DRA-4-CO:R:C:E 224633 AJS

Regional Director, Commercial Operations
U.S. Customs Service
South Central Region
423 Canal Street
New Orleans, LA 70130

RE: Request for Internal Advice; 19 U.S.C. 1313(j)(2); "fungibility"; C.S.D. 85-52; petroleum; laboratory reports; 19 CFR 191.2(l); Guess? Inc. v. U.S.; Fortunato v. Ford Motor Co.; Federal Rule of Evidence 803(6); U.S. v. Blackburn.

Dear Regional Director:

This is in reply to your request of April 5, 1993, for Internal Advice (IA) concerning the fungibility of petroleum in various substitution same condition (SSC) drawback claims.


Your established procedure for the subject SSC drawback cases has been to refer these claims to the Customs Laboratory for technical advice regarding fungibility. Utilizing chemical analysis certificates supplied by the drawback claimant on the imported and exported shipments, the Customs Laboratory has rendered reports on each claim. The certificates of analysis have not always been from an independent, Customs approved laboratory. In some cases, the drawback claimant has used its own company laboratories to sample and analyze the shipments, and submitted its own internal report as evidence of fungibility. Your office has rejected these reports and the claims on which they are based.


Whether an internal laboratory report submitted by the drawback claimant is acceptable as evidence of fungibility for purposes of 19 U.S.C. 1313(j)(2).



Section 313(j)(2) of the Tariff Act of 1930, as amended (19 U.S.C. 1313(j)(2)), provides that for SSC drawback purposes, the merchandise substituted for exportation must be fungible with the duty-paid merchandise and in the same condition as was the imported merchandise at the time of importation.

Fungibility is defined in section 191.2(l), Customs Regulations, (19 CFR 191.2(l)), as "merchandise which for commercial purposes is identical and interchangeable in all situations." Customs has interpreted fungibility as not requiring that merchandise be precisely identical; identical for "commercial purposes" allows some slight differences. The key is complete commercial interchangeability. As stated in C.S.D. 85- 52: "[t]he commercial world consists of buyers, sellers, comminglers, government agencies and others. If these groups treat articles or merchandise as fungible or commercially identical, the articles or merchandise are fungible . . . When two or more units of apparently identical properties are treated differently by the commercial world for any reason, they are not fungible." 19 Cust. Bull. 605, 607 (1985). Interchangeability means that the article, merchandise, or good is treated as identical for commercial purposes, or in a commercial context, by those entities that commonly deal in such articles, merchandise, or goods.

The courts have recently addressed the question of fungibility in Guess? Inc. v. United States, 752 F. Supp. 463 (Ct. Int'l Trade (CIT) 1990), 24 Cust. Bull. No. 51, 26 (December 19, 1990), vacated and remanded, No. 1145 (Court of Appeals for the Federal Circuit (CAFC) September 11, 1991), 26 Cust. Bull. No. 10, 30 (March 4, 1992); See also Tandom Corp. v. United States, Slip. Op. 92-197 (CIT, October 29, 1992). The CAFC essentially agreed with the interpretation of the term "fungible" as expressed by the CIT, but remanded for procedural reasons. In Guess?, the plaintiff argued that the fungibility of goods in a general or contractual sense should suffice to bring them within the coverage of 19 U.S.C. 1313(j)(2). However, the CIT stated that "[w]e are not dealing here [i.e., fungibility] with a question of whether a party has satisfied a commercial contract." Guess? p. 29, See also CAFC p. 39. The CAFC added that "[w]e are dealing instead with an exemption from duty, a statutory privilege due only when enumerated conditions are met." Guess? p. 33. Further, the CAFC stated that "[s]uch a claim is within the general principle that exemptions must be strictly construed, and that doubt must be resolved against the one asserting the exemption." Guess? p. 34.


