OT:RR:CTF:EPDR H322158 MY
Peter W. Klestadt, Esq.
Grunfeld Desiderio Lebowitz Silverman & Klestadt LLP
599 Lexington Avenue FL 36
New York, NY 10022-7648
RE: Use of an approved accounting method to claim drawback under 19 U.S.C. § 1313(j)(1);
exports to Canada.
Dear Mr. Klestadt,
This is in response to the November 22, 2021, ruling request filed by your firm, on behalf
of Safilo USA Inc. (“Safilo”). You seek a determination as to the permissibility of using an
approved accounting method under 19 C.F.R. § 190.14 to identify drawback eligible goods in
order to claim direct identification unused merchandise drawback pursuant to 19 U.S.C. §
1313(j)(1). You seek confirmation that merchandise withdrawn from a fungible inventory, in
which duty-paid unused merchandise and customer returned retail merchandise is commingled,
may be identified as drawback eligible through an approved accounting method, specifically the
low-to-high blanket method
FACTS:
Safilo imports non-prescription eyewear (“eyewear”). None of the imported eyewear is
originating under the United States-Mexico-Canada Agreement (“USMCA”). While most of the
imported eyewear is sold to domestic retailers, Safilo states that it “also exports [some] eyewear
to Canada in the same condition as imported.” It is this exported eyewear that is at issue in
Safilo’s request.
The exported eyewear is withdrawn from an inventory consisting of unsold merchandise
and returned merchandise. The returned merchandise is comprised of eyewear that was either
returned by a retailer, without having first been sold to an end-customer, or eyewear that was
returned by a customer after retail sale. Both types of returned merchandise, retailer-returned and
customer-returned, are inspected by Safilo’s receiving department. As part of this inspection,
Safilo pulls any defective or damaged eyewear to be destroyed. The remaining eyewear, which is
deemed “of saleable quality,” is returned to Safilo’s inventory and commingled with eyewear
that was never sold.
All eyewear within Safilo’s commingled inventory is tracked by a Stock Keeping Unit
(“SKU”). Each model of eyewear is assigned a 13-digit SKU number – this SKU identifies a
given unit’s model, color, bridge size, and front. Safilo posits that all eyewear of the same SKU
is identical and interchangeable for commercial purposes, rendering it fungible for drawback
purposes. Safilo explains that its inspection and inventory tracking process allows it to keep a
tally of all returned merchandise. Although Safilo cannot identify which specific units of
eyewear within its commingled inventory were returned as opposed to unsold, it proposes to
identify unsold eyewear by utilizing an accounting method specified in 19 C.F.R. § 190.14(c).
Safilo does not claim that the returned merchandise in its inventory is “unused” and
therefore eligible for drawback under 19 U.S.C. § 1313(j)(1). Instead, Safilo seeks to claim direct
identification unused merchandise drawback under 19 U.S.C. § 1313(j)(1) on the unsold portion
of its inventory by distinguishing it from returned merchandise through an accounting method
specified in 19 C.F.R. § 190.14(c). Safilo provides an example of how it may utilize an approved
accounting method to identify unsold eyewear in its commingled inventory. Safilo proposes that
by utilizing the low-to-high blanket accounting method (19 C.F.R. § 190.14(c)(3)(iv)): all
returned merchandise in its inventory will be assigned a zero duty value for drawback purposes;
exports to Canada in any given period will be first matched with receipts having the lowest duty
value; no drawback will be claimed on receipts with a zero duty value; and therefore no
drawback will be paid on returned merchandise. This process, Safilo explains, will allow it to
restrict the amount of drawback sought to the value of unsold merchandise in inventory.
