• HQ H053646
• Jul 24, 2009

• Type : • HTSUS :

DRA-4 OT:RR:CTF: H053646 PTM

Port Director U.S. Customs and Border Protection 555 Battery Street San Francisco, California 94111-2316

Attention: Catherine A. Markey – Drawback Chief

Dear Ms. Markey,

I am writing in response to your February 27, 2009 correspondence in which you request Internal Advice pursuant to 19 CFR § 177.11(b)(2) regarding duty drawback on biodiesel under 19 U.S.C. §1313(j)(2). Our response follows.

FACTS Biodiesel is used to power diesel engines. Biodiesel is defined as mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats which conform to ASTM D6751 specifications for use in diesel engines. Biodiesel refers to the pure fuel before blending with diesel fuel. Biodiesel blends are denoted as, "BXX" with "XX" representing the percentage of biodiesel contained in the blend (ie: B20 is 20% biodiesel, 80% petroleum diesel). B100 is the pure or “neat” form of biodiesel.

Enagra, Inc. (“Enagra”) is a corporation that operates as a trader and broker of biodiesel fuel. The product line for these transactions consists of imports and exports of biodiesel produced from raw materials of canola soybean oil, palm oil and other grant crops and animal fats. In its drawback application, Enagra states that the imported biodiesel is “B100” and the exported biodiesel fuel is “B99”, but that both the imported and exported biodiesel meet the ASTM D-6751 standard. The sole purpose of mixing B100 with a small percentage of domestic refined diesel oil is so that the blender of the biodiesel can claim a Federal Excise Tax credit pursuant to section 301 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357. Under this law, biodiesel blenders can claim a credit up to $1 per gallon of biodiesel blended with conventional diesel fuel. While this credit existed, foreign biodiesel producers shipped their biodiesel to the U.S., where a small amount of petroleum diesel was added to the biodiesel. With this “splash” of petroleum added in the U.S., the importer could then claim the excise tax subsidy from the Internal Revenue Service for the entire shipment. The biodiesel would then be reexported, or “dash”, to markets in Europe. The biodiesel blender’s credit for foreign biodiesel producers was recently repealed by the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343 § 203, which disqualified foreign-produced biodiesel that is used or sold for use outside the U.S. from the excise tax credit. This legislation repealing the credit was enacted on October 3, 2008, but the effective date of the repeal of the incentive was May 15, 2008.

Enagra asserts that both the imported B100 biodiesel and the exported B99 are commercially interchangeable and consequently eligible for substitution drawback. In support, they state that the addition of a small amount of diesel fuel, up to 1%, does not change the characteristics of biodiesel: both B99 and B100 are properly classified under HTSUS 3824.90.40 and both meet the ASTM D-6751standard. Enagra contends that this would cause a “hypothetical reasonable purchaser” to accept the exported B99 merchandise in lieu of the imported B100. Additionally, Enagra asserts that the difference in nomenclature between B99 and B100 is used only to ensure that the tax credit is not claimed more than once on the blended biodiesel.

Enagra states that the company imports quantities of biodiesel that are held in storage. Some of the biodiesel is sold domestically, some of it is blended to various biodiesel – petroleum diesel blends such as B20, and some is re-exported to customers in Europe.

The request for commercial interchangeability, privilege applications and drawback claim were sent to the U.S. Customs and Border Protection Laboratory in San Francisco (“CBP Lab”) for its view as to whether the imported biodiesel and exported biodiesel are commercially interchangeable, if the blending of 0.1% of domestic refined diesel oil changes the characteristic of the imported biodiesel, and whether the blending of 0.1% of diesel into the biodiesel constitutes a manufacturing process. Based on the submitted documentation, CBP Lab expressed its view that the imported and exported merchandise were not commercially interchangeable. The CBP Lab reports stated:

