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 > 2003 HQ Rulings > HQ 116015 - HQ 229481 > HQ 227876

Previous Ruling Next Ruling
HQ 227876

---

August 21, 2000

DRA-4 RR:CR:DR 227876 LW

CATEGORY: DRAWBACK

R. Kevin Williams, Esq.
20 North Wacker Drive
Suite 1416
Chicago, IL 60606

RE: Ruling request on behalf of Enesco Corporation; 19 U.S.C. § 1313(j)(1); inventory identification methods; 19 C.F.R. § 191.14; NAFTA drawback

Dear Mr. Williams:

This is in response to your letter dated January 26, 1998, regarding your request to issue a ruling concerning the adequacy of the accounting procedures used by your client, Enesco Corporation for claiming same condition drawback.

Initially we note that in your November 11, 1999, letter, you requested that this office withhold action on this request pending resolution of a protest and application for further review filed by Merck & Co. (Protest number 1001-98-104326) You assert that the foregoing protest raises the same issues addressed in Enesco Corporation’s ruling request; however, a review of our protest module indicates that said protest pertains to the drawback eligibility of harbor maintenance and merchandise processing fees. Thus, we are proceeding to rule on your request.

FACTS:

According to your letter, more than 95% of the merchandise in Enesco Corporation (“Enesco”) inventory is imported. Some items are sourced from U.S. manufacturers. You state that there is no dual-sourcing of domestic and imported merchandise. That is, a particular item is either imported or of domestic origin. Enesco sells its merchandise in the United States and also exports to Canada as well as other countries. Enesco was approved for same condition drawback under the Exporter’s Summary Procedure in 1989.

You state that, because there is no dual-sourcing of merchandise, all the merchandise for which Enesco claims drawback is imported merchandise. Thus, Enesco’s drawback claims never involve the substitution of domestically produced merchandise for imported merchandise. According to your request, Enesco sources some of its imports from Mexico and claims the NAFTA preferential duty rate on this merchandise upon importation into the United States. This merchandise is not included in the drawback program.

At the conclusion of a drawback compliance review conducted in 1997, Regulatory Audit concluded that Enesco’s method of identifying import entries for drawback purposes was inadequate. This conclusion was limited to Enesco’s Canadian exports.

Mr. Gonzales, of the Chicago Regulatory Audit office, on July 6, 2000, explained that the high rates of compliance were determined by excluding drawback claims involving exports to Canada made on or after January 1, 1996. On that date, by virtue of 19 USC 1313(j)(4), the limitation with respect to substitution drawback became effective for shipments to Canada. The merchandise so excluded from that compliance assessment is the subject of this ruling.

You state that Enesco uses a computerized database to prepare its drawback claims. When a particular item is exported, the program searches for the most recent (last in) import shipment of the product and so on until the total quantity of the export shipment is covered. The drawback program accounts only for export shipments. Domestic sales of the imported merchandise are not deducted from the drawback pool. Further, you state that the program also establishes the “duty-paid” status of any import entries identified for a drawback claim. You indicate that this is necessary because some of Enesco’s inventory for particular products may originate in GSP-eligible countries. When the drawback program identifies a duty-free entry as the “last in” entry, the exported quantity is deducted from the drawback pool but no drawback claim is filed for that product until a quantity equal to the entire quantity of the product on the duty-free entry has been exported.

ISSUE:

Does Enesco’s drawback system properly identify the import entries upon which the same condition drawback claims are based?

LAW AND ANALYSIS:

Under 19 U.S.C. §1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty-paid merchandise, any other merchandise (whether imported or domestic) that is commercially interchangeable with the imported merchandise and if certain other requirements are met. The statutory language is clear, the substituted merchandise may be domestic or imported. Pursuant to 19 U.S.C. §1313(j)(4) which provides:

Effective upon the entry into force of the North American Free Trade Agreement, . . . the exportation to a NAFTA country, . . . of merchandise that is fungible

Fungible merchandise is a term of art, for drawback purposes, which is defined by regulation and administrative decisions. “Fungible merchandise” is defined as merchandise which for commercial purposes is identical and interchangeable in all situations.” See 19 CFR 191.2(o); see also, Customs Service Decision (C.S.D.) 85-52, HQ 219181 dated June 6, 1989, and HQ 223109 dated August 26, 1991. with and substituted for imported merchandise described in paragraphs (1) through (8) of section 3333(a) of this title, shall not constitute an exportation for the purposes of paragraph (2).

Enesco interprets that § 1313(j)(4) limits the use of § 1313(j)(2) substitution same condition drawback to fungible NAFTA originating merchandise substituted for non-originating merchandise. Enesco asserts that the statute should be interpreted to mean “fungible NAFTA originating merchandise substituted for non-originating merchandise” pursuant to the exception set forth in 19 U.S.C. § 3333(a)(2)(B) and the accounting methods in 19 C.F.R. § 181, Appendix X. Enesco argues that the foregoing statute and Customs regulation support its interpretation because both are used to determine the origin of commingled NAFTA and non-NAFTA products to ensure that an exporter claims either the NAFTA preferential duty rate or drawback, but not both. Enesco concludes that Congress clearly did intend to preclude the use of § 1313(j)(2) for NAFTA non-originating goods, but merely limit its use thereto. There is no support in the legislative history for Enesco’s interpretation of the statute.

