PRO-2-02 CO:R:C:E 221059 C

Area Director of Customs
U.S. Customs Service
New York Seaport

RE: Protest and Application for Further Review No. 1001-3- 009097; warehouse; shortage of distilled spirits; 19 CFR 158.3; 19 CFR 159.4; Manual Supplement 3260-03

Dear Sir:

This responds to the referenced protest, approved for further review on November 3, 1988. The protest pertains to several entries against which increased duties were assessed in the amount of $112,288.17 for various violations described in the protest as follows:

1. The importer failed to file a CF 5931 with Customs Quantity Control for merchandise found short, as required by 19 CFR 158.3;

2. the importer failed to provide proof of transportation and/or exportation for various uncertified CF 7512's, as required under the entry bond;

3. the importer failed to file certificates of use for various uncertified CF 7506's (vessel supplies), as required under the bond;

4. the importer failed to provide withdrawal documentation and proof of payment and/or exportation for merchandise removed from the warehouse but not accounted for, as required under the bond.

The protest, as submitted, lacks a complete, comprehensive explanation of the facts. Consequently, our understanding of the scenario in question is set forth below with reservation. For the purposes of this protest, we will treat the following scenario as accurate. Our response is formulated on this basis.

The protestant imported and entered for warehouse distilled spirits in bottle containers packed in cases. The protestant withdrew the merchandise for consumption, as well as for other purposes. Apparently, a shortage of merchandise was evident. The protestant did not file certain documents, as desired/expected by Customs. Consequently, Customs imposed liability against protestant for increased duty and taxes. Protestant asserts that it is not so liable because its liability is limited to the quantity of merchandise withdrawn for consumption, and, therefore, it is not liable for duty and taxes on any measure of shortage that occurred while the merchandise was in the warehouse. Customs asserts that the merchandise in question does not qualify for the favored treatment urged by protestant, and that, therefore, both protestant, as importer, and the warehouse proprietor are liable for shortages under their respective bonds.

The issue presented appears to focus on a shortage of distilled spirits occurring while the spirits were in the warehouse. Protestant and Customs disagree over how such shortage should be treated with respect to duty and tax liability. Protestant stated the following in its protest submission: "We protest the liquidation of this entry with the assessment of duty and internal revenue tax on four cases of distilled spirits that were not entered or withdrawn for consumption." You concluded your remarks on the protest by stating that "Customs acted well within its authority in assessing increased duties and taxes for the importer's failure to adhere to 19 CFR 158.3 as well as the terms of his entry bond." Section 158.3 of the Customs Regulations (CR) provides for an allowance in the assessment of duties for lost or missing packages. The regulation requires the filing of a CF 5931. It is unknown how the shortage, or loss, occurred.

The protestant cites Customs Manual Supplement 3260-03 (dated April 16, 1980), CSD 81-82, and Customs Regulation 159.4(a) to support its position. Essentially, protestant urges that distilled spirits are accorded favored treatment under the regulations, such that an importer of distilled spirits is not liable for shortages that occur while the spirits are in the warehouse. You appear not to disagree with the substance of the above authorities, but, rather, assert that they apply only to distilled spirits packed in bulk containers, or "bulk distilled spirits," not to protestant's non-bulk, bottled and cased liquor.

We agree with protestant's application of the above authorities to the scenario of this case. Customs, through the Secretary of the Treasury, promulgated {159.4(a) of the Customs Regulations. It provides, in relevant part, that duties and internal-revenue taxes on alcoholic beverages provided for in headings 2207 and 2208 of the Harmonized Tariff Schedule of the United States (HTS) "shall be collected only on the number of proof gallons and fractional parts thereof entered or withdrawn for consumption." 19 CFR 159.4(a). (The bottled distilled spirits that are subject of the instant case are classifiable under heading 2208.) No distinction is made between bulk and non-bulk spirits. Yet, the regulation goes on to specifically address "distilled spirits in bulk" that are transferred to bonded distilled spirits plants. Based on the structure and language of the regulation, it is clear that the foregoing provision (pertaining to alcoholic beverages under headings 2207 and 2208, HTS) is not limited to bulk spirits.

Section 159.4(a) was promulgated to implement what is now Additional U.S. Note 1, Chapter 22, Harmonized Tariff Schedule of the United States (HTS) (Note 1). (Under the Tariff Schedules of the United States (TSUS), Headnote 3, Part 12, Schedule 1.) Note 1, in part, provides that duty will be assessed against the quantity of bulk spirits withdrawn from Customs custody. Both you and protestant cite this provision in support of your respective positions. Yet, this provision applies only to merchandise imported in bulk containers and transferred in such containers (or by pipeline) to bonded distilled spirits plants. This situation is not applicable to the instant case. However, Note 1, again in part, provides that duties imposed on covered products are imposed only on the quantities subject to internal- revenue taxes. Internal-revenue taxes are assessed against distilled spirits that are subject to such taxes upon withdrawal of the spirits for consumption. Thus, duties, like taxes, above, can be assessed against no more than the quantity of spirits withdrawn. This comports with {159.4(a), as above.