Safilo argues that the commingling of drawback eligible goods with returned goods does
not, of itself, render the unsold portion of the commingled inventory ineligible for unused
merchandise drawback nor preclude the use of an accounting method under 19 C.F.R. §
190.14(c) to identify unsold merchandise. In support of its argument, Safilo invokes Toyota
Motor Sales v. United States (“Toyota Motor Sales”) in which the Court of International Trade
specifically acknowledged that an accounting method could be utilized to identify and
distinguish between drawback eligible and drawback ineligible goods stored in a commingled
inventory. See 35 C.I.T. 1205 (Ct. Int’l Trade 2011). Safilo further underscores that the
regulatory text of 19 C.F.R. § 190.14(c)(3)(iv)(B) contemplates that some exports will consist of
goods on which drawback is not available by stating that “[a]ll withdrawals for export must be
accounted for whether or not drawback is available or claimed on the withdrawals.”
Safilo also argues that its inventory of eyewear is fungible as required by 19 C.F.R. §
190.14(b)(1) in order to utilize an inventory accounting method. Safilo posits that its eyewear is
fungible for the following reasons: all units of the same SKU number have the same model,
color, bridge size, and front; both returned and unsold eyewear originate from the same source
abroad; the returned eyewear which is deemed “of saleable quality” is not distinguishable from
unsold eyewear based on its characteristics; and purchase orders for domestic sales and exports
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are both placed based on a product’s SKU number, without regard to its status as unsold or
returned merchandise.
ISSUES:
I. Whether the unsold portion of Safilo’s inventory, that is exported to Canada, is
unused and therefore eligible for drawback under 19 U.S.C. § 1313(j)(1).
II. Whether Safilo’s inventory of eyewear is fungible for purposes of utilizing an
accounting method specified in 19 C.F.R. § 190.14(c).
III. Whether an accounting method specified in 19 C.F.R. § 190.14(c), specifically the
low-to-high blanket method, may identify unused merchandise commingled with
returned merchandise in inventory for purposes of claiming direct identification
unused merchandise drawback under 19 U.S.C. § 1313(j)(1).
LAW AND ANALYSIS:
I. Whether the unsold portion of Safilo’s inventory, that is exported to Canada, is
unused and therefore eligible for drawback pursuant to 19 U.S.C. § 1313(j)(1).
Pursuant to 19 C.F.R. § 182.42(c), substitution unused merchandise drawback under 19
U.S.C. § 1313(j)(2) is not available on exports to Canada or Mexico. See also 19 U.S.C. §
1313(j)(4)(A)(i) (“the exportation to a USMCA country of merchandise that is fungible with and
substituted for imported merchandise . . . shall not constitute an exportation”). Additionally, the
refund for drawback eligible claims, such as unused merchandise drawback under 19 U.S.C. §
1313(j)(1), is generally limited to the lesser of the total duties paid or owed on the importation
into the United States, or the total amount of duties paid on the exported good on its subsequent
importation into Canada or Mexico. See 19 C.F.R. § 182.44(a). This limitation is referred to as
the “lesser of” rule. An exception from the “lesser of” rule arises in circumstances where a good
is exported to Canada or Mexico in the same condition as imported into the United States. See 19
U.S.C. § 4534(a)(2); 19 C.F.R. § 182.45(b).
A good generally remains in the “same condition” if prior to exportation it does not undergo
an operation that materially alters its characteristics. See 19 C.F.R. § 182.45(b)(1); see also HQ
H331751 (Nov. 20, 2024). The USMCA drawback requirements under Part 182 are also of
particular relevance to Safilo’s proposal to utilize an accounting method specified in 19 C.F.R. §
190.14(a). Pursuant to 19 C.F.R. § 181.45(b)(2)(i)(B), if an inventory of fungible goods consists
entirely of non-originating goods then identification of merchandise “for same condition
drawback” purposes under 19 U.S.C. § 1313(j)(1) must be based on one of the accounting
methods specified in 19 C.F.R. § 190.14. Safilo states that none of the eyewear in its inventory is
originating under the USMCA, and that its eyewear is fungible. Safilo’s ruling request thus stems
in part from the requirement to utilize an accounting method specified in 19 C.F.R. § 190.14(c)
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for USMCA drawback purposes, specifically to claim unused merchandise drawback under 19
U.S.C. § 1313(j)(1).
