

With respect to the first of Pendleton’s stated grounds for objecting to the holding in Customs ruling letter 114983 (i.e., it disregards Customs own principles for new and different product determinations in factually similar situations), we offer the following.

At the outset, it should be noted that contrary to counsel’s assertions, there is no controlling authority with respect to Customs position on the blending of wheat for purposes of creating a “new and different product” within the meaning of 19 CFR § 4.80b(a). Simply put, since Customs has never ruled on this issue, Pendleton’s request is a case of first impression. The two Customs ruling letters cited in Customs ruling letter 114983, while illustrative of Customs interpretation of 19 CFR § 4.80b(a) in prior scenarios presented for our consideration, are not controlling in this matter in that they not only involved different processing operations, they also involved different merchandise (i.e., Customs ruling letter 112895, dated February 2, 1994, addressed the blending of fuel oils, and Customs ruling letter 114476, dated November 2, 1998, addressed the production of cattle). Consequently, these two rulings are clearly distinguishable from the case currently under consideration both factually (they concern fuel oil and cattle as opposed to wheat), and with regard to the standards applied in analyzing 19 CFR § 4.80b(a) in each case (those of the American Society for Testing Materials (ASTM) and the beef cattle industry as opposed to the U.S. Department of Agriculture/Federal Grain Inspection Service (USDA/FGIS)).

Furthermore, as noted in footnote 4 on p. 6 of counsel’s request for reconsideration, § 177.9(b)(4), Customs Regulations (19 CFR § 177.9(b)(4)) provides, in pertinent part, that, “Each ruling letter setting forth the applicability of the navigation laws to a vessel will be applied only with respect to transactions involving operations identical
to those set forth in the ruling letter.” (Emphasis added) As discussed above, it is readily apparent that the aforementioned two Customs ruling letters (concerning fuel oil blending and cattle production) do not involve operations identical to the one under consideration (wheat blending). Notwithstanding this regulatory provision which clearly supports the fact that there is no controlling authority in this case, counsel nonetheless cites to § 177.9(a), Customs Regulations (19 CFR § 177.9(a)), which provides that a “principle” of a ruling set forth in a ruling letter “may be cited as authority in the disposition of transactions involving the same circumstances.” (Emphasis added) Again, the transaction under consideration (wheat blending) clearly does not involve the same circumstances as those addressed in the aforementioned two rulings (fuel oil blending and cattle production).

Accordingly, there is no established principle governing Customs position with respect to the application of 19 CFR § 4.80b(a) to the blending of wheat.

In regard to the remaining bases for Pendleton’s objection to Customs ruling letter 114983 (i.e., it arbitrarily rejects as the criteria for distinguishing wheat products in the commercial marketplace the Federal Government’s own wheat product classification system under which, by law, the industry operates commercially in the United States, and the findings and opinions of LSS upon which Customs subsequently relied to deny Pendleton’s request are themselves without basis in science or fact, and are contradicted by expert opinion within the industry), we offer the following.

In analyzing the information presented by Pendleton, LSS undertook a comparison of the products from a combination of class, protein content and other physical factors that are compared before and after the occurrence of processing in Vancouver. Consequently, our determination in Customs ruling letter 114983 was based on the following.

In the first blending operation, Hard Red Spring Wheat and Hard Red Winter Wheat were blended to produce a “Mixed Wheat” product. The protein contents of the unblended wheat and the final blend are within 1 percent of each other. The characterization of Mixed Wheat is done by listing its protein content, grade and originating components. Descriptions of Hard Red Spring and Hard Red Winter Wheat by “U.S. Wheat Associates” show that the two wheats are very similar with regard to protein content, milling and baking characteristics and certain uses. Therefore, the characteristics of the blended “mixed”
product lie between these two similar wheats. Based on these facts it is simple to deduce that the blended product is very similar in physical and baking characteristics to those of both the Hard Red Spring and Hard Red Winter Wheat. Accordingly, we concluded that the blended “Mixed Wheat” is not a “new and different product” when compared to the unblended products.

The second blending operation involved the blending of two subclasses of Soft White Wheat, Soft White and White Club, which are blended to form a third subclass of Soft White Wheat called “Western White”. Information provided by Pendleton at the aforementioned April 20, 2000, meeting above indicates that the protein content of these products is within a range of 1 percent. While the blended wheat is a U.S. Grade No. 1 type, the unblended wheat is not graded prior to blending. Therefore, grading cannot be used as one of the parameters in this determination. Accordingly, based on the fact that both the unblended wheat and final wheat blend are of the same class and have very similar protein contents, we concluded that the final blend is not a “new and different product” when compared to the unblended products

Pendleton’s main argument in urging Customs to reconsider its position is that Customs erroneously relied on the protein content in determining whether or not the blended wheat products are “new and different” products within the meaning of 19 CFR § 4.80b(a). This argument is without merit. As noted above, LSS, like Pendleton, used a multiple factor approach in reviewing this case which included both USDA/FGIS class and protein content in the analysis.

