DRA-2-01, DRA-2-02, DRA-1-03
OT:RR:CTF:ER H024887 GGK
Port Director
U.S. Customs and Border Protection
2350 N. Sam Houston Parkway East, Suite 100
Houston, TX 77032-3126
Attn: Fletcher A. Benton, Drawback Specialist
RE: Tesoro Corporation, Protest Number 5301-08-100149
Dear Port Director:
This is in response to the application for further review (“AFR”) for Protest Number 5301-08-100149 (“protest”), filed by Tesoro Corporation (“Tesoro”), on January 30, 2008. We apologize for the delay in our response.
FACTS:
Tesoro Corporation is an independent petroleum refiner and marketer based in San Antonio, Texas. The company is comprised of various wholly-owned subsidiaries, including multiple refineries in the United States. Based on Tesoro’s March 21, 2003, 10-K Annual Report filed with the U.S. Securities and Exchange Commission (“SEC”), Tesoro owned and operated six refineries located in Washington, Alaska, Hawaii, California, North Dakota, and Utah as of September 2002. Two refineries are involved in the drawback claims at issue in the protest: Tesoro’s Washington Refinery, incorporated as Tesoro Refining and Marketing Company (“Tesoro Washington”) and Tesoro’s Alaska Refinery, incorporated as Tesoro Alaska Company (“Tesoro Alaska”). The refineries operated by Tesoro Washington and Tesoro Alaska are located in foreign trade zones at Anacortes, Washington and Kenai, Alaska, respectively.
In 2007, Tesoro Washington, on behalf of Tesoro, filed three drawback claims pursuant to 19 U.S.C. § 1313(b) and 19 U.S.C. § 1309 with Customs and Border Protection’s (“CBP”) Houston Drawback Center for duties paid on imported crude petroleum. The three drawback claims are: xxx-xxxx571-3, filed on January 16, 2007; xxx-xxxx569-7, filed on January 16, 2007; and xxx-xxxx572-1, filed on January 23, 2007. All three drawback claims were subject to accelerated payment prior to liquidation. The underlying consumption entries for the three drawback claims are as follows:
Entry xxx-xxxx532-9, entered on September 18, 2002;
Entry xxx-xxxx534-5, entered on October 3, 2002;
Entry xxx-xxxx537-8, entered on October 23, 2002;
Entry xxx-xxxx538-6, entered on November 2, 2002; and
Entry xxx-xxxx539-4, entered on November 7, 2002.
Tesoro Washington, as importer of record, filed all five consumption entries with the Port of Anacortes. Duty and fees on all five entries were fully paid upon liquidation.
On May 16, 2007, the Houston Drawback Center issued a “Request for Additional Information” to Tesoro in order to verify the three drawback claims at issue. This initial Request for Additional Information sought clarification regarding entry type coding issues and compliance with export time requirements. A second Request for Additional Information was sent to Tesoro on June 13, 2007. Specific documents requested in the June 13, 2007 Request for Additional Information included the following:
Per individual claim: all storage and transportation records for the manufactured product beginning with the manufacturing period through lading on the designated aircraft to include all beginning and ending inventory levels. Records should be provided for every entity involved in the storage and transportation of the manufactured product for the relevant time frame. Storage records should include all activity for the specific storage vessel throughout the relevant time frame.
On August 3, 2007, the Drawback Center liquidated all three drawback claims without the benefit of drawback. As justification for the denial, the Drawback Center cited to Tesoro’s failure to comply with the Drawback Center’s two Requests for Additional Information. Thereafter, Tesoro Washington, again on behalf of Tesoro, filed the instant protest, on January 30, 2008, to contest the liquidation.
According to the manufacturing abstracts submitted as a part of the three drawback claims, crude petroleum from entry xxx-xxxx532-9 was received at Tesoro refineries in September 2002 and used by the recipient refineries throughout September, October, November and December 2002. Crude petroleum from entry xxx-xxxx534-5 was received and used by Tesoro’s refineries in October 2002. Crude petroleum from entry xxx-xxxx537-8 was received by Tesoro’s refineries in October 2002 and used by the recipient refineries in October and November 2002. Crude petroleum from entry xxx-xxxx538-6 was received by Tesoro’s refineries in November 2002 and used by the recipient refineries in November and December 2002. Finally, crude petroleum from entry xxx-xxxx539-4 was received by Tesoro’s refineries in November 2002 and used by the recipient refineries in December 2002. Which specific refinery received the imported crude petroleum is not identified.