In this instance, the IA applicant asks whether its internal laboratory reports are acceptable as evidence of fungibility. The applicant asserts that these reports are accepted in many cases by both import vendors and export customers. However, we note that these reports are accepted in the context of whether a party has satisfied a commercial contract. As stated in Guess?, we are not dealing with the satisfaction of a commercial contract but whether a certain shipment of duty-paid petroleum is fungible with a certain shipment of exported petroleum. Therefore, the fact that laboratory reports are acceptable for commercial purposes is not necessarily controlling for determining fungibility under 19 U.S.C. 1313(j)(2).

Our search of over 100 court cases which mention laboratory reports did not reveal any instance in which fungibility was determined solely on the basis of a drawback claimant's internal laboratory report. A great many of these cases involved instances in which a Customs laboratory report was involved with the resolution of the issue at hand. Therefore, the acceptance of a drawback claimant's own laboratory reports is not required based on any type of case law precedent.

In our view, the acceptance of the drawback claimant's internal laboratory report to establish fungibility in and of itself is analogous to the evidentiary principle that "[t]est results [prepared for litigation purposes] should not be admissible as evidence, unless made by a qualified, independent expert or unless the opposing party has the opportunity to participate in the test." C. McCormick, Evidence, section 202, at 867 (1992) citing Fortunato v. Ford Motor Co., 464 F. 2d 962, 966 (2d Cir. 1972), cert. denied 409 U.S. 1038. Internal laboratory reports prepared for drawback purposes are prepared in order to receive a statutory privilege, and not in the ordinary course of business. The submission of evidence to qualify for a statutory privilege is similar to submitting evidence to establish a fact during litigation. Accordingly, it would appear reasonable to require that laboratory reports intended for submission as evidence of fungibility be prepared by an independent laboratory. As stated in Guess?, drawback is a statutory privilege which must be strictly construed, and doubt must be resolved against the one asserting the privilege. We view the potential danger to the revenue of accepting a claimant's internal report prepared for drawback purposes to be of a possible self-serving nature and thus creating the type of doubt discussed in Guess?. Without the safeguard of an independent laboratory report, Customs


possesses no method in which to corroborate the information contained in these internal reports and therefore the potential for fraud and abuse is great.

The IA applicant contends that acquiring an independent laboratory report in all drawback cases is expensive and onerous. Your memorandum also points out that in some cases the importer may not be aware of the need to obtain a laboratory report at the time of importation, or that the possibility for obtaining drawback on the duty-paid merchandise may not materialize until a later date. Based on these concerns, we cite to Federal Rule of Evidence 803(6) which provides for the admission of:

Records of regularly conducted activity. A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.

The rationale for this rule is that records prepared and kept in the ordinary course of business are presumed reliable for two general sorts of reason. United States v. Blackburn, 992 F.2d 666, 670 (7th Cir. 1993). First, businesses depend on such records to conduct their own affairs; accordingly, the employees who generate them have a strong motive to be accurate and none to be deceitful. Id. Second, routine and habitual patterns of creation lend reliability to business records. Id. Based on Rule 803(6) and its rationale, the drawback applicant may submit certain internal laboratory reports as evidence of fungibility. Generally, the report must be made at or near the time of importation, be kept in the course of a regularly conducted business activity, and it must be the regular practice of that business activity to make the report. These reports may then be forwarded to the Customs Laboratory for technical review to determine if the information provided within the reports supports fungibility. The applicant may not simply submit a report stating that petroleum is fungible because of the potential self-serving nature of such a report. Rather, it must


submit a laboratory report which contains sufficient technical information for Customs to determine that the petroleum is fungible. Of course, if Customs officials have reason to believe that the information is suspect or not trustworthy, they may refuse to accept the information contained therein as evidence of fungibility.


A drawback claimant's laboratory analysis is acceptable to show fungibility if the claimant shows that the analysis was done in the ordinary course of business, identifies the analyst, and offers to provide the analyst's work papers to Customs for review. An analysis shall be considered to be done in the ordinary course of business if the person using the analysis for drawback purposes can show that the analysis was relied upon by that person in a commercial transaction; i.e., a buyer who paid the seller based on the analysis shall be considered to have relied on that analysis.


John Durant, Director