OT:RR:CTF:VS H326671 RMC
Ted Murphy
Sidley Austin LLP
1501 K St. NW
Washington, DC 20005
RE: Preferential Tariff Treatment of Jet Fuel Under the U.S.-Korea Free Trade Agreement
Dear Mr. Murphy:
This is in response to your correspondence dated June 10, 2022, in which you request a ruling pursuant to 19 C.F.R. Part 177 on behalf of your client Hyundai Oilbank Co., Ltd. (“HDO”) and its subsidiary Hyundai Chemical Co., Ltd. (“HDC”). Your request concerns whether certain jet fuels qualify as originating goods under the U.S.-Korea Free Trade Agreement (“UKFTA”). If the jet fuels are found to qualify as originating, you also ask whether they may be considered “fungible goods” and whether “first-in, first-out” inventory management may be employed to conserve the originating status of the fuels when they are comingled with non-originating fuels.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision.
FACTS:
HDO and HDC both produce jet fuels in Korea for export to foreign clients. The fuels at issue are of a Kerosene-type known in the industry as Jet A-1, which are produced to certain standardized international specifications for use in aircraft powered by gas-turbine engines. You state that the fuels are classified in 2710.19.16, Harmonized Tariff Schedule of the United States (“HTSUS”), as “Petroleum oils and oils obtained form bituminous minerals, other than crude . . .; Other; Kerosene-type jet fuel.”
The production process for the jet fuels begins with non-originating liquid condensates or crude oil imported into Korea from various countries. HDO and HDC then undertake three steps to produce the finished jet fuel.
First, the crude oil undergoes what you describe as an atmospheric distillation process in crude distillation units (“CDUs”). The purpose of this process is to separate kerosene from the crude oil or liquid condensates. Crude oil is heated to approximately 700-750 degrees Fahrenheit and injected into the lower part of the CDU, where much of it vaporizes. As the vapors rise through the CDU and cool, their components condense back into liquid at different levels in the CDU based on their boiling point. For example, the lighter liquids will condense at higher points in the CDU, whereas the heavier hydrocarbons will condense lower down. These different streams are called distillation cuts or fractions, and include a distillation cut comprised of “straight-run kerosene.”
Second, the “straight-run kerosene” goes through a sweetening stage to remove sulfide compounds and make the kerosene suitable for use as jet fuel. In the case of HDO and HDC, the sweetening process involves [ ] removes sulfur compounds and improves the color, odor, and oxidation.
Third and finally, the finished product is moved into storage tanks. You state that it is common practice in the jet fuel industry to comingle jet fuels from various suppliers in joint storage tanks so long as the comingled jet fuels satisfy the same industry requirements. As a result, the Jet A-1 fuel produced by HDO and HDC may be mixed with other Jet A-1 fuel, possibly of other origins, before exportation to the United States. You propose to account for this using first-in, first-out inventory management.
ISSUES:
Whether the finished jet fuels are originating goods under the UKFTA.
If so, whether the goods qualify as “fungible goods” under the UKFTA.
If so, whether “first-in, first-out” inventory management may be employed to conserve the originating status of the fuels when they are comingled with non-originating Jet A-1 fuels.
LAW AND ANALYSIS:
UKFTA-Originating Status of the Jet Fuel
The requirements for eligibility for preferential tariff treatment under the UKFTA are set forth in General Note (“GN”) 33 of the HTSUS (19 U.S.C. § 1202). GN 33 provides in pertinent part:
For the purposes of this note subject to the provisions of subdivisions (c), (d), (n) and (o) thereof, a good imported ... is eligible for treatment as an originating good of a UKFTA country under the terms of this note if-
The good is wholly obtained or produced entirely in the territory of Korea or of the United States, or both.
The good is produced entirely in the territory of Korea or of the United States, or both, and-
Each of the non-originating materials used in the production of the good undergoes an applicable change in tariff classification specified in subdivision (o) of this note; or
The good otherwise satisfies any applicable regional value-content or other requirements set forth in such subdivision (o); and satisfies all other applicable requirements of this note and of applicable regulations; or
The good is produced entirely in the territory of Korea or of the United States, or both, exclusively from materials described in subdivisions (i) or (ii), above.
As noted above, you state that the finished products incorporate non-originating materials and are classified in 2710.19.16, HTSUS. The applicable product-specific rule of origin in GN 33(o) requires:
A change to any good of heading 2710 from any other good of heading 2710, provided that the good resulting from such change is the product of a chemical reaction, atmospheric distillation or vacuum distillation; or
(B) A change to heading 2710 from any other heading, except from heading
2207.
