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HQ 229074

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May 1, 2002

RR:CR:DR
229074 RDC

Alfred J. D’Amico
Sandler & Travis Trade Advisory Services, Inc. 38345 Ten Mile Road
Farmington Hills, Michigan
48335

RE: Venator Group, Inc.

Dear Mr. D’Amico:

This is in reply to your letter of February 5, 2001, regarding your ruling request on behalf of your client, Venator Group, Inc. and your additional submission of March 6, 2002. Your original request asked only for a determination on the issue of whether, under the facts you present, were the garments in question “destroyed” for purposes of 19 USC § 1313(c). The second submission proposes an alternative if under the facts presented it is determined that the garments are not destroyed. The alternative Venator proposes is that “690 jackets of the style with the highest entered value and duty paid” be subtracted from the drawback claim and the remaining 3997 jackets be deemed destroyed under Customs supervision. We note that at the time of this request and response there is no claim pending for the garments at issue.

FACTS:

Between June and September of 1998 Venator imported certain jackets and sweaters and then distributed these garments to company owned stores in the United States. Venator then recalled the Macintosh Red jackets and Cherry Red sweaters because when worn the red dye bled onto skin and other clothing. The returned sweaters and jackets were counted, sorted and stored in a warehouse in Pennsylvania.

Around April 8, 1999, Venator faxed a CF 7553 “Notice of Intent to Export, Destroy or Return Merchandise for Purposes of Drawback” to the Customs Service in Harrisburg, Pennsylvania. A copy of this CF 7553 is included with the ruling request. On that form Venator stated that it intended to destroy the merchandise, which it described as jackets, by mutilation on April 14, 1999. It also indicated that it intended to file unused merchandise drawback for rejected merchandise which was defective at time of importation. Also on the CF 7553 a Customs Inspector designated that examination of the merchandise was required by Customs. The Inspector did not indicate in box 21 of the form whether destruction was to be witnessed by Customs nor did he indicate the date in box 24 nor the port in box 25.

Venator states that “because of the large number of garments to be destroyed, the Customs Inspector had authorized Venator to destroy these garments by shipping them to a landfill without first mutilating them.” Further, Venator states that the inspector “told Venator that if Customs supervised the loading of the garments into the dumpster(s) and witnessed the goods leaving the premises that mutilation would not be required.” Venator does not state when the Inspector made these remarks. According to Venator, the Customs Inspector witnessed the garments being loaded into two open-top thirty yard containers at Venator’s Camp Hill location. As the garments were loaded they were counted and corrections in the number of garments made to the CF 7553. The garments were not mutilated (cut, torn or ripped) but loaded as they were into the dumpsters.

On July 29, 1999, the Inspector wrote in box 26 of the CF 7553, Comments / Results of Examination or Witnessing of Destruction: “M[erchandi]se examined at importers premises – destruction verified by attached waste co. receipts.” Included in the file are various receipts from Waste Management of Central Pennsylvania which appear to indicate that one container was emptied at a landfill on April 21 and the second container emptied at the landfill on April 22.

On September 24, 1999, a Venator employee became aware that jackets belonging to Venator were for sale at a yard sale. It was determined by Venator that these jackets were those that had been disposed of in the landfill. In an electronic memo dated November 10, 1999, the employee repeated what she had been told about the yard sale: that about 15 to 20 jackets were offered for sale at $5 each and that an undetermined quantity had been sold before these jackets were observed. Venator states that a Waste Management employee, who was married to a Venator employee, stole an undetermined number of the garments from the landfill which were seen for sale at a yard sale. The Venator employee’s employment was terminated during an interview about this incident.

ISSUE:

Whether the subject jackets and sweaters were destroyed for purposes of 19 U.S.C. § 1313(c)?

LAW AND ANALYSIS:

19 USC § 1313(c) provides, in pertinent part, for drawback on goods which deviate from sample or specifications,

[u]pon the exportation, or destruction under the supervision of the Customs Service, of merchandise . . . which . . . has been returned to the custody of the Customs Service for exportation or destruction under the supervision of the Customs Service . . . .

Congress, which provided for the allowance of drawback claims under 19 U.S.C. § 1313(a)-(1) (1988), delegated authority to issue regulations to the Commissioner of Customs to describe in detail the type of drawback allowed, eligibility requirements, and procedures for filing claims (19 C.F.R. § 191.1). 19 CFR § 191.42(c) requires the drawback claimant to file Customs Form 7553, Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback in order to give Customs notice of claimant’s intent to export or destroy merchandise which may be the subject of a rejected merchandise drawback claim (19 U.S.C. § 1313(c)) and to provide to the Customs Service the opportunity to examine the merchandise.

Per, 19 CFR § 191.44,
a claimant may destroy merchandise and obtain rejected merchandise drawback by complying with the procedures set forth in § 191.71 of this part relating to destruction.