In order to claim unused merchandise drawback, imported and duty-paid merchandise must
remain unused within the United States prior to its exportation or destruction. See 19 U.S.C. §
1313(j)(1)(B); 19 C.F.R. § 190.31(a). When drawback is claimed on a finished article, such as
the eyewear at issue, U.S. Customs and Border Protection (“CBP”) has consistently held that an
article is used when employed for its intended purpose. See Headquarters Ruling Letter (HQ)
H290868 (Sept. 11, 2019) (citing Customs Service Decision (C.S.D.) 81-222 (May 27, 1981)).
For example, CBP has previously held that wearing apparel and accessories such as jewelry and
clothing that were manufactured for the purpose of being worn after retail sale became used
when sold and worn by an end customer. Id.; HQ H263493 (July 25, 2017); HQ H292054 (Sept.
26, 2022). Conversely, in circumstances where such articles were never sold to a prospective
customer at a retail location, although they may have been displayed or tried on, these articles
remain unused for drawback purposes. See HQ H290868; HQ H292054. Further, in circumstance
where “used merchandise is indistinguishably commingled with unsold [and thus unused]
merchandise within [a party’s] exported inventory,” it may not be possible to prove the statutory
requirement of non-use due to improper inventory records or limited information regarding how
an article was utilized after sale. HQ H263493.
Here, Safilo does not seek to claim drawback on any returned merchandise, irrespective of
whether it was returned by a retailer or by a customer after sale. Instead, it seeks to limit its
drawback claim to unsold eyewear that has never reached a retailer. Non-prescription eyewear,
like jewelry, is generally worn by an end customer for personal adornment after retail sale. See
HQ 730963 (April 21, 1988) (“conventional frames function as more than merely lens holders
and their identity as an article of personal adornment is retained after lenses are inserted”); HQ
950700 (Aug. 25, 1993). The eyewear on which Safilo seeks to claim drawback was never sold
to an end customer who could have employed it for its intended purpose of being worn. We thus
find that the unsold portion of Safilo’s inventory, that was never sold to a retailer for prospective
sale to a customer, is unused for purposes of drawback eligibility under 19 U.S.C. § 1313(j)(1).
II. Whether Safilo’s inventory of eyewear is fungible for purposes of utilizing an
accounting method specified in 19 C.F.R. § 190.14(c).
Pursuant to 19 C.F.R. § 190.14(a), an accounting method may be used to identify
merchandise in inventory for non-substitution drawback claims. There are various criteria that
must generally be satisfied in order for an accounting method to be used, such as: (1) the
merchandise in inventory must be fungible; (2) inventory records “prepared and used in the
ordinary course of business [must] account for the lots of merchandise . . . as being received into
and withdrawn from the same inventory;” (3) “all receipts (or inputs) into and all withdrawals
from the inventory must be recorded in the accounting record;” and (4) a single adopted
accounting method must be used exclusively for a period of at least a year. 19 C.F.R. §§
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190.14(b)(1)-(3); 190.14(b)(5). Accordingly, fungibility is the first criteria that must be satisfied
for purposes of utilizing an accounting method.
Merchandise is fungible when, for commercial purposes, it is identical and
interchangeable in all situations. 19 C.F.R. § 190.2. Fungibility does not require that
merchandise be precisely identical; identical for “commercial purposes” allows some slight
differences. See, e.g., HQ 224287 (April 15, 1993). CBP previously addressed whether certain
retail articles identified by a barcode or SKU are fungible. In HQ 229403, dated April 15, 2002,
CBP considered whether imported and domestically produced footwear was interchangeable for
commercial purposes and thus fungible despite differences in color, size, and style. In that case,
New Balance Athletic Shoes, Inc. (“New Balance”) imported finished athletic footwear
manufactured in the People’s Republic of China and components of footwear that were
assembled in the United States into nearly identical footwear. The imported and domestic
footwear was identified and tracked through a barcode, which contained information about its
color, size, and style. The last five digits of the bar code for all shoes represented a SKU
identifying specific style categories. Any imported and domestic footwear with the same barcode
were interchangeable based on their color, size, and style. However, there were two differences
between the imported and the domestic footwear. First, the sizing systems used to indicate shoe
size varied depending on the country of production. Second, all footwear was marked with its
respective country of origin. Despite these differences, all purchase orders were processed based
on characteristics other than country of origin, and no distinction was made between imported
and domestic footwear in the company’s sales and marketing activities. Additionally, differences
in sizing had no effect on pricing to either distributors or retail customers. CBP ultimately found
that the imported and domestic footwear was fungible because the shoes were interchangeable
for commercial purposes based on color, size, and style. CBP concluded that New Balance was
thus permitted to use an accounting method specified in 19 C.F.R. § 191.14(c).
