CATEGORY: Protest

HQ W229027

August 13, 2001

DRA-4-RR:CR:DR 229027 DR CATEGORY: Protest

Port Director of Customs Attn: Richard M. Andrejko 300 S. Ferry Street Terminal Island, CA 90731

Re: Protest Application for Further Review No. 2704-00-102642; 19 U.S.C. 1313(j)(1); 19 U.S.C. 1313(j)(2); 19 C.F.R. 181.45; NAFTA drawback; substitution drawback; same condition drawback; unused merchandise drawback; evidence of exportation; Mexican agricultural goods; inventory recordkeeping

Dear Mr. Andrejko:

The above-referenced protest was forwarded to our office for further review. Our decision follows.

The protest is of the liquidation of one drawback entry that was filed on November 19, 1996, and liquidated on June 30, 2000. The entry was liquidated with no drawback. The drawback claim designated entries of several types of chilled Mexican produce, and drawback was claimed under 19 U.S.C. 1313(j)(1) for the produce that was exported to Canada. Claimant asserts that it uses three distinct methods of identification: FIFO, LIFO and direct identification, to identify the shipped produce, and the protested drawback claim shows that Claimant is attempting to identify the exported merchandise with the imported merchandise by using the FIFO inventory method.

According to the submitted evidence, Claimant imported Mexican produce into the Customs territory of the United States between November 26, 1991, and January 22, 1994, with total duties paid of $25,149.62. Claimant then exported portions of the merchandise in varying quantities and combinations to Canada from December 6, 1993, to May 20, 1996.

The documents forwarded to this office include a report of an April 1998 Customs investigation in which the investigator stated that Claimant receives produce from Mexican growers during the winter months and from U.S. growers during the summer months. According to the report, both the Mexican and domestic produce are stored in the same location prior to shipment and Claimant alleges that it used the FIFO inventory method to directly identify the merchandise that is exported. The investigative report relates the results of an interview with John Manfre, who was identified as a partner of Claimant, that occurred on April 6, 1998. According to the report, Claimant buys and sells both Mexican and U.S. produce is received during the summer. During the Fall and Spring, produce is received from both sources. According to the report, there are daily inventory records. The file also contains a letter to Claimant from the Supervisory Drawback Specialist dated October 30, 1997, concerning a meeting that occurred during the previous week in which the various methods of identifying individual lots of merchandise within commingled fungible merchandise were explained. There is said to be a lot marking system, but Claimant has declined to submit records of such a system. However, Claimant has submitted a June 2, 1997, letter in which it states that it uses a “first in-first out and last in-last out system of trading product.” The process is described in the following manner:

When the product comes in from Mexico and we receive the manifest from the driver we do the following: … At the receiving end (the cooler) the receiver has a harvest sheet for that day. He looks at the harvest sheet for the ranch or field and then assigns the product with a label, day of the week, and the lot number. The product is cooled and put away. The salesmen sell the product under this system. The label, day of the week and the lot number appear on the Bill of Lading that goes with every shipment.

Drawback was denied on the grounds that the method used by Claimant to account for its withdrawals from inventory was insufficient and did not meet the requirements for drawback under 19 U.S.C. 1313(j)(1). Specifically, the Port alleges that Claimant failed to appropriately demonstrate that the exported merchandise was the same merchandise that was imported and thereby would qualify for drawback under 19 U.S.C. 1313(j)(1). The Port takes the position that the lag-time between the importation of the produce and its exportation necessitates a finding that the imported merchandise was actually substituted with domestic or other imported merchandise, thus allowing only the filing of a substitution drawback claim under 19 U.S.C. 1313(j)(2). However, substitution drawback is no longer permitted for goods exported to Canada or Mexico on or after January 1, 1994. Furthermore, the Port suggests that Claimant has submitted inadequate documentation as evidence of exportation of any of the goods.

Claimant has submitted certain records relating to the receipt into and withdrawal from storage of the merchandise, including two types of export summaries and a chronological summary of certificates of delivery in ship-date order. Claimant’s Customs broker compiled all of the summaries. Claimant had also stated to the Port that it would submit inventory and exportation records to substantiate its claim for 1313(j)(1) drawback in an amendment to this protest, but later recanted. The following documentation was submitted in support of this drawback claim.

2 1. CF 7539 Continuation Sheet by 7501#; CF 7539 Continuation Sheet by Part #/Product Code. These documents show the import dates of the various types and quantities of produce and the corresponding rates of duty and claimed drawback.

2. 11/12/96 Exporter’s Chronological Summary by Date; 11/12/96 Exporter’s Chronological Summary by Part; Certificate of Delivery in Ship-Date Order. These documents were prepared by Claimant’s broker and purport to show the dates of export to Canada of the Mexican produce, as well as the rates of duty and claimed drawback for each export.

3. CF 7539; CF 7539 Continuation Sheet by Part #/Product Code. On November 12, 1996, Claimant claimed drawback pursuant to 19 U.S.C. 1313(j)(1), on the duties paid for the merchandise that was exported to Canada. The total amount of claimed drawback is $24,896.42.

