CLA-02 RR:CTF:VS 563303 DCC
Mr. Joseph F. Donohue, Jr.
Donohue and Donohue
26 Broadway Suite 911
New York, N.Y. 10004
RE: Petroleum products; U.S. Virgin Islands; insular possession; duty-free treatment; General Note 3(a)(iv), HTSUS; § 213(b) CBERA; CBTPA; ‘NAFTA parity’
Dear Mr. Donohue:
This is in response to your letters dated June 2, and August 10, 2005, on behalf of Hovensa, L.L.C. (“Hovensa”), and Amerada Hess Corporation (“Amerada”) regarding preferential tariff treatment under General Note 3(a)(iv)(A) and (D), Harmonized Tariff Schedules of the United States (HTSUS), section 213 of the Caribbean Basin Economic Recovery Act (as amended by the United States-Caribbean Trade Partnership Act) for Reformulated Gasoline Blendstock for Oxygenate Blending, or “RBOB.”
FACTS:
Hovensa owns and operates a petroleum refinery in the U.S. Virgin Islands and exports its products to the United States and elsewhere. The principal feedstock to the refinery is imported foreign crude oil, which Hovensa processes to produce various blendstocks, which are combined to produce the RBOB. Sometimes the Hovensa-produced blendstocks will be combined with imported blendstocks to produce the RBOB. RBOB is classified under heading 2710, HTSUS. In addition to RBOB, Hovensa produces reformulated gasoline blendstock for the California market, which is referred to as CARBOB. For convenience, this ruling will refer to RBOB and CARBOB collectively as “RBOB.”
RBOB is used to produce reformulated gasoline, which is a type of gasoline that contains a minimum of 2% oxygen, by weight. The oxygen content is achieved by including “oxygenates” as one of the components in gasoline. RBOB must meet specifications for Reid vapor pressure, distillation points, sulfur content, vapor lock index, and other properties.
Hovensa produces RBOB at its refinery located in the U.S. Virgin Islands by using essentially identical materials and production processes that the company uses to produce finished gasoline. The process begins with crude petroleum, which is processed in an atmospheric distillation unit. The production may also use imported resid, catfeed, naphtha, or coker feed, which are processed in a vacuum distillation unit, catalytic cracker, reformer, or delayed coker, respectively. These processes result in several intermediate and final products, and include several products generically referred to as gasoline blendstocks or blending stocks. These blendstocks may be sold, further processed, or blended to produce a marketable gasoline. These blendstocks include the following products:
Butane-Butene
DIP Overhead
Pentanes
Light Straight-run Naphtha (“LSR”)
DIP Bottoms
Light Naphtha
Heavy Naphtha
Whole Naphtha
Penexate
Dimate
Alkylate
Light Raffinate
Heavy Raffinate
FCC Pentane-Pentene
Light Cat Naphtha
Heavy Cat Naphtha
Reformate (Platformate)
Toluene
Xylene
Heavy Aromatics
Hovensa will use some, but not all, of these blendstocks to produce RBOB. Typically, four blendstocks will be used. Due to several factors, however, the blending formula will vary. These factors include: 1) the desired product volatility specifications depending on the season and the geographic area the product will be used; 2) the properties of the available individual blendstocks; and 3) the available inventory of blendstocks at the refinery. Although different blending formulations may be used, the resulting RBOB must meet certain industry specifications.
In producing RBOB, Hovensa may use self-produced blendstocks, or a combination of self-produced blendstocks and imported blendstocks. Hovensa will track the quantity of foreign blendstock used in any blending operation and determine the amount of such foreign material, by volume or value, contained in the final product. The blending operation involves either “in-line blending” or “tank blending.”
You claim that RBOB produced from foreign crude oil or the other feedstocks (i.e., resid, catfeed, naphtha, or coker feed) or blendstocks referred to above is entitled to duty-free treatment under General Note (“GN”) 3(a)(iv)(A), HTSUS. That provision provides duty-free treatment for products of insular possessions that do not contain foreign materials in excess of 70 percent (50 percent in the case of petroleum products) of their value. You also claim that these petroleum products are entitled to duty-free treatment under the CBERA as amended by the “NAFTA parity” provision of the U.S.-Caribbean Basin Trade Partnership Act, and applied to products of the U.S. Virgin Islands pursuant to General Note 3(a)(iv)(D).