Counsel believes that the term “new and different product” extends beyond the six classes of wheat to the different subclasses and the numerous different mixtures of the classes and subclasses. It should be noted that a number of subclasses have general purpose uses across a number of similar products. Of course, the usage may not be ideal for the purpose, but market conditions make it more economical to use these general-purpose products than a more specific type of wheat.

In regard to Pendleton’s claim that LSS did not remain consistent with respect to the holding in Customs ruling letter 113095, dated December 12, 1994, and that LSS was arbitrary and capricious in its review of the subject case, we disagree. The ASTM breaks out fuel
oils into 6 different grades, only three of which (i.e., Fuel Oil Nos. 1, 2 and 6), are commercially important. Customs is of the opinion that fuel used for kerosene burners (Fuel Oil No.1, a.k.a., kerosene); fuel used for heating homes, apartment and diesel engines (Fuel Oil No. 2); and fuel used for power plants and ocean going vessels (Fuel Oil No. 6) are significantly different Accordingly, each type of product is a “new and different product” when compared to the other.

In reviewing the wheat issue, Customs accepted the premise that, much like the three different fuel oil grades, the six different wheat classes could stand up as different products when compared to each other notwithstanding the fact that two or three of the grades can be used interchangeably to produce the same product. Of course, in using USDA/FGIS class as a differentiation point Customs allows, for instance, that one type of wheat used to produce Italian bread and one used to produce French bread or baguettes are “new and different products” within the meaning of 19 CFR § 4.80b(a). However, given the fact that even at the class level the products are not substantially different, it is clear that counsel’s insistence that Customs allow for subclasses of wheat within the classes to be considered totally new and different products is somewhat unreasonable. We could agree that the different subclasses of wheat may be “better” for certain types of usage, but they are not “new and different products” compared to others in its class.

We further note that counsel’s comparison of ungraded wheat products to Vacuum Tower Bottoms (VTB) discussed in Customs ruling letter 113095, dated December 12, 1994, shows a lack of familiarity with petroleum products and petroleum processing. Pendleton states that VTB is chemically similar to ASTM graded products. Customs ruling letter 113095 concerned the blending of VTB with a petroleum product to produce a No. 6 fuel oil. VTB is a crude, asphalt-like material that must be strenuously refined before it can be used to produce fuel oil. The processing must consist of either catalytic cracking or heavy blending with a very light expensive oil prior to the assignment of an ASTM grade. In fact, if the product is blended rather than cracked, the amount of VTB in the final product must be relatively small. Accordingly, Pendleton’s statement indicating that VTB and graded fuel oil are chemically similar is misplaced. In contrast, ungraded wheat has simply not yet been tested for grade. The ungraded wheat may not be allowed on the market but, in reality, it may be of fairly high quality requiring minimal processing (i.e., cleaning) to bring it up to USDA class. Accordingly, counsel’s comparison of VTB to a finished fuel product and its
processing in a billion-dollar refinery to the application of a simple 25-dollar test by an FGIS agent to grade the product is inappropriate and misleading. Based on these analyses, we believe it illogical to draw a conclusion on the wheat issue using Customs ruling letter 113095 concerning petroleum blending.

Finally, we find it surprising that counsel has vigorously assailed Customs decision to use protein as a important factor in its determination in this case. In fact, the statements put forth by counsel and its experts attempt to convey the message that protein content has little or no relevance with respect to wheat properties and usage. However, it is clear from both our research, documentation provided by Pendleton, and statements made by Pendleton’s experts, that protein, is indeed, a key factor in the characterization of wheat. Marketing brochures distributed by U.S. Wheat Associates, Inc., the industry’s major lobby and marketing arm, clearly list the protein content of each wheat class on the front. Furthermore, the brochures list 4 “bullet” statements describing the key features of each wheat grade prominently displaying protein content as its first key statement. The brochures also provide a side-by-side comparison of the six different classes of wheat listing their respective protein content as one of the three key characteristics.

In addition, we note that Dr. David Shelton, one of counsel’s experts, clearly indicates that “wheat protein content is an indicator of end-use flour performance...” (See Attachment 3 to counsel’s letter of January 23, 2001) Dr. Shelton further indicates that the usage of farinograph and alveograph testing are better gauges of flour performance than protein content. Both of these tests measure the wheat gluten strength of the wheat. However, while the factors attributed to wheat gluten strength are not solely related to protein, we must emphasize that protein content is one of the key factors, if not the key factor, in wheat gluten development in products. Accordingly, if industry uses protein as a key indicator of wheat characteristics and usage, we believe that Customs is prudent to adopt it as a key factor in its decision.

In conclusion, we are of the opinion that Customs is correct in applying both protein content and USDA/FGIS class in determining whether a blended wheat is a “new and different product” for purposes of 19 CFR § 4.80b(a). Furthermore, we are of the opinion that the usage of subclass is an inappropriate determinant factor in such cases.

HOLDING:

The proposed blending operations would not result in the creation of a “new and different product” within the meaning of 19 CFR § 4.80b(a) so as to render inapplicable the prohibition against non-coastwise-qualified vessels set forth in 46 U.S.C. App. § 883.

Accordingly, the holding in Customs ruling letter 114983 is affirmed.

Sincerely,

Larry L. Burton

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