HQ H107675
OT:RR:CTF:VS H107675 KSG
Kirstin I. Silberschlag
Director and Counsel
Valero Energy Corporation
One Valero Way
San Antonio, TX 78249-1616
RE: Gasohol; CBOB; NAFTA: fungible material; inventory management
Dear Ms. Silberschlag:
This is in response to your request for a binding ruling dated May 11, 2010, on behalf of Valero Marketing & Supply Company (“Valero U.S.”) relating to the importation of a certain petroleum product from Canada and its eligibility for duty preference under the North American Free Trade Agreement (“NAFTA”). You submitted additional information on June 24, 2010, and November 9, 2010.
FACTS:
This case involves an imported blended petroleum product known as gasohol, composed of 90% or more gasoline/blendstock (CBOB) and 10% or less ethanol. This formulation of gasohol is also known as “E10.” The imported gasohol will be brought into various ports in Maine, Vermont, New York and Michigan by truck or rail.
The two base components are blended together in Canada, either in Levis, Montreal or Maitland, Ontario. You specify that the gasoline involved is Conventional Gasoline blendstock for Oxygenate Blending (“CBOB”). You state that in the majority of the cases, the CBOB is produced in Canada by Ultramar, a related party that is engaged in the refining and marketing of petroleum products in Eastern Canada. You contemplate that some CBOB will be imported into Canada from a country that is not a party to the NAFTA. You state that the CBOB is classified in subheading 2710.11 of the Harmonized Tariff Schedule of the United States (“HTSUS”). You state that the other base component, denatured ethanol, is produced in Canada, the U.S., and/or Brazil, and is classified in subheading 2207.20, HTSUS. You state that the finished gasohol is classified in subheading 2710.11.15, HTSUS.
CBOB must meet all applicable governmental and regulatory specifications and be “on spec.” The most widely cited industry CBOB spec is that published by the Colonial Pipeline Company. This includes standards for octane levels, oxygen content, reid vapor pressure and sulfur. You provided both the Colonial Pipeline specifications for Grade A CBOB (87 octane) and Grade D CBOB (93 octane). Although you note that your product is not imported via a pipeline, you state that any CBOB has to be interchangeable and fit within these specifications to ensure that the finished gasohol is suitable for use in the U.S. market. The Colonial Pipeline Company product specifications for Grade A CBOB states that the CBOB may not be combined with any other CBOB unless it has the same requirement for oxygenate type and amount. All parameters must be met after blending with denatured fuel ethanol unless noted. Ultramar has dedicated storage tanks for CBOB and gasoline blending components for U.S. grade products. Any CBOB used by Ultramar in the production of its E10 blend would meet the same standards and be used indiscriminately in the production of gasohol suitable for the U.S. market. You also provided a table showing key parameters for the E10 gasohol for both the originating and non-originating CBOB. The key parameters provided include: the motor octane number, reid vapor pressure, benzene maximum, the sulfur maximum, and the distillation 50% point, which are identical for the originating and non-originating CBOB (except for a slight difference in the distillation 50% point).
Counsel contends that a portion of the imported gasohol is an originating good for purposes of the NAFTA. Valero U.S. proposes to utilize the average method using the preceding one-month period to calculate the ratio of originating versus non-originating CBOB in inventory, and then apply that ratio for the subsequent one-month period. Specifically, the ratio of originating versus non-originating CBOB in the opening inventory for the period is determined using the ending ratio percentage from the immediately preceding one-month period. Receipts of new CBOB into inventory are tracked as originating or non-originating by volume. The sum of originating CBOB from the opening inventory, plus the originating CBOB from new receipts into inventory during the period, is divided by the sum of all originating and non-originating CBOB from the opening inventory and new inventory receipts to obtain the ratio of originating CBOB in the next period. Counsel asserts that the portion of imported gasohol produced using originating CBOB will be entitled to duty-free treatment under the NAFTA.
ISSUE:
Whether non-originating CBOB is considered a fungible material with originating CBOB within the meaning of General Note 12(g) and Part 181, Customs Regulations, allowing Valero U.S. to use the average method, an inventory management method described in 19 CFR Part 181 App., to determine whether a portion of imported gasohol is entitled to preferential tariff treatment under the NAFTA.
