FOR-2-01-CO:R:C:E 222874 CB
David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
New York, New York 10279
RE: Request for binding ruling relative to payment of duties
on merchandise admitted into a foreign trade zone
Dear Mr. Ostheimer:
This is in response to your letter of December 7, 1990, on
behalf of Trade Zone Operations, Inc., wherein you requested a
binding ruling clarifying the time at which duties must be
deposited on merchandise admitted into a General Purpose Foreign
Trade Zone (FTZ).
FACTS:
General Purpose FTZ #9 is presently comprised of three
separate sites, one of which is known as the Campbell Industrial
Park. Your client has been designated the FTZ Operator for this
FTZ. At the present time, your client wishes to activate a
specific area within the Campbell Industrial Park. The area for
which activation is being requested is leased to AES Barbers
Point (AES-BP). AES-BP plans to operate a co-generation facility
at this site which will ultimately convert chemical energy in the
form of coal into electricity to be sold to the Hawaiian Electric
Company for use by its customers on Oahu. AES-BP will be
purchasing, from various vendors, imported foreign status
merchandise (such as a turbine-generator) which needs to be
assembled and tested prior to its utilization as production
equipment at the co-generation facility. The imported foreign
status merchandise will be arriving at the General Purpose FTZ in
shipments over an extended period of time. You have stated that
the merchandise will be stored and assembled by AES-BP's vendors
within the General Purpose FTZ and must, prior to its actual use
as production equipment, be tested for the purpose of determining
its suitability for use as production equipment.
Subsequent to your initial ruling request, a conference was
held on January 28, 1991, to discuss the timing of the payment of
customs duties. During the course of the meeting, you introduced
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the concept of constructive transfer of the equipment once it is
installed. It is your position that 19 CFR 146.52 requires the
filing of a Customs Form (CF) 216 with the District Director
requesting permission to commence the intended activity. Thus,
prior to actually utilizing any of the foreign status merchandise
as production machinery or capital equipment, a CF 216 must be
signed by both the Zone Operator and the Grantee and must be
approved by Customs, thereby assuring that all parties will be
placed on notice prior to utilization of the equipment.
Furthermore, prior to approving the CF 216 Customs can require
the filing of a consumption entry which would constructively
transfer the capital equipment into the customs territory.
ISSUE:
When must duties be deposited on imported articles admitted
into a General Purpose FTZ, when such articles are to be used as
production equipment within the General Purpose FTZ?
LAW AND ANALYSIS:
The statute governing the creation and operation of foreign
trade zones is the Foreign Trade Zones Act of 1934, as amended
(48 Stat. 998; 19 U.S.C. 81a through 81u). Pursuant to the
provisions of section 3 of the Foreign Trade Zones Act, as
amended (19 U.S.C. 81c), merchandise of every description may be
brought into a zone without being subject to the Customs laws for
the purposes set forth in the statute. Merchandise may "be
brought into a zone and may be stored, sold, exhibited, broken
up, repacked, assembled, distributed, sorted, graded, cleaned,
mixed with foreign or domestic merchandise, or otherwise
manipulated, or be manufactured...." 19 U.S.C. 81c (1982).
It is your opinion that the storage, assembly and testing of
foreign status merchandise which subsequently becomes production
machinery or capital equipment are activities clearly delineated
and permitted under the FTZ Act. Moreover, that the merchandise
does not become subject to the deposit of customs duties until
such time as it is determined to be suitable for its intended use
and is actually used.
In C.S.D. 79-418 the Customs Service ruled that foreign
production equipment may not be brought into a zone for use as
production equipment. This ruling was issued by the Customs
Service notwithstanding the decision in Hawaiian Independent
Refinery v. U.S., 81 Cust. Ct. 117, CD 4777 (1978), appeal
dismissed 66 C.C.P.A. 135 (1979), wherein the Court of
International Trade held that merchandise which does not
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actually enter the customs territory of the United States is not
dutiable. C.S.D. 79-418 was based on the premise that production
equipment is not merchandise as that term is used in the Foreign
Trade Zones Act. It was concluded that "[g]iven the common
understanding of the term 'merchandise', we believe that Congress
deliberately used that more limited term in the Foreign Trade
Zones Act to avoid this very conduct."
The issue of the importation of production equipment into an
FTZ was most recently addressed by the Court of International
Trade in Nissan Motor Mfg. Corp., U.S.A. v. United States, Slip
Op. 88-108 (CIT), 22 Cust. Bull., No. 39, p. 27. In the Nissan
case the court held, under facts similar to the instant case,
that production equipment is not "merchandise" entitled to the
duty exemption of Section 3 of the Tariff Act of 1930 (the Act).
The court based its decision on the exclusive language of the
statute (19 U.S.C. 81c) and its legislative history. The court
was not persuaded to the view that Hawaiian Independent Refinery
was relevant to the facts then in question. In affirming the
lower court's decision, the United States Court of Appeals for
the Federal Circuit reached the same conclusion. Nissan Motor
Mfg. Corp. USA v. United States, Appeal No. 89-1040, 23 Cust.
Bull., No. 39, p. 3. The Nissan opinion is directly applicable
to the instant set of facts.
Based on the Nissan opinion, Customs issued a General Notice
revoking C.S.D. 82-103 which had held that the payment of duty
could be deferred until production equipment introduced into a
FTZ became operational. It is your position that Customs
interpretation of the Nissan decision is incorrect and that there
was no need to revoke C.S.D. 82-103. You read the Nissan holding
as standing solely for the proposition that production equipment
used in an FTZ is ultimately subject to duty. You do not read
the decision as requiring the deposit of duties at the time of
importation of an article into a FTZ.
