DRA 1
H285450 SMS
OT:RR:CTF:ER
John M. Peterson
Neville Peterson LLP
One Exchange Plaza
55 Broadway, Suite 2602
New York, NY 10006
RE: Charter Brokerage, LLC: Request for a determination of the availability of Drawback for Shipboard Blending of Energy Products
Dear Mr. Peterson:
This is in response to your application, dated April 10, 2017 and updated on November 10, 2017, on behalf of Charter Brokerage, LLC, (“Charter”), for a formal ruling on the availability of drawback for various situations involving shipboard blending of energy products, under the drawback law as set forth in Section 313 of the Tariff Act of 1930 (“the Tariff Act”), and as amended pursuant to Section 906 of the Trade Enforcement and Trade Facilitation Act of 2015 (“TFTEA”) (19 U.S.C. § 1313). We regret the delay in our response.
FACTS:
Charter is a licensed Customs broker, which files drawback claims on behalf of various clients. Many of Charter’s drawback transactions involve petroleum and other energy products, which are shipped in bulk via tanker vessels. Charter anticipates to file proposed drawback claims with the Newark, New Jersey; Houston, Texas; and San Francisco, California Drawback Offices. Charter’s petroleum trader clients export products in the same condition as when they are acquired, or after blended with other materials, to make new products prior to exportation. The blending of products either occurs within the tanks, upon the exporting vessels, before the vessels clear from the Unites States ports, or while the vessel is in international waters. These products are actively traded and their ownership may change several times in a short period of time, over the course of the transaction. Charter seeks guidance concerning the availability and type of drawback refunds in the scenario outlined below. Charter asserts that in the proposed scenario, all of the petroleum products laden on the vessels are for commercial exportations as cargo, to non-NAFTA countries, and are not used as vessel supplies. We also assume that all of the merchandise loaded on the vessel for exportation, is imported and duty paid.
Proposed Scenario: Company A loads No. 6 fuel oil on board a foreign-flagged vessel at U.S. Port #1, pursuant to an export bill of lading issued by the carrier. Upon lading, Company A sells the No. 6 fuel oil to Company B. Without the knowledge of Company A, Company B loads No. 2 fuel oil on the same vessel, and at Company B’s direction, the two fuel oils are blended to make No. 4 fuel oil (50% each), which is then exported when the vessel sails from Port #1. Charter provided four scenarios all very similar, except that the foreign-flagged vessel moved from different U.S. ports, prior to exportation.
Charter contends that Company A can claim drawback on duty paid merchandise, which is commercially interchangeable with No. 6 fuel oil under 19 U.S.C. §§ 1313(p) or (j)(2). However, Charter explains because the No. 6 fuel oil is blended with No. 2 fuel oil, prior to exportation, a “use” has occurred, which would defeat a drawback claim by Company A, pursuant to 19 U.S.C. §§ 1313(p), (j)(1), or (j)(2). Charter explains that in this scenario “the combination of biodiesel and petroleum diesel to create B50 does effect significant changes in character and use of the product” and constitutes a use for drawback purposes. Charter further contends that drawback is available for Company B, pursuant to 19 U.S.C. § 1313(a) and (b), as Company B caused a manufacture by blending the No. 6 and No. 2 fuel oils to form No. 4 fuel oil. Lastly, Charter asserts that Company B may claim unused merchandise drawback under 19 U.S.C. §§ 1313(p), (j)(1) (direct identification) and (j)(2) (substituted), if it possessed “commercially interchangeable” or merchandise “classifiable under the same 8-digit HTS subheading number” as the imported, duty-paid No. 4 fuel oil.
Charter explains that the trading and shipboard blending activity, described above, has resulted in confusion concerning when drawback may be claimed on the exported blended products, what type of drawback may be claimed, and by whom, under the law as set forth in the Tariff Act and as amended pursuant to TFTEA. Accordingly, confirmation of Charter’s above analysis, is requested.
ISSUE:
Whether drawback is applicable in the described scenario, and to whom.
LAW AND ANALYSIS:
The Tariff Act provides for drawback, which is a refund of certain duties, taxes, and fees imposed on imported merchandise which are paid after timely filing a claim with U.S. Customs and Border Protection (“CBP”), providing sufficient evidence linking to an article’s exportation or destruction. Drawback is a privilege, not a right, subject to compliance with the prescribed rules and regulations. See 19 U.S.C. § 1313(l). The implementing regulations regarding drawback under the Tariff Act are contained in Part 191 of the CBP regulations (19 C.F.R. § 191). On February 24, 2016, the Trade Enforcement and Trade Facilitation Act of 2015 (“TFTEA”) (Pub. L. 114–125, 130 Stat. 122) was signed into law, and regulations were promulgated to implement TFTEA changes on December 18, 2018. See 83 Fed. Reg. 64,942 (Dec. 18, 2018) (19 C.F.R. § 190). Please note that pre-TFTEA provisions of this ruling do not apply to claims filed after February 23, 2019. Id.