Analogous to New Balance’s inventory in HQ 229403, Safilo’s inventory is recorded and
tracked using a SKU, with all goods of the same SKU identifying merchandise with the same
characteristics, such as model, color, bridge size, and front, irrespective of whether the eyewear
in inventory constitutes unsold or returned merchandise. Further, as was the case in HQ 229403,
Safilo does not discriminate or distinguish between the products based on their status as returned
or unsold merchandise; instead, all purchase orders for domestic sales and exports are placed and
honored based on SKU number, without regard to status as unsold or returned merchandise. This
makes the returned and the unsold goods of the same SKU number identical and interchangeable
for commercial purposes, and therefore fungible. We thus find that the unsold and returned
eyewear of the same SKU number in Safilo’s inventory is commercially interchangeable and
therefore fungible for purposes of utilizing an accounting method specified in 19 C.F.R. §
190.14(c). We note that Safilo is obligated to satisfy the remaining criteria for utilizing an
accounting method detailed in 19 C.F.R. §§ 190.14(b)(2)-(5). We further note that Safilo remains
obligated to satisfy all other requirements applicable to its drawback claims, to include
establishing whether the eyewear exported to Canada is in the same condition as at importation
for USMCA purposes.
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III. Whether an accounting method specified in 19 C.F.R. § 190.14(c), specifically the
low-to-high blanket method, may be used to identify unused merchandise
commingled with returned merchandise in inventory for purposes of claiming
direct identification unused merchandise drawback under 19 U.S.C. § 1313(j)(1).
The regulatory text of 19 C.F.R. § 190.14(c) supports the use of an accounting method to
identify exports withdrawn from a commingled inventory consisting of drawback-eligible and
drawback-ineligible fungible articles. Within the list of approved accounting methods specified
in 19 C.F.R. § 190.14(c), the first-in, first-out (FIFO) method and low-to-high method both
specifically reference accounting for units of “no drawback attributable” merchandise as opposed
to “drawback attributable” units. See 19 C.F.R. §§ 190.14(c)(1)(ii); 190.14(c)(3)(i). An example
of such “no drawback attributable” merchandise is provided as part of the low-to-high method:
The low-to-high method is the method by which fungible merchandise or
articles are identified by recordkeeping on the basis of the lowest drawback
amount per unit of the merchandise or articles in inventory. Merchandise or
articles with no drawback attributable to them (for example, domestic
merchandise or duty-free merchandise) must be accounted for and are treated
as having the lowest drawback attributable to them.
Likewise, the regulatory history of 19 C.F.R. § 190.14 provides that an accounting
method may be utilized to “determine the identity” of drawback eligible merchandise. In 1997,
in a notice of proposed rulemaking for 19 C.F.R. § 191.14, the predecessor to 19 C.F.R. §
190.14, CBP explained that:
For those situations in which the statute does not allow substitution of
merchandise or articles [], and in which a company is not able to specifically
identify merchandise or articles (e.g., by serial number), accounting methods
may be used to determine the identity thereof. Such identification may be made
on the basis of a company’s records, rather than on the basis of the actual
physical movement of the inventory.
