OT:RR:CTF:EPDR H332753 CC
Center Director
Petroleum, Natural Gas, and Minerals
Center of Excellence and Expertise
2350 N Sam Houston Pkwy E.
Houston, TX 77032
Attn: Deidra Golden, Drawback Specialist
Re: Internal Advice; Apportionment of Merchandise Processing Fees on Direct Identification Drawback Claims
Dear Center Director:
On June 7, 2023, the Petroleum, Natural Gas, and Minerals Center of Excellence and Expertise (“PNGM”) requested Internal Advice pursuant to 19 C.F.R. § 177.11, regarding the apportionment of merchandise processing fees (“MPFs”) paid in accordance with 19 U.S.C. § 58c(a)(9)(A) for drawback claims.
FACTS:
There is disagreement between the PNGM and certain members of the trade community as to the proper way drawback claimants should calculate the refund of MPFs. The PNGM believes that apportionment is made at the entry summary line item level (e.g., CBP Form 7501 or its electronic equivalent) and that such an apportionment methodology applies no matter whether the drawback claim is pursuant to direct identification or substitution. Certain trade community members assert that apportionment should occur at the invoice line item level for direct identification drawback claims (e.g., 19 U.S.C. §§ 1313(a) and 1313(j)(1)) and apportionment should occur at the entry summary line level for substitution drawback claims (e.g., 19 U.S.C. §§ 1313(b) and 1313(j)(2)).
ISSUE:
Whether merchandise processing fees are to be calculated and apportioned at the entry summary line level for direct identification drawback claims.
LAW AND ANALYSIS:
Pursuant to 19 U.S.C. § 58c(a)(9)(A), a merchandise processing fee is generally assessed on all imports and importers of record must pay MPFs upon formally entering their goods. 19 U.S.C. § 58c(a)(9)(A); 19 C.F.R § 24.23(b)(1). Prior to a decision by the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) in Texport Oil v. United States, 185 F.3d 1291 (Fed. Cir. 1999), U.S. Customs and Border Protection (“CBP”) did not interpret the relevant statute to permit the drawback of MPFs. Drawback is generally a refund of certain duties, taxes, and fees paid by the importer of record and granted to a drawback claimant under specific conditions. 19 U.S.C. § 1313. Pursuant to drawback regulations, drawback claimants are required to correctly calculate the amount of drawback due and generally can request 99 percent of the MPFs eligible for drawback. 19 C.F.R. § 190.51(b)(1) and § 191.51(b)(1).
In Texport, the Federal Circuit held that MPFs were eligible for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j). To implement the holding in Texport, CBP promulgated 19 C.F.R. § 191.51(b)(2) to provide the manner in which drawback claimants should apportion MPF apportionments to correctly calculate the amount of drawback due. Merchandise Processing Fee Eligible To Be Claimed as Unused Merchandise Drawback, 66 Fed. Reg. 9,647 (Feb. 9, 2001) (hereinafter “MPF Interim Final Rule”); Merchandise Processing Fee Eligible To Be Claimed as Unused Merchandise Drawback, 67 Fed. Cir. 48,547 (July 25, 2002) (hereinafter “MPF Final Rule”).
MPF is required to be apportioned because the drawback of MPF is only permitted on the merchandise that provides the basis for the drawback claim and because MPFs are subject to monetary limits. See MPF Interim Final Rule, 66 Fed. Reg. at 9,648; 19 U.S.C. §§ 58c(a)(9)(B)(i) and 58c(b)(B)(8)(A)(i) (capping the MPF amount at $485 “for any release or entry”, implemented at 19 C.F.R. § 24.23(b)(i)(B)); and 19 C.F.R. § 24.23(d)(1) (capping MPFs at $400 per monthly periodic statement). In response to a comment opposing the apportionment formula set forth in the MPF Interim Final Rule and suggesting that MPFs be allowed to be allocated to “individual items,” CBP made it clear that it did not agree that allocation of MPFs could be made at the invoice line level and stated that,
It is noted that pursuant to 19 U.S.C. § 58c(a)(9)(B)(i), a cap of $485 is applicable to each entry. For this reason, it is necessary that the merchandise processing fee be apportioned and refunded as a percentage of the entire entry.
MPF Final Rule, 67 Fed Reg. at 48,548.
