H305251

U.S. Department of Homeland Security Washington, DC 20229 U.S. Customs and Border Protection HQ H305251 December 10, 2021 DRA 4 OT:RR:CTF:ER H305251 KF Mr. David Ostheimer Lamb & Lerch 233 Broadway Suite 2702 New York, New York 10279 RE: Substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2); foreign status components of articles produced within a Foreign Trade Zone. Dear Mr. Ostheimer: This is in response to your letter, dated August 19, 2019, requesting a ruling on the drawback eligibility of vehicles withdrawn from a Foreign Trade Zone pursuant to 19 U.S.C. § 1313(j)(2). FACTS: Mercedes-Benz USA, LLC (“MBUSA”) produces vehicles in a Foreign Trade Zone (“FTZ”) with domestic and foreign status components. The foreign components are both in privileged and nonprivileged foreign status. Once production is complete, MBUSA proposes withdrawing the finished vehicles for exportation under bond without filing an entry for consumption. MBUSA seeks to claim unused merchandise drawback under 19 U.S.C. § 1313(j)(2) on the vehicles it so exports from an FTZ, substituting them for previously imported and entered vehicles which remain within the United States. MBUSA seeks confirmation that vehicles so exported from an FTZ, containing foreign status components on which no duties were paid, are eligible for substitution unused merchandise drawback. ISSUE: Whether vehicles produced within an FTZ from domestic and foreign status components and exported without being entered for consumption are eligible to be substituted for imported and duty-paid vehicles to claim drawback under 19 U.S.C. § 1313(j)(2). LAW AND ANALYSIS: Drawback “means the refund, in whole or in part, of the duties, taxes, and/or fees paid on imported merchandise.” 19 C.F.R. § 190.2. Pursuant to 19 U.S.C. § 1313(j)(2), drawback may be claimed on exported merchandise which is substituted for imported and duty-paid merchandise. Among the requirements for claiming drawback under 19 U.S.C. § 1313(j)(2), the substituted merchandise must be: (A) [] classifiable under the same 8-digit HTS subheading number as such imported merchandise; (B) [exported or destroyed under customs supervision] before the close of the 5-year period beginning on the date of importation of the imported merchandise and before the drawback claim is filed … ; and (C) before such exportation or destruction— (i) [] not [be] used within the United States, and (ii) [be] in the possession of, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback under this paragraph, if that party— (I) is the importer of the imported merchandise, or (II) received the imported merchandise, other merchandise classifiable under the same 8-digit HTS subheading number as such imported merchandise, or any combination of such imported merchandise and such other merchandise, directly or indirectly from the person who imported and paid any duties, taxes, and fees imposed under Federal law upon importation or entry and due on the imported merchandise (and any such transferred merchandise, regardless of its origin, will be treated as the imported merchandise and any retained merchandise will be treated as domestic merchandise). Eligibility for substitution drawback is additionally conditioned by the terms of 19 U.S.C. § 1313(u), which prohibits imported merchandise “that has not been regularly entered or withdrawn for consumption [from] satisfy[ing] any requirement for use, exportation, or destruction under” the statutory drawback provisions. Hence, at issue here are the foreign status components that are not entered and used to build the exported vehicles in the FTZ. The legislative policy underlying prohibition under 19 U.S.C. § 1313(u) is prevention of “‘piggybacking’ other duty exemption benefits ([provided by] FTZs, bonded warehouses and duty-free temporary importation) onto [] drawback benefits.” Senate Report 103-189, 84 (Nov. 18, 1993). Foreign status merchandise admitted into an FTZ is afforded a benefit, i.e., duty is deferred until the goods are withdrawn from the zone. The prevention of “‘piggybacking’ prohibits the accumulation of other duty exemption benefits like drawback on goods that have already received the benefit of one duty exemption like foreign status merchandise admitted into an FTZ. U.S. Customs and Border Protection (“CBP”) has explained that, to effect the legislative policy underlying 19 U.S.C. § 1313(u), imported merchandise, i.e., foreign status merchandise “withdrawn and exported from an FTZ … is not considered regularly entered or withdrawn for consumption for purposes of drawback. Therefore, the subject merchandise would not be [considered] exported as required under section 1313(j)(2) and thus, receive the duty deferral benefit of foreign status goods admitted into an FTZ and duty drawback. Consequently, this merchandise may not be used as the basis for drawback claims.” HQ 224997 (Feb. 18, 1994); HQ 228008 (April 30, 1999) (“foreign merchandise in a zone [i]s not eligible to be an exportation for drawback purposes … consistent with Congressional intent”) (citing C.S.D. 85-49 (July 19, 1985)). The policy of preventing “piggybacking” duty exemptions prohibits drawback claims based on exported merchandise that is manufactured within an FTZ from foreign status components, meaning imported but non-duty-paid articles that have not been released from customs custody. 