LAW AND ANALYSIS:
Pursuant to General Note (“GN”) 12, HTSUS, for an article to be eligible for NAFTA preference, the article in question must be “originating.”
With regard to this criteria, GN 12(b), HTSUS, provides, in pertinent part, as follows:
For purposes of this note, goods imported into the customs territory of the U.S. are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as goods originating in the territory of a NAFTA party only if --(i) they are goods wholly obtained or produced in the territory of Canada, Mexico and/or the U.S.; or (ii) they have been transformed in the territory of Canada, Mexico, and/or the U.S. so that each of the non-originating material used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s), and (t) of this note or the rules set forth therein, …
The tariff shift rule set forth in GN 12(t), HTSUS, for goods of heading 2710 is as follows:
A change to heading 2710 from any other heading, except from headings 2711 through 2715;
Production of any good of heading 2710 as the result of atmospheric distillation, vacuum distillation, catalytic hydroprocessing, catalytic reforming, alkylation, catalytic cracking, thermal cracking, coking or isomerization; or
Production of any good of heading 2710 as the result of direct blending, provided that (1) the non-originating material is classified in chapter 27, (2) no component of that non-originating material is classified under heading 2207, and (3) the non-originating material constitutes no more than 25 percent by volume of the good.
If imported gasohol is comprised of Canadian CBOB and Canadian or U.S. ethanol, it would be considered a good produced entirely in the territory of Canada, Mexico, and/or the U.S., and pursuant to GN 12(b)(i), HTSUS, it would be an originating good.
If imported gasohol is comprised of non-originating CBOB and non-originating ethanol, it would not satisfy any of the tariff-shift rules set forth in GN 12(t), HTSUS, and would be a non-originating good.
If imported gasohol is comprised of Canadian CBOB and non-originating ethanol, the non-originating ethanol would satisfy the tariff shift rule set forth in GN 12(t), HTSUS, in rule (A) by making the shift from heading 2207 to 2710, HTSUS, and be an originating good.
If imported gasohol is comprised of non-originating CBOB and originating ethanol it would not satisfy any of the tariff shift rules set forth in GN 12(t), HTSUS, and would be a non-originating good. Rule A would not be satisfied because the non-originating CBOB would not make a tariff shift (heading 2710 to 2710, HTSUS). Rule B is not applicable and Rule C(3) for goods of heading 2710, HTSUS, is also not satisfied because the non-originating CBOB constitutes more than 25 percent by volume of the imported gasohol.
In sum, the imported gasohol would be a NAFTA originating good under Rule C GN 12(t), HTSUS, only if it is comprised of originating CBOB.
Counsel states that the originating and non-originating CBOB used to produce the imported gasohol are commingled in tanks and proposes to apply an inventory management method to claim preferential treatment under the NAFTA for the originating portion of the imported gasohol.
This issue turns on whether CBOB of a particular grade (e.g. grade A CBOB) is determined to be a fungible material as defined in the NAFTA.
General Note 12(g), HTSUS, provides as follows:
(g) Fungible goods and materials. For purposes of determining whether a good is an originating good—
(i) where originating and non-originating fungible materials are used in the production of a good, the determination of whether the materials are originating need not be made through the identification of any specific fungible material, but may be determined on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury; and
(ii) where originating and non-originating fungible goods are commingled and exported in the same form, the determination may be made on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury.
The term “fungible materials” for NAFTA purposes means that the particular materials or goods are interchangeable for commercial purposes and have essentially identical properties. See 19 CFR Part 181 App., section 2.
The NAFTA Rules of Origin Regulations, 19 CFR Part 181 App. (“ROR”) for purposes of determining NAFTA preference eligibility provide for the use of inventory management methods. The various inventory management methods set out in ROR, Schedule X, section 2 include: a) specific identification method; b) FIFO method; c) LIFO method; and d) average method. Section 5 of Schedule X references the average method and states “where the producer or person referred to in section 3 chooses the average method, the origin of fungible materials withdrawn from materials inventory is determined on the basis of the ratio of originating materials and non-originating materials in materials inventory that is calculated under sections 6 through 8.”