Whether the produce imported from Mexico and exported to Canada is subject to NAFTA drawback

Whether the merchandise is eligible for drawback under 19 U.S.C. 1313(j)(1)

LAW AND ANALYSIS

Under 19 U.S.C. §1313(j)(1), drawback is authorized if imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation is, within 3 years of the date of importation, exported or destroyed under Customs supervision and was not used in the United States before such exportation or destruction. Section 632 of the NAFTA Implementation Act changed same condition drawback under 19 U.S.C. 1313(j)(1), by providing that imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation, and is within 3 years of the date of importation, exported or destroyed under Customs supervision and was not used in the United States before such exportation or destruction, is eligible for “unused merchandise drawback.” The requirement that the merchandise be exported remains in all instances of drawback.

3 Substitution of commercially interchangeable merchandise, subject to certain conditions, is authorized under 19 U.S.C. §1313(j)(2), but 19 U.S.C. §1313(j)(4) limits that authorization in the following manner:

Effective upon the entry into force of the North American Free Trade Agreement, the exportation to a NAFTA country ... of merchandise that is fungible with and substituted for imported merchandise, other than merchandise described in paragraphs (1) through (8) of [19 U.S.C. 3333(a)(1) through (8)], shall not constitute an exportation for purposes of [section 1313(j)(2)].

The Agreement entered into force on January 1, 1994. See 19 U.S.C. 3311; Executive Order No. 12889, Section 8, 58 F.R. 69681 (December 27, 1993). However, if the exported produce at issue was exported to a NAFTA country in the same condition as when imported into the U.S., then it would be exempt from the above limitation. See 19 U.S.C. §3333(a)(2). Thus it is clear from the above provisions that substitution drawback under 19 U.S.C. §1313(j)(2) no longer exists for shipments to Canada of Mexican-origin agricultural products imported into the United States unless one of the specific exemptions is met. See also House Report (Ways & Means Committee) No. 103-161(I), pp. 39- 40, 103d Cong., 1st Sess. (1993) (reprinted at 1993 U.S.C.C.A.N. 2552, 2589-2590) (stating that section 203(c) of the NAFTA Implementation Act eliminates "same condition substitution drawback" for imported Mexican-origin goods shipped to Canada, except for the excepted goods listed in section 203(a)). Here, all of the exported merchandise consists of Mexican agricultural products and practically all of it was exported after January 1, 1994. Of the 3,790,070 kg of produce upon which drawback is claimed, 3,783,920 kg (99.84%) was exported after the January 1, 1994, cut-off date for substitution drawback. Therefore, the amount exported after that date would be ineligible for substitution drawback under 19 U.S.C. 1313(j)(2) unless the goods were exported in the same condition as imported.

A good exported to a NAFTA country may escape NAFTA drawback limitations and gain full drawback under 1313(j) if it is a good exported to a NAFTA country in the same condition as when imported into the United States. See 19 U.S.C. 3333(a)(2)(B). If such a good is commingled with fungible goods and exported in the same condition, the identity of such a good may be determined on the basis of the inventory methods provided for in the regulations implementing Title 19, except for agricultural products covered by 19 U.S.C. 3333(a)(2)(B). Note that the above does not apply to agricultural goods imported into the U.S. or Mexico that is substituted by an identical or similar good that is subsequently exported to the territory of the other country. See paragraph 12 of section A of Annex 703.2 of the Agreement

Accordingly, 19 C.F.R. 181.45 provides for goods eligible for full drawback (i.e., not subject to the NAFTA drawback limitations of §181.44). See 19 C.F.R. 181.45(a)(1), (b)(1) (April 7, 1997). For same condition drawback, if the inventory from which the exported goods are removed consists of fungible goods that are commingled, an inventory or accounting method (such as the FIFO method) may be used to identify the goods on which same condition drawback is claimed. See 19

4 C.F.R. 181.45(b)(2)(i). If the commingled goods are originating and non-originating goods, then the origin of the goods and the identification of entries for designation for same condition drawback my be made on the basis of an approved inventory method contained in the appendix to 19 C.F.R. Part 181. See 19 C.F.R. 181.45(b)(2)(i)(A). If the commingled goods consist entirely of non-originating goods, then the identification of entries for designation for same condition drawback my be made on the basis of one of the accounting methods contained in 19 C.F.R. 191.14. See 19 C.F.R. 181.45(b)(2) (i)(B).

However, Mexican agricultural goods that are commingled with fungible U.S.- origin agricultural goods are excluded from the application of such methods. See 19 C.F.R. 181.45(b)(2)(ii). Therefore, the Claimant must establish that the exact same merchandise imported from Mexico was exported to Canada in order to claim same condition drawback (without use of an approved inventory method) if the imported Mexican agricultural goods are commingled in inventory with U.S. agricultural goods.

Here, the investigation revealed that the imported Mexican produce is commingled with domestic produce before it is eventually exported. Although Claimant’s letter of June 2, 1997, asserts that it uses three distinct methods of identification: FIFO, LIFO and direct identification, to identify the shipped produce, the protested drawback claim shows that Claimant is attempting to identify the exported merchandise with the imported merchandise by using the FIFO inventory management method. Claimant asserts that it maintains a recordkeeping system that allows it to track its imported Mexican produce by the FIFO method, using the label, day of the week and the lot number of the imports, and placing that information on the bills of lading that go with every shipment to Canada.