At the time of promulgating the MPF Final Rule, drawback claims were calculated based on the invoice value of the designated imported merchandise. The MPF Final Rule created a new subsection titled “Merchandise processing fee apportionment calculations,” and walks the claimant through a four-step process as to how to properly apportion MPFs for purposes of a drawback claim. 19 C.F.R. § 191.51(b)(2). The first step is to determine the relative value ratio for each line item. The second step is to determine the MPF apportioned to each line item. The third step is to determine the amount of MPF eligible for drawback per line item. The final fourth step is to determine the amount of MPF eligible for drawback per unit of merchandise. Two calculation examples are provided. Throughout all the subsections and examples, the term “line item” is used without being defined as to whether it refers to the entry summary line item or the invoice value line level.
In 2016, Congress promulgated the Trade Facilitation and Trade Enforcement Act (“TFTEA”) that, among other changes, liberalized the substitution merchandise drawback standard. § 906, Title IX, Pub. Law No. 114-125, 130 Stat. 226-234 (Feb. 24, 2016). In 2018, CBP promulgated the Modernized Drawback regulations, which created 19 C.F.R. Part 190. Modernized Drawback, 83 Fed. Reg. 37,886 (Aug. 2, 2018) (hereinafter “Modernized Drawback NPRM”); Modernized Drawback, 83 Fed. Reg. 64,942 (Dec. 18, 2018) (hereinafter “Modernized Drawback Final Rule”). Pursuant to statutory changes to drawback under TFTEA, CBP implemented the necessary changes to the drawback regulations. The Modernized Drawback regulations mandated that TFTEA-drawback substitution claim refunds be calculated based on the per unit average value reported on the line from the entry summary that covered the designated imported merchandise. Modernized Drawback NPRM, 83 Fed. Reg. at 37,890-37,891; Modernized Drawback Final Rule, 83 Fed. Reg. at 64,953. TFTEA-drawback direct identification claim refunds, however, are to be calculated based on the invoice value of the designated imported merchandise. Id.
With regard to MPFs, the Modernized Drawback regulations expanded the drawback of MPFs to be permitted generally, rather than limited to the unused merchandise and substitution of finished petroleum derivatives drawback provisions discussed in Texport. Modernized Drawback NPRM, 83 Fed. Reg. at 37,902; Modernized Drawback Final Rule, 83 Fed. Reg. at 64,942. The Modernized Drawback regulations under 19 C.F.R. § 190.51(b)(2), however, did not change the MPF apportionment calculation instructions or examples from 19 C.F.R. § 191.51(b)(2). As a result of the Modernized Drawback changes of calculating at the entry summary line level for substitution claims and based on invoice value for direct identification claims, confusion has arisen as to whether the MPF calculation is similarly differentiated or should, no matter the type of claim (e.g., direct identification or substitution), be apportioned based on the entry summary line level.
We find that MPFs are to be calculated and apportioned at the entry summary line level for both direct identification and substitution claims for three reasons. First, CBP has the authority to dictate, pursuant to regulations, that MPFs are to be calculated and apportioned at the entry summary line level. Second, a plain reading of the regulatory text shows that MPF calculations have always been set apart in the regulations as something different than the calculation for “all other” duties, taxes, and fees. Third, the term “line item” is used consistently throughout CBP’s regulations to refer to the entry summary line and not to a commercial invoice line.
Regarding the first point, Congress provided CBP with the authority to dictate, pursuant to regulations, how to determine the calculation of amounts refunded as drawback. Pursuant to 19 C.F.R. § 1313(l), “Regulations,” which provides CBP with the authority to prescribe drawback regulations, Congress stated that CBP “may require the claim to be based upon the average per unit duties, taxes, and fees as reported on the entry summary line item or, if not reported on the entry summary line item, as otherwise allocated by [CBP] . . . .” 19 U.S.C. § 1313(l)(2)(B) (emphasis added). See also 19 U.S.C. § 1313(l)(2)(C). Accordingly, CBP has the authority to dictate that MPFs be calculated and apportioned at the entry summary line level. As discussed above, such apportionment at the entry summary line level is necessary to ensure that MPFs are not over-refunded because MPFs are capped at the entry level. MPF Final Rule, 67 Fed. Reg at 48,548 (“It is noted that . . . a cap of $485 is applicable to each entry. For this reason, it is necessary that the merchandise processing fee be apportioned and refunded as a percentage of the entire entry.”). Consequently, CBP has the authority to require that claims for drawback of MPFs be calculated and apportioned at the entry summary line item level and doing so is important to avoid loss of revenue to the United States.
