WAR-2-01-WAR-5-RR:CR:DR
228563 IOR
Jonathan Fee, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
303 Peachtree St., NE
Suite 2980
Atlanta, GA 30308
Re: Warehouse transfers; application for transfers between integrated bonded warehouses; 19 CFR 144.34(c); 19 CFR 113.63
Dear Mr. Fee:
We are in receipt of your ruling request dated August 23, 1999 on behalf of International Shoppes, Inc. (“ISI”) and ISATA LLC (“ISATA”), regarding their eligibility for application under 19 CFR 144.34(c). Our response follows a November 28, 2000 meeting between staff from this office, a representative of the Office of Field Operations, and you and your client.
FACTS:
The following facts are based on statements made in your submission and at the meeting. ISI is an importer and bonded warehouse proprietor that currently operates duty-free stores at JFK International Airport. Each of its facilities is leased by ISI from the airport authority, and has been approved for duty-free store operations by Customs. ISI maintains a continuous importation bond and a warehouse proprietor’s bond. ISI is the importer of record of merchandise carried in the stores, and also purchases duty-paid imported merchandise and domestic merchandise (including tobacco products and alcoholic beverages) from vendors in the U.S. To move merchandise among its facilities, ISI maintains a fleet of vehicles and operates as a licensed Customs cartman. ISI maintains a centralized inventory control and recordkeeping system for its warehoused merchandise.
ISI is owned by a small group of stockholders. Through their ownership of ISI, they own 80 percent of ISATA. The officers of ISI and ISATA are the same individuals. The entities and their equity holders wish to transfer the overall business from ISI to ISATA gradually over a period of seven years.
Over this seven year transition period, ISI and ISATA plan that the warehouse and sales activities will gradually be assumed by ISATA. ISI and ISATA anticipate that ISATA will first assume operations in ISI’s present store locations in JFK Terminal One, the American terminal, and in ISI’s liquor and cigarette store locations in JFK Terminal Four. Prior to occupying these premises, and in all future individual location transitions over seven years, ISATA will obtain the necessary bond and will apply to Customs for approval of the facilities being turned over, which facilities will have already been approved as an ISI location.
ISI will remain the sole importer of record throughout the transition period. Warehouse entries will be made by ISI, and withdrawals will also be made by ISI under the blanket permit and sales ticket procedures afforded duty-free stores under 19 CFR 19.6(d) and 144.37(h). Either entity will record sales of the duty-free merchandise delivered directly from bonded locations to individuals departing the Customs territory of the U.S. for exportation (or to persons or organizations for use as specified in 19 CFR part 148, subpart I). Throughout the seven year transition, all physical transfers of merchandise between ISI facilities and ISATA facilities will be recorded on ISI’s centralized inventory control system in accordance with the requirements of 19 CFR 144.34(c)(4). During the transition period, ISI will continue to maintain its centralized inventory control and recordkeeping systems for all merchandise in both ISI and ISATA facilities. At the end of the seven-year transition period, it is contemplated that ISATA will assume the role of importer of record, and will assume responsibility for inventory control and recordkeeping, and ISI will no longer conduct any importing or warehousing activity. With respect to responsibility for the merchandise, it is stated that ISI will remain liable on its continuous importation bond if ever any merchandise were not properly exported and both ISI and ISATA will be liable under their respective warehouse proprietor’s bonds for compliance with all Customs requirements.
On March 8, 1999 ISI and ISATA submitted a written application to the Area Director at JFK requesting approval to operate using the transfer procedure permitted by 19 CFR 144.34(c). The application set forth the contemplated operations as they are described above. The application is asserted to have contained all required certifications and signatures, except that of ISATA’s surety because ISATA has not obtained a bond or become a proprietor of a warehouse at this time. Counsel for ISI and ISATA has represented that if required, ISATA will request and obtain approval to become a duty free store operator and obtain a bond, prior to submitting another application.
On May 27, 1999, the Area Director issued a written response declining to officially respond to the application on the grounds that 1) ISATA is not an approved duty free store operator and does not qualify to apply for the alternate transfer procedure, and 2) the alternate transfer procedure under 19 CFR 144.34(c) applies only to a single importer operating multiple duty free stores and the alternate transfer procedure would not apply to transfers of merchandise between warehouses and stores operated by ISI and ISATA.
ISI and ISATA request a ruling that upon proper application, ISI and ISATA are eligible to apply for the transfer procedure permitted by 19 CFR 144.34(c).
ISSUE:
Whether under the facts set forth above, ISI and ISATA, two separate legal entities, are eligible to apply for the alternate transfer procedure set forth in 19 CFR 144.34(c).