Previous rulings have dealt with the question of the scope of the term fungible materials. In particular, CBP held in Headquarters Ruling Letter (“HRL”) H012415, dated August 3, 2010, that based on the facts described in that case, non-originating diluent/condensate was considered a fungible material for the purposes of NAFTA inventory management. Accordingly, use of the average method, an inventory management method described in Schedule X, NAFTA, was permitted for purposes of determining which materials were originating, contingent upon the ability to provide documentation supporting the claims.
In HRL 563062, dated October 13, 2004, CBP considered whether a blend of certain base oils used to manufacture lubricating motor oils could be treated as fungible materials for purposes of the NAFTA. CBP held that such a blend of originating and non-originating base oils stored in common storage tanks could be treated as fungible materials under a NAFTA authorized inventory management method. The API Guidelines allowed substitution of one base oil for another if certain standards were met so that engine performance tests could be satisfied. CBP determined that the base oils were commercially interchangeable and met certain standards for saturates level, viscosity index, and sulfur content and were within the same API group.
The first requirement set forth in the definition of fungible materials for purposes of NAFTA inventory management is that the materials be “interchangeable for commercial purposes.” The factors to be examined in determining whether the material is “interchangeable for commercial purposes” is decided on a case-by-case basis and must take into account the nature of the material and the use to which it is put. The material involved in this case, CBOB of a particular grade (.e.g. CBOB grade A), is heavily government regulated and must meet certain industry standards and be utilized in the same manner as Canadian CBOB of the same grade. Further, it is used in an interchangeable manner by the industry. In this case, the Colonial Pipeline standards are used as the industry standard. According to those standards, the key parameters submitted by Valero U.S. for both the originating and non-originating CBOB, and the existence of U.S. government standards for the product in question, we find that Canadian and non-originating CBOB of a particular grade, i.e., grade A, are interchangeable for commercial purposes in this case.
The second requirement set forth in the definition for fungible materials, is that fungible materials have “essentially identical properties.” In this case, determining whether the properties of the relevant materials are essentially identical requires consideration of the properties that are most significant for the use of a particular grade of CBOB in the U.S. market. The properties set forth in the regulatory and Colonial Pipeline standards, which include octane levels, oxygen content, reid vapor pressure and sulfur content should be considered. These properties are essentially identical and measured and tracked with precision by Valero. Examining all the factors, we find that the originating Canadian CBOB and non-originating CBOB of the same grade are interchangeable for commercial purposes and the properties are essentially identical. Accordingly, we find that non-originating CBOB, of a particular grade as described in this case, may be considered a fungible material with originating CBOB of the same grade for purposes of NAFTA inventory management.
Since CBOB of a particular grade is considered a fungible material, one of the four methods of NAFTA inventory management provided for in Schedule X may be used in accordance with generally accepted accounting methods. The average method proposed by counsel based on a ratio over a one month period is consistent with Addendum B, Schedule X of the Appendix (19 CFR 181, App.). Therefore, we find it is an acceptable inventory management method to determine the amount of CBOB of a particular grade that is an originating material for purposes of the NAFTA, provided sufficient records are maintained to support the calculations and origin determinations. Accordingly, based on the facts described in this case, we find that Valero U.S. may use the average method as described in 19 CFR Part 181 App. to segregate the commingled non-originating and originating CBOB of a particular grade to calculate the dutiable and non-dutiable shipments of the imported gasohol.
HOLDING:
Imported gasohol, as described above, comprised of originating CBOB satisfies the tariff-shift rule set forth in GN 12(t), HTSUS and is an originating good under the NAFTA.
Non-originating CBOB of a particular grade is a fungible material with originating CBOB of the same grade for the purposes of NAFTA inventory management. Therefore, Valero U.S. may use the average NAFTA inventory management period based on the previous one-month period to determine the amount of imported gasohol utilizing originating CBOB which is eligible for preferential tariff treatment under the NAFTA.
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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 & Special Programs Branch