Pursuant to Section 313 of the Tariff Act, there are two main categories of drawback at issue in this case: manufacturing drawback and unused merchandise drawback. Prior to the implementation of modernized drawback under TFTEA, 19 U.S.C. § 1313(a) and (b)), provided that if imported duty-paid merchandise (direct identification) and any other merchandise (whether imported or domestic, i.e., substitution manufacturing) of the “same kind and quality” are used within three years of the receipt of the imported merchandise in the manufacture or production of articles and the articles manufactured or produced are exported or destroyed, under CBP supervision, without being used in the United States, 99 percent of the duties paid shall be refunded as drawback, even if none of the imported merchandise was actually used in the manufacture or production of the exported or destroyed articles. See Subpart B of Part 191 (19 C.F.R. §§ 191.21 – 191.28). Nineteen U.S.C. § 1313(j)(1) and (j)(2), provided that drawback may be claimed on imported duty-paid merchandise that is directly identified or substituted for “commercially interchangeable” and unused merchandise if the unused merchandise is exported or destroyed within three years from the date of receipt of the imported merchandise. See Subpart C of Part 191 (19 C.F.R. §§ 191.31 – 191.38). Pursuant to 19 U.S.C. § 1313(j), prior to the exportation or destruction, the substituted or directly identified merchandise, must not have been used in the United States and must have been in the possession of the drawback claimant. Id.
Section 906 of TFTEA made significant changes to the drawback laws which generally liberalize the standards for substituting merchandise, ease recordkeeping requirements, extend and standardize timelines for filing drawback claims, and simplify the claims process by requiring electronic filing. TFTEA provided for a universal five-year filing deadline for drawback claims. All TFTEA-Drawback claims must be filed no later than five years after the date the merchandise on which drawback is claimed was imported. See 19 U.S.C. § 1313(r)(1). TFTEA provides a new standard for substitution claims which is based, generally, on the 8-digit Harmonized Tariff Schedule of the United States (“HTSUS”) subheading number. This standard replaces the “same kind and quality” and “commercial interchangeability” standards that were applied, respectively, to substitution manufacturing and substitution unused merchandise drawback claims under §§1313(a),(b), (j)(1), and (j)(2). Under TFTEA, claimants whose drawback-eligible goods are exported (in lieu of destruction) must provide proof that establishes fully the date and fact of exportation and the identity of the exporter. Proof of exportation is required in the form of export summary data, and the underlying supporting records must fully prove the exportation through records kept in the normal course of business. See 19 C.F.R. § 190.72.
Lastly, TFTEA did not substantively amend 19 U.S.C. § 1313(p), under both the Tariff Act and TFTEA, notwithstanding any other provision in section 1313, drawback is allowed if: (A) the “exported article” of the “same kind and quality” as a “qualified article” is exported; (B) the requirements set forth in section 1313(p)(2) are met; and (C) a drawback claim is filed regarding the exported article. See 19 C.F.R. § 190.171. Nineteen U.S.C. § 1313(p)(3) defines qualified articles, we note that this definition includes articles described in HTSUS headings 2710. See 19 U.S.C. § 1313(p)(3)(A)(i)(I).
Generally, pre-TFTEA drawback regulations provide that the exporter (or destroyer) will be entitled to claim drawback, unless the exporter (or destroyer), by means of a certification, assigns the right to claim drawback to the manufacturer, producer, importer, or intermediate party. See 19 C.F.R. §§ 191.28, 191.33, and 191.82. The regulation requires that “[s]uch certification shall also affirm that the exporter . . . has not and will not assign the right to claim drawback on the particular exportation . . . to any other party.” Id. With respect to claims filed pursuant to § 1313(p), the drawback claimant must be the exporter of the exported article, or the refiner, producer, or importer of either the qualified article or the exported article. 19 U.S.C. § 1313(p)(3)(C). Any of these persons may also designate another person to file the drawback claim. If the right to claim drawback is transferred, pursuant to the Tariff Act, a drawback claimant must provide a Certificate of Manufacture and Delivery (“CMD”) or Certificate of Delivery (“CD”) establishing the drawback eligibility of the articles for which drawback is claimed. See 19 C.F.R. §§ 191.24, 191.33, and 191.175. However, TFTEA removed the requirements for CDs and CMDs. Pursuant to TFTEA, parties involved in transfers of drawback products or other drawback-eligible goods must maintain records kept in the normal course of business to evidence such transfers. See 19 C.F.R. § 190.10.
