OT:RR:CTF:EPDR H331481 IPW
Mr. David Murphy Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP
599 Lexington Avenue, 36th floor
New York, 10022
Re: Partial destruction in a U.S. Foreign Trade Zone; zone-restricted status; exportation under the drawback laws and regulations
Dear Mr. Murphy
This is in response to your letter, dated May 8, 2023, requesting whether it is permissible to admit merchandise into a U.S. Foreign Trade Zone (FTZ) under zone-restricted status for partial destruction and subsequent exportation, and whether such admission in zone-restricted status is an exportation under the drawback laws and regulations so that a drawback claim can be made pursuant to 19 U.S.C 1313(j)(1).
FACTS:
Clover II is a wholesaler that imports jewelry and distributes to retailers in the United States to sell to consumers. Some of the jewelry is returned by consumers to the retailers, and in turn, returned to Clover II. Clover II intends to establish a FTZ to admit the returned jewelry under zone-restricted status. The returned jewelry will be added to a tumbler filled with iron balls that, when shaken, breaks the jewelry apart into metal scraps. The metal will be exported to Italy to be sold in accordance with CBP requirements under 19 C.F.R. §§ 146.67-146.68. Clover II intends to file drawback pursuant to 19 U.S.C. 1313(j)(1) for unused merchandise on the returned jewelry as it is admitted into the zone.
ISSUE: Whether it is permissible to admit merchandise into a FTZ under zone-restricted status for partial destruction and subsequent exportation, and whether such admission in zone-restricted status is an exportation under the drawback laws and regulations to allow for a 1313(j)(1) claim.
LAW AND ANALYSIS:
Section 3 of the Foreign-Trade Zones Act of 1934, as amended (19 U.S.C. 81c), provides in part that:
. . . under the rules and regulations of the controlling Federal agencies, articles which have been taken into a zone from customs territory for the sole purpose of exportation, destruction (except destruction of distilled spirits, wines and fermented malt liquors), or storage shall be considered to be exported for the purpose of - (a) the drawback. . . .
Under the regulations, merchandise that is admitted into a FTZ for the sole purpose of exportation, destruction, or storage will be given zone-restricted status upon proper application. 19 CFR § 146.44. Merchandise admitted into a zone under zone-restricted status may be considered exported for the purpose of any Customs law, including drawback. 19 CFR § 146.44(c)(1), 190.181.
Drawback is a refund or remission, in whole or in part, of a Customs duty, internal revenue tax, or fee. There are different kinds of drawback authorized under law, but the one at issue is unused merchandise drawback pursuant to 19 U.S.C. § 1313(j). Specifically, the claimant intends to rely upon 19 CFR § 190.43, which states that “[r]ejected merchandise may be the subject of an unused merchandise drawback claim under 19 U.S.C. 1313(j)(1).” Rejected merchandise includes merchandise that is “ultimately sold at retail by the importer, or the person who received the merchandise from the importer, and for any reason returned to and accepted by the importer, or the person who received the merchandise from the importer” if exported or destroyed within five years of the importation. 19 U.S.C. 1313(c)(ii), (d); 19 CFR § 190.41. As FTZ law intersects with drawback law, as noted above, the admission of merchandise into a zone under zone-restricted status serves as the “export” for purposes of completing a drawback claim. It is therefore necessary to determine if the tumbler process within the zone is a permissible activity in the confines of zone-restricted status, such that the drawback on the returned jewelry may be claimed upon admission into the zone in zone restricted status.
Destruction for purposes of merchandise under zone-restricted status requires the merchandise and its residue from the destruction process to be rendered valueless; otherwise, the process will be treated as a manipulation. Historically, in interpreting the term destruction, Customs followed the Customs Court case American Gas Accumulator Co. v. United States, Treasury Decision 43642, 56 Treas. Dec. 368 (1929). In that case, the Customs Court defined destruction as,
destruction as an article of commerce. In other words, if articles were destroyed to such an extent that they were only valuable in commerce as old scrap they still would be articles of commerce to which duty attached upon importation, and therefore could not be said to have been destroyed.
Id. at 370. Destruction, however, need not take place in one step. See Customs Service Decision (C.S.D.) 80-67, 14 Cust. Bull. 830 (1979); C.S.D. 81-100, 15 Cust. Bull. 938 (1980). A partial destruction combined with further destruction, exportation, and/or storage also meets the requirements of the Foreign Trade Zones Act and the Customs regulations for treatment of merchandise in zone-restricted status. Id. In C.S.D. 80-67, a firm imported semiconductor devices into the United States. Defective devices were sent to a FTZ under zone-restricted status so that they may be considered exported for the purposes of drawback, which was claimed pursuant to 19 U.S.C. 1313(c) for defective imports. The defective devices were put through a crushing process that left gold scrap, a valuable waste, as a residue. We held that the crushing of semiconductors in a FTZ is a destruction for the purposes of 19 U.S.C. 81c, even though valuable gold scrap remained, on the condition that the scrap was only exported, further destroyed, or stored in the FTZ. In C.S.D. 81-100, a firm intended to bring rejected semiconductor devices into a FTZ for destruction under zone-restricted status. In the FTZ, the devices would be immersed in a cyanide solution to remove a precious metal overlay. After the precious metal was chemically removed and in solution, the devices would then be crushed in a hammer mill and reduced to scrap that contained precious metals. We held that this process would satisfy the destruction requirement of 19 U.S.C. section 81c, despite the two-step process, because both steps would carry forward the destruction of the zone-restricted merchandise.
Here, Clover II intends to admit returned jewelry in a FTZ under zone-restricted status. The jewelry will be placed into a tumbler to be aggressively shaken with heavy metal balls to break the jewelry down into smaller metal pieces. This process, alone, would not constitute a destruction. The remaining metal pieces, like the gold scrap in C.S.D. 80-67 and precious metals in C.S.D. 81-100, are articles of commerce and, therefore, cannot be said to be destroyed. However, the breaking of the jewelry into smaller pieces is a step toward destruction. Consistent with C.S.D. 80-67, this process is permissible under the zone-restricted status of the jewelry as long as the metal pieces are either further destroyed, exported, or stored in the zone. As the requester states, it will export the metal pieces to Italy to be sold. This meets the requirements of the Foreign Trade Zones Act and the Customs regulations for treatment of merchandise in zone-restricted status. As such, the merchandise may be considered “exported” upon admission into the zone under zone-restricted status. The claimant may use this “export” to complete its drawback claim pursuant to 19 U.S.C. 1313(j)(1).
HOLDING:
We find that it is permissible to admit merchandise into a FTZ under zone-restricted status for partial destruction and subsequent exportation, and that such admission in zone-restricted status is an exportation under the drawback laws and regulations to allow for a 1313(j)(1) claim.
The holding set forth above applies only to the specific factual situation and procedures and processes identified in the ruling request. This position is set forth in 19 C.F.R. § 177.9(b)(1), that states 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 ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect.” Should it be subsequently determined that the information furnished is not complete and does not comply with 19 C.F.R. § 177.9(b)(1), the ruling will be subject to modification or revocation. In the event there is a change in the facts previously furnished, this may affect the determination of whether the work performed by the broker is “customs business.” Accordingly, if there is any change in the facts submitted to Customs, it is recommended that a new ruling request be submitted in accordance with 19 C.F.R. § 177.2.
Sincerely,
Monika R. Brenner, Interim Chief
Entry Process & Duty Refunds Branch