This drawback submission should be rejected because: [1] laboratory test results are only available for four of the thirteen imported cargoes; [2] the designated entry numbers for the imported cargoes are not connected to the laboratory and other submitted information of the thirteen imported cargoes; [3] the three laboratory reports for the cargo exported on the M/T Fairchem Steed, and identified respectively as “Customer One, Customer Two, and Customer Three,” are not connected in the

submitted documentation to any of the designated exported bill of lading numbers A1 through A5 for the M/T Fairchem Steed; [4] only approximately three quarters of the laboratory test results were performed on each of the four of the thirteen imported cargoes and all of the exported cargoes; and [5] most of the cargoes failed one or more test result. Enagra disputes each of these contentions in turn. Regarding the CBP Lab’s claim that testing reports were incomplete, Enagra states that the San Francisco drawback office forwarded to CBP Lab the import and export testing results for one drawback claim and a partial set of import test results, plus export test results for the second claim. Enagra states that the drawback claim files themselves contain test result records for every import shipment and export shipment referenced in the claims, and thus the results are not incomplete. Additionally, Enagra notes that the ASTM D-6751 test has been changed repeatedly and that the CBP Lab’s analysis was based on the 2008 version of the ASTM standard, and not against the ASTM D- 6751 standard in place on the date of the testing. The drawback application stated that part numbers of the product are irrelevant as only a miniscule amount of diesel fuel is blended into the biodiesel. Thus, Enagra contends, designations such as “B100” and “B99” have no real bearing on the commercial interchangeability of the product. Additionally, Enagra states that such designations are not part numbers. Rather, they are only used to establish whether a particular batch of biodiesel has been blended to receive the credit, and thus identify it as ineligible to receive the credit more than once.

Regarding value, the application stated that the values of the imported and exported biodiesel are similar. Enagra contends that biodiesel is a commodity, and as such its value is determined by the market for biodiesel at the time it is ordered. Thus, so long as it meets the product specifications demanded by the customer, imported and substituted biodiesel offered in the same market at the same time will command the same relative value. You queried this office as to whether the availability of the excise tax rebate affects the value of the designated B100 imports against the exported B99 merchandise. In other words, since the tax incentive is available for B100 but not B99, does B100 have a significantly higher value than B99?

As to the claim itself, the CBP Drawback Office found additional inconsistencies. It noted inconsistencies between the information on the export invoices, export tanker bills of lading and cargo manifests for cargoes on the export vessel Fairchem Steed. The export invoice number 112XXX-2 for tanker bill of lading numbers A1 and A2 and the corresponding cargo manifest identify the exported merchandise as “PME biodiesel B99.9.” Export invoice 112XXX2, tanker bill of lading number A3 and corresponding cargo manifest indicates the sale and lading of “Palm Methyl Esters.” Export invoice number 112XXX, tanker bill of lading number A4 and A5 indicates the sale and loading of “Fatty Acid Methyl Ester (PME).” Based on this information, the CBP Port in San Francisco determined that the tanker bill of lading numbers A3, A4 and A5 did not contain a B99.9 qualifying cargo. Enagra responds to this charge by noting that the testing laboratory would be unaware of the import entry number for a product, and would not note the entry number on a test report. That notwithstanding, testing reports can be tied to import entries by examining vessel name and voyage number, as well as the date of unlading. Enagra also states that because this is an entry-type 45 claim (substitution unused merchandise) and not an entry-type 41 claim (direct identification), the association of a given import entry with a drawback claim is not strictly essential.

Based on the information provided in the drawback application and the results from CBP lab, the CBP Drawback Office denied drawback for the following reasons: the imported and exported product did not meet recognized industry standard (ASTM D-6751), there was a significant difference in relative value between the imported and exported biodiesel due to the excise tax credit, and the part numbers (B99 and B100) were different.

Your letter requested this office’s position regarding the following issues:

ISSUES:

Is imported B100 commercially interchangeable with exported B99? To make this determination, should the tax credit be considered relevant in determining the relative import and export value?

Does the addition of small amounts of petroleum diesel (1% or less) to pure B100 biodiesel constitute a “manufacturing process”? Can biodiesel B100 and biodiesel B99 be considered for direct identification drawback?

If the addition of less than 1% of conventional diesel to pure biodiesel is not a manufacture, would the entries of biodiesel for purpose of collecting a blender’s credit be eligible for direct identification unused merchandise drawback under 19 U.S.C. §1313(j)(1)?

