OT:RR:CTF:ER H102097 CKG
Grace Lopez
Operations Specialist
Houston Field Office
2323 S Shepherd Pl, Suite 1200
Houston, TX 77019
RE: Foreign Trade Zone; Accounting Systems
Dear Ms. Lopez:
In your letter of April 12, 2010, you requested that CBP determine whether entries must be filed for foreign-status natural gas that is being stored in a Foreign Trade Zone (“FTZ”) with domestic status natural gas.
FACTS:
The FTZ in Calhoun-Victoria, Texas was approved by the FTZ Board on June 25, 2008. Activation became effective on January 22, 2009. The FTZ Operator is Tres Palacios Gas Storage (TPGS). The activation request describes the use of the zone as storage for domestic and foreign natural gas. TPGS states that the natural gas admitted into the zone is primarily duty-paid natural gas, stored in caverns on behalf of specific customers. TPGS further states that the only foreign status natural gas admitted into the zone is used as a “cushion” for the domestic status gas (to maintain pressure in the storage caverns), and that TPGS is only importing enough foreign gas to maintain the cushion. TPGS accounts for its physical inventory of domestic gas using the First In, First Out (FIFO) method. No entries have been filed by TPGS at the time of submission of this request.
“Cushion” gas refers to a certain quantity or percentage of gas that must remain in the cavern to maintain pressure (and prevent the cavern from collapsing). It is not a specific batch or batches that is maintained in the cavern. Indeed, any foreign status gas in the cavern would eventually be displaced by the injection of new gas. In the normal injection and withdrawal cycle, as new gas is injected into the cavern, an equivalent quantity of stored gas is “pushed” out. TPGS states that the different batches of natural gas it stores are fungible.
ISSUE:
Whether entries must be filed for foreign-status natural gas that is being stored in an FTZ with domestic status natural gas.
LAW AND ANALYSIS:
The statute governing the creation and operation of FTZs is the Foreign Trade Zones Act of 1934, as amended (48 Stat. 998; 19 U.S.C. 81a through 81u). Under 19 U.S.C. §81c(a), foreign and domestic merchandise of every description (except prohibited merchandise) may be brought into an FTZ without being subject to the U.S. customs laws and may there be, among other things, stored, mixed with foreign or domestic merchandise, or otherwise manipulated and be exported, destroyed, or sent into the U.S. customs territory. When foreign merchandise is so sent from an FTZ into U.S. customs territory it is subject to the U.S. laws and regulations affecting imported merchandise. Articles of the United States and articles previously imported on which duty and/or tax has been paid, or which have been admitted free of duty and tax, may be taken into an FTZ from the U.S. customs territory, placed under the supervision of the appropriate CBP officer, and, whether or not they have been combined with or made part of other articles while in the FTZ, be brought back thereto free of quotas, duty, or tax. See 19 U.S.C. 81c(a). If the identity of such articles (i.e., the "domestic status" articles described in the preceding sentence) has been lost, articles not entitled to duty free entry by reason of noncompliance with the requirements under the authority of this provision are treated as foreign status merchandise if they reenter the customs territory. Id. The Customs Regulations issued under the authority of this statute are found in 19 CFR Part 146.
19 C.F.R. §146.43 provides as follows:
§ 146.43 Domestic status. (a) General. Domestic status may be granted to merchandise:
(1) The growth, product, or manufacture of the U.S. on which all internal-revenue taxes, if applicable, have been paid; (2) Previously imported and on which duty and tax has been paid; or (3) Previously entered free of duty and tax. … (c) Return of merchandise of Customs territory. Upon compliance with the provisions of this section, any of the merchandise specified in paragraph (a) of this section, may subsequently be returned to Customs territory free of quotas, duty, or tax.
In contrast, 19 C.F.R. §146.42, provides that:
§ 146.42 Nonprivileged foreign status. All of the following will have the status of nonprivileged foreign merchandise: … (c) Certain domestic merchandise. Domestic merchandise in a zone, which by reason of noncompliance with the regulations in this part has lost its identity as domestic merchandise, will be treated as foreign merchandise. Any domestic merchandise will be considered to have lost its identity if the port director determines that it cannot be identified positively by a Customs officer as domestic merchandise on the basis of an examination of the articles or consideration of any proof that may be submitted promptly by a party-in-interest.
Pursuant to 19 C.F.R. §146.43, “Domestic status” may be granted to merchandise that is the product of the United States, or imported merchandise on which duties and taxes have been paid. In general, TPGS does not need to seek permission from or notify CBP when admitting domestic status merchandise into the zone, nor is it required to make a formal entry of the duty-paid natural gas before taking it out of the zone and into the stream of commerce, unless it is being mixed or combined with foreign status gas, or upon order of the Commissioner of CBP. See 19 C.F.R. §146.43(b)(1). In contrast, TPGS must make formal entry for any transfer of foreign status gas outside of the zone and into U.S. customs territory. However, if domestic natural gas loses its identity as domestic merchandise, it will be subject to any duties and entry procedures that apply to foreign status merchandise. The identity of domestic merchandise may be lost if, pursuant to 19 CFR §146.42(c), the district director determines that it cannot be identified by CBP Officers as domestic merchandise, on the basis of either an examination of the articles, or any proof of identity that the party submits. However, if a party is able to identify the domestic merchandise, the merchandise will not lose its domestic status even if it is commingled with other merchandise.