Drawback, 62 Fed. Reg. 3082 (Jan. 21, 1997). 1 The regulatory framework of 19 C.F.R. § 190.14
thus specifically authorizes identification of drawback eligible merchandise, or merchandise to
which drawback is attributable, which may be commingled in inventory with drawback ineligible
merchandise, or merchandise to which no drawback is attributable, such as domestically
manufactured or duty-free merchandise.
1
19 C.F.R. § 190.14 “differs from the corresponding section in part 191 regarding the five-year time period
[amendment to 19 U.S.C. § 1313 pursuant to Section 906 of the Trade Enforcement and Trade Facilitation Act of
2015 (TFTEA)] and generally due to minor clarifying edits as well as grammatical and nomenclature changes.”
Modernized Drawback, 83 Fed. Reg. 37886 (Aug. 2, 2018). The intent of the regulation, to permit identification of
merchandise through an accounting method, thus remained unchanged from Part 191 to 190 of CBP Regulations.
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CBP rulings have also addressed the use of an accounting method to identify drawback
eligible merchandise. In HQ 229938, dated June 3, 2004, Toyota Motor Sales, U.S.A., Inc.
(“Toyota”) protested CBP’s denial of drawback on automobile service parts. Toyota sought to
utilize an accounting method to identify imported and duty-paid automobile service parts that
were taken out of an inventory in which they were commingled with domestically produced
service parts. CBP determined that “the use of an inventory management method set forth in 19
C.F.R. 191.14 to identify a good for purposes of eligibility of drawback under 19 U.S.C. §
1313(j)(1) is authorized.” However, CBP found that the parts at issue were not fungible as
required by 19 C.F.R. § 191.14(b)(1) and thus precluded Toyota’s use of an accounting method.
CBP ultimately denied the protest on multiple grounds. When the denial was challenged at the
Court of International Trade, the court affirmed that “a claimant need not track merchandise on a
unit-specific basis if it can identify those exports eligible for drawback through an approved
accounting method.” Toyota Motor Sales, 35 C.I.T. 1205, 1207 (Ct. Int’l Trade 2011). The court
explained that “if an importer maintains fungible inventories consisting of both drawback
eligible and ineligible merchandise (e.g., domestically produced products), any merchandise
subject to drawback may be identified by inventory accounting methods.” Id. at 1208.
Safilo relies on Toyota Motor Sales for its argument that a commingled inventory of
fungible merchandise may consist of unused merchandise eligible for drawback under 19 U.S.C.
§ 1313(j)(1) and returned merchandise to which no drawback will be attributed because it is or
may be ineligible for drawback under 19 U.S.C. § 1313(j)(1). 2 Safilo stresses that the function of
an accounting method specified in 19 C.F.R. § 190.14(c) is to identify drawback eligible
merchandise from a commingled inventory containing drawback ineligible goods, such that it
makes “no difference if the ineligible goods are domestically produced goods, duty free goods[,]
or used merchandise.” We agree.
The regulatory text of 19 C.F.R. § 190.14 does not limit the use of an accounting method
to inventories commingled with certain types of drawback ineligible merchandise. Although 19
C.F.R. § 190.14(c)(3)(i) references certain types of drawback ineligible articles – such as
domestic and duty-free merchandise – that may be commingled with drawback eligible articles,
these references are illustrative as indicated by the language “for example.” These references are
thus not intended to restrict the types of “no drawback attributable” units of inventory that may
be distinguished from “drawback attributable” units, but to illustrate circumstances in which no
drawback may be attributable to merchandise within a commingled inventory. Under the various
examples of how to utilize an accounting method provided in 19 C.F.R. § 190.14(c), to include
the low-to-high blanket method that Safilo proposes to use, articles that are ineligible for direct
identification drawback are treated as “no drawback attributable” units of inventory. See 19
C.F.R. § 190.14(c)(3)(iv)(C) (“the drawback attributable to the January 15 withdrawal for export
is zero”). We thus find that merchandise to which “no drawback [is] attributable” may be
2
The returned merchandise to which no drawback will be attributed is or may be ineligible for drawback under 19
U.S.C. § 1313(j)(1) because it is comprised of eyewear returned by a retailer, which may have never been sold to an
end customer and thereby not used for its intended purpose, and eyewear returned by a customer, which was or may
have been worn after retail purchase and thus used for its intended purpose. See HQ H290868 (Sept. 11, 2019); HQ
H292054 (Sept. 26, 2022).