19 CFR § 191.71(a) provides:

At least 7 working days before the intended date of destruction of merchandise or articles upon which drawback is intended to be claimed, a Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback on Customs Form 7553 shall be filed by the claimant with the Customs port where the destruction is to take place, giving notification of the date and specific location where the destruction is to occur. Within 4 working days after receipt of the Customs Form 7553, Customs shall advise the filer in writing of its determination to witness or not to witness the destruction. If the filer of the notice is not so notified within 4 working days, the merchandise may be destroyed without delay and will be deemed to have been destroyed under Customs supervision. Unless Customs determines to witness the destruction, the destruction of the articles following timely notification on Customs Form 7553 shall be deemed to have occurred under Customs supervision. If Customs attends the destruction, it must certify the Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback.

It is well established that drawback laws confer a privilege, not a right (Swan & Finch Company v. United States, 190 U.S. 143, 23 Sup. Ct. 702 (1903)). When merchandise is imported and a drawback statute may potentially be applicable, an accruing or inchoate right may be said to arise. However, the right to recover drawback ripens only when all provisions of the statute and applicable regulations prescribed under its authority have been met (Romar Trading Co., Inc. v. United States, 27 Cust. Ct. 34 (1951); General Motors Corporation v. United States, 32 Cust. Ct. 94 (1954)). Drawback claimants must strictly adhere to the requirements set forth in the statutes and applicable regulations (United States v. Lockheed Petroleum Services, Ltd., 1 Fed. Cir. (T) 63, 709 F.2d 1472 (1983)).

Rejected merchandise drawback under 19 U.S.C. § 1313(c) was amended to provide for destruction in lieu of exportation (Act of December 8, 1993, Public Law 103-182, Title VI, § 632(a), 107 Stat. 2192)). However, no definition of destruction is provided in any of the drawback statutes, nor is there any indication in the legislative history for any of these enactments as to how the Congress intended Customs to interpret the provisions authorizing destruction (see Sen. Report 96-999 (Finance Committee), page 3, 96th Cong., 2d Sess. (1980), reprinted at 1980 U.S.C.C.A.N. 7345, 7347; Sen. Report 98-308 (Finance Committee), pages 28-29, 98th Cong., 2d Sess. (1983), House Report. 98-1015 (Ways and Means), page 64, 98th Cong., 2d Sess. (1984), House Conf. Report 98-1156, page 125, 98th Cong., 2d Sess. (1984), reprinted at 1984 U.S.C.C.A.N. 4910, 4937-4938, 5023, 5242); House Report 103-361 (Ways and Means), part I, pages 128-132, 103d Cong., 1st Sess. (1993); Senate Report 103-189 (Finance Committee, and others), pages 81-85, 103d Cong., 1st Sess., page 85 (1993)).

Customs does however have an historical interpretation of “destruction,” based on Court decisions. In the absence of a statutory definition of destruction modifying that practice, or legislative history indicating an intent by Congress to modify that practice, it is necessary, under current law, to continue to apply that practice (see, e.g., Joshua Hoyle & Sons., Ltd., Inc. v. United States, 25 CCPA 128, T.D. 49244 (1937), and United States v. Samuel Dunkel & Co., Inc., 33 CCPA 60, C.A.D. 317 (1945).

First, C.S.D. 82-128 states that "destroyed under Customs supervision" does not require on site observation of the destruction by Customs but does require the opportunity to observe the destruction." Venator invited Customs to observe the destruction of the garments and a Customs Inspector traveled to Venator’s Camp Hill location. Customs was given the opportunity to observe and it would seem that the requirement of Customs supervision was satisfied in this instance. However, at issue it whether the events observed by Customs constitute destruction for purposes of § 1313(c).

In interpreting the term destruction, as used in the drawback law Customs has followed the Customs Court case American Gas Accumulator Co. v. United States, Treasury Decision (T.D.) 43642 (Cust. Ct., 3rd Div. 1929) (see also H.A. Johnson Co. v. United States, 21 Cust. Ct. 56, 61, C.D. 1127 (1948), following the American Gas Accumulator case and stating that it is in line with Lawder v. Stone, 187 U.S. 281, 23 S. Ct. 79 (1902), United States v. Pastene, 3 Ct. Cust. App. 164, T.D. 32458, (1912), and Poole Co. v. United States, 9 Ct. Cust. App. 271, T.D. 38216 (1919)). In American Gas Accumulator, involving the applicability of a temporary importation under bond (T.I.B.) provision (now in chapter 98, subchapter XIII, Harmonized Tariff Schedule of the United States (HTSUS)) of certain cylindrical tubular tanks which were imported for testing after which the drums were sold as scrap or salvaged, the Court defined destruction as follows:

Destruction in this connection 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 attached upon importation, and therefore could not be said to have been destroyed. [56 T.D. 368, 370]

Thus, if that which is said to be destroyed is still viable as an “article of commerce” it is not destroyed for purposes of drawback.