Did CBP properly deny drawback on Enagra’s shipments of biodiesel?

LAW AND ANALYSIS

The statute that provides for substitution, unused merchandise drawback, 19 U.S.C § 1313(j)(2) does not specifically define what constitutes “commercially interchangeable” products. The CBP Regulations concerning substitution drawback, 19 C.F.R. 191.32 provides:

In determining commercial interchangeability, Customs shall evaluate the critical properties of the substituted merchandise and in that evaluation factors to be considered include, but are not limited to, Governmental and recognized industrial standards, part numbers, tariff classification and value.

Case law offers additional insight into the meaning of commercial interchangeability. In Texport Oil Co. v. United States, 185 F.3d 1291 (Fed. Cir. 1999), the Federal Circuit Court of Appeals (the “CAFC”) held that commercial interchangeability is “an objective, market-based consideration of the primary purpose of the goods in question” and that:

“commercially interchangeable” must be determined objectively from the perspective of a hypothetical reasonable competitor; if a reasonable competitor would accept either the imported or the exported good for its primary commercial purpose, then the goods are “commercially interchangeable” according to 19 U.S.C § 1313(j)(2). Texport Oil Co. v. U.S. at 1295.

Thus, commercial interchangeability is determined using an objective standard. If a hypothetical like-minded buyer would accept either good at the specified price for the purpose intended in an arms length transaction, the goods will be considered commercially interchangeable. In order to determine if either good at the specified price would be acceptable for the purpose intended, the relevant characteristics of the imported goods are compared with those characteristics of the substituted goods. Per the CBP Regulations, the pertinent characteristics include any governmental or industry standards applicable to the good, the tariff classification, part numbers if any, value, and any other characteristics relevant to the good. We now apply these factors to the facts of this case.

Government and Industry Standards

Standards or grades established by the government or industry consensus aid in the determination of commercial interchangeability in that they establish markers by which the product is commoditized and measured against like products for use in the same manner, regardless of manufacturer. Generally, products that meet the same industry accepted standard may be used to produce the same products or utilized for the same purposes. These uses are typically indicated in the standard.

Regarding CBP Lab’s determination that not all the import and export cargoes passed all the tests required to establish conformity with the ASTM D-6751 standard, this is only relevant to the extent that it proves that the imported and exported merchandise are, in fact, different. The instant case involves pure biodiesel that is blended with a miniscule amount of petroleum diesel. There is an applicable standard for B100 that is used in the United States, ASTM D-6751. Europe uses a different standard, EN 14214, which is a more exacting standard and requires additional tests. The EN standard is based on the use of biodiesel as a pure fuel and establishes requirements for minimum oxidation stability, specific cold flow, total un-saturation as measured by iodine value, maximum limits on linolenic acid methyl ester content and maximum limits on polyunsaturated content. The ASTM standard differs from the EN standard in that it contemplates that the pure biodiesel will be blended with petrodiesel in levels of up to 20% by volume, and thus does not require the full range of tests the EN 14214 does. Furthermore, most biodiesel produced in Europe uses rapeseed as its stock, whereas U.S. origin biodiesel uses either soy or palm oil as stock. Due to the differences in fuel stock, palm and soy stock biodiesel have difficulty meeting the EN standard due to an exacting iodine requirement. Enagra states that European customers realize that biodiesel derived from soy or palm oil cannot meet the EN 14214 standard due to the iodine requirement, so they typically order biodiesel that meets the EN 14214 standard but with a waiver on the iodine component of the standard. Enagra also notes that the EN 14214 standard applies only to pure, neat biodiesel fuel, but that most biodiesel is most commonly blended at lower levels such as B20. When mixed at those levels, there does not appear to be performance differences between the rapeseed-stock biodiesel and biodiesel derived from soy or palm-stock. Consequently, purchasers do not differentiate based on the feed-stock of a particular batch of biodiesel.

