- Type : • HTSUS :
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Related:
221059
OT: RR: CTF: ER H122861 TT
Munford Page Hall, II
Adduci Mastriani & Schaumberg LLP
1200 Seventeenth Street, N.W.
Washington, DC 20036
RE: Bonded Warehouse Class 8 Ruling Request on Diluting Vodka
Dear Mr. Hall: This is in response to your letter, dated September 10, 2010, on behalf of Constellation Brands, Inc., and its subsidiary, Sprits Marque One, LLC (collectively, “Constellation”) regarding the dilution and bottling of imported vodka in a Class 8 bonded warehouse.
FACTS:
On September 13, 2010, our office received a letter on Constellation’s behalf requesting a ruling on the permissibility of diluting and bottling imported vodka in a Customs and Border Protection (“CBP”) Class 8 bonded warehouse and whether the duties assessed would be based on the condition of the vodka at the time of importation or at the time of withdrawal from the bonded distilled spirits plant. Constellation’s imported vodka has an ethyl alcohol content of 96% by volume. While in a CBP bonded warehouse or alternatively, in an Alcohol and Tobacco Tax and Trade Bureau (“TTB”) bonded distilled spirits plant (“DSP”), Constellation proposes to add water to the vodka in order to dilute its alcohol concentration down from 96% to 40% by volume and to possibly bottle the vodka therein. The dilution would involve adding water without removing any part of the vodka. Additionally, it asserts that both the imported and the diluted vodka will comply with the definition of “vodka” found within TTB regulations, 27 C.F.R. § 5.22(a)(1).
ISSUES:
Whether diluting imported vodka by adding water to reduce its alcohol content from 96% to 40% by volume constitutes permissible manipulation for a Class 8 bonded warehouse.
Whether the duty rate of imported vodka is determined based on the condition of the vodka when it is entered into the United States or withdrawn from a TTB DSP.
LAW AND ANALYSIS:
CBP bonded warehouses are secured areas in which, “dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty.” T.D. 82-204 (Oct. 22, 1982). There are various types of bonded warehouses and each type operates under certain restrictions. Under section 562 of the Tariff Act of 1930, as amended (19 U.S.C. § 1562), only operations not exceeding “manipulation” can be conducted in a Class 8 bonded warehouse. The statute provides that imported “merchandise may [with Customs permission and supervision] be cleaned, sorted, repacked, or otherwise changed in condition, but not manufactured, in bonded warehouses established for that purpose. . . .” 19 U.S.C. § 1562 (emphasis added). See also, 19 C.F.R. § 19.1(a)(8) (“Class 8: Bonded warehouses established for the purpose of cleaning, sorting, repacking, or otherwise changing in condition, but not manufacturing, imported merchandise, under Customs supervision and at the expense of the proprietor.”).
“Manufacture” for purposes of 15 U.S.C. § 1562 does not require a substantial transformation, instead “a low threshold of ‘transformation’” satisfies the meaning of ‘manufactured’ for bonded warehouses purposes. Tropicana Products, Inc. v. U.S., 16 C.I.T. 155, 160 (1992). In Tropicana, the Court of International Trade (“CIT”) looked at the meaning of ‘manufacture’ in 19 U.S.C. § 1562 and distinguished it from the meaning of ‘manufacture’ when used in the context of drawback, classification, and a country of origin analysis. Id. 16 C.I.T. at 160 (“the criterion of whether goods have been ‘manufactured’ serves different purposes under different statutes, particularly § 1562 on the one hand and statutes concerned with country-of-origin marking, Generalized System of Preferences and drawback on the other. . .”). The CIT determined that:
To interpret ‘manufacturing’ – an expressly prohibited manipulation under § 1562 – as requiring a high threshold of transformation (viz., a substantial transformation as stringently required in country of origin and drawback cases), would negate the evident legislative intent of the statute to permit only very minor or rudimentary manipulations in bonded warehouses – akin to the exemplars (cleaning, sorting and repacking).
Id. Therefore, the analysis to determine whether a procedure constitutes a “manufacture” for purposes of 19 U.S.C. § 1562 is a “low threshold.” Id.