The above imported duty-paid crude petroleum that was received and used by Tesoro’s refineries was designated as the basis for Tesoro’s three drawback claims at issue in this protest. Specifically, Tesoro designated the above imported duty-paid crude petroleum as the basis for drawback on jet fuel manufactured at its Washington Refinery using substitute crude petroleum pursuant to 19 U.S.C. § 1313(b). Furthermore, Tesoro selected four manufacturing periods for the Washington Refinery, September 2002, October 2002, November 2002, and December 2002, to establish the dates of production for the jet fuel and quantities manufactured.
Tesoro’s three drawback claims indicate that the jet fuel was laden onto foreign aircrafts in Alaska in 2004 for exportation, pursuant to 19 U.S.C. § 1309. Tesoro representatives clarified in an email dated January 9, 2012, that the jet fuel laden onto the aircrafts, was not manufactured by the Washington Refinery. Rather, it was Tesoro Alaska’s jet fuel. The jet fuel manufactured by the Washington Refinery during the September, October, November, and December 2002 manufacturing periods was never physically transported from the Washington Refinery to Alaska for exportation.
Finally, although Tesoro is comprised of various wholly-owned subsidiaries, the company reports to the SEC as one entity. Specifically, 10-K Annual Reports filed by Tesoro with the SEC reference consolidated financial statements of operations, comprehensive income (loss) and stockholders’ equity, and cash flows accounting for all subsidiaries under the company. Tesoro’s 2011 10-K SEC filing includes legal liabilities incurred by Tesoro Washington as a part of its consolidated financial statement.
Additionally, Tesoro represents in its protest that the company files taxes with the Internal Revenue Service (“IRS”) as one entity rather than through its individual subsidiaries. Tesoro also represents in its protest that its corporate officers are also the corporate officers of Tesoro Washington and Tesoro Alaska. Tesoro further explains that both refineries are centrally controlled and wholly financed by Tesoro. Moreover, Tesoro directs the movement of crude petroleum and petroleum derivatives between the refineries based on the best interests of the company as a whole. Finally, to the general public and investors, Tesoro consistently refers to Tesoro Washington and Tesoro Alaska as Tesoro’s petroleum refineries without reference to the subsidiaries’ independent legal status. Based on these facts, we evaluate whether Tesoro’s three drawback claims were properly liquidated without the benefit of drawback.
ISSUES:
1. Whether Tesoro is one legal entity.
2. Whether Tesoro may substitute the exported article.
LAW AND ANALYSIS:
As a preliminary matter, we note that a drawback claimant may protest a refusal by CBP to pay a claim for drawback pursuant to 19 U.S.C. § 1514(a)(6). Moreover, we find that Tesoro’s claims raise novel issues that have not previously been ruled upon by CBP. Therefore, further review is permissible pursuant to 19 C.F.R. § 174.24(b) and we will examine the merits of this case.
1. Whether Tesoro is one legal entity.
As a threshold issue, we first examine whether Tesoro’s various subsidiary refineries constitute a single legal entity for purposes of drawback. Under 19 C.F.R. § 191.22(b) (emphasis added),
Duty-paid merchandise or drawback products used at one factory of a manufacturer or producer within 3 years after the date on which the material was received by the manufacturer or producer may be designated as the basis for drawback on articles manufactured or produced in accordance with these regulations at other factories of the same manufacturer or producer.
This regulation permits Tesoro to substitute imported merchandise received at one refinery with same kind and quality merchandise located at a different refinery to manufacture exported articles. When multiple companies, such as Tesoro and its subsidiary refineries, are involved in a drawback claim, CBP will first examine the legal relationship between the parties to determine whether the substance of the relationship qualifies the companies as a single legal entity. See C.S.D. 82-71 (October 21, 1981) (holding that the legal relationship between parties for 19 U.S.C. § 1313(b) drawback purposes is determined by examining the substance and not the name of the arrangement). In C.S.D. 82-71, a cooperative association composed of multiple corporations qualified as a single legal entity for purposes of drawback because the entities functioned as a single integrated enterprise. Id. The corporations collectively used the imported and substituted merchandise in a combined manufacturing operation. Id. Moreover, the corporations shared equitably in the economic gains and losses derived from the operation. Id. For these reasons C.S.D. 82-71 found that the cooperative association was a single entity for drawback purposes. In contrast to C.S.D. 82-71, in HQ H064876 (February 24, 2010), a parent company and its subsidiary did not qualify as a single legal person because the entities operated entirely independently from each other. Specifically, the parent company and subsidiary were treated as separate for purposes of taxation, regulation, liability, debts and so forth. Id. Moreover, the subsidiary operated independently and under the direction of its own board. Id. The relationship between Tesoro and its subsidiary refineries is akin to the cooperative association and its member corporations described in C.S.D. 82-71.
