[Federal Register Volume 60, Number 155 (Friday, August 11, 1995)]
[Rules and Regulations]
[Pages 40995-40997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19911]
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DEPARTMENT OF THE TREASURY
Customs Service
19 CFR Part 191
[T.D. 95-61]
Accounting Procedures for Drawback
AGENCY: Customs Service, Department of the Treasury.
ACTION: Final interpretive rule.
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SUMMARY: This document gives notice that Customs is amending the
general drawback rate (or contract) for crude petroleum and petroleum
derivatives (Treasury Decision (T.D.) 84-49) to permit first-in-first-
out (FIFO) accounting for exports and drawback deliveries of petroleum
products with different drawback factors which are commingled in
inventory. Customs is also revoking a published ruling (Customs Service
Decision (C.S.D.) 84-82) under which identification of merchandise and
articles for drawback purposes is permitted on a ``higher-to-lower''
basis. However, drawback claimants operating under properly approved
specific drawback rates may continue to claim drawback using higher-to-
lower accounting procedures, as provided for in C.S.D. 84-82, if the
drawback rates under which they are operating expressly provide for the
use of such procedures, until such rates are modified, with notice to
the rate holders.
EFFECTIVE DATE: The amendment of T.D. 84-49 and the revocation of
C.S.D. 84-82 will be effective as to drawback entries or claims
properly filed with Customs on or after November 9, 1995, unless there
is a prior approved properly-executed contract.
FOR FURTHER INFORMATION CONTACT: Paul Hegland, Entry Rulings Branch,
Office of Regulations and Rulings, 202-482-7040.
Background
Section 313, Tariff Act of 1930, as amended (19 U.S.C. 1313),
authorizes ``drawback''. Drawback is a refund or remission, in whole or
in part, of a Customs duty, internal revenue tax, or fee. There are a
number of different kinds of drawback authorized under law, including
manufacturing and unused merchandise drawback. Under section 1313(a),
drawback is authorized when imported merchandise is used in the
manufacture of articles which are exported or destroyed. Under section
1313(j)(1), drawback is authorized when imported merchandise is
exported or destroyed without having been used in the U.S. Sections
1313(b) and (j)(2) respectively provide for the substitution of other
merchandise (whether imported or domestic) for the imported merchandise
in manufacturing and unused merchandise drawback. Section 1313(l)
provides that the allowance of drawback shall be subject to compliance
with such rules and regulations as the Secretary of the Treasury shall
prescribe.
The regulations pertaining to drawback are found in part 191 of the
Customs Regulations (19 CFR part 191). Under the Customs Regulations
(19 CFR part 191, subparts B and D), manufacturers or producers of
articles intended for exportation with drawback under section 1313(a)
or (b) must apply for and obtain approval of a drawback rate (sometimes
called a drawback contract) describing the manufacturing or production
operations covered and setting forth the conditions which are to be met
to obtain drawback.
Subpart D of part 191 of the Customs Regulations (19 CFR part 191,
subpart D) authorizes general drawback rates for certain common
manufacturing operations. A general drawback rate for substitution
manufacturing drawback under section 1313(b) for crude petroleum and
petroleum derivatives is provided for in T.D. 84-49, 18 Cust. Bull.
149. This general drawback rate was initially promulgated by T.D.
56487, which added the rate to the Customs Regulations then pertaining
to drawback (see 19 CFR 22.6(g-1) (1983)). The general rate for crude
petroleum and petroleum derivatives now in T.D. 84-49 is substantively
the same as the rate formerly contained in the Customs Regulations.
The features and procedures of, as well as the background to, T.D.
84-49 and its predecessor (see 19 CFR 22.6(g-1)(1983), as promulgated
by T.D. 56487) were extensively described in the June 28, 1994, Federal
Register (59 FR 33322) notice inviting public comment on the subject of
this document. Under T.D. 84-49, distribution of drawback among the
products produced during a period of production is based on the
relative values of all products manufactured or produced during the
production period, as of the time of separation of the products. The
time of separation of the products is considered to be the monthly
period of production. Relative values are stated in terms of drawback
factors, which attach to each of the products manufactured or produced
during the production period. An example of the calculation of these
drawback factors was given in the June 28, 1994, Federal Register
notice.
Because the relative value of the petroleum products which may be
produced under T.D. 84-49 may vary from month to month, the drawback
factors for a particular product produced under the procedures in T.D.
84-49 may also vary from month to month. The T.D. contains explicit
procedures to account for such variances. When the inventory of a
particular product contains product with different drawback factors
(e.g., if the inventory of a product was from more than one month's
production, each month's quantity could have a different drawback
factor), withdrawals from the inventory for exports are required to be
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from lowest factor on hand, withdrawals for drawback deliveries (i.e.,
for further manufacture resulting in a product on which drawback could
be claimed) are required to be from lowest on hand after exports are
deducted, and withdrawals for domestic (nondrawback) shipments are
required to be from earliest on hand after withdrawals for export and
drawback deliveries are deducted.