Title 19 U.S.C. § 1311 provides that, “[d]istilled spirits and wines which are rectified in bonded manufacturing warehouses, class six, and distilled spirits which are reduced in proof and bottled in such warehouses, shall be deemed to have been manufactured within the meaning of this section. . . .” See also, C.S.D. 82-3 (July 17, 1981) (explaining that bonded manufacturing warehouses are established under 19 U.S.C. § 1311, which provides that diluting distilled spirits is considered manufacturing). Class 6 bonded warehouses, which are provided for under the authority of 19 U.S.C. § 1311, are “warehouses for the manufacture in bond, solely for exportation, of articles made in whole or in part of imported materials… .” 19 C.F.R. § 19.1(a)(6) (emphasis added). Constellation’s proposal to reduce the proof of its vodka, a type of spirit, in a bonded warehouse is the activity that 19 U.S.C. § 1311 defines as a manufacture.
Constellation argues that the language “bottled in such warehouses” refers only to Class 6 warehouses, thus that provision is inapplicable when determining whether its processes satisfy the requirements of a Class 8 bonded warehouse. However, the statutes together explain that this process is a manufacture that is impermissible for a Class 8 bonded warehouse. As discussed above, 19 U.S.C. § 1562, generally addresses “Manipulation in warehouse” and explains that manipulation is processing that does not amount to the level of a manufacture. Thus, for purposes of bonded warehouses, if a product is manufactured, by statute, it cannot be considered to be manipulated. Therefore, because 19 U.S.C. § 1311 states that reducing in proof and bottling distilled spirits is “deemed to [be] manufactured,” that same activity cannot also be considered a manipulation.
Constellation further argues that diluting alone is not manufacture as 19 U.S.C. § 1311 states, “distilled spirits which are reduced in proof and bottled… shall be deemed to have been manufactured.” (emphasis added). However, the process of diluting alone constitutes a manufacture, which renders it impermissible for a Class 8 bonded warehouse. This is because CBP regulations indicate that bottling is permissible in a Class 8 bonded warehouse and is thus, not a manufacture. See 19 C.F.R. § 12.37. Thus, if the action of bottling is manipulation, then it follows that it must be the process of dilution that renders bottling and distilling a manufacture. Therefore, Constellation’s proposed action of dilution is a manufacture.
This conclusion is consistent with previous court decisions. In Tropicana, the CIT held that the process of diluting concentrated orange juice to be a manufacture for purposes of 19 U.S.C. § 1562. Tropicana, 16 C.I.T. at 162. Constellation argues that its process is fundamentally different from Tropicana’s by asserting that, Tropicana’s process was more intricate. However, the CIT explained that “manufacture” has a “low threshold.” Id. 16 C.I.T. at 160. Further, Constellation, like Tropicana, is diluting its liquid merchandise by means of adding water to achieve a specific ratio of concentration. Finally, even if Tropicana’s dilution of orange juice concentrate was more involved than Constellation’s dilution of vodka, a fact which is not established in Constellation’s request, the statute directs that dilution of distilled spirits is a manufacture.
Constellation also cites to C.S.D. 80-165, a ruling that found that the dilution of beer by means of adding water and its subsequent bottling, was a permissible manipulation for a non-manufacture bonded warehouse. C.S.D. 80-165 (Nov. 29, 1979). However, the ruling distinguishes dilution of beer from dilution of distilled spirits, which would be a manufacture, pursuant to 19 U.S.C. § 1311. The ruling cites the language of Section 1311 and explains that, “[s]ince that provision refers only to distilled spirits and is applicable only to procedures in section 1311 bonded manufacturing warehouses, it has no effect upon the reduction in alcoholic content of beer in a manipulation warehouse.” Thus, the law distinguishes distilled spirits from beer and C.S.D. 80-165 is not controlling in this case.
The above statute, case law, and previous ruling establish that the action of reducing the proof of distilled spirits, such as Constellation’s proposed dilution procedure, is an impermissible manufacture for a Class 8 bonded warehouse.