Like the cooperative association composed of multiple corporations in C.S.D. 82-71, Tesoro and its wholly-owned subsidiaries operate as one entity in that the refineries are centrally controlled and wholly financed by Tesoro. Tesoro and its refinery subsidiaries file SEC reports as a single entity. See Tesoro’s 10-K Annual Report, dated March 21, 2003. Moreover, the companies share the same corporate officers. Id. Finally, the financial interests and liabilities of the companies are not independent and separate. Instead, Tesoro, as the parent company, assumes responsibility for liabilities incurred by the subsidiary refineries as evidenced by the consolidated financial statements filed with the SEC. Id. Based on these facts, Tesoro and its subsidiary refineries qualify as a single legal entity under 19 C.F.R. § 191.22(b). Therefore, Tesoro may substitute imported merchandise received at one refinery with same kind and quality merchandise located at a different refinery.
2. Whether Tesoro may substitute the exported article.
Tesoro’s second argument in its protest asserts that because the subsidiaries constitute a single legal entity under 19 C.F.R. § 191.22(b), it may qualify for drawback under 19 U.S.C. § 1313(b) by: 1) designating imported crude petroleum as the basis for drawback on jet fuel manufactured at its Washington Refinery from substitute crude; and 2) substituting the exported article by lading jet fuel from its Alaska Refinery onto qualified flights rather than jet fuel manufactured by its Washington Refinery. However, although Tesoro and its refineries qualify as a single legal entity, for purposes of substituting merchandise that will be used in the manufacturing process, the company is not permitted to substitute the manufactured articles when claiming drawback under 19 U.S.C. § 1313(b).
Drawback pursuant to 19 U.S.C. § 1313(b) allows for substitution of imported merchandise. Specifically, the statute states in relevant part:
If imported duty-paid merchandise and any other merchandise (whether imported or domestic) of the same kind and quality are used in the manufacture or production of articles within a period not to exceed three years from the receipt of such imported merchandise by the manufacturer or producer of such articles, there shall be allowed upon the exportation, or destruction under customs supervision, of any such articles, notwithstanding the fact that none of the imported merchandise may actually have been used in the manufacture or production of the exported or destroyed articles...
19 U.S.C. § 1313(b). In HQ 222494, dated February 14, 1996, CBP explained that the statute requires a drawback claimant to establish four criteria: 1) that designated imported duty-paid merchandise was received by the manufacturer and used in manufacture or production within three years of the receipt date; 2) that exported articles be manufactured, in accordance with applicable rules and regulations, from substituted domestic or imported merchandise within the three-year timeframe established from the date of receipt of the imported duty-paid merchandise; 3) that the substituted merchandise was of the same kind and quality as the designated imported duty-paid merchandise; and 4) that the exported articles claimed as the basis for drawback, were actually exported within five years of the date of importation of the designated imported duty-paid merchandise. See also 19 U.S.C. §§ 1313(b), (i); 19 C.F.R. §§ 191.22(a), 191.27(b). CBP properly denied the three drawback claims at issue because the exported articles were not manufactured from the substituted or imported merchandise, as required by the second criteria.