Thus, customers do require the biodiesel to meet some of the specifications contained in both the EN 14214 and ASTM D-6751 standard, but not all of the standards. B99 and B100 are essentially identical products, different only to the extent of the miniscule amount of petroleum diesel added to the mixture. Industry practice is to mix as little as one tenth of one percent of petroleum diesel into neat B100 fuel, so the resulting B99 is different only by 0.01% due to the petroleum diesel added. Most major engine companies have stated formally that the use of blends up to B20 will not void their parts and workmanship warranties. Most engine companies have already specified that the biodiesel must meet ASTM D-6751 as a condition, while others are still in the process of adopting that standard. The petroleum diesel in a biodiesel-petroleum diesel blend must meet the applicable standard for petroleum diesel fuel, ASTM D-975. Thus, if biodiesel is intended to be blended, either the B99 or B100 would be suitable so long as it met the tests required by the customer. Differences in test results, then, are primarily due to differences in the ASTM D-6751 and EN 14214 standards and not to actual differences in the product itself.

In a letter dated November 21, 2008, Enagra addressed the CBP Port of San Francisco’s Drawback Office request to address the discrepancy in test results for the imported merchandise unladen from the “Golden Charlotte” and the exported merchandise on the “Fairchem Steed.” Enagra notes that the analysis for the imported merchandise is specific to test methods for the U.S. ASTM D-6751 standard in accordance with customer specifications, and the analysis for the exported merchandise is specific to test methods required for the EN-14214 standard in accordance with customer specifications.

Additionally, Enagra addressed the concern that the merchandise did not appear to match established standards in respect to two qualities: distillation levels and carbon residue. Regarding the distillation test, Enagra notes that no distillation test was performed on the exported merchandise. Enagra explains that this test was not performed as other tests were performed on the exported goods, and those tests showed the presence and levels of certain types of constituents that indicated that the product had undergone the requisite level of distillation. Regarding the Carbon Residue test, the ASTM standard for biodiesel allows a maximum carbon residue of 0.05% by weight, which is the standard that was applied to the designated merchandise. The exported goods were tested to the EN-14214 which requires the goods to have a carbon residue of 0.3% or less. The actual carbon level reported on the exported goods was 0.15%, which fails the ASTM standard but meets the EN standard. Enagra reports that the assayer stopped the carbon residue test after the level had dropped below 0.3%, as there was no need to continue the test once it met the EN-14214 level. We do note that the cargo did not meet the ASTM standard for carbon residue.

The test for sulphur on both the import and export showed less than 1% sulphur by weight. The imported biodiesel had carbon residue of 0.05% by weight while the exported biodiesel had 0.15% by weight. However, there is no evidence that those differences affected the use of biodiesel. That is, the intended purpose of both was to be a blend stock for motor-fuel grades of biodiesel.

In Texport Oil, the exported substituted goods had not been given a complete panel of tests, and CBP argued that, absent full testing on both the imported and exported merchandise, the claimant could not demonstrate commercial interchangeability. The Court of Appeals for the Federal Circuit rejected that argument, holding that where full testing is not performed, commercial interchangeability could still be established by examining commercial acceptance and invoice descriptions. Here, the invoice descriptions are similar for the imports and the exports.

Part Numbers

The CBP Port of San Francisco indicated that the part numbers for this transaction are B99 and B100. We find that these designations are not part numbers. Rather, they are designations used to show the percentage amount of biodiesel in a given batch. B100 is pure biodiesel. B99 biodiesel indicates that a tiny percentage of diesel fuel has been added in order to receive a blender’s excise tax credit, and consequently is not eligible to receive the credit again. Biodiesel is a bulk commodity and consequently does not use part numbers or product code numbers. Since part numbers are inapplicable to the subject merchandise, it is not useful in the analysis of commercial interchangeability.

Tariff Classification

The entry summary lists the imported product under Harmonized Tariff Schedule of the United States (HTSUS) line 3824.90.4020, which provides for prepared binders for foundry molds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included: Other: Fatty substances of animal or vegetable origin and mixtures thereof: Mixtures of fatty acid esters. The exported biodiesel also falls under 3824.90.4020. Because the tariff classifications of the imported and exported product are identical, this criterion is deemed to have been met. Value