ISSUES:
Whether RBOB produced from foreign crude oil or other feedstocks or blendstocks referred to above is eligible for duty-free treatment pursuant to General Note 3(a)(iv)(A), HTSUS.
Whether RBOB produced from foreign crude oil or other feedstocks or blendstocks referred to above is eligible for duty-free treatment under § 213(b)(3) of CBERA, as amended, and pursuant to General Note 3(a)(iv)(D), HTSUS.
LAW AND ANALYSES:
I RBOB Produced in the U.S. Virgin Islands is Eligible for Duty-free Treatment Under General Note 3(a)(iv)(A)
GN 3(a)(iv), HTSUS, provides that goods imported from a U.S. insular possession may enter the customs territory of the U.S. free of duty if the goods:
are the growth or product of the possession;
do not contain foreign materials which represent more than 70 percent of the goods’ total value (or more than 50 percent with respect to goods described in section 213(b) of the Caribbean Basin Economic Recovery Act) (CBERA); and
come directly to the customs territory of the U.S. from the possession.
Section 213(b), CBERA (codified at 19 U.S.C. 2703(b)), includes petroleum, or any product derived from petroleum, provided for in headings 2709 and 2710, HTSUS. Therefore, in order for RBOB to be eligible for duty-free treatment under GN 3(a)(iv), HTSUS, it must be a product of the U.S. Virgin Islands and it must not contain foreign materials which represent more than the allowable percentage of its total value. The U.S. Virgin Islands is a U.S. insular possession. 19 CFR 7.2.
Pursuant to 19 CFR § 7.3(b), goods are considered to be the growth or product of, or manufactured or produced in, an insular possession if the goods:
are wholly the growth or product of the insular possession, or
become a new and different article of commerce as a result of production or manufacture performed in the insular possession.
Foreign materials imported into an insular possession become a “product of” the possession if they are substantially transformed there into a new and different article of commerce. A substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982). 19 CFR § 7.3(b).
A. RBOB Produced from Double Substantially Transformed Blending Stocks
You state that Customs and Border Protection (“CBP”) has previously held that the blendstocks used to produce RBOB qualify for duty-free entry under GN 3(a)(iv)(A) when produced from foreign petroleum products that undergo a double substantial transformation as a result of processing in the U.S. Virgin Islands. See Headquarters Ruling Letter (“HRL”) 555032, dated September 23, 1988; HRL 557180, dated December 23, 1993; and HRL 562387, dated July 30, 2002. To the extent that CBP has previously determined the blending stocks used to produce RBOB are entitled to duty-free entry into the United States under GN 3(a)(iv)(A), RBOB produced from these blendstocks would also qualify for preferential tariff treatment under GN 3(a)(iv)(A).
B. RBOB Produced from Blending Stocks Imported into the U.S. Virgin Islands, Blending Stocks that Result from a Single Substantial Transformation, and Blending Stocks that Result from a Double Substantial Transformation
In some circumstances, Hovensa may use foreign blending stocks and blending stocks that result from a single substantial transformation in addition to blending stocks that result from a double substantial transformation to produce RBOB. The most likely blendstock imported for direct blending is naphtha, but other foreign blendstocks may also be used. The Hovensa-produced blendstocks that may involve only one substantial transformation include the following materials: butane and pentane produced from foreign crude oil; LSR produced from foreign crude oil; naphtha produced from foreign crude oil; butene-butane and pentene-pentane produced from foreign cat cracker feedstocks; cat naphtha produced from foreign cat cracker feedstocks; and reformate produced from imported naphtha. You claim that the blending together of these blendstocks to produce RBOB is a manufacturing process that results in a new and different article of commerce that should be eligible for duty-free treatment under GN 3(a)(iv)(A), provided that the value any foreign blendstock used in the blending process does not exceed 50 percent of the total value of the finished RBOB.
The issue presented is whether the blending operation in the U.S. Virgin Islands itself results in a substantial transformation of the foreign blendstocks when those stocks are used to produce RBOB. You claim that the process of blending the various blending stocks to produce RBOB constitutes a substantial transformation because the RBOB that results from the blending operation differs in name, character, and use, and is a different article of commerce. For example, Hovensa may produce RBOB from LSR that resulted from a single transformation of imported crude oil and Naphtha that has been imported into the Virgin Islands.