The legislative history to the NAFTA, with respect to 19 U.S.C. §1313(j)(2), is very unambiguous. The House Report states as follows:

Subsection (c) eliminates, effective upon entry into force of the Agreement, “same condition substitution drawback” by amending section 1313(j)(2) of the Tariff Act of 1930 (19 U.S.C. 1313(j)(2)), thereby eliminating the right to a refund on the duties paid on a dutiable good upon shipment to Canada or Mexico of a substitute good, except for goods described in paragraphs one through eight of section 203(a).

See H. Rept. 103-361, 103d Cong., 1st Sess., 132 (1993). The goods described in paragraphs one through eight of section 203(a) (19 U.S.C. §3333(a)) are those that are not subject to NAFTA drawback. Thus, the availability of substitution is not dependent on whether the merchandise is non-originating or not.

Regarding exportations to Canada and Mexico, 19 U.S.C. § 3333(a)(2), provides that “[a] good exported to a NAFTA country in the same condition as when imported into the United States” is not a good subject to the NAFTA drawback limitation. See 19 CFR § 181.44(a). Under 19 U.S.C. § 3333(a)(2)(B):

[E]xcept for a good referred to in paragraph 12 of section A of Annex 703.2 of the Agreement [regarding certain agricultural goods exported to Mexico] that is exported to Mexico, if a good described in the first sentence of this paragraph [i.e., exported to a NAFTA country in the same condition as imported into the United States] is commingled with fungible goods and exported in the same condition, the origin of the good may be determined on the basis of the inventory methods provided for in the regulations implementing this title.

The Customs Regulations implementing the NAFTA Implementation Act are found in 19 CFR Part 181. Subpart E of Part 181 of the Customs Regulations provides for drawback and other dutydeferral programs under NAFTA. Section 181.45(b)(2), which implements 19 U.S.C. § 3333(a)(2), provides for claims under 19 U.S.C. § 1313(j)(1) and states, in part:

(A) . . .Commingling of fungible originating and non-originating goods in an inventory is permissible provided that the origin of the goods and the identification of entries for designation for same condition drawback are on the basis of an approved inventory method set forth in the appendix to this part. [19 C.F.R. § 181, Appendix X]

(B) “[i]f all goods in a particular inventory are non-originating goods, identification of entries for designation shall be on the basis of one of the accounting methods in §191.14 of this chapter, as provided therein.”

Furthermore, in T.D. 95-68, the Final rule promulgating Part 181, it is stated that “[i]n order to avail itself of full drawback under direct identification, the Agreement and implementing legislation permit identification of the exported good as the imported good by means of a record keeping system only if the goods are fungible and commingled.”

You argue that subpart (B) of § 181.45(b)(2) is applicable to Enesco’s drawback program because all of its products are non-originating and Enesco or the Canadian buyer pays the appropriate Canadian duty on non-originating goods. Any item that is sourced in a NAFTA country is sourced only from that country, so that there is no possibility of a non-NAFTA item in an export shipment to Canada or Mexico. Assuming Enesco can support the foregoing assertions, we need to determine whether the accounting method used by Enesco as its method of product identification meets the requirements of § 191.14. Section 191.14(b)(2) provides that:

The person using the identification method must be able to establish that inventory records . . . prepared and used in the ordinary course of business, account for the lots of merchandise or articles to be identified as being received into and withdrawn from the same inventory.

Enesco asserts that its LIFO inventory method for identifying drawback eligible merchandise is adequate to support its claims for same condition drawback. In its August 18, 1998, letter Enesco asserts that only products sourced from a non-NAFTA country are entered into their drawback recordkeeping system and that all purchases of such products are accounted for including the duty paid on the item. To support this assertion Enesco has submitted documentation showing the importation of music boxes from Hong Kong, a non-NAFTA country, and its subsequent exportation to the Netherlands, also a non-NAFTA country. However, the inventory documents that were submitted therewith do not account for withdrawals for domestic sales. Further, in your January 26, 1998 letter to this office you state that Enesco’s drawback program only accounts for export shipments and domestic sales of imported merchandise are not deducted from the drawback pool.

Last, on January 7, 1999, a meeting was held between Enesco’s counsel and representatives of the Customs Service at which Enesco’s counsel agreed that a further submission would be made relative to the issue of Enesco’s accounting methodology. By way of a letter dated November 11, 1999, you informed this office that it was not possible for Enesco to reconstruct its inventory records in a cost-effective manner for past drawback entries.

Consequently, the LIFO methodology that you employ does not comply with either the LIFO method set forth in § 191.14(c)(2) or Schedule X, App. to Part 181, C.F.R. because it does not account for all receipts into and removals from your inventory. The applicable Customs regulations are very clear on this issue. The claimant using the identification method must be able
to establish that the inventory records account for lots of merchandise as being received into and withdrawn from the same inventory record. See 191.14(b)(2).

HOLDING:

Enesco’s inventory accounting system does not meet all of the requirements of sections 181.45(b)(2)(B) and 191.14, Customs Regulations, in that the inventory records do not account for lots of merchandise as being received into and withdrawn from the same inventory.

Sincerely,

John A. Durant
Director
Commercial Rulings Division

Previous Ruling Next Ruling