With respect to multiple drawback claims, the drawback statute provides in 19 U.S.C. § 1313(v) as follows: “[m]erchandise that is exported or destroyed to satisfy any claim for drawback shall not be the basis of any other claim for drawback; except that appropriate credit and deductions for claims covering components or ingredients of such merchandise shall be made in computing drawback payments.” 19 U.S.C. § 1313(v). Legislative history of section 1313(v), states that the paragraph “provides that only one drawback claim per exportation or destruction of goods would be allowed.” HQ 229590 (Oct. 24, 2002) (citing H. Report 103 361, 103d Cong., 1st Sess., 130). With regards to manufacturing drawback claims, multiple claimants may file for drawback with respect to the same export, where different parts of the merchandise has been produced by different manufacturers, under drawback conditions, and the exporter waives the right to claim drawback and assigns such right to the manufacturers. See 19 C.F.R. § 191.26(e) and 19 C.F.R. § 190.26(e), see also, 19 C.F.R. 190.82 (“[u][nless otherwise provided in this part . . . the exporter (or destroyer) will be entitled to claim drawback, unless the exporter (or destroyer), by means of a certification, waives the right to claim drawback and assigns such right to the manufacturer, producer, importer, or intermediate party”).
As noted above, drawback is a refund of certain duties, taxes, and fees imposed on imported merchandise which are paid after providing sufficient evidence linking to the article’s exportation. Charter explains that all of the petroleum products laden on the vessel are for commercial exportation as cargoes, rather than as vessel supplies. In the case of a commercial cargo, the goods are not considered “exported,” for drawback purposes, until they have been sent out of the country with the intent of uniting them with the goods of a foreign country. See Swan & Finch, 190 U.S. at 145. See also, 19 C.F.R. § 101.1 and HQ H169017 (July 25, 2014). (By contrast, in the case of vessel supplies, “exportation” for drawback purposes is considered complete upon lading of the supplies on the outbound vessel). See, e.g., 19 U.S.C. § 1309(b).
Additionally, Charter declares the combination of biodiesel and petroleum diesel to create fuel oil No. 4 constitutes a use for drawback purposes. Charter did not provide specific enough information for us to determine if an actual use occurred; however, there is precedence that allows the blending of fuel oil to constitute a use for drawback purposes. In HQ 116230, dated May 28, 2004, a company proposed to blend different blendstocks, such as, Vacuum Tower Bottoms; Hugh Sulfur Oil, Low Sulfur Slurry, and Medium Fuel Oil to create a final product meeting ASTM D 396-02 standard for grade No. 6 fuel oil. The Low Sulfur Slurry met ASTM 396 standards already for No. 4 or No 5 fuel oils but after the blending operations it was transformed to No. 6 fuel oil. Here we explained that for coastwise laws “the Customs Service will generally consider fuel oils of a different ASTM grades as different products.” Additionally, after referring the matter to the Laboratories & Scientific Services (“LSS”), we confirmed that the blending of the four fuel oils to make another, created a “new and different product.” See HQ 116230. Conversely, in HQ H091497, dated February 4, 2010, we found that the blending of three grade No. 2 diesel fuel oils was not a manufacturer and did not create a new product, as LSS also confirmed the blended fuel oils could still be employed in the same manner. See HQ H091497.
While these are rulings related to coastwise transportation law, a similar analysis would be used to determine if a manufacturer/use occurred in this instance. Pursuant to 19 C.F.R. § 190, a manufacture or production “means a process, including, but not limited to, an assembly, by which merchandise is either made into a new and different article having a distinctive name, character or use; or is made fit for a particular use even though it is not made into a new and different article.” 19 C.F.R. § 190(TFTEA); see also 19 C.F.R. § 191.2(q)(pre-TFTEA). Lastly, we note that the simple act of blending is not considered a use, without the creation of a new product or being made fit for a particular use, “the performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes” is not a use. 19 U.S.C. § 1313(j)(3) (emphasis added). Therefore, only if under the proposed scenario, the blending of the No. 6 and No. 2 fuel oils to create the No. 4 fuel oil is found to be a new and different article, or made fit for a particular use, would it qualify for manufacturing drawback under 19 U.S.C. § 1313(b), and precluded under the unused drawback provisions found under 19 U.S.C. § 1313(j). A specific manufacturing ruling would need to be submitted to Regulations and Rulings, under 19 C.F.R. § 190.8, and the specifics of the proposed blending would be analyzed and a “use” confirmed, prior to the approval of a manufacturing drawback claim. Additionally, the location of the factory, in this scenario a vessel, were the process of manufacture will take place, would need to be provided and reviewed. See Appendix B to Part 190. For purposes of this ruling, we note that the applicant did not request a determination on whether the fuel oil blending qualifies as a manufacturing process under 1313(a) or (b) drawback or whether a vessel qualifies as a factory identified in a drawback manufacturing ruling. Therefore, we will not address these issues in this ruling and defer the assessment once a proper manufacturing drawback ruling is filed.