Generally, CBP has held that an article that undergoes “only a simple” combining operation or a “mere dilution” is not regarded to have undergone a substantial transformation. See 19 CFR 10.195(a)(2) (discussing the standard for what constitutes a substantial transformation for purposes of CBERA). Operations held not to constitute a substantial transformation in this context involve blending of similar ingredients, the addition of chemicals such as the addition of anti-caking agents, preservatives, and wetting agents, which facilitate the use of a main ingredient, or the dilution of the prime component with inert ingredients. See 19 CFR 10.195(a)(2)(i).
However, CBP has held that under certain circumstances the blending of various materials into a stable mixture constitutes a substantial transformation. See HRL 555609, dated November 5, 1990. In that ruling, various ingredients were blended together to form petroleum jelly. CBP found that, despite the fact that a chemical reaction did not result from the blending operation, the resulting product had been substantially transformed from its constituent ingredients into a new and different article of commerce.
Furthermore, in HRL 555032, CBP held that blending stocks that were mixed together to produce gasoline resulted in a substantial transformation. In that case, isomerate and penexate (gasoline blendstocks) were created when LSR, from the crude distillation unit (stage one) was sent to the LSR desulfurizer where hydrogen was introduced to chemically remove sulfur and nitrogen. The desulfurized LSR then went to the “PENEX unit” to increase the octane. This process chemically converted straight chain hydrocarbons (paraffin) into branched hydrocarbons (isoparaffins). CBP held that when the isomerate and penexate were mixed with various other blending stocks (i.e., light catalytic cracker naphtha, heavy catalytic cracker naphtha, alkylate, dimate and butanes), this process resulted in a further substantial transformation of the constituent materials.
Based on our holdings in HRL 555032 and HRL 555609 we find that the production of RBOB from blending stocks results in a new and different article of commerce. The mixing of the blending stocks results in a petroleum product that has qualities different from those of the original blending stocks. By themselves, the individual blending stocks do not have the essential character or properties and cannot be used as RBOB. The individual blending stocks do not impart the essential character to the gasoline, but each blending stock brings to the finished RBOB essential characteristics which the blend would not otherwise have. See National Juice Products v. United States, 628 F. Supp. 978 (Ct. Int’l Trade 1986). The blending stocks at issue, including naphtha, butane and pentane, LSR, butene-butane and pentene-pentane, and cat naphtha are not simply variant grades of the resulting product but rather different petroleum products.
Furthermore, each blendstock used to produce RBOB has its own properties and industry-recognized specifications related to exhaust emissions, evaporation, octane, antiknock, Reid vapor pressure, and vapor-liquid ratio. It is only after the blending stocks are blended together in appropriate proportions that the RBOB is produced, and becomes a marketable product. The various blending stocks do not meet the specifications for RBOB, and are not marketable as such, until they are blended together.
Finally, we note that RBOB is specifically formulated to be blended with ethanol at petroleum terminals to produce Reformulated Gasoline. The various blendstocks cannot be used in the same manner as RBOB because they do not meet RBOB specifications. Consequently, RBOB has a different identity compared to the blendstocks from which it is produced.
We find that the RBOB is a new and different “article of commerce.” To be an “article of commerce,” the new and different intermediate product “must be commercially recognizable as a different article, i.e., [it must] be readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production.” Azteca Milling Co., v. United States, 703 F. Supp. 949 (CIT 1988), aff’d, 890 F.2d 1150 (Fed. Cir. 1989). Therefore, the imported RBOB is produced from foreign materials that undergo a double substantial transformation in the Virgin Islands, so that those materials are not considered “foreign” materials for purposes of GN 3(a)(iv), HTSUS.
As a result of the blending process, the finished RBOB is a product of the U.S. Virgin Islands with a new name, character and use, different from the blending stocks from which it is made. Before the blending process, the various blendstocks used in the blending process do not meet the properties of RBOB and cannot be used as RBOB. It is only after the blending process that a new and different article emerges.
You state that Hovensa may produce some blendstocks through a single substantial transformation of the imported crude oil or other imported feedstocks described above and import other blending stocks into the U.S. Virgin Islands for direct blending in the manufacture of RBOB. Under this scenario, the Hovensa-produced blendstocks used in the process (whether derived through a single or double substantial transformation of the foreign crude oil) will constitute Virgin Islands materials when used to produce the finished RBOB and consequently will be excluded from the value of foreign materials. The foreign origin blendstock, if any, will constitute foreign materials (unless they undergo a double substantial transformation) and must be included in the 50 percent limit on the value of foreign materials. As long as the value of the foreign blendstock does not exceed 50 percent of the value of the RBOB, the RBOB will qualify for duty-free entry under GN3(a)(iv)(A).