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ineligible for drawback altogether, or, may be ineligible for the specific type of direct
identification drawback being claimed.
Safilo seeks to claim direct identification unused merchandise drawback under 19 U.S.C.
§ 1313(j)(1) for the unsold eyewear commingled in its inventory with returned merchandise to
which no drawback will be attributable. Accordingly, like the importer in HQ 229938, Safilo
appropriately seeks to use an accounting method under 19 C.F.R. § 190.14 to identify exports of
eyewear eligible for drawback under 19 U.S.C. § 1313(j)(1) that are withdrawn from a fungible
commingled inventory. A distinction between the present facts and the scenario in HQ 229938 is
that Toyota did not attribute drawback to domestically produced parts that were ineligible for
drawback altogether, while Safilo is not attributing drawback to eyewear that may be eligible for
drawback under a provision other than 19 U.S.C. § 1313(j)(1). The returned merchandise to
which no drawback will be attributed by Safilo includes eyewear returned by a customer after
retail purchase that may be eligible for drawback under 19 U.S.C. § 1313(c)(C)(ii) for articles
“ultimately sold at retail . . . and for any reason returned” by an end customer. However, this
does not preclude Safilo from electing to not attribute any drawback whatsoever to the returned
merchandise in its inventory for purposes of claiming unused merchandise drawback under 19
U.S.C. § 1313(j)(1). The amount of drawback Safilo is eligible to claim by utilizing an
accounting method specified in 19 C.F.R. § 190.14(c) for the unsold portion of its inventory is
limited to the value of articles actually eligible for direct identification drawback under 19
U.S.C. § 1313(j)(1). Accordingly, Safilo’s returned merchandise constitutes drawback ineligible
merchandise for purposes of its unused merchandise drawback claim.
We note that all drawback claims are subject to verification by CBP, which includes
examination of all records relating to the transactions as needed. 19 C.F.R. §§ 190.61(a)-(b);
190.14(b)(4). Further, drawback is a privilege, not a right, and “as a statutory privilege,
drawback is due only when enumerated conditions are met.” Toyota Motor Sales, 35 C.I.T. 1205,
1221 (internal citations omitted). Stated alternatively, “[d]rawback is a privilege that is only
secured by strict compliance with the prescribed rules and regulations.” HQ H329090 (Oct. 23,
2023). Safilo’s eligibility to claim direct identification unused merchandise drawback under 19
U.S.C. § 1313(j)(1) by utilizing an accounting method specified in 19 C.F.R. § 190.14(c),
specifically the low-to-high blanket method, is thus conditioned on strict adherence to all
statutory and regulatory requirements for drawback. If CBP cannot verify that all applicable
requirements for drawback have been satisfied then no drawback is owed or payable to a
claimant. We further note that Safilo, to facilitate CBP’s verification of a claim, may elect to
record returns to its inventory from a retailer with the term “Returned” or some other designation
as part of its recordkeeping.
HOLDING:
Based on the above, we find that (1): the unsold portion of Safilo’s inventory, that was
never sold to a retailer for prospective sale to a customer, is unused for drawback purposes;
(2) Safilo’s unsold and returned eyewear is commercially interchangeable and therefore fungible;
and that (3) Safilo may use an accounting method specified in 19 C.F.R. § 190.14(c), specifically
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the low-to-high blanket method, to identify merchandise eligible for drawback under 19 U.S.C §
1313(j)(1) that was withdrawn from a fungible inventory of eyewear and commingled with
returned merchandise to which no drawback will be attributed.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the
assumption that all the information furnished in connection with the ruling request and
incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and
complete in every material respect. The application of a ruling letter by [CBP] 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.”
Sincerely,
Kristina Frolova, Chief
Entry Process & Duty Refunds Branch
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