Goods that are commercially interchangeable generally have similar values when sold at the same place, at the same time, to like buyers from like sellers. Enagra contends that the imported B100 and exported B99, if offered in the same market at the same time will command the same relative value. You have inquired whether the blender’s credit is relevant in determining the relative value of the imported B100 and the exported B99. The blender’s credit ranges from $0.50 to $1.00 per gallon depending on certain conditions. This translates to a benefit of $150-$300 per metric ton. The instant case involves a drawback claim on 10,926,902 gallons of exported B99. Presumably, the tax credit was claimed on this export and the blender received between $5,463,451.00 and $10,926,902.00 on this particular batch of B99. By logical extension, this would suggest that U.S. biodiesel exporters could price the exported B99 at levels lower than the pre-credit B100, or that B100 is much more valuable than B99 as B99 is no longer eligible to receive the credit.

The documentation provided appears to refute that notion. For example, Sales Contract No. SCXXXXX42 on imported Palm Methyl Esthers lists a unit price of $689.94 per metric ton. On the export side of the transaction, Enagra invoice No. 11XXXX-2 lists a unit price of $687.98 per metric ton of Palm Methyl Esters. This represents a mere 0.285 % difference, well within the percentage change allowed to account for differences in prevailing market conditions. Due to similarity in declared value, we find that the value criterion is satisfied for this transaction.

Manufacture or Production

Although this particular claim was made under 19 U.S.C. §1313(j)(2) and is not a manufacturing drawback claim, you have requested clarification as to whether the blending of 0.1% of conventional diesel to the B100 constitutes a manufacture or production. “Manufacture or production” is defined in 19 CFR 191.2(q) as

A process, including, but not limited to, an assembly, by which merchandise is made into a new and different article having a distinctive “name, character or use:” or A process, including, but not limited to, an assembly, by which merchandise is made fit for a particular use even though it does not meet the requirements of paragraph (q)(1) of this section

B99 and B100 are virtually indistinguishable products. Although they have a different designation, they still share the same name: Biodiesel. The two products have the same use: to power diesel engines, or to mix further with conventional diesel to formulate different blends of biodiesel such as B20. Finally, the character of the product is essentially identical as they are both methyl esters classified under the same HTSUS heading. Moreover, mixing the miniscule amount of conventional diesel with biodiesel does not constitute a process that makes the merchandise fit for a particular use as it changes nothing about the products suitability to power diesel engines or mix at lower level blends. Since there is no material change in name, character or use, and since it is not a process that makes merchandise fit for a particular use, we find that mixing 0.1% of conventional diesel with B100 is not a manufacture or production. Consequently, similar cases filed under 19 U.S.C. §1313(a) (direct identification manufacturing drawback—entry type 41) should be denied.

Direct Identification Unused Merchandise Drawback

19 U.S.C. §1313(j)(1) provides for direct identification drawback. That provision provides for drawback when merchandise is exported in an unused condition. Although the term “use” is not defined in either the statute or implementing regulation, Customs Service Decision 81-222 found that an article is “used” when it is employed for the purpose for which it was manufactured or intended. Biodiesel is manufactured to power diesel engines, so this would suggest that it has not been used. Additionally, 19 U.S.C. §1313(j)(3) states:

The performing of any operation or combination of operations (including, but not limited to…blending…), not amounting to manufacture or production for drawback purposes under the preceding provisions of this section on…(B) the commercially interchangeable merchandise in cases to which paragraph(2) applies, shall not be treated as a use of that merchandise for purposes of applying paragraph (1)(B) or (2)(C). (emphasis added)

Accordingly, we find that blending a small amount of petroleum diesel with pure biodiesel, which does not amount to a manufacture or production, does not render it ineligible for Direct Identification Unused Merchandise Drawback.

HOLDING:

Consistent with the analysis above, we find that B100 is commercially interchangeable with B99. We find that the addition of 0.1% of conventional diesel does not constitute a manufacturing process. Finally, the addition of 0.1% of conventional diesel to biodiesel is not a use and does not disqualify it for Direct Identification Unused Merchandise Drawback. For these reasons, we find that Enagra properly satisfied the requirements for substitution, unused merchandise drawback.

You are to mail this decision to counsel for the importer no later than 60 days from the date of this letter.  On that date, the Office of International Trade will make the decision available to CBP personnel, and to the public on the Customs 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