In 1980, when Supplement 3260-03 was issued, {159.4(a) was, in essential part, the same. The supplement, applying {159.4(a), stated the following:

Distilled spirits are treated differently from any other imported commodity in that duties and taxes are assessed only on the quantity entered or withdrawn for consumption (19 CFR 159.4(a)). Since an importer of distilled spirits entered for warehouse is liable for any duties and taxes on the amount withdrawn therefrom, he is not liable for any duties and taxes on shortages that occur while the spirits are in the warehouse.

A warehouse proprietor, on the other hand, is responsible for shortages of distilled spirits (as he is for shortages of any merchandise) which occur while the spirits are in his warehouse. Liquidated damages for such shortages may be assessed against the proprietor under 19 U.S.C. 1555 and conditions . . . of [the proprietor's warehouse bond]. Shortages of bottled distilled spirits are relatively easy to ascertain and measure through physical examination of the shipment. Shortages of bulk distilled spirits require quantity determination by gauging. 'Bulk distilled spirits', for the purpose of this issuance, means distilled spirits in a container having a capacity in excess of 1 wine gallon.

Again, in quoted paragraphs 1 and 2 above, no distinction is made between bulk and non-bulk distilled spirits. If importers were deemed liable for non-bulk shortages, that information would have been set forth in paragraph 1. Moreover, the underlined language in the third quoted paragraph further demonstrates Customs (1980) position that non-bulk spirits qualified for the same treatment as bulk spirits under the law and regulations to the extent that liability accrued on no more than the quantity withdrawn for consumption, for surely if the importer were liable for shortages occurring to non-bulk spirits, as opposed to bulk spirits, as you contend, the supplement would have recommended the procedures for such shortages for the importer's use, not just for the proprietor's use. The language of paragraph 3 regarding these procedures, for both bottled and bulk distilled spirits, is addressed only to the proprietor. This paragraph, considered together with paragraphs 1 and 2, clearly supports the notion that importers are not liable for either bulk or non-bulk shortages.

It is evident from the above quoted paragraphs that the hereinbefore submitted interpretation of {159.4(a), as well as that urged by protestant, is harmonious with Customs interpretation of the regulation as far back as 1980.

In CSD 81-82, Customs recognized the correctness of Supplement 3260-03. Although the ruling did not contain reference to {159.4(a), it applied Headnote 3, Part 12, Schedule 1, TSUS, what is now Note 1. Customs therein stated the following:

By virtue of the act of June 8, 1948, Public Law 612, the substance of which is set forth in headnote 3, part 12, schedule 1, . . . (TSUS) (19 U.S.C. 1202), distilled spirits have been given a favored position with respect to payment of duty. Duty is payable only on the quantity withdrawn from the warehouse for consumption. . . . Thus, in the case of distilled spirits, the obligation of an importer to pay duty does not accrue on importation. As a statutory exception to 19 CFR 141.1, an importer of distilled spirits is not liable for the payment of duty on spirits that are missing from the warehouse. However, there is a loss to the Government, and that loss is covered by the bond of the warehouse proprietor.

Cust. Bull., Vol. 15, p. 901, 903 (1981).

Again, in CSD 81-82, Customs did not distinguish distilled spirits from bulk distilled spirits; its statement applied to both, in affirmance of Supplement 3260-03. Moreover, there is no such distinction evident in the language of Public Law 612 (June 8, 1948, 62 Stat. 344, 80th Cong. 2d Sess).

Based on the foregoing, we conclude that distilled spirits of the kind in question, classifiable under heading 2208.30.60, HTS (and classified in 1983 under the predecessor to 2208.30.60, item 169.2100, TSUS), are subject to {159.4(a), CR. Qualifying distilled spirits that are subject to internal-revenue taxes and withdrawn for consumption are dutiable upon no more than the quantity withdrawn. The importer of qualifying distilled spirits, in either bulk or non-bulk form, is not liable for the payment of duty and taxes on shortages that occur in the warehouse. Where there is a loss to the Government, the warehouse proprietor's bond secures such loss.

You are instructed to apply our conclusion to the facts of this case, review the status of alleged violations and increased duty and tax assessments, and make appropriate modifications. Please notify protestant of this decision, and of your final determinations based on this decision, as above.

Sincerely,

John Durant, Director
Commercial Rulings Division