FOR-2-03-CO:R:C:E 224110 JRS
Mr. John R. Babb
District Director of Customs
One Virginia Avenue
Wilmington, North Carolina 28401
RE: Disposition of machinery and equipment located in a foreign
trade zone in "zone-restricted" status; Destruction requirement;
eligibility for substitution same condition drawback under 19
U.S.C. 1313(j)(2); 19 U.S.C. 1313; 19 U.S.C. 81c (fourth proviso
of subsection (a)); 19 CFR 191.161 - 191.162; 19 CFR 191.41;
19 CFR 146.44; C.S.D. 80-67; Headquarters Ruling 221050, dated
September 20, 1989; HQ 222742, dated December 11, 1991.
Dear Sir:
This is in response to your Internal Advice request on
behalf of the R.J. Reynolds Tobacco Company dated August 11,
1992. Our opinion follows.
FACTS:
R.J. Reynolds Tobacco Company (RJR) has had certain unused
fungible machinery and equipment admitted, in "zone-restricted"
status, to the Foreign Trade Zone in Charlotte, North Carolina,
in order to satisfy the exportation requirement of the
substitution same condition drawback statute, 19 U.S.C.
1313(j)(2). We understand that the drawback claim has been paid.
The machinery currently is stored in the foreign trade zone.
RJR had originally planned to landfill the merchandise in the
foreign trade zone under Customs supervision in conformity with
Customs Ruling 221050 C, dated September 20, 1989. However, RJR
was informed by some federal and state EPA regulators that their
regulations require that metals be recycled rather than
landfilled whenever possible, although there exists some
controversy within the EPA when landfilling is permissible.
RJR asks whether Customs Ruling 221050, which was issued in
1989 before the current emphasis on recycling by the EPA, is
still valid or, if there are any alternatives to landfilling that
Customs would find acceptable. RJR does not want to jeopardize
the drawback payments received on the machinery and equipment.
RJR proposes the following destruction method and asks
whether Customs would permit such recycling of the metal
machinery for purposes of drawback under 19 U.S.C. 1313(j):
First, the machinery would be broken down in the
foreign trade zone, removing any pieces or workings
which cause the machinery to be proprietary in nature.
Second, the now disassembled machines would be sold
domestically to a scrap dealer, for smelting and
recycling of the machine's metals.
Finally, the proceeds from recycling would only be used
to offset the costs of destruction. In the unlikely
event that the proceeds should exceed the costs of
destruction, RJR would not accept such funds.
Disposition of any such funds could be dictated by
Customs.
ISSUE:
What constitutes destruction of "zone-restricted"
merchandise for drawback purposes in a foreign trade zone?
LAW AND ANALYSIS:
Section 3 of the Foreign-Trade Zones Act of 1934, as amended
(19 U.S.C. 81c), provides in part that:
... under the rules and regulations of the controlling
Federal agencies, articles which have been taken into a zone
from customs territory for the sole purpose of exportation,
destruction (except destruction of distilled spirits, wines
and fermented malt liquors), or storage shall be considered
to be exported for the purpose of - (a) the drawback,
warehousing, and bonding, or any other provisions of the
Tariff Act of 1930, as amended, and the regulations
thereunder.
See 19 CFR 191.161 and 191.162 (drawback allowance on the fourth
proviso of section 3 of the Foreign-Trade Zones Act of 1934, as
amended (19 U.S.C. 81c)).
In order to be eligible for drawback under the same
condition drawback statute (19 U.S.C. 1313(j)) and regulations,
merchandise must be either destroyed under Customs supervision,
unless waived, or exported.
Customs has followed the "complete destruction" rule to
satisfy the alternative to exportation provided under 19 U.S.C.
1313(j). Destruction has been defined as "destruction as an
article of commerce" by the Customs Court. American Gas
Accumulator Co. v. United States, T.D. 43642, 56 Treasury
Decision 368 (1929). The Court stated that "[I]n other words, if
articles were destroyed to such an extent that they were only
valuable in commerce as old scrap, they would still be articles
of commerce to which duty attaches upon importation, and
therefore, could not be said to have been destroyed." Id. at
370. Merchandise is not destroyed for drawback purposes if
anything remains from the destruction process that could be
considered an article of commerce. The Customs Service has ruled
that scrap 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. Landfilling remains a viable
process of destruction. The economic infeasibility concept of
C.S.D. 79-419 was recently affirmed in HQ 222742, December 11,
1991; this case will be further discussed on page 4 infra.