Regarding the second point, a plain reading of the regulatory text removes MPF apportionment calculations from the distinction between direct identification claims and substitution claims and supports CBP’s apportionment of MPF drawback claims to the entry summary line level. The MPF apportionment calculation prescribed in 19 C.F.R. § 190.51(b)(2) is separate from the “Calculations for all other duties, taxes, and fees” provided in § 190.51(b)(3). Thus, by the plain organization of the regulation, MPFs are treated differently than “all other” fees. While the regulations for MPF drawback only mention apportionment based upon “line item,” CBP was explicit in the Federal Register notice creating the MPF regulations that CBP deemed it important to apportion MPF drawback claims at the entry summary level because of the MPF caps at the entry level. MPF Final Rule, 67 Fed. Reg. at 48,548.
Additionally, while the MPF apportionment calculations only discuss “line item” value ratios, the § 190.51(b)(3) provision for “all other duties, taxes, and fees” states that the claimant must accurately calculate the fees owed whether using per unit averaging (substitution claims) or inventory management methods (invoice values for direct identification claims). Accordingly, the regulations direct drawback claimants for “other fees” to calculate their claims accurately and distinguish between direct identification claims and substitution claims. In contrast, the regulation for MPF apportionment calculations does not create such a distinction between the two types of claims. By setting MPF drawback calculations apart from “all other fee” drawback claims, CBP regulations speak clearly that MPF drawback claims are treated differently.
Regarding the third point, the term “line item,” while not defined by statute or regulation, is used consistently throughout CBP statutes and regulations to refer to the entry summary line item on CBP Form 7501 or its electronic equivalent in the Automated Commercial Environment (“ACE”). For example, as discussed above, pursuant to 19 C.F.R. § 1313(l), CBP may require the claim to be based “upon the average per unit duties, taxes, and fees as reported on the entry summary line item or, if not reported on the entry summary line item, as otherwise allocated by [CBP] . . . .” 19 U.S.C. § 1313(l)(2)(B). See also 19 U.S.C. § 1313(l)(2)(C). CBP regulations also consistently refer to “line item” in the context of entry summary lines. For example, pursuant to 19 C.F.R. § 190.51, “Completion of drawback claims,” a drawback entry must include, “[f]or each designated import entry line item, the entry number and the line item number designating the merchandise . . .” 19 C.F.R. § 190.51(a)(2)(viii). Similarly, 19 C.F.R. § 190.51(a)(3), titled “Election of line item designation for imported merchandise,” provides for the designation of the line item for either direct identification or substitution claims:
Merchandise on a specific line on an entry summary may be designated for either direct identification or substitution claims but a single line on an entry summary may not be split for purposes of claiming drawback under both direct identification and substitution claims. The first complete drawback claim accepted by CBP which designates merchandise on a line on an entry summary establishes this designation for any remaining merchandise on that same line.
19 C.F.R. § 190.51(a)(3) (emphasis added). Accordingly, even though the title of the regulatory subsection refers to “line item,” the full regulatory provision clarifies that the reference was meant to specify the “line on an entry summary.”
Further, we are unable to find an example of the regulations referring to “line item” in the context of invoice values. For example, when discussing the calculation of a drawback claim based on invoice value for purposes of direct identification claim refunds, the terms “invoice value” or “fees that were paid for that unit” are the terms applied. See, e.g., 19 C.F.R. § 190.51(b)(1)(i); Modernized Drawback NPRM, 83 Fed. Reg. at 37,890. Accordingly, our review of the relevant statutes and regulations leads us to conclude that the term “line item” in 19 C.F.R. § 190.51(b)(2) is limited to the data recorded on CBP Entry Form 7501, or the electronic equivalent in ACE.
In conclusion, 19 C.F.R. § 190.51(b)(2) requires drawback claimants to calculate and apportion MPFs at the entry summary line level, whether the claim is direct identification or substitution. As discussed above, CBP has the authority to require the apportioning of MPFs at the entry summary line level and that apportionment is necessary to ensure that MPFs are not over-refunded. The MPF apportionment calculation regulations also set MPF calculations apart from the calculation of all other fees. Finally, although the MPF regulations only refer to “line item,” CBP has been consistent throughout its regulations to use the term “line item” when referencing the entry summary line. For all these reasons, MPFs are to be calculated and apportioned at the entry summary line level whether the drawback claim is based upon direct identification or substitution.
HOLDING:
Based on the above discussion, MPFs are to be calculated and apportioned at the entry summary line level whether the drawback claim is based upon direct identification or substitution.
Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
Signed May 20, 2024
Yuliya A. Gulis, Director
Commercial and Trade Facilitation Division