19 C.F.R. § 146.1. CBP has cautioned that “[b]ecause foreign merchandise admitted to an FTZ is exempt from duty until it is entered into the U.S. ... no drawback of duty is permitted upon … goods manufactured with that foreign merchandise and exported.” HQ 230591 (Feb. 17, 2005) (quoting C.S.D. 85-49 (“While in a foreign-trade zone exempt from the payment of duty, privileged foreign or nonprivileged foreign merchandise does not thereby constitute duty-free merchandise within the meaning of the substitution manufacturing drawback law … and, hence, an article manufactured therefrom, and then exported, may not be the subject of a claim for drawback.”). Granting drawback on exports comprised of foreign status components would result in the “piggybacking” of a duty-refund benefit onto duty-exempt merchandise, contrary to Congressional intent in enacting 19 U.S.C. § 1313(u). Id.; HQ 228008. MBUSA contends that by manufacturing vehicles within an FTZ located geographically in the United States, the vehicles qualify as “domestic” merchandise for drawback purposes because they are “substantially transformed” into products originating within the United States. MBUSA concludes that any foreign status components utilized during manufacture are therefore exempt from the requirement of being regularly entered and duty paid under 19 U.S.C. § 1313(u). MBUSA asserts that exports of such vehicles are thus eligible for substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2). MBUSA confuses the factual conclusion that vehicles manufactured in an FTZ located within the United States using foreign status components yield products manufactured in the United States with the erroneous legal conclusion that such vehicles are legally “domestic status” merchandise. Domestic status means: (1) articles grown, manufactured, or produced in the United States on which any internal revenue taxes owed have been paid; (2) imported and duty-paid articles; and (3) articles entered into customs territory as duty and tax free. 19 C.F.R. § 146.43(a)(1)-(3). CBP has clarified that the statutory prohibition under 19 U.S.C. 1313(u) applies only to imported merchandise which has not been entered. HQ 230591; Nat'l Ass'n of Mfrs. v. United States Dep't of Treasury, 427 F. Supp. 3d 1362, 1372 (Ct. Int’l Trade 2020). Consequently, exports manufactured from only domestic status components may be substituted for imported duty-paid goods and drawback paid because merchandise in domestic status

Drawback “means the refund, in whole or in part, of the duties, taxes, and/or fees paid on imported merchandise.” 19 C.F.R. § 190.2. Pursuant to 19 U.S.C. § 1313(j)(2), drawback may be claimed on exported merchandise which is substituted for imported and duty-paid merchandise. Among the requirements for claiming drawback under 19 U.S.C. § 1313(j)(2), the substituted merchandise must be:(A) [] classifiable under the same 8-digit HTS subheading number as such imported merchandise;(B) [exported or destroyed under customs supervision] before the close of the 5-year period beginning on the date of importation of the imported merchandise and before the drawback claim is filed … ; and(C) before such exportation or destruction—(i) [] not [be] used within the United States, and(ii) [be] in the possession of, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback under this paragraph, if that party—(I) is the importer of the imported merchandise, or(II) received the imported merchandise, other merchandise classifiable under the same 8-digit HTS subheading number as such imported merchandise, or any combination of such imported merchandise and such other merchandise, directly or indirectly from the person who imported and paid any duties, taxes, and fees imposed under Federal law upon importation or entry and due on the imported merchandise (and any such transferred merchandise, regardless of its origin, will be treated as the imported merchandise and any retained merchandise will be treated as domestic merchandise).Eligibility for substitution drawback is additionally conditioned by the terms of 19 U.S.C. § 1313(u), which prohibits imported merchandise “that has not been regularly entered or withdrawn for consumption [from] satisfy[ing] any requirement for use, exportation, or destruction under” the statutory drawback provisions. Hence, at issue here are the foreign statu