II. Duties are Assessed at the Time of Entry
Constellation argues that duties from its importation of vodka should be assessed based on the vodka’s condition at withdrawal from a TTB bonded distilled spirits plant (“DSP”). The duty rate of merchandise imported into the United States is assessed at the time of entry. 19 C.F.R. § 141.69. However, CBP’s bonded warehouses provide for an exception to that rule by allowing duties to be assessed at time of withdrawal from such warehouses. 19 U.S.C. § 1557(a)(1); 19 C.F.R. § 141.69(a). Therefore, without an exception like the one for CBP bonded warehouses, general customs laws apply and duties are assessed at time of entry. Constellation proposes to import its vodka and to admit it into a TTB DSP where it will be diluted as explained above. TTB DSPs are not CBP bonded warehouses and are operated by the TTB. TTB DSPs are codified under the Internal Revenue Code, Title 26 of the United States Code, in 26 U.S.C. §§ 5171 – et seq, whereas CBP bonded warehouses are codified in Title 19, Customs Duties, 19 U.S.C. § 1556. Therefore, since TTB DSPs do not fall within the exception provided for CBP bonded warehouses, or any other exception, the general rule of duty assessment applies and Constellation’s duties for its vodka will be assessed at entry and not at withdrawal from a TTB DSP.
In support of its argument that duties on its vodka should be assessed upon withdrawal from a TTB DSP, Constellation cites to Additional U.S. Note 1 to Chapter 22 of the HTSUS (“AUSN 1”). AUSN 1 states:
The duties prescribed on products covered by this chapter are in addition to the internal-revenue taxes imposed under existing law or any subsequent act. The duties imposed on products covered by this chapter which are subject also to internal-revenue taxes are imposed only on the
quantities subject to such taxes; except that, in the case of distilled spirits transferred to the bonded premises of a distilled spirits plant under the provisions of section 5232 of the Internal Revenue Code of 1954, the duties are imposed on the quantity withdrawn from customs custody.
(emphasis added). Constellation uses this Note to argue that duties are assessed upon withdrawal. However, the last sentence of this Note states that duties are assessed upon withdrawal from customs custody. As explained above, TTB DSP are operated by TTB, not CBP. 26 U.S.C. §§ 5171 – et seq. Merchandise within a TTB DSP is not within “customs custody.” Therefore, Note 1 does not apply to TTB DSPs.
Similarly, Constellation cites to Headquarters’ ruling HQ 221059 highlighting a sentence within that ruling, which states, “duties, like taxes . . . can be assessed against no more than the quantity of spirits withdrawn.” HQ 221059 (November 7, 1990). However, this statement was made in construing the above cited AUSN Note 1, which speaks to duties being assessed upon withdrawal from “customs custody.” As discussed above, TTB DSPs are not within “customs custody,” thus the cited provision is inapplicable. Additionally, Constellation points to the fact that HQ 221059 relies upon a legacy Customs ruling which states, “in the case of distilled spirits, the obligation of an importer to pay duty does not accrue on importation.” C.S.D. 81-82; Cust. Bull., Vol. 15, p. 901, 903 (1981). However, the legacy Customs ruling refers to the case of distilled spirits in warehouses, not TTB DSPs, and is thus, not relevant to the facts of this case.
Further, Constellation points to 26 U.S.C. § 5232, which provides for “[t]ransfer to distilled spirits plant without payment of tax.” It argues that this statute explains that duties should be paid upon withdrawal from a TTB DSP. However, that statute is referring to internal revenue taxes, not duties. This is demonstrated as that statute is codified within Title 26, which is the Internal Revenue Code. Moreover, the statute is limited to the payment of the “tax” and does not speak to payment of the “duties.” Therefore, neither AUSN 1 nor 26 U.S.C. § 5232 support Constellation’s argument for duty assessment upon withdrawal of a TTB.
Finally, Constellation relies on 19 C.F.R. § 159.4(a) to argue that duties should be assessed upon withdrawal from a TTB DSP. It argues that this is because 19 C.F.R. § 159.4(a) states that, “custom duties… shall be collected only on the number of proof gallons and fractional parts thereof, entered or withdrawn for consumption.” From this regulation it argues that duties should be assessed on the condition of the vodka at the time of withdrawal from a TTB DSP. However, as previously explained, merchandise has already “entered or withdrawn” for consumption prior to being admitted into a TTB DSP. The duty rate assessment will be made when the vodka is entered pursuant to, 19 C.F.R. § 142.2. Thus, Constellations’ duties will be assessed on the condition of the vodka as its being entered into the United States and not as it is withdrawn from a TTB DSP.
HOLDING:
Based on the above determinations, we conclude that the dilution of vodka by means of adding water would constitute an impermissible manufacture under 19 U.S.C. § 1562. Further, duties on the imported vodka will be assessed at time of entry and not withdrawal from a TTB DSP.
Sincerely,
Myles B. Harmon,
Director
Commercial and Trade Facilitation Division