WAR-2-01-CO:R:C:E 224237 AJS

Director
Office of Regulatory Audit
Attn: Ms. Kandance Black

RE: Request for Internal Advice; Multiple Storage Locations for Bonded FIFO Merchandise; C.S.D. 83-63; C.D. 3260-11 A(4); Bonded Warehouse Manuel, section 6.6; 19 CFR 19.12(b)(6); C.D. 3260-11 F(1) & F(2); 19 CFR 19.4; 19 CFR 161.1.

Dear Sir:

This is in reply to your Internal Advice request of October 7, 1992, regarding the storage of First-In First-Out (FIFO) bonded merchandise with the same identifier in more than one location within a bonded warehouse.

FACTS:

A bonded warehouse facility requests permission to store FIFO bonded merchandise with the same identifier in more than one location of the warehouse. Commingling of merchandise with different identifiers will not take place within the same location.

ISSUE:

Whether FIFO bonded merchandise with the same identifier may be located within more than one location of a bonded warehouse.

LAW AND ANALYSIS:

FIFO is an inventory method that may be used to account for fungible merchandise which is commingled. If there is commingling of fungible goods the method is based on an assumption regarding the flow of fungible merchandise that older stock is disposed of first, in accordance with good

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merchandising policy. Customs Directive (C.D.) 3260-11, A(4) (September 30, 1985); see also Bonded Warehouse Manuel, section 6.6 (1990). Thus, in bonded warehouses, fungible merchandise deducted from the inventory is deducted from the oldest entry first. C.D. 3260-11, A(4). In Customs Service Decisions (C.S.D.) 83-63, we ruled that FIFO accounting may be applied to identify fungible merchandise that is commingled in storage in a Customs bonded warehouse.

The legal requirements regarding warehoused goods are set forth in 19 U.S.C. 1557 (period in warehouse), 1558 (remission of duty) and 1559 (abandonment). Without an example of the manner in which the subject warehouse facility proposes to meet these statutory limits with non-commingled goods it would be unclear how the above statutes would be applied. The statutes as written require direct identification. FIFO satisfies that requirement only when goods are commingled. While a FIFO system for non- commingled goods might be possible, it would appear to be just as difficult to administer as direct identification.

Under FIFO procedures, each type of fungible merchandise constitutes a separate inventory category. C.D. 3260-11, F(1); see also Bonded Warehouse Manuel, section 6.6(c)(1). An inventory category is a specific collection of fungible merchandise which distinguishes it from other collections of fungible merchandise, for both recordkeeping and physical storage purposes. C.D. 3260-11, A(4). Each inventory category shall be assigned a unique number or other identifier by the proprietor to distinguish it from all other inventory categories under FIFO procedures. C.D. 3260-11, F(1).

This requests specifically asks the question of whether FIFO merchandise of the same identifier must be stored in only one location of a bonded warehouse. Regarding segregation of inventory categories under FIFO procedures, all merchandise in a given inventory category shall be physically placed so as to be segregated from merchandise under other inventory categories or merchandise accounted for under other methods. C.D. 3260-11, F(2); see also Bonded Warehouse Manuel, section 6.6(c)(2). Furthermore, the unique identifier shall be marked on the merchandise, its container, or the location where it is stored so as to clearly show the inventory category of each article under FIFO procedures. The use of the singular term "location" indicates that the segregation of FIFO merchandise was intended to be in only one location, and not several locations. Therefore, we are of the view that FIFO merchandise of the same identifier is required to be stored within only one location of a bonded warehouse.

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19 CFR 19.12(b)(6) provides that "[a]ll containers covered by a given warehouse entry, general order or seizure shall be stored in the same location and not mixed with goods covered by any other entry, general order or seizure unless approval has been given in writing by the district director for an exception from this requirement." While this provision does not specifically address FIFO merchandise, it does emphasize that merchandise which requires segregated storage should be stored in the same location. We find this provision supportive for determining that FIFO merchandise, which is also required to be segregated, should likewise be stored in the same location.

Assuming arguendo that C.D. 3260-11 does not specifi- cally require that FIFO merchandise be stored in only one location, it would nevertheless be within the discretion of the principal Customs field officer to require this manner of storage. 19 CFR 19.4 provides that "[t]he character and extent of Customs supervision to be exercised in connection with any warehouse facility or transaction provided for in this part shall be in accordance with Section 161.1 of this chapter." 19 CFR 161.1 states that "[i]n the absence of a governing regulation or instruction, supervision [generally] shall be direct and continuous, or by such occasional verification as the principal Customs field officer shall direct if such officer determines that less intensive supervision will ensure proper enforcement of the law and protection of the revenue." The governing regulation for bonded warehouse supervision provides that the District Director may authorize a Customs Officer to supervise any procedure at the bonded warehouse facility. 19 CFR 19.4. Such supervision may be performed through reviews of the conditions of storage in a warehouse facility. 19 CFR 19.4. Therefore, the District Director is authorized to require that in instances when the conditions of storage are under supervision, that FIFO merchandise be stored in only one location.

If 19 CFR 19.4 is alternatively not viewed as governing the storage issue, Customs would continue to possess the authority to require that FIFO merchandise be stored in only one location. As stated previously, 19 CFR 161.1 provides that generally supervision shall at a minimum be by such occasional verification as the principal Customs field officer shall direct if such officer determines that less than direct and continuous supervision will "ensure proper enforcement of the law and protection of the revenue". The key to this type of warehouse supervision is that it must "ensure proper enforcement of the law and protection of the

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revenue". Accordingly, if the principal Customs field officer determines that the storage of FIFO merchandise in only one location is required in order to "ensure proper enforcement of the law and protection of the revenue", then such officer may require this type of storage pursuant to their general supervisory authority.

HOLDING:

Under the current regulations the only permissible controls by record over inventory such as the application of FIFO require that the procedure be applied to merchandise commingled in one location. However, if your office devises an alternative system we would assist you in amending the Customs Regulations.


Sincerely,


John Durant, Director
Commercial Rulings Division