We disagree with your interpretation. As stated by the
Court of Appeals in Nissan, Congress "signalled its intention to
make the imposition of immediate duties dependent on the
operations that occur in a foreign trade zone when it listed the
activities that could be performed on merchandise brought into a
zone. The fact that a comprehensive listing is set forth in the
statute indicates that Congress did not intend a blanket
exclusion from Customs duties irrespective of what is done with
the imported merchandise." 23 Cust. Bull. 39, at page 6. In its
decision, the court affirmed Customs interpretation of the
Foreign Trade Zones Act as published in C.S.D. 79-418. The court
concluded that "[u]nder the plain language of the 1950 amendment
to the Act and the legislative history of that amendment, and
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Customs' published decision interpreting the Act as amended, such
a use does not entitle the equipment to exemption from Customs
duties." 23 Cust. Bull. 39, at page 7. It is the Customs
Service opinion that the court's holding has resolved the
question of production equipment in foreign trade zones. The
Nissan appellate court found that certain operations were outside
any benefits conferred by the Foreign Trade Zones statute. The
court expressly found that there was no authority to allow
imported articles to be "installed," "used," "operated," or
"consumed." The Customs position that production equipment,
supplies, and building materials were dutiable upon entry and
were not entitled to be considered as merchandise was developed
in accordance with public notice and comment. Even if Customs
believed its position was wrong despite the favorable court
decisions, any reversal of that position could only be
accomplished by adherence to that same procedure.
Regarding your contention that the obligation to deposit
customs duties does not arise until such time as the equipment is
put to its intended use, it is the Customs Service position that
the intended use is established at the time of importation.
Therefore, the requirement to deposit customs duties must be
satisfied at such time. The post-importation use of an article
must be considered if that use has a bearing on its tariff
treatment. Vandegrift & Co. v. United States, 15 Ct. Cust.
Appls. 165, T.D. 42221 (1927); Leonard Levin Co. v. United
States, 27 C.C.P.A. 101, CAD 69 (1939). An analogy may be drawn
between the instant facts and a temporary importation under bond
(TIB). The Customs Regulations provide that the entry summary
for articles brought into the United States under a TIB must
include a declaration that the goods are not imported for sale or
sale upon approval. Furthermore, the Harmonized Tariff Schedule
(HTSUSA), Subchapter XIII, U.S. Note 1(a) speaks to the intent of
the importer at the time the entry is filed. There must be a
definite intent on the part of the importer at the time of
importation that the articles shall be used in a manner
contemplated by the provision of law under which entry is claimed
and that the articles shall be exported within the bond period.
If a sale was intended before entry the entry would be in
violation of section 592 of the Tariff Act of 1930. In the
instant case, you intend to use the articles as production
equipment once it is installed. The use to which the articles
will be put is not in question. The articles are imported as
capital or production equipment and will be used as such.
Hence, the articles must be imported as capital or production
equipment and estimated duties must be deposited at the time of
entry. "Duties and the liability for their payment accrue upon
imported merchandise on arrival of the importing vessel...,
unless otherwise specially provided for by law." 19 CFR 141.1.
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A construction which ignores the adjectives "production" and
"building" with respect to equipment or materials that are
imported with the intent to be installed in a zone and then used
in that zone would be contrary to that principle and the courts'
findings in the Nissan litigation. That court concluded that
Customs lacked authority to put conditions in a zone grant that
were not imposed by the Foreign Trade Zones Board.
Concerning your constructive transfer proposal, you cite 19
CFR 146.61 to indicate that the Customs regulations provide for
the constructive transfer of merchandise which remains physically
in the zone. However, section 146.61 falls under Subpart F
"Transfer of Merchandise from a Zone." Subpart F sets forth the
procedure for the entry of merchandise which is to be transferred
from a zone, or removed from a zone for exportation or
transportation to another port, for consumption or warehouse. In
the instant case, the production equipment will always physically
remain in the zone. There is no intention of transferring the
equipment into the Customs territory. The concept of
constructive transfer was adopted by the Customs Service "to
provide relief in those instances where merchandise was expressly
intended to be physically moved into Customs territory and not as
to merchandise which could not be, and was never intended to be,
physically moved [into the Customs territory]...." See P.R.D.
75-5; 9 Cust. Bull. 746, 749 (1975). The court in Hawaiian
Independent Refinery rejected the argument that foreign
merchandise that is "consumed" in a zone can be considered to
have been "constructively transferred" to the Customs territory.
It held that no authority is anywhere conferred upon Customs to
require the involuntary constructive transfer of merchandise
which is never intended to, and which does not actually enter,
the Customs territory from a zone. 81 Cust. Ct. 117, 125.
It is not within the Customs Service authority to grant a
postponement or deferment of the statutorily required deposit of
estimated duties. However, you may wish to explore the
possibility of petitioning the Foreign Trade Zones Board to allow
the entry of the articles as privileged foreign merchandise and,
thereby, locking into a tariff classification and rate of duty.
The Board can place a restriction on the zone grant that duties
must be paid before the co-generation facility is activated.
Payment of duties will be postponed until such time as the
production equipment is actually put to its intended use.
HOLDING:
All merchandise is subject to duty upon importation except
if covered by an exemption. The Nissan decisions held that
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production equipment does not fall within any of the Foreign
Trade Zones Act exemptions. Therefore, production equipment is
subject to duty upon its importation and before it is admitted
into a FTZ.
Sincerely,
John Durant, Director
Commercial Rulings Division