The above accounting procedures were based on the accounting
requirements for drawback applicable at the time that the general
drawback rate was initially promulgated, as fully described in the June
28, 1994, Federal Register notice. The general requirements in the
Customs Regulations for records, storage, and identification pertaining
to drawback are now found in 19 CFR 191.22. Section 191.22(c)
authorizes the identification for drawback purposes of commingled lots
of fungible merchandise or articles by applying FIFO accounting
principles or any other accounting procedure approved by Customs.
Customs has issued a number of rulings on the accounting procedures
which may be used to identify merchandise or articles for drawback
purposes. Those rulings and the background to them were extensively
described in the June 28, 1994, Federal Register notice. In one of
those rulings, Customs Service Decision (C.S.D.) 84-82, 18 Cust. Bull.
1036, Customs held that when fungible drawback and nondrawback input
was placed in commingled storage, withdrawals for drawback purposes
could be identified on a higher-to-lower basis against the drawback
input commingled therein.
In the June 28, 1994, Federal Register notice, Customs furnished
notice that it had been requested to amend T.D. 84-49 to permit the
accounting for withdrawals for export and for drawback deliveries from
the inventory of a particular product containing product with different
drawback factors on the basis of FIFO or higher-to-lower. In the June
28, 1994, Federal Register notice, Customs stated that it believed that
the proposal to amend T.D. 84-49 to permit the accounting on a FIFO
basis in the described situation had merit. In the interest of
administrative simplicity, Customs stated that it believed that the
order of such withdrawals should continue to be the same (i.e., first
exports, then drawback deliveries, then domestic shipments). In regard
to the proposal to amend T.D. 84-49 to permit the described accounting
on a higher-to-lower basis, however, Customs stated that T.D. 84-49
should not be amended to permit such accounting. Customs also stated
that C.S.D. 84-82, the only published Customs ruling permitting higher-
to-lower accounting for drawback purposes, as well as any unpublished
Customs rulings to the same effect, should be revoked. The reasons for
these conclusions were fully described in the June 28, 1994, Federal
Register notice.
In the June 28, 1994, Federal Register notice, Customs invited
comments on the proposed changes. Four commenters responded to the
notice. After review of these comments, Customs has decided to proceed
as proposed (i.e., to amend T.D. 84-49 to permit the described
accounting on a FIFO basis and to revoke C.S.D. 84-82). In regard to
the latter, it is Customs position that unless substitution is
specifically provided for in the law, accounting methods used to
identify merchandise or articles for drawback purposes must be revenue
neutral or favorable to the Government. Other criteria for evaluating
such accounting methods include consistency with commercial accounting
procedures, consistency with the accounting procedures generally used
by the drawback claimant, and ease of administration. The comments
received are discussed below.
Discussion of Comments
Comment: The use of FIFO accounting for T.D. 84-49, as proposed in
the June 28, 1994, Federal Register notice, is not opposed. However, in
the interest of maximum flexibility in accounting for drawback, higher-
to-lower accounting should also be permitted for the described
accounting in T.D. 84-49.
Response: In regard to the comment on FIFO accounting for T.D. 84-
49, this document is proceeding as proposed and amending T.D. 84-49 to
permit such accounting. In regard to permitting higher-to-lower
accounting for the described purposes in T.D. 84-49, such accounting
would not be revenue neutral or favorable to the Government (i.e.,
withdrawals for drawback purposes (exports or drawback deliveries)
would always be from the highest drawback factor first, thus always
resulting in the greatest amount of drawback). Furthermore, higher-to-
lower accounting methods are not consistent with commercial accounting
procedures nor, based on information submitted to Customs by a
representative of the petroleum industry, are they consistent with the
accounting methods generally used by that industry. Therefore, Customs
is not permitting higher-to-lower accounting for the described purposes
in T.D. 84-49.
Comment: Customs should make it clear that T.D. 56487 (the
predecessor of T.D. 84-49) is not authoritative on the issue of
producibility, particularly that of proportional deductions.
Response: The June 28, 1994, document did not, and was not intended
to, comment on the authoritativeness of T.D. 56487 on the issue of
producibility or the issue of proportional deductions (see 19 CFR
22.6(g-1)(5)(1983) and T.D. 84-49, paragraph (5)). No change was
proposed in this regard.
Comment: C.S.D. 84-82 should not be revoked. Higher-to-lower
accounting procedures are consistent with the purposes of the drawback
law and adequately protect the revenue and should continue to be
allowed to be used for drawback. Drawback claimants under section
1313(b) are able to substitute any eligible merchandise of the same
kind and quality as eligible imported merchandise received and put into
production. This should continue.
Response: This comment appears to be based on a misunderstanding of
the proposal to revoke C.S.D. 84-82. The proposal would not (and could
not) change the current statutory provision allowing a drawback
claimant to substitute any eligible merchandise of the same kind and
quality as the designated imported merchandise to use in manufacture or
production of the exported articles. In this regard, Customs notes the
amendment of section 1313(b) by the North American Free Trade Agreement
(NAFTA) Implementation Act, Title VI, section 632 (Pub. L. 103-182; 107
Stat. 2057, 2192-2193), specifically providing for the substitution of
any other merchandise (whether imported or domestic) for the imported
duty-paid merchandise designated for drawback under section 1313(b).
