CBP Ruling H050335

HQ H050335 April 25, 2013 OT:RR:CTF:ER H050335 CSO Mr. Larry D. Fluty Port Director – Houston Sea Port U.S. Customs and Border Protection Houston – POE, Sea Port 7141 Office City Drive Houston, TX 77087 Dear Mr. Fluty: This is in response to your memorandum received by our office on January 29, 2009, requesting internal advice as to whether any gain in crude oil that is transported via pipeline from one Foreign Trade Zone (FTZ) to another, should be treated as domestic or foreign merchandise for purposes of filing U.S. Customs and Border Protection (CBP) Form 214. In a letter dated October 27, 2008, Valero, a refiner and marketer of crude oil, asked your office whether CBP Form 214 (which is not typically required for domestic-status merchandise entering an FTZ) should be filed for gains in shipments of crude oil shipped via pipeline from one FTZ to another and how the gain in crude oil shipped via pipeline should be treated for purposes of CBP’s FTZ regulations. In response, you sent us the January 29, 2009, internal advice request. We regret the delay in responding to your request. FACTS: Valero receives foreign crude oil from vessels into free-standing storage tanks known as the “Teppco Terminal.” The Teppco Terminal is located in Foreign Trade Subzone 199C (Teppco FTZ). All of the foreign crude oil that is discharged into the Teppco Terminal storage tanks is measured by an independent, CBP-approved, inspection company. The volume is reported to CBP as it is admitted into the Teppco FTZ. The foreign crude oil is shipped from the Teppco Terminal storage tanks via pipeline to two refineries operated by Valero. The first refinery is the Texas City Refinery that is also located in the Teppco FTZ. Occasionally, when the Texas City Refinery is at full capacity, Valero ships the foreign crude oil to a second refinery known as the Houston Refinery that is located in Foreign Trade Subzone 84F (Houston FTZ). Enterprise Products is the pipeline operator that owns and operates the pipeline between the Teppco FTZ and the Houston FTZ. The Enterprise Products pipeline receives both domestic and foreign crude oil from Valero and other companies. Valero’s foreign crude oil is “batched” as it is put into the pipeline. Batching is a process that allows different batches of crude oil to be kept separate as they move through the pipeline. Where the end of one batch meets the beginning of another, the two batches will mix together. The resulting mixture of the two batches is called the “interface material.” There may be a loss or gain in volume that occurs when one batch is released from the pipeline where the two batches interface. Thus the amount measured as received by the Houston FTZ may be greater or lesser than the amount discharged from the Teppco Terminal. In such instances, one batch’s loss is another batch’s gain. Valero informed CBP that it files consumption entries for any loss that results from a batch that is cut-off before the end of the batch at the interface material. The Port of Houston and Valero disagree as to how to account for any gain that may be received from an imprecise cut-off of a batch. As a result of moving approximately 200,000 barrels of crude oil from the Teppco FTZ to the Houston FTZ over a one year period, Valero experienced a gain that was approximately 435 barrels. This represents an approximate 0.22% gain. Valero argues that any gain in the amount of crude oil should be treated as domestic crude oil for purposes of admission into the Houston FTZ because all foreign crude is accounted for when metered into the Teppco FTZ and reported to CBP on CBP Form 214. Any additional gain reported on the CBP Form 214, which is the result of an imprecise cut-off would erroneously quantify foreign crude oil admitted into the United States. Valero also argues that if it were to file the gain as foreign on CBP Form 214, for statistical purposes, it would skew the trade statistics that reflect the amount of foreign crude entering into the zone because unknown and domestic oil would be reported as foreign crude. Further, Valero argues that the requirement to file a CBP 214 for the gain would potentially lead to over payments of fees and taxes such as the Oil Spill Liability Trust Fund. See 26 U.S.C. § 4611. The Port of Houston’s position is that any gain should be treated as foreign crude oil because of its interpretation of 19 C.F.R. §§ 146.43(b)(1) and 146.42(c). ISSUE: What is the proper zone status for gains/losses that result from movements of crude petroleum via pipeline. LAW AND ANALYSIS: Part 146 of Title 19 of the CBP regulations governs the admission of merchandise into a zone; the manipulation, manufacture, destruction, or exhibition in a zone; the exportation of merchandise from a zone; and the transfer of merchandise from a zone into the customs territory. 