To have complete destruction for purposes of the drawback
law in a foreign trade zone, the "zone-restricted" merchandise
and its residue from the destruction process must be rendered
valueless; otherwise, the process will be treated as a
manipulation. Destruction, however, need not take place in one
step. C.S.D. 80-67 and C.S.D. 81-100. A partial destruction,
however, combined with further destruction, exportation and/or
storage, meets the requirements of the Foreign Trade Zones Act
and the Customs regulations for treatment of merchandise in
"zone-restricted" status. See C.S.D. 80-67.
In C.S.D. 80-67, Customs permitted a partial destruction of
the semiconductors in the FTZ because the resulting valuable
scrap (also the "zone-restricted" status) could only be further
destroyed, stored, or exported, unless the Board deemed its
return to Customs territory in the public interest. Customs held
that the crushing of semiconductors was a process of destruction
under 19 U.S.C. 81c even though valuable gold scrap resulted from
this process; however, a further process of recovering the gold
from the resulting scrap was not permitted in the zone since this
was not a process of destruction.
In the instant case, the proposed alternative to the
complete destruction rule for same condition drawback is
unacceptable for the following reasons. First, the breaking down
and removal of the proprietary markings from the machinery in the
foreign trade zone is not a destruction process, but rather a
disassembly process -- nothing prevents the machinery from being
reassembled and, moreover, nothing has been destroyed but merely
manipulated. The machinery and equipment, in disassembled form,
retains its commercial value.
Secondly, the process of returning the disassembled goods in
"zone-restricted" status to the Customs territory for
consumption, i.e., recycling, is forbidden under the Foreign-
Trade Zones Act (see 19 U.S.C. 81c, fourth proviso) unless the
Board approves of its return to the Customs territory in the
public interest. If the Board allows the machinery to be
returned, the goods will be subject to a duty up to the amount of
drawback paid (see subheading 9801.00.80, HTSUS).
Moreover, smelting and recycling in the Customs territory
are not processes of destruction because they result in articles
of commerce. However, Customs has ruled that recycling may be
permitted to satisfy the destruction requirement of 19 U.S.C.
1313(j)(2) only on proof that local laws require it and that the
cost of recycling exceeds the value of the goods recycled. HQ
222742, dated December 11, 1991. In that case, the cost of
salvaging the alcoholic residue of bottled beer and malt liquor,
in order to comply with state law which prohibits the disposal of
liquid wastes in a landfill without a permit from the state, was
more than the value of the residue. Based on the accounting
figures submitted by the importer, drawback was allowed because
the importer by complying with state law assumed a loss of 14
cents per case, that is, the salvaging of the residue (53 cents
per case) was more than the total value of the residue (39 cents
per case).
This case is distinguishable from HQ 222742. From the cost
data submitted by the importer, upon our request, the metal scrap
is worth between $2,400 and $3,000 (for 160,000 to 200,000 pounds
of metal (or 80 to 100 tons)) and the cost of disposing this
amount is between $2,000 and $2,500, thus resulting in a profit
to the importer between $400 and $500. Also, it is not clear
that landfilling is an impossibility under local law. While the
importer is willing to give up any proceeds to Customs, this is
an irrelevant consideration because once the disassembled
"zone-restricted" merchandise is returned to Customs territory,
assuming Board approval for purposes of recycling, the
merchandise would be assessed duties and Customs would have no
interest in any recycling proceeds.
Section 146.44(a) of the Customs Regulations (19 CFR 146.44)
in pertinent part, states:
[t]hat [zone-restricted] status may be requested at any time
the merchandise is located in the zone, but cannot be
abandoned once granted. Merchandise in zone-restricted
status may not be removed to Customs territory for domestic
consumption except where the [Foreign Trade Zones] Board
determines the return to be in the public interest.
(Emphasis added).
Return to Customs territory of "zone-restricted" merchandise is
an extremely rare occurrence. We note that the Board approved,
in the public interest, the return of the remaining valuable gold
scrap residue of C.S.D. 80-67 to the Customs territory for
domestic consumption. Foreign-Trade Zones Board Order No. 158
signed June 4, 1980.
Our position in Customs ruling 221050, dated September 20,
1989, is reaffirmed. If scrap left over from the destruction
process has commercial value, destruction is incomplete for
purposes of destruction under same condition drawback under 19
U.S.C. 1313(j)(1) or (2).
HOLDING:
Generally speaking, the destruction required for drawback
purposes under 19 U.S.C. 1313(j) is complete destruction as an
article of commerce, except as otherwise noted in this ruling;
however, partial destruction of "zone-restricted" merchandise in
a foreign trade zone, combined with further destruction in the
zone, exportation and/or storage, meets the requirements of the
Foreign-Trade Zones Act and the Customs regulations as discussed
herein.
Sincerely,
John Durant, Director