LAW AND ANALYSIS:
The regulation in issue and under which ISI and ISATA submitted an application is Customs Regulation 144.34(c) (19 CFR 144.34(c)). Section 144.34 (a) provides for transferring merchandise from one bonded warehouse to another at the same port, under the supervision of the port director. The port director may require the filing of a rewarehouse entry if determined necessary for proper control of the merchandise. Section 144.34(b) provides for the withdrawal of merchandise from a warehouse at one port, transportation and entry for rewarehouse at a different port. Section 144.34(c) was added to the regulation by T.D. 97-19, 62 FR 15840, in 1997, and provides as follows:
(c) Transfers between integrated bonded warehouses—(1) Eligibility. (i) Only an importer who will transfer warehoused merchandise among Class 2 and 9 warehouses listed on the application in paragraph (c)(2) of this section is eligible to participate.
(ii) The importer must have a centralized inventory control system that shows the location of all of the warehoused merchandise at all times, including merchandise in transit.
(iii) The importer and its surety must sign the application. If the application to use this alternative procedure is approved by the appropriate port director, the importer's entry bond containing the conditions provided under § 113.62 of this chapter will continue to attach to any merchandise transferred under these alternative procedures.
(iv) Each proprietor of a warehouse listed on the application and each surety who underwrites that proprietor's custodial bond coverage under § 113.63 of this chapter shall sign the application.
(2) Application. Application must be made in writing to the port director of the port in which the applicant's centralized inventory control system exists, with copies to all affected port directors, for exemptions from the requirements for transfer of merchandise from one bonded warehouse to another set forth in paragraphs (a) and (b) of this section. The application must list all bonded warehouses to and from which the merchandise may be transferred; all such warehouses must be covered by the same centralized inventory control system. Only blanket exemption requests will be considered; exemptions will not be considered for individual transfers. The application may be in letter form, signed by all participants, and contain a certification to the port director by the applicant that he maintains accounting records, documents and financial statements and reports that adequately support Customs activities.
(3) Operation. An importer who receives approval to transfer merchandise between bonded warehouses in accordance with the provisions of this section may, after entry into the first warehouse, transfer that merchandise to any other warehouse without filing a withdrawal from warehouse or a rewarehouse entry. The warehoused merchandise will be treated as though it remains in the first warehouse so long as the actual location of the merchandise at all times is recorded as provided under the provisions of this section.
(4) Inventory control requirements. The records required to be maintained must include a centralized inventory control system and supporting documentation which meets the following requirements:
(i) Provide Customs upon demand with the proper on-hand balance of each inventory item in each warehouse facility and each storage location within each warehouse;
(ii)Provide Customs upon demand with the proper on-hand balance for each open warehouse entry and the actual quantity in each warehouse facility;
(iii) If an alternative inventory system has been approved, provide Customs upon demand with the proper on-hand balance for each unique identifier and the quantity related to each open warehouse entry and the quantity in each warehouse facility;
(iv) Maintain documentation for all intracompany movements, including authorizations for the movement, shipping documents and receiving reports. These documents must show the appropriate warehouse entry number or unique identifier, the description and quantity of the merchandise transferred, and must be properly authorized and signed evidencing shipment from and delivery to each location; (v) Maintain a consolidated permit file folder at the location where the merchandise was originally warehoused. The consolidated permit file folder must meet the requirements of § 19.12(d)(4) of this chapter regardless of the warehouse facility in which the action occurred. Documentation for all intracompany movements, including authorizations for movement, shipping documents, receiving reports, as well as documentation showing ultimate disposition of the merchandise must be filed in the consolidated permit file folder within seven business days;
(vi) Maintain a subordinate permit file at all intracompany locations where merchandise is transferred containing copies of documentation required by § 19.12(d)(4) of this chapter and by paragraph (c)(3)(v) of this section relating to merchandise quantities transferred to the location. A copy of all documents in the subordinate permit file folder must be filed in the consolidated permit file folder within seven business days; no exceptions will be granted to this requirement. When the final withdrawal is made on the respective entry, the subordinate permit file shall be considered closed and filed at the intracompany location to which the merchandise was transferred; and
(vii) File the withdrawal from Customs custody at the original warehouse location at which the merchandise was entered.
(5) Waiver of permit file folder requirements. The permit file folder requirements of paragraphs (c)(3)(v) and (c)(3)(vi) of this section may be waived if the proprietor's recordkeeping and inventory control system qualifies under the requirements of § 19.12(d)(4)(iii) of this chapter at all locations where bonded merchandise is stored.
(6) Procedure not available—(i) Liens. The transfer procedures permitted under paragraph (c) of this section shall not be available for merchandise with respect to which Customs is notified of the existence of a lien, as prescribed in § 141.112 of this chapter (see 19 U.S.C. 1564), until proof shall be produced at the original warehouse location that the lien has been satisfied or discharged.
(ii) Restricted merchandise. With the exception of alcohol and tobacco products, merchandise subject to a restriction on release such as covered by a licensing, quota or visa requirement, is not eligible.
The background in the notice of proposed rulemaking, 61 FR 28808 (June 6, 1996), which proposed the language in (c) explained the provision and proposed change as follows:
Currently, the procedure to transfer warehoused merchandise requires the transfer to be done by Customs bonded cartage operators or carriers. The transfer in the same port may require a rewarehouse entry into the destination warehouse when both warehouses are within the same port. A rewarehouse entry is required if the transfer is between warehouses in different ports. The current procedure will be retained in 144.34 (a) and (b).