In this instance, the zone operator acknowledged that some mixing may occur. Indeed, our research confirms that “cushion” natural gas is not separately maintained in the storage caverns, and that it mixes freely with domestic status gas. Furthermore, as new injections of gas are made, an equivalent volume of the existing gas is “pushed” out via displacement. The foreign status gas would inevitably be withdrawn from the cavern in this manner, and is likely to have entered U.S. customs territory with the shipments of domestic status gas. As TPGS admits that the foreign and domestic natural gas is fungible and indistinguishable, a physical examination of the merchandise pursuant to 19 CFR §146.42(c) would not be sufficient to distinguish between gas in each zone status. However, if the identity of the domestic status merchandise leaving the zone can be established through the accounting and inventory management procedures submitted by the zone operator, then the domestic status merchandise will retain its identity and domestic status.
The general requirements for inventory control and recordkeeping in an FTZ are provided in 19 CFR §146.21. Under this provision, an FTZ operator is required to maintain inventory control and recordkeeping systems capable of: (1) accounting for all merchandise undergoing operations (listed in the provision) in an FTZ, including the admission into, storage in, and/or removal from an FTZ; (2) producing accurate and timely reports and documents as required by the applicable CBP Regulations; (3) identifying shortages and overages of merchandise in an FTZ in sufficient detail to determine the quantity, description, tariff classification, zone status, and value of the missing or excess merchandise; (4) providing all information necessary to make entry for merchandise transferred to the Customs territory; and (5) providing an audit trail to Customs forms from admission through transfer of merchandise from an FTZ either by zone lot or CBP authorized inventory method.
Under 19 CFR §146.23(a)(1), which provides for the accountability for merchandise in an FTZ, a zone lot number or unique identifier is required to be used to identify and trace merchandise. Under paragraph (b) of this provision, inventory records are required to specify by zone lot or unique identifier the following information: (1) location of the merchandise; (2) zone status of the merchandise; (3) cost or value of the merchandise; (4) beginning balance, cumulative receipts and removals, adjustments, and current balance on hand by date and quantity; (5) destruction of the merchandise; and (6) scrap, waste, and by-products. Under paragraph (a)(2) of this section, fungible merchandise may be identified by an inventory method authorized by CBP which is consistently applied, such as FIFO, and using a unique identifier.
TPGS uses the First In, First Out Method of accounting (i.e., what comes in first is also the first to leave via its accounting method). Each batch of foreign or domestic status natural gas brought into the zone is assigned a unique batch id code number, which identifies the customer and connecting carrier, and assigns a sequential receipt number to the batch. The internal accounting system further specifies, for each transaction, the following information: total volume received; customer's name; country of origin; cost per unit of measure; location of merchandise; zone status; cost or value; beginning balance, cumulative receipts and removals, adjustments, and current balance.
The applicable inventory and recordkeeping procedures submitted by TPGS, however, do not account for the transfer of foreign status gas outside of the zone. Instead, TPGS assumes, for accounting and entry purposes, that the foreign status gas does not leave the cavern, and that only domestic status gas is withdrawn. However, the natural gas is not maintained separately in the pipeline or in the storage cavern. The molecules of the foreign status and domestic status gas mix with each other, making it impossible to keep the foreign status gas contained in the storage cavern while withdrawing only domestic status gas. Thus, TPGS’s inventory method is not consistently applied to all merchandise entering and exiting the FTZ, as required by 19 CFR §146.23(a)(2) and 19 CFR §146.24. TPGS must modify its inventory method to ensure that foreign status merchandise is properly entered for consumption. As TPGS tracks both foreign and domestic natural gas receipts entering the zone, TPGS must ensure that the natural gas designated as foreign are counted as withdrawn in the order that would be dictated by the FIFO system, and make formal entry on those transactions. Accounting for domestic status merchandise that cannot be physically distinguished from commingled foreign status merchandise via an inventory method is consistent with our prior rulings. See HQ 224628 (January 10, 1994) (holding that under the proposed accounting procedure, an airline's receipts of foreign status fuel, identified with a unique identification code showing FTZ status, would be debited using a FIFO inventory method, on the basis of first received in the FTZ); and HQ 210896 (September 5, 1980) (holding that if privileged domestic crude oil and nonprivileged foreign crude oil are mixed in specific quantities and distilled in an FTZ, the resulting products derived in part from domestic crude and in part from foreign crude may retain their zone identity when the quantities derived from each can be established through inventory control and accounting procedures approved by CBP).
HOLDING:
TPGS must account for the transfer of foreign status gas from the zone via its chosen inventory method, and must make formal entry on those transactions involving the transfer of natural gas designated as foreign pursuant to the modified inventory method.
You are to mail this decision to the internal advice requester no later than 60
days from the date of the decision. At that time, the Office of International Trade,
Regulations and Rulings, will make the decision available to CBP personnel and to the
public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of
the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division