19 C.F.R. § 146.0. The identification and documentation of all merchandise admitted into the FTZ is necessary for keeping track of merchandise entering and leaving the zone. Therefore, all merchandise except for domestic status merchandise is traceable to a CBP Form 214 and accompanying documentation. In order to identify all merchandise admitted into a zone: [a]ll merchandise will be recorded in a receiving report or document using a zone lot number or unique identifier. All merchandise, except domestic status merchandise for which no permit for admission is required under §146.43, will be traceable to a Customs Form 214 and accompanying documentation. 19 C.F.R. § 146.22(a). Generally, in order for merchandise to be admitted into an FTZ a person must complete an application on CBP Form 214 with a few exceptions. One of the exceptions to the general rule of making an application for admitting merchandise into an FTZ is that merchandise is considered to be domestic status merchandise. 19 C.F.R. § 146.32 states: (a)(1) Application on CBP Form 214 and permit. Merchandise may be admitted into a zone only upon application on a uniquely and sequentially numbered CBP Form 214 (“Application for Foreign Trade Zone Admission and/or Status Designation”) and the issuance of a permit by the port director. Exceptions to the CBP Form 214 requirement are for merchandise temporarily deposited (§146.33), transiting merchandise (§146.34), or domestic merchandise admitted without permit (§146.43). . . CBP regulations define “domestic merchandise” for purposes of FTZs as: merchandise which has been. . .previously imported into Customs Territory and properly released from Customs Custody. 19 C.F.R. § 146.1. Under the FTZ regulations “domestic status merchandise” is defined as merchandise “previously imported and on which duty and tax has been paid” or “previously entered free of duty and tax.” 19 C.F.R. § 146.43(a). Therefore, if an entry for consumption is made on the loss, it would be considered domestic status and no CBP Form 214 would be required. Valero stated that it makes entry for all of its losses that it discovers when the crude oil is measured into the Houston FTZ. Under these circumstances, Valero reasons that, CBP is receiving the applicable duty, taxes and accounting of the loss, i.e., the displaced volume of crude oil that is the result of an imprecise cut-off by virtue of receiving the CBP entry. See 19 C.F.R. § 142.3 and CBP Form 3461 and 7501. Because the loss already entered into the U.S. territory as per CBP regulations, it is “previously imported into Customs Territory and properly released from Customs Custody.” Hence, if Valero can demonstrate that the loss that results from the imprecise cut-off has been entered, then it may record the corresponding gain as “domestic status merchandise” and, hence, no CBP Form 214 is required. The “corresponding gain” that could be entered as domestic would only be for the amount entered as a loss on the connecting batch. However, if Valero cannot demonstrate that entry was made for the corresponding loss, then the gain that results from the imprecise cut-off is considered foreign status and a CBP Form 214 is required. In support of its arguments that the gain in crude oil should always be considered foreign and not domestic, the Port cites to HQ 228616 (July 1, 2002). However, HQ 228616 does not address the issue presented to us in this case. The issue in HQ 228616 was whether the measurement taken as the crude oil entered the pipeline or the measurement taken as it entered the destination FTZ should be used for reporting purposes. The two measurements were often different as a result of different temperatures of the crude oil. In that case, there were no instances where the “loss” on a batch was entered for consumption. Further, the loss or gain that is the result of an imprecise cut-off was not at issue. HOLDING: For instances in which Valero can demonstrate that the loss of crude oil that results from the imprecise cut off was entered for consumption, then it may consider the corresponding gain to have domestic status and the CBP Form 214 is not required. However, if entry for the loss cannot be demonstrated by Valero and Valero cannot demonstrate both batches were domestic status, then the merchandise is considered foreign status and Valero must complete CBP Form 214 to account for the foreign status merchandise. Please note that 19 C.F.R. § 177.9(b)(1) provides 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. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” Sincerely, Myles Harmon, Director Commercial and Trade Facilitation Division