The same is true of substitution unused merchandise drawback under
section 1313(j)(2) (i.e., any merchandise (whether imported or
domestic) may be substituted for the designated imported merchandise,
provided that the lots of merchandise are commercially interchangeable
and that the other requirements of the law are met).
The revocation of C.S.D. 84-82 would apply to the identification by
accounting procedures of merchandise or articles in situations where
the law does not authorize substitution. For example, except in the
case of petroleum derivatives under certain circumstances, the drawback
law does not authorize the substitution of articles on which drawback
is claimed under the manufacturing drawback law (section 1313 (a) or
(b)) for other
[[Page 40997]]
articles. That is, when manufactured articles qualifying for drawback
are commingled with nonqualifying articles after the former are
manufactured by a drawback claimant, substitution under the law is not
authorized. In such situations, identification of merchandise or
articles for drawback purposes by accounting procedures must be revenue
neutral or favorable to the Government and the accounting procedures
should be consistent with the criteria for such accounting procedures
described above.
Comment: The drawback law does not require any method of
identifying fungible duty-paid imported materials which may be
commingled in storage with other foreign or domestic materials; rather,
the law delegates authority to the Secretary of the Treasury to
prescribe appropriate accounting methods by regulation.
Response: Section 1313(l) of the drawback law provides that the
allowance of drawback shall be subject to compliance with such rules
and regulations as the Secretary of the Treasury shall prescribe. Under
this authority, the agency has already prescribed, inter alia, a
regulation governing the use of accounting methods (see, 19 CFR
191.22(c)). As stated above, the final interpretative ruling
articulates Customs position that in situations where the law does not
specifically authorize substitution, identification of merchandise or
articles for drawback purposes by appropriate accounting procedures
should be consistent with the criteria for such accounting procedures
described above.
Comment: The higher-to-lower accounting method promotes
administrative efficiency because it allows Customs to verify drawback
claims without inquiring as to the order of withdrawal from commingled
inventory.
Response: The drawback statute contains specific time limits (see
e.g., sections 1313 (i), (b), (c), (j), (p)). Any verification by
Customs of whether a drawback claimant has complied with the drawback
law and the regulations issued thereunder must include verification
that the statutory time-limits were met.
Comment: If Customs decides to revoke C.S.D. 84-82 and proscribe
the use of higher-to-lower accounting for drawback, Customs should
specify a ``cut-off'' date for use of the higher-to-lower method.
Customs should delay the effective date for this change in position
because the drawback public may have relied on this ruling in
establishing its inventory methods for drawback. One commenter suggests
an implementation period of 3 years.
Response: Customs is delaying the effective date of the amendment
of T.D. 84-49 and the revocation of C.S.D. 84-82 for 90 days after the
publication of this document, the maximum delay provided for in the
Customs Regulations for a modification or revocation of a ruling (see
19 CFR 177.9). Customs notes that, in regard to manufacturing drawback,
a drawback claimant which relied on C.S.D. 84-82 should be able to
document such reliance in its drawback rate (i.e., in order to be paid
manufacturing drawback, a claimant must have an approved drawback rate
(see 19 CFR 191.23 and the general drawback rate for section 1313(a)
(T.D. 81-234), as well as the sample drawback proposal for section
1313(b) provided for in 19 CFR 191.21(c), the latter of which contains
specific sections in which the claimant is instructed to describe its
inventory procedures)). In such instances (i.e., when a claimant is
operating under a drawback rate which specifically provides for higher-
to-lower accounting), drawback claimants may continue to use higher-to-
lower accounting procedures, as provided for in their drawback rates,
until their rates are modified, and notice of the modification is sent
to the rate holders.
Conclusion
For the reasons given in the June 28, 1994, Federal Register
notice, and following careful consideration of the comments received
and further review of the matter, Customs is taking the actions
described in the June 28, 1994, Federal Register notice. That is:
1. T.D. 84-49 is amended to permit the accounting for withdrawals
from inventory of exports and drawback deliveries on a FIFO basis. The
order of such withdrawals will continue to be: first exports, then
drawback deliveries, after which domestic shipments will be accounted
for on a FIFO basis.
2. C.S.D. 84-82 is revoked.
This amendment of T.D. 84-49 and the revocation of C.S.D. 84-82
will be effective to drawback entries or claims properly filed with
Customs on or after 90 days from the date of publication in the Federal
Register. Drawback claimants operating under properly approved drawback
rates under 19 CFR 191.23 may continue to claim drawback using higher-
to-lower accounting procedures, as provided for in C.S.D. 84-82, if the
drawback rates under which they are operating specifically provide for
the use of such procedures, until such rates are modified, and notice
of such modification is sent to the rate holders.
Michael H. Lane,
Acting Commissioner of Customs.
Approved: July 6, 1995.
John P. Simpson,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 95-19911 Filed 8-10-95; 8:45 am]
BILLING CODE 4820-02-P