In HQ 222975 (1991), following American Gas Accumulator, Customs held that an operation consisting of striking machine parts with a heavy, solid metal ball and then dismantling the parts for scrap iron, did not amount to a destruction for purposes of drawback under 19 U.S.C. § 1313(j) because "destruction means destruction as an article of commerce, and valuable scrap iron is an article of commerce." However, the Customs Service has ruled that scrap metal could be considered destroyed as an article of commerce, by burying it, under Customs supervision, in a landfill, such that the cost of extracting the scrap would exceed its value (see C.S.D. 79-419). Therefore disposal in a landfill remains a viable process of destruction but only when coupled with the economic infeasibility concept as stated in C.S.D. 79-419 which was affirmed in HQ 222742.

In ruling HQ 222742, (1991) we considered the applicability of drawback under 19 U.S.C. § 1313(j) to the destruction of beer and malt liquor. The destruction left a residue of crushed cardboard containers, crushed bottles, and salvaged alcohol content. State law was said to proscribe the disposition of liquid wastes without a permit from the state, and the protestant in that case stated it was unaware of any landfill in the state that was allowed to accept such waste. The salvaged alcohol was sold as scrap rather than dumped as waste. The value of the residue was less than the cost of salvaging the residue. On the basis of "an economic infeasability claim as delineated in C.S.D. 79-419", the ruling held that drawback could be allowed "because the merchandise has been destroyed as required under statute and existing law."

Therefore the subject garments could be considered destroyed by disposal in a landfill if their recovery would be economically infeasible, i.e., it would cost more to recover the garments than they would be worth after recovery. Clearly, the garments arrived at the landfill as evidenced by documents submitted by Venator: the Service Ticket Agreement between Waste management and Venator, which shows that Venator contracted for Waste Management to haul away the garments; the Waste Management Invoice which bills Venator for the hauling; and the Roll Off Dispatch Closed Ticket Maintenance sheet with shows the containers were emptied at the landfill. However, there is no evidence that it would have been economically infeasible to recover the sweaters and jackets from the landfill. In fact there is evidence to the contrary, that, recovery of at least some of the sweaters in the landfill was worth the effort, at least to the Venator employee and the Waste Management employee.

When Congress provides destruction as an alternative to exportation for purposes of avoiding tariff and tax liability otherwise attaching, it is only logical for destruction to have a meaning commensurate with exportation, i.e., an act that removes an article entirely from the commerce of the United States so that the imported good is not used in any commercial activity within the United States. At least a portion of the sweaters and jackets at issue here were used in a commercial activity, if only in a limited and illicit way. Thus Venator argues, in the alternative, that it is logical to assume that most of the jackets were actually disposed of, i.e., there was only a limited time to pilfer the garments from the landfill before additional refuse and the elements made it economically unfeasible to remove more garments in saleable condition.

Venator supports this alternative with a series of assumptions largely unsupported by evidence. Venator surmises that an average of 30 jackets were sold at a single yard sale each week for 23 weeks for a total of 690 jackets; that this was the only method of sale and that only a very small quantity might have been given away. Venator contends that it is this number of garments on which drawback should be denied and that it should be entitled to drawback on the remaining 3997. We find Venator’s proposal fatally flawed in several respects.

First, this issue in dispute is not how many garments were sold but how many, if any were destroyed. Thus, the facts necessary to prove are how many garments remained in the landfill and became so changed in condition that it would have been economically unfeasible to remove them in saleable condition and return them to commerce. We do not agree with Venator’s assertion that the definition of “commerce” does not include sales apart from a major venture, such as a yard sale.

Second, Venator is unable to support by affidavit, police report or documentary evidence that in fact any garments remained in the landfill and were eventually so spoiled as to render them destroyed. It has been stated that “determination of issues in customs litigation may not be based on supposition” (United States v. Enrique C. Lineiro, 37 C.C.P.A. 5, 13 C.C.P.A. (1949)). In Lineiro the plaintiff argued that the goods – a grain called hegari – were classified as other than seed based on analysis of samples. The Customs court agreed, stating,

The official tests of samples of a superior portion of the merchandise show the percentage of pure, live seed to be little more than 75 per centum. It seems logical to suppose, therefore, that the bulk of the merchandise, which contained more shrivelled [sic] and cracked grain and appeared frostbitten, would have shown less than the required 75 per centum of pure, live seed.

(Enrique C. Lineiro v. United States, 21 Cust. Ct. 48, 54 Cust. Ct. (1948)). This lower court decision was overturned finding assumption an impermissible foundation for its decisions. Likewise, that Venator can, by logical deduction, assume that, at most, it is likely that no more than a certain number of the garments were removed from the landfill and sold is not sufficient basis upon which to grant a narrowly construed statutory privilege such as drawback.

HOLDING:

Under the circumstances described the subject jackets and sweaters were not destroyed for purposes of 19 U.S.C. § 1313(c).

Sincerely,

John Durant, Director

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