An alternative procedure for merchandise in Class 2 or Class 9 warehouses is proposed in a new paragraph (c) to 144.34. Under the alternative, the merchandise would be treated as remaining in the warehouse in which it was originally entered for warehouse. The importer and the proprietor of that warehouse would be liable for duties and for the proprietor’s custodial responsibilities, respectively. To ensure that the parties in interest are fully aware of their responsibilities, the proposal requires the importer, all proprietors, and their sureties to sign the application to use the alternative procedure. Section 113.63 would be revised by adding new paragraphs (a)(4) and (b)(4), and by revising paragraph (d), in order to secure the obligors’ custodial performance here.
The basic custodial bond conditions are set forth in 19 CFR 113.63, in pertinent part:
(a) Receipt of merchandise. The principal agrees:
(1) To operate as a custodian of any bonded merchandise received, including merchandise collected for transport to his facility, and to comply with all regulations regarding the receipt, carriage, safekeeping, and disposition of such merchandise;…
(3) To maintain all records required by regulations relating to merchandise received into bond, and to produce the records upon demand by an authorized Customs officer;
(4) If authorized to use the alternative transfer procedure set forth in § 144.34(c) of this chapter, to operate as constructive custodian for all merchandise transferred under those procedures, thereby assuming primary responsibility for the continued proper custody of the merchandise notwithstanding its geographical location;…
(b) Carriage and Safekeeping of Merchandise. The principal agrees:
(1) If a bonded carrier, to use only authorized means of conveyance;
(2) To keep safe any merchandise placed in its custody including, when approved by Customs, repacking and transferring such merchandise when necessary for its safety or preservation;
(3) To comply with Customs Regulations relating to the handling of bonded merchandise; and
(4) If authorized to use the alternative transfer procedure set forth in § 144.34(c) of this chapter, to keep safe any merchandise so transferred.
The language in the regulation at issue, 144.34(c), allows for ISI and ISATA to apply for transfers between integrated bonded warehouses, as set forth in the regulation. The language does not limit application of the regulation to one single company, by virtue of the reference to “each proprietor of a warehouse” in (c)(1)(iv). The term “proprietor” is not defined in the regulations. A “proprietor” is defined in the dictionary as an owner, having legal title to something, and an “owner or owner-manager of a business or other institution.” American Heritage Dictionary 994 (2d College ed., 1982). By the reference to “each” proprietor, the language takes into consideration that the warehouses included on the application may not always be owned by the same legal entity or entities. Similarly, the notice of proposed rulemaking also refers to multiple proprietors by use of the term “all proprietors.”
The revenue of the U.S. is first protected by the operation of the transfer procedure and the importer’s importation and entry bond. Paragraph (3) of section 144.34(c) provides that any merchandise transferred in accordance with the provisions of the regulation shall be treated as though it remains in the first warehouse. In turn paragraph (c)(1)(iii), provides that the importer’s entry bond continues to attach to merchandise transferred under the procedures set forth in the regulation. Second, in addition to the revenue being protected under the entry bond, the revenue is protected under the custodial bond of each warehouse proprietor to whose warehouse merchandise is transferred, as well as the custodial bond of the importer from whose warehouse the merchandise was transferred. See 19 CFR 113.63. In accordance with 19 CFR 19.2(c), all Class 2 and 9 warehouse proprietors must execute a bond containing the conditions set fort in section 113.63. Any application for this warehouse transfer procedure should be clear that the importer and its surety understand that they remain liable and responsible for all warehoused merchandise regardless of the location of the merchandise.
Customs ability to conduct spot checks is ensured by the requirement of a centralized inventory control system set forth in (c)(1)(ii) and the supporting documentation required from each warehouse and for each transfer of merchandise, as set forth in (c)(4)(i) through (vii).
As a result of the inventory control and bond requirements, provided that those requirements are met as well as all others set forth in section 144.34(c), an applicant for the transfer procedure is not precluded from applying for the procedure on the sole basis that the proprietors of the subject warehouses are separate legal entities from the importer.
A second issue raised is whether a party identified as a warehouse proprietor on the application must be an existing warehouse proprietor before the application for the transfer procedure is accepted. We find that the regulation is applicable to parties that are either existing approved warehouse proprietors, or who have been approved as a warehouse proprietor and have executed a bond, but may not yet be operating a warehouse. Nothing in the regulation requires Customs to approve a prospective warehouse proprietor for the transfer application.
The determination of whether the requirements set forth in section 144.34(c) are met and thus the decision of whether to grant or deny the transfer application, is within the discretion of the port director.
HOLDING:
Under the facts set forth herein, ISI and ISATA, two separate legal entities, are eligible to apply for the alternate transfer procedure set forth in 19 CFR 144.34(c).
Sincerely,
John Durant
Director, Commercial
Rulings Division