Claimant asserts that the same Mexican produce that is imported, chilled and stored per its recordkeeping system is the same merchandise that is eventually shipped to Canada, but has only supported its claim with the import and export summaries. For example, the first import entry listed on the claim was entry 264-XXXXX51-7. Customs records show that the entry covered 9800 kilograms of merchandise classifiable under subheading 0706.10.20, HTSUS. The listing on the claim identifies the merchandise as “CAR,” which presumably refers to carrots. While the classification does include carrots, it also covers other root vegetables. The merchandise was released from Customs custody on December 10, 1993, a date that is consistent with the listed import date on the claim. The first page of the claim’s 11/12/96 Exporter’s Chronological Summary by Part lists 37 export shipments that identify the merchandise said to be covered as carrots. The first export is listed as having occurred on May 6, 1994. The second through twenty-second exports are listed as having occurred from February 1995 through December 1995. The remaining exports are listed as having occurred from January 1996 through April 1996.

5 Other import entries listed on the claim were entries 264-XXXXX92-0, 264-XXXXX13-4, 264-XXXXX44-9, 264-XXXXX03-2, 264-XXXXX15-6, 264- XXXXX34-7, 264-XXXXX46-1, 264-XXXXX71-9, 264-XXXXX83-4, 264- XXXXX93-3, and 264-XXXXX09-7. Those eleven entries occurred from November 22, 1993, to December 3, 1993. Customs records show that the entries covered 15,210 kilograms of merchandise classifiable under subheading 0704.90.4040, HTSUS. The listing on the claim identifies the merchandise as “K,” which presumably refers to kale. While the HTSUS classification does include kale, it also covers other “similar edible brassicas.” The merchandise was released from Customs custody on the same day (as listed on the claim) as imported. Pages ten to thirteen of the claim’s 11/12/96 Exporter’s Chronological Summary by Part lists 158 export shipments that identify the merchandise said to be covered as kale. The first six exports are listed as having occurred from May 2, 1994 to May 20, 1994. The seventh through eightieth exports are listed as having occurred from February 2, 1995 through December 27, 1995. The remaining exports are listed as occurring from January 3, 1996 through May 8, 1996. For all of the above export examples, the export listings identify the destination country as “CA,” presumably a reference to Canada.

The tariff classification for the carrot shipments covers fresh or chilled root vegetables, and the tariff classification for the kale covers fresh or chilled edible brassicas, but the carrots were not sent to Claimant’s customers until after they were stored for 6 months to over two years based on the listing in the claim, and the kale was not sent until it was stored from 5½ months to 2½ years.

This storage and export pattern continues for all of the produce upon which drawback is claimed.1 The application of the inventory management methods to goods exported to NAFTA countries were set by Part 181 of the Customs Regulations, as promulgated by T.D. 95-68. The FIFO method is described in addendum B, schedule X, appendix to Part 181, Customs Regulations. A key feature of the method is that every receipt into inventory and every removal from inventory is required to be taken into account in order to preserve the integrity of the method. “ ‘FIFO method means the method by which the origin of fungible goods first received in finished goods inventory is considered to be the origin of fungible goods first withdrawn from finished goods inventory’.” See Section 10, Part II, Schedule X, Appendix to Part 181, Customs Regulations. Example 1 in Addendum A to Part II illustrates the application of the FIFO method in which all receipts into and all removals from that inventory are taken into account. The lack of integrity that occurs if only receipts and withdrawals of imported merchandise are used is shown by application of the method to the listed imports and exports on the protested claim. That is, Claimant’s method of asserting that

1 The other produce on which drawback is claimed includes rapini, squash, leeks, lettuce, mustard greens, turnips, green onions, and parsley. See CF 7539. 6 the receipts and removals of only the imported produce constituted the universe of its inventory, when Claimant also received and sold U.S. produce, results in the removal of so-called fresh carrots from Claimant’s storage facility 6 months to over 2 years after the harvest of the carrots. The ground upon which the drawback claims fail is that Claimant failed apply the inventory management method to complete inventory records as required by the Regulations.

Without documentary proof that forms the basis of the import and export summaries, it is implausible that Claimant exported the same Mexican produce that was imported because the produce would have had to have been be cooled and stored for such long periods of time. Instead, the record of import and export dates indicates that Claimant substituted fungible merchandise for the imported produce, and exported the substituted merchandise to Canada, which is prohibited by 19 U.S.C. 1313(j)(4) (effective January 1, 1994) for purposes of drawback.. Even if substitution has not occurred, Claimant has failed to submit adequate proof of exportation. For these reasons, we believe that the protest should be denied in full, and Claimant is not entitled to drawback under 19 U.S.C. 1313(j)(1) or 1313(j)(2).

HOLDING:

The protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the claimant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

John Durant Director Commercial Rulings Division