Under 19 U.S.C. § 1313(b), articles exported as the basis of a drawback claim must be manufactured from substitute merchandise selected by the claimant. This is because § 1313(b) only permits substitution of imported duty-paid merchandise, not substitution of the exported articles. Compare 19 U.S.C. § 1313(b) (permitting substitution of imported merchandise with same kind and quality merchandise only), with 19 U.S.C. § 1313(p) (allowing for the substitution of qualified articles with exported articles of the same kind and quality). Since only substitution of imported merchandise is allowed under 19 U.S.C. § 1313(b), a drawback claimant must: 1) trace the imported duty-paid merchandise from receipt into inventory to its withdrawal for use; and 2) trace drawback articles from the point of manufacture to exportation. HQ 224942 (December 4, 1995). See also 19 C.F.R. § 191.22(b) (stating that duty-paid merchandise used at one factory may be designated as the basis for drawback on articles manufactured at a different factory). In this case, Tesoro’s drawback entries, on CBP Form 7551, indicate that the three drawback claims are filed pursuant to the company’s general manufacturing drawback ruling under 19 U.S.C. § 1313(b) for petroleum or petroleum derivatives. Moreover, the standard accounting documents accompanying the claims, including the Abstract of Manufacturing Records, Abstract of Production, Inventory Control Sheets, producibility and designation documents and so forth, are based upon manufacture at Tesoro’s Washington Refinery. According to these documents, the company designated the underlying imported crude identified in the claims at issue, as the basis for drawback on jet fuel manufactured from substitute crude from Tesoro’s Washington Refinery. Consequently, the company must export jet fuel manufactured from the selected substitute crude, from its Washington Refinery, in order to qualify for drawback under § 1313(b).
Rather than export jet fuel manufactured from the selected substitute crude, however, Tesoro acknowledged that the company never physically transported jet fuel from its Washington Refinery to Alaska for exportation. See Email from Anthony A. Tonucci, on behalf of Tesoro, sent on January 9, 2012. Rather, Tesoro stated that the jet fuel laden onto the foreign aircrafts for exportation, pursuant to 19 U.S.C. § 1309, came directly from Tesoro’s Alaska Refinery. Id. Thus, although Tesoro selected crude petroleum from its Washington Refinery as the substitute merchandise, the company failed to export any finished articles, i.e., jet fuel, manufactured from the substitute merchandise. Instead, the company substituted jet fuel from its Alaska Refinery for exportation. Stated differently, Tesoro’s drawback claims involved two substitutions. The first substitution of imported merchandise complied with regulations in that imported crude petroleum used at an unidentified refinery was substituted with available same kind and quality crude at the Washington Refinery. The company then impermissibly made a second substitution of the exported article by exporting jet fuel from its Alaska Refinery instead of jet fuel actually manufactured by the company’s Washington Refinery. Neither 19 U.S.C. §1313(b) nor 19 C.F.R. § 191.22(b) allows a drawback claimant to substitute finished articles at the time of exportation. Thus, Tesoro’s three drawback claims are properly denied.
On a final note, Tesoro’s protest includes several additional arguments, which we will briefly address. First, Tesoro alleges that CBP denied its drawback claims because the company commingled the exported jet fuel with fungible jet fuel prior to exportation. Contrary to Tesoro’s allegation, the defect in the three drawback claims is not the company’s commingling of fungible jet fuel prior to lading. CBP permits claimants to comingle fungible merchandise or articles in inventory and use approved accounting methods as a means to directly identify the goods. See 19 C.F.R. § 191.14(a), (b)(1). The accounting method used must establish that inventory records account for the lots of merchandise or articles to be identified as being received into and withdrawn from the same inventory. 19 C.F.R. § 191.14(b)(2). Consequently, Tesoro may commingle fungible jet fuel and use accounting methods to identify finished articles manufactured from selected substitute merchandise for 19 U.S.C. § 1313(b) drawback claims.
As to the remaining arguments found in Tesoro’s protest, we agree with Tesoro’s assertion that 19 U.S.C. § 1313(p) is not applicable to the company’s three drawback claims. Specifically, although § 1313(p) allows for the substitution of articles, the statute requires that substituted articles be exported 1) within the period that the qualified article is manufactured; 2) within 180 days from the close of such manufacturing period; or 3) within 180 days after the date of entry of an imported qualified article. See 19 U.S.C. § 1313(p)(2)(C), (E). Tesoro’s three drawback claims do not meet any of the deadlines above because exportation of the articles occurred approximately two years after the close of the manufacturing period during which jet fuel was produced from the selected substitute merchandise. Lastly, because Tesoro’s three drawback claims are denied due to the impermissible substitution of articles, we will not address the merits of Tesoro’s final arguments regarding whether the jet fuel was properly exported pursuant to 19 U.S.C. § 1309.
HOLDING:
The protest must be DENIED IN FULL because the manufacturer substituted finished articles for exportation, which is not permissible for drawback under 19 U.S.C. § 1313(b).
In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Sixty days from the date of the decision, the Office International Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP 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