GN 33(o) further provides:
Heading rule: For purposes of heading 2710, the following processes confer origin:
Atmospheric distillation: A separation process in which petroleum oils are converted, in a distillation tower, into fractions according to boiling point and the vapor then condensed into different liquefied fractions.
Vacuum distillation: Distillation at a pressure below atmospheric but not so low that it would be classed as molecular distillation.
Accordingly, goods classified in heading 2710, HTSUS, may qualify as originating under the UKFTA either by meeting the applicable product-specific rule of origin in GN 33(o) or by meeting the heading rule. Here, you state that the jet fuel will be produced from non-originating materials through atmospheric distillation which, as described above, involves heating the crude oil or liquid condensates in the CDU and separating the various vapors based on boiling point. As this process comports with the description of “atmospheric distillation” in the heading rule for goods classified in heading 2710, the production in Korea will result in UKFTA-originating goods.
UKFTA Fungible Goods
Having established that the finished products qualify as originating, you further inquire as to whether the originating Jet A-1 fuel qualifies as a “fungible good” when it is commingled in storage tanks with non-originating Jet A-1 fuel.
GN 33(j) provides, in pertinent part, that:
The term “fungible good” or fungible material” means a good or material, as the case may be, that is interchangeable with another good or material for commercial purposes and the properties of which are essentially identical to such other good or material.
In determining whether goods are “interchangeable . . . for commercial purposes,” we have examined how they are bought, sold, and used, as well as whether a reasonable buyer in the marketplace would accept the non-originating material in lieu of the originating material. This determination is made on a case-by-case basis considering the nature of the good or material and the use to which it is put. In Headquarters Ruling (“HQ”) H012415, dated August 3, 2010, for example, we concluded that diluents/condensates were “interchangeable . . . for commercial purposes” under the North American Free Trade Agreement fungible materials provision because they both satisfied the same pipeline standards, were capable of carrying bitumen to its destination, and buyers in the marketplace attested that the materials were commercially interchangeable.
In determining whether the properties of the goods or materials are “essentially identical,” we have looked to whether they are chemically distinguishable and meet the same standards. In H012415, we held that the originating and non-originating diluents were “essentially identical” because they were chemically indistinguishable and met the same specifications for use as a diluent to allow bitumen to flow through the pipeline.
Finally, we have considered the role and purpose of the originating and non-originating good or material. In H012415, we held that the both the non-originating and the originating material had the same role and purpose (i.e., as a carrier for the bitumen, rather than as an ingredient for the further processing or manufacturing of bitumen). Furthermore, we found that the two materials had essentially identical levels of density, viscosity, and sulfur content, which were the properties most relevant to the materials’ purpose. Based on all these factors, we held that the originating and non-originating diluent/condensate may be considered a fungible material for purposes of NAFTA inventory management.
Applied here, these factors support a conclusion that the jet fuels are fungible goods for purposes of the UKFTA. The originating and non-originating jet fuels are “interchangeable . . . for commercial purposes” because both are sold and used as fuel for aircraft powered by gas-turbine engines. You state that commingling various Jet A-1 fuels in the same tank is a common industry practice, which further supports a finding of commercial interchangeability. Moreover, the fuels have “properties . . . which are essentially identical” because they both meet the same internationally recognized standards. Finally, the role and purpose of the goods are identical; both are finished goods (i.e., jet fuels) that meet the industry standard for Jet A-1 fuels. Based on the information provided, we find that the originating and non-originating fuels at issue here are fungible goods for purposes of the UKFTA.
Inventory Management
Regarding inventory management, GN 33(j)(i) provides that:
A person claiming that a fungible good or fungible material is an originating good may base the claim either on the physical segregation of the fungible good or fungible material or by using an inventory management method with respect to the fungible good or fungible material. For purposes of this subdivision, the term “inventory management method” means:
averaging,
(B) “last-in, first-out,”
(C) “first-in, first out,” or
(D) any other method that is recognized in the generally accepted accounting principles of the country in which the production is performed (whether Korea or the United States) or otherwise accepted by that country.
Here, your claim that the Korean-produced fuel is an originating good is based on inventory management, rather than physical segregation. Specifically, you propose to use the first-in, first-out method. Because the first-in, first-out method is specifically authorized under GN 33(j)(i)(C), we find that this is an acceptable method of inventory management under the UKFTA. We note, however, that under GN 33(j)(ii), “[a] person selecting an inventory management method under subdivision (j)(i) above for a particular fungible good or material shall continue to use that method for that fungible good or material throughout the fiscal year of such person.”
HOLDING:
Based on the information provided, the jet fuels qualify as originating goods under the UKFTA, are fungible goods with respect to the non-originating jet fuels, and may be accounted for using first-in, first-out inventory management.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter 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