II RBOB Produced in the U.S. Virgin Islands is Eligible for Duty-free Treatment Under § 213(b)(3) of CBERA, Provided the RBOB is Produced Entirely from One or More of the Processing Operations that Confer NAFTA Origin under General Note 12, Chapter 27, HTSUS
GN 3(a)(iv)(D) provides that products of U.S. insular possessions may receive tariff status no less favorable than that afforded to beneficiary countries under CBERA. Under § 213(b) of CBERA, as amended by CBTPA, petroleum products classified under heading 2710 that originate in a CBTPA beneficiary country are entitled to the same preferential treatment accorded to products classified under the same 8-digit subheading of the HTSUS when imported into the United States from Mexico under the North American Free Trade Agreement (“NAFTA”). See Section 213(b)(3)(A) of CBERA, as amended (codified at 19 U.S.C. § 2703(b)(3)(A)). The good must be a “CBTPA originating good,” which is determined by applying the origin rules of Annex 401 of NAFTA, as implemented by U.S. GN 12, HTSUS, and the Appendix to Part 181 of the CBP Regulations (19 C.F.R. Part 181).
Under the Chapter 27 rule to GN 12, a heading 2710 good produced from any of the following processes will be considered NAFTA originating:
Atmospheric distillation;
Vacuum distillation;
Catalytic hydroprocessing;
Reforming (catalytic reforming);
Alkylation;
Cracking;
Coking; or
Isomerization
Thus, a heading 2710 good produced by one or the above processes in a CBTPA beneficiary country from non-originating materials is eligible for preferential treatment under the NAFTA parity provision of CBERA.
In HRL 562918, dated March 4, 2004, we held that the NAFTA parity provision of CBERA is applicable to products of the U.S. Virgin Islands by virtue of operations of GN 3(a)(iv)(D). At the time of that ruling, however, NAFTA eligibility for heading 2710 goods produced in Mexico required a change in tariff classification, i.e., a tariff shift, of the non-originating material from a heading outside headings 2710 through 2715, HTSUS. That rule limited NAFTA eligibility to heading 2710 goods produced from crude oil, which falls under heading 2709, HTSUS, and precluded NAFTA eligibility for heading 2710 goods produced from materials classified under heading 2710.
Effective July 15, 2004, the NAFTA rule of origin applicable to goods classified under heading 2710 that are produced in Mexico were expanded to include the eight NAFTA origin conferring processes listed above, irrespective of the heading under which the non-originating materials is classified. By reason of the applicability of the NAFTA parity provision to the U.S. Virgin Islands pursuant to GN 3(a)(iv)(D), processing operations that confer NAFTA origin status on heading 2710 goods produced in Mexico as of July 15, 2004, also confer preferential status on heading 2710 goods produced in the U.S. Virgin Islands. Because RBOB is classified under heading 2710, the RBOB will qualify for NAFTA preferential tariff treatment provided it undergoes one or more of the processes specified in the Chapter 27 rule to GN 12, HTSUS (i.e., atmospheric distillation, vacuum distillation, catalytic hydroprocessing, reforming, alkylation, cracking, coking, or isomerization).
HOLDING:
Based on the information provided, we find that the RBOB is a product of the U.S. Virgin Islands as the blending operations performed there constitute a substantial transformation of the imported blendstocks or blendstocks produced in the Virgin Islands from imported raw materials as described herein. Blendstocks imported into the U.S. Virgin Islands will be considered foreign material for purposes of calculating the 50 percent maximum foreign material value limitation set forth in GN 3(a)(iv), HTSUS. Imported raw materials that undergo a double substantial transformation in the Virgin Islands as a result, in part, of the blending operation to produce RBOB will be considered a material produced in the Virgin Islands, and will not be considered foreign material for purposes of calculating the 50 percent maximum foreign material value limitation set forth in General Note 3(a)(iv), HTSUS. Finally, goods classified under heading 2710, including RBOB, will qualify for duty-free entry by application of § 213(b)(3) of CBERA, as applied to U.S. insular possessions pursuant to GN 3(a)(iv)(D), when the good is produced entirely from one or more of the processing operations that confer NAFTA origin under General Note 12, Chapter 27, HTSUS (i.e., atmospheric distillation, vacuum distillation, catalytic hydroprocessing, reforming, alkylation, cracking, coking, or isomerization).
A copy of this ruling should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch