[Federal Register Volume 68, Number 163 (Friday, August 22, 2003)]
[Rules and Regulations]
[Pages 50700-50703]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 03-21575]
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DEPARTMENT OF HOMELAND SECURITY
Bureau of Customs and Border Protection
19 CFR Part 191
[CBP Dec. 03-23]
RIN 1515-AD02
Manufacturing Substitution Drawback: Duty Apportionment
AGENCY: Bureau of Customs and Border Protection, Department of Homeland
Security.
ACTION: Final rule.
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SUMMARY: This document adopts as a final rule, with changes, the
interim rule amending the Customs Regulations that was published in the
Federal Register on July 24, 2002, as T.D. 02-38. The interim rule
amended the regulations to provide the method for calculating
manufacturing substitution drawback where imported merchandise, which
is dutiable on its value, contains a chemical element and amounts of
that chemical element are used in the manufacture or production of
articles which are either exported or destroyed under Customs
supervision. Recent court decisions have held that a chemical element
that is contained in an imported material that is subject to an ad
valorem rate of duty may be designated as same kind and quality
merchandise for drawback purposes. The amendment provides the method by
which the duty attributable to the chemical element can be apportioned
and requires a drawback claimant, where applicable, to make this
apportionment calculation.
EFFECTIVE DATE: August 22, 2003.
FOR FURTHER INFORMATION CONTACT: William G. Rosoff, Chief, Duty and
Refund Determinations Branch, Office of Regulations and Rulings, Bureau
of Customs and Border Protection, Tel. (202) 572-8807.
SUPPLEMENTARY INFORMATION:
Background
Drawback--19 U.S.C. 1313
Section 313 of the Tariff Act of 1930, as amended, (19 U.S.C.
1313), concerns drawback and refunds. Drawback is a refund of certain
duties, taxes and fees paid by the importer of record and granted to a
drawback claimant upon the exportation, or destruction under Customs
supervision, of eligible articles. The purpose of drawback is to place
U.S. exporters on equal footing with foreign competitors by refunding
most of the duties paid on imports used in domestic manufactures
intended for export.
Substitution for Drawback Purposes--19 U.S.C. 1313(b)
There are several types of drawback. Under section 1313(b), a
manufacturer can recoup duties paid for imported merchandise if it uses
merchandise of the same kind and quality to produce exported articles
pursuant to the terms of the statute. Section 1313(b) reads, in
pertinent part:
(b) Substitution for drawback purposes.
If imported duty-paid merchandise and any other merchandise
(whether imported or domestic) of the same kind and quality are used
in the manufacture or production of articles within a period not to
exceed three years from the receipt of such imported merchandise by
the manufacturer or producer of such articles, there shall be
allowed upon the exportation, or destruction under customs
supervision, of any such articles, notwithstanding the fact that
none of the imported merchandise may actually have been used in the
manufacture or production of the exported or destroyed articles, an
amount of drawback equal to that which would have been allowable had
the merchandise used therein been imported * * *.
Manufacturing substitution drawback is intended to alleviate some
of the difficulties in accounting for whether imported merchandise has,
in fact, been used in a domestic manufacture. Section 1313(b) permits
domestic or other imported merchandise to be used to make the export
article, instead of the actual imported merchandise, so long as the
domestic or other imported merchandise is of the ``same kind and
quality'' as the actual imported merchandise.
Several recent court cases have examined the scope of the term
``same kind and quality'' as used in 19 U.S.C. 1313(b). See E.I. DuPont
De Nemours and Co. v. United States, 116 F. Supp. 2d 1343 (Ct. Int'l
Trade 2000). See also International Light Metals v. United States, 194
F.3d 1355 (Fed. Cir. 1999). In these cases, the courts held that a
chemical element that is contained in an imported material that is
dutiable on its value may be designated as same kind
[[Page 50701]]
and quality merchandise for purposes of manufacturing substitution
drawback pursuant to 19 U.S.C. 1313(b). The holding in DuPont
necessitates apportionment as a necessary method of claiming a drawback
entitlement under these circumstances. DuPont, 116 F. Supp. 2d at 1348-
49.
Amendment to Sec. 191.26(b) of the Customs Regulations
On July 24, 2002, Customs and Border Protection (CBP), as its
predecessor agency, the Customs Service, promulgated interim amendments
to the Customs Regulations, published in the Federal Register (67 FR
48368) as T.D. 02-38, to implement the courts' holdings in DuPont and
ILM. The interim amendments to the Customs Regulations were made to
Sec. 191.26 (19 CFR 191.26), which sets forth the recordkeeping
requirements for manufacturing drawback. Paragraph (b) of this section
describes the recordkeeping requirements for substitution drawback.
To implement the courts' interpretation of 19 U.S.C. 1313(b), T.D.
02-38 amended Sec. 191.26(b) by adding language that explains how to
apportion the duty attributable to same kind and quality chemical
elements contained in ad valorem duty-paid imported materials for
purposes of manufacturing substitution drawback. T.D. 02-38 also
amended Sec. 191.26(b) to provide an example of apportionment
calculations.
Duty Apportionment Calculation
In order for a drawback claimant to be able to ascertain what
portion of the ad valorem duty paid on imported merchandise is
attributable to a chemical element contained in the merchandise, an
apportionment calculation is necessary. First, if the imported duty-
paid material is a compound with other constituents, including
impurities, and the purity of the compound in the imported material is
shown by satisfactory analysis, that purity, converted to a decimal
equivalent of the percentage, is multiplied against the entered amount
of the material to establish the amount of pure compound. The amount of
the element in the pure compound is to be determined by use of the
atomic weights of the constituent elements, converting to the decimal
equivalent of their respective percentages, and multiplying that
decimal equivalent against the above-determined amount of pure
compound. Second, the amount claimed as drawback based on a contained
element must be taken into account and deducted from the duty paid on
the imported material that may be claimed on any other drawback claim.
Discussion of Comments
Five commenters responded to the solicitation of public comment
published in T.D. 02-38. A description of the comments received,
together with CBP's analyses, is set forth below.
Comment: Several commenters disagreed with CBP's interpretation
that the court decisions in DuPont and ILM require an apportionment
calculation to determine the proper drawback entitlement.
CBP's response: CBP maintains its view that the holdings in DuPont
and ILM necessitate apportionment of the duty attributable to a
chemical element contained in an ad valorem duty-paid imported material
if this chemical element is the designated good in a drawback claim
under 19 U.S.C. 1313(b). As noted above, the CAFC in ILM and the CIT in
DuPont examined the scope of the term ``same kind and quality'' as used
in 19 U.S.C. 1313(b) and determined that a chemical element contained
in an imported material that is dutiable on its value may be designated
as same kind and quality merchandise for purposes of manufacturing
substitution drawback. In ILM, the CAFC stated that as there was ``* *
* no dispute as to the amount of titanium that was used in the scrap *
* * the amount of drawback to which ILM would be entitled based upon
the titanium in that scrap and the titanium in the imported sponge
could be precisely determined.'' Similarly, in DuPont, the CIT noted
that because the amount of titanium in the feedstocks can be accurately
determined, substitution of another feedstock for synthetic rutile is
permitted. If either the CAFC or the CIT intended drawback to be
permitted on all the titanium-containing raw materials, the courts
would not have emphasized that calculation of the amount of titanium
contained in the raw materials entitled the claimant to a specific
amount of drawback. The courts clearly recognized that apportionment by
relative weight was necessary to prevent the overpayment of drawback.
Comment: Several commenters noted that if apportionment is
required, apportionment by relative value is a more appropriate
calculation method than apportionment by relative weight. In a related
comment, one commenter suggested that a drawback claimant should have
the option to apportion duty using either relative value or relative
weight.
CBP's response: CBP disagrees. As discussed above, the courts in
both ILM and DuPont require apportionment by relative weight. Both of
these courts held that the quantity, and not the value, of the sought
material (the titanium) could be determined and consequently the amount
of drawback could be determined. Moreover, there is no authority to
apportion duty by relative value for a drawback claim per 19 U.S.C.
1313(b) when only one good results from the processing of the imported
merchandise. If the sought material, i.e., the titanium, was divided to
make two articles, then relative value apportionment would be required.
Comment: One commenter submitted that apportionment by relative
weight contradicts the drawback statute (19 U.S.C. 1313) because this
section, at paragraph (a), provides drawback upon the ``exportation or
destruction under custom supervision of articles manufactured or
produced in the United States with the use of imported merchandise, * *
*.'' The commenter noted that the sought element in DuPont (the
titanium) is neither ``used'' nor ``imported'' because it is the
feedstock containing the titanium that is ``imported'' and ``used''
within the meaning of section 1313(b). Another commenter stated that
section 1313(b) provides no legal basis for apportionment under these
circumstances.
CBP's response: CBP disagrees. The plain language of 19 U.S.C.
1313(b) permits drawback to be paid only on the sought element, and the
sought element in both ILM and DuPont was the titanium. Section 1313(b)
provides that an amount of drawback equal to that which would have been
allowable had the merchandise used therein been imported is payable if
imported duty-paid merchandise and any other merchandise (whether
imported or domestic) of the same kind or quality are used in the
manufacture or production of articles subsequently exported or
destroyed. Clearly, per 19 U.S.C. 1313(b), the merchandise upon which
drawback may be paid is the merchandise characterized as ``same kind
and quality.'' It cannot be said that the various feedstocks used to
provide the sought element in those cases are of the ``same kind and
quality,'' but only that the titanium, as a discrete element contained
in the feedstocks, was of the ``same kind and quality'' as required by
section 1313(b). In ILM, the CAFC makes clear that the merchandise of
the ``same kind and quality'' required by 19 U.S.C. 1313(b) was the
sought element, titanium, and not the various feedstocks. ILM, 194 F.3d
1355 at 1367. Additionally, in applying the three
[[Page 50702]]
factors promulgated by the CAFC in ILM, the CIT in Dupont stated:
* * * the [ILM] court reasoned that the phrase ``same kind and
quality'' should be applied only to the sought element contained in
a source material, and not to the source material as a whole or the
impurities contained therein * * *. Thus, although different ores
may be made up of a number of elements, the ``same kind and
quality'' standard applies only to the element used in manufacturing
the exported article.
Dupont, at 1348. Therefore, the court held that the titanium is the
designated merchandise. Since titanium is an element, and an element is
measured by its weight, apportionment by relative weight is required.
Consequently, the apportionment of the duty attributable to a chemical
element contained in ad valorem duty-paid imported merchandise must be
calculated by the relative weights of the sought element and the
feedstock used.
Comment: One commenter stated that since T.D. 82-36 (16 Cust. B. &
Dec. 97, February 26, 1982) is specific as to ``how to determine the
quantity of imported merchandise to be designated, and therefore, the
basis for the allowance of drawback,'' apportionment by weight is not
mandated by the court decisions.
CBP's response: CBP disagrees. The CAFC in ILM stated:
* * * we find little assistance in the facts of T.D. 82-36. That
ruling dealt with a substitution of copper ores, in which each ore
contained impurities and a single sought element, copper * * * In
this case, the scrap contains several sought elements, and no
impurities have been identified as such.
ILM at 1363.
It is additionally noted that the ILM and the Dupont Courts found
that the designated material was titanium, an element. The amount of an
element is calculated by its weight.
Comment: One commenter suggested that since the drawback claimant
does not separate the sought element from the feedstock, then it is the
feedstock and not the sought element that must be the imported
merchandise designated for drawback.
CBP response: CBP disagrees. The courts in ILM and Dupont held that
the element was the material that met the same kind and quality
requirement and therefore the element was the designated merchandise.
The CAFC in ILM noted that it was not necessary to extract the sought
element from the feedstock, and stated ``* * * we see no reason why ILM
should be required to undertake such an additional step [of extracting
the titanium from the scrap] * * *'' Both the ILM and Dupont Courts
determined that since the amount of the sought element (the titanium)
could be precisely determined, it was unnecessary to require that it be
extracted as a discrete element before drawback was payable.
Comment: One commenter stated that CBP was incorrectly using the
``same kind and quality'' test to apportion the duties because this
standard is only used for determining whether imported goods may be
substituted for other goods.
CBP response: CBP disagrees. As discussed above, the only
merchandise upon which drawback may be paid as per 19 U.S.C. 1313(b) is
the imported duty-paid and designated merchandise characterized as
``same kind and quality.'' In ILM, the CAFC unequivocally stated that
the merchandise of the ``same kind and quality'' required by section
1313(b) is the sought element--not the various feedstocks. ILM at 1367.
Therefore, the CAFC found that the sought element, the titanium, was of
the same kind and quality and thus only the titanium could be the
designated merchandise.
Comment: One commenter stated that CBP's example of the
apportionment calculation set forth in Sec. 191.26(b)(4) is incorrect,
and noted that CBP applies the $0.011 factor to each pound of titanium.
The commenter submits that, in fact, each pound of material in the
imported synthetic rutile, be it titanium, oxygen, or impurities, bears
the same $0.02 duty.
CBP response: CBP agrees. The example in the interim amendments to
Sec. 191.26(b)(4), set forth in T.D. 02-38, is inconsistent with the
liquidation instructions on which it was to have been based. Since the
total duty on the imported synthetic rutile includes duty on its
titanium content, the calculation should be $600 duty paid divided by
30,000 pounds synthetic rutile ($600 / 30,000 = .02) duty per pound of
imported rutile. Therefore, the example set forth in Sec. 191.26(b)(4)
is amended accordingly and set forth below in the regulatory text
section of this document.
Comment: One commenter suggested that apportioning duty based on
weight ``encourages uneconomical activities, such as the export of
waste and impurities in order to obtain drawback that would be due
under value based methodologies.'' The same commenter noted that this
exportation of waste would result in an overpayment of duty and a
doubling of drawback claims because each drawback claimant would file
an additional claim for waste.
CBP response: CBP disagrees. No waste is generated from the
designated merchandise, i.e., the titanium. Additionally, even if waste
were generated, it has been CBP's position based on long-standing court
decisions that drawback is not allowable on the exportation of waste.
In United States v. Dean Linseed-Oil Co., 87 Fed. 453, 456 (2nd Cir.
1898), cert. den., 172 U.S. 647 (1898), the court implicitly accepted
the government's position that drawback was unavailable on the
exportation of waste. CBP has continuously followed this position. See
Precision Specialty Metals, Inc. v. United States, 116 F.Supp. 2d 1350
(Ct. Int'l Trade (2001).
Comment: One commenter stated that apportioning the duty by weight
will be administratively difficult and burdensome. Another commenter
stated that all the information necessary to perform the duty
calculation required by Sec. 191.26(b), as amended by T.D. 02-38, is
not on the manufacturing certificate.
CBP response: The court instructed CBP to make the calculation to
properly administer the statute. Therefore, CBP must follow the court's
decision regardless of whether the requisite calculation is burdensome.
Conclusion
After analysis of the comments and further review of the matter,
CBP has determined to adopt as a final rule, with the changes mentioned
in the comment discussion and with additional non-substantive editorial
changes, the interim rule published in the Federal Register (67 FR
48368) on July 24, 2002, as T.D. 02-38.
Inapplicability of Delayed Effective Date
These regulations serve to add apportionment language to the
Customs Regulations necessitated by recent decisions of the Court of
International Trade and the Court of Appeals for the Federal Circuit,
and to finalize an interim rule that is already in effect. In addition,
the regulatory changes serve to benefit the public by providing
specific information as to how a drawback claimant is to correctly make
the requisite duty apportionment calculations when claiming
manufacturing substitution drawback for a chemical element contained in
ad valorem duty-paid imported merchandise. For these reasons, pursuant
to the provisions of 5 U.S.C. 553(d)(1) and (3), CBP finds that there
is good cause for dispensing with a delayed effective date.
The Regulatory Flexibility Act and Executive Order 12866
Because no notice of proposed rulemaking was required, the
provisions of the Regulatory Flexibility Act (5
[[Page 50703]]
U.S.C. 601 et seq.) do not apply. Further, these amendments do not meet
the criteria for a ``significant regulatory action'' as specified in
Executive Order 12866.
Drafting Information
The principal author of this document was Ms. Suzanne Kingsbury,
Regulations Branch, Office of Regulations and Rulings, Bureau of
Customs and Border Protection. However, personnel from other offices
participated in its development.
List of Subjects 19 CFR Part 191
Claims, Commerce, Customs duties and inspection, Drawback,
Reporting and recordkeeping requirements.
Amendment to the Regulations
0
For the reasons stated above, the interim rule amending part 191 of the
Customs Regulations (19 CFR part 191), which was published at 67 FR
48368-48370 on July 24, 2002, is adopted as a final rule with the
change set forth below.
PART 191--DRAWBACK
0
1. The general authority citation for part 191 continues to read as
follows:
Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 23,
Harmonized Tariff Schedule of the United States), 1313, 1624.
* * * * *
0
2. In Sec. 191.26, the example to paragraph (b)(4) is amended to read
as follows:
Sec. 191.26 Recordkeeping for manufacturing drawback.
* * * * *
(b) Substitution manufacturing. * * *
(4) * * *
Example to paragraph (b)(4).
Synthetic rutile that is shown by appropriate analysis in the entry
papers to be 91.7% pure titanium dioxide is imported and dutiable at a
5% ad valorem duty rate. The amount of imported synthetic rutile is
30,000 pounds with an entered value of $12,000. The total duty paid is
$600. Titanium in the synthetic rutile is designated as the basis for a
drawback claim under 19 U.S.C. 1313(b). The amount of titanium dioxide
in the synthetic rutile is determined by converting the purity
percentage (91.7%) to its decimal equivalent (.917) and multiplying the
entered amount of synthetic rutile (30,000 pounds) by that decimal
equivalent (.917 x 30,000 = 27,510 pounds of titanium dioxide contained
in the 30,000 pounds of imported synthetic rutile). The titanium, based
on atomic weight, represents 59.93% of the constituents in titanium
dioxide. Multiplying that percentage, converted to its decimal
equivalent, by the amount of titanium dioxide determines the titanium
content of the imported synthetic rutile (.5993 x 27,510 pounds of
titanium dioxide = 16,486.7 pounds of titanium contained in the
imported synthetic rutile). Therefore, up to 16,486.7 pounds of
titanium is available to be designated as the basis for drawback. As
the per-unit duty paid on the synthetic rutile is calculated by
dividing the duty paid ($600) by the amount of imported synthetic
rutile (30,000 pounds), the per-unit duty is two cents of duty per
pound of the imported synthetic rutile ($600 / 30,000 = $0.02). The
duty on the titanium is calculated by multiplying the amount of
titanium contained in the imported synthetic rutile by two cents of
duty per pound (16,486.7 x $0.02 = $329.73 duty apportioned to the
titanium). The product is then multiplied by 99% to determine the
maximum amount of drawback available ($329.73 x .99=$326.44). If an
exported titanium alloy ingot weighs 17,000 pounds, in which 16,000
pounds of titanium was used to make the ingot, drawback is determined
by multiplying the duty per pound ($0.02) by the weight of the titanium
contained in the ingot (16,000 pounds) to calculate the duty available
for drawback ($0.02 x 16,000 = $320.00). Because only 99% of the duty
can be claimed, drawback is determined by multiplying this available
duty amount by 99% (.99 x $320.00 = $316.80). As the oxygen content of
the titanium dioxide is 45% of the synthetic rutile, if oxygen is the
designated merchandise on another drawback claim, 45% of the duty
claimed on the synthetic rutile would be available for drawback based
on the substitution of oxygen.
Robert C. Bonner,
Commissioner, Customs and Border Protection.
Approved: August 19, 2003.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-21575 Filed 8-21-03; 8:45 am]
BILLING CODE 4820-02-P