We will assume that both No. 6 and No. 2 fuel oils were imported and duty paid. Accordingly, if proven that Company A sells duty paid imported No. 6 fuel oil to Company B, prior to its use and exportation, despite Company A selling the merchandise pursuant to an export bill of lading, the No. 6 fuel oil was not severed from the goods of the United States until after Company B caused its blending with the imported duty paid No. 2 fuel oil to manufacture No. 4 fuel oil. As there are no facts to discern otherwise, the exportation event for drawback purposes, appears to have occurred after the declared manufacture of the No. 4 fuel oil. The scenario presented by Charter, and the applicable drawback provisions that could be claimed for each, would not change under Section 906 of TFTEA. There will be changes to the way drawback is claimed and refunded, but the actual provisions eligible to the petroleum products, as Charter described, will remain the same under TFTEA. Here, as Charter explained, because the No. 6 fuel oil was “used” prior to exportation, Company A would be precluded from filing a drawback claim pursuant to 19 U.S.C. § 1313(j)(1) or (2). However, Company A, may file a manufacturing drawback claim under § 1313(a) or (b) for fuel oil No. 6, if Company B waives and assigns its drawback rights under 19 C.F.R. §§ 191.28, 191.33, 191.82; 190.28, 190.33, and 190.82. Lastly, multiple claims may be filed by both Companies if proportioned pursuant to 19 U.S.C. § 1313(v) and 19 C.F.R. § 190.26(e).
In summary, if drawback is claimed on a “qualified article” pursuant to §1313(p), under the provisions found in §§ 1313 (a), (b), or (j)(1), the standards outlined in the Tariff Act will remain the same under TFTEA, with exceptions to the time limitation to file a claim and the recordkeeping requirements. See 19 C.F.R. § 190.171. Specifically, for claims filed under both Part 191 and Part 190, based on a qualified article under §1313(p), Charter would need to continue to demonstrate the “same kind a quality” substitution standard. Id. However, if Charter proposes to file a claim after February 23, 2019, for a finished petroleum derivative under a substitution drawback provision, i.e. §§1313(b) and (j)(2), the new TFTEA 8-digit HTSUS standard would apply, and the previous “same kind and quality” and “commercial interchangeability” standards, would no longer apply. Lastly, for direct identification claims 1313(a) (manufacturing) and 1313(j)(1) (unused), there are no substantive changes, under TFTEA, other than time limits to file a claim and recordkeeping requirements.
As Company B has the power and responsibility for determining and controlling the exportation of the manufactured article out of the United States, Company B may file drawback on imported duty paid fuel oil Nos. 6 and 2 that are used to manufacture any exported fuel oil No. 4, pursuant to §§ 1313(a) or (b). See Subparts B of 19 C.F.R. Part 191 and Part 190. Again, if the merchandise was used prior to exportation, Company B cannot file an unused merchandise drawback claim under 19 U.S.C. § 1313(j)(1) or (2) on either fuel oils Nos. 6 and 2. Alternatively, while there are no facts that discuss any importation of substitutable No. 4 fuel oil; if as Charter asserts, No. 4 fuel oil was manufactured domestically with duty-paid imports in the United States and is not used before it is exported, fuel oil No. 4 can be used as a substitute for imported commercially interchangeable fuel oil, or imported fuel oil classifiable under the same 8-digit HTSUS. Therefore, upon exportation of unused fuel oil No. 4, Company B may be eligible for drawback under 1313(j)(2), as long as a manufacturing claim for fuel oil Nos. 6 and 2 has not been made. Lastly, as Charter indicates that the exported No.4 fuel oil is a finished “qualified article” classified in heading 2710, as included in 19 U.S.C. § 1313(p)(3)(A)(i)(I), it is also alternatively eligible for drawback under § 1313(p).
HOLDING:
Based on the above discussion and specific scenario presented, Company B may file manufacturing drawback claims for imported duty-paid fuel oils Nos 6 and 2 under 19 U.S.C. §§ 1313(a) or (b), if all applicable requirements are met. Conversely, Company A, may file a manufacturing drawback claim under 19 U.S.C. §§ 1313(a) or (b) for fuel oil No. 6, if Company B assigns and waives its drawback rights, as multiple claims may be filed by both Companies if proportioned pursuant to 19 U.S.C. § 1313(v) and 19 C.F.R. § 190.26(e). Finally, Company B may seek drawback for fuel oil No. 4, as a qualified article under 19 U.S.C § 1313(p).
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruing letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” If the activities vary from the facts stipulated to herein, this decision shall not be binding on CBP, as provided for in 19 C.F.R. § 177.9(b).
Sincerely,
Gail G. Kan, Chief
Entry Process & Duty Refunds Branch