Accounting Procedures for Drawback

DEPARTMENT OF THE TREASURY

Customs Service

Accounting Procedures for Drawback

AGENCY: U.S. Customs Service, Department of Treasury.

ACTION: Proposed Change of Position; solicitation of comments.

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SUMMARY: This notice advises the public that Customs proposes to amend

the general drawback rate for crude petroleum and petroleum derivatives

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. Currently, such accounting is required on

the basis of lower-to-higher drawback factors, and is not consistent

with recent changes to the Customs Regulations in this regard or

commercial accounting procedures. Additionally, Customs proposes to

revoke a published ruling and any unpublished rulings to the same

effect under which identification of merchandise and articles for

drawback purposes is permitted on a higher-to-lower basis. This change

is consistent with the Customs Regulations, commercial accounting

procedures, and efficient administration and will result in revenue

neutrality when drawback claimants choose to commingle merchandise or

articles and to identify them by an accounting procedure.

DATES: Comments must be received on or before August 29, 1994.

ADDRESSES: Written comments (preferably in triplicate) may be addressed

to the U.S. Customs Service, Office of Regulations and Rulings,

Regulations Branch, 1301 Constitution Avenue, NW., Washington, DC

20229. Comments filed may be inspected at the Regulations Branch,

Franklin Court, 1099 14th Street, NW., Suite 4000, Washington, DC.

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 same condition drawback. Under paragraph (a) of

Sec. 1313, drawback is authorized when imported merchandise is used in

the manufacture of articles which are exported. Under paragraph (j)(1)

of Sec. 1313, drawback is authorized when imported merchandise is

exported (or destroyed) in the same condition as when it was imported,

if the merchandise is not used in the U.S. Paragraphs (b) and (j)(2) of

Sec. 1313 respectively provide for the substitution of domestic or

other merchandise for the imported merchandise in manufacturing and

same condition drawback. Paragraph (l) of Sec. 1313 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 Customs 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

Sec. 1313(a) or (b) must apply for and obtain approval of a drawback

contract (sometimes called a drawback ``rate'') describing the

manufacturing or production operations covered and setting forth the

conditions which are to be met to obtain drawback.

The general requirements in the Customs Regulations for records,

storage, and identification pertaining to drawback are found in 19 CFR

191.22. Section 191.22(c) authorizes the identification for drawback

purposes of commingled lots of fungible merchandise and articles by

applying first-in-first-out (FIFO) accounting principles or any other

accounting procedure approved by Customs.

Section 191.22(c) was added to the Customs Regulations in its

current form when the drawback regulations (formerly in Part 22 of the

Customs Regulations) were revised in 1983 (T.D. 83-212, published in

the Federal Register on October 14, 1983 (48 FR 46740)). Before this

revision, the corresponding provision in Part 22 of the Customs

Regulations (19 CFR 22.4(f)) permitted identification of fungible

merchandise and articles commingled in storage on the basis of the lot

or lots of merchandise or articles with the lowest drawback value or

allowance first, then the next-lowest, and so on (i.e., ``lower-to-

higher'').

The Notice of Proposed Revision of Part 22 (published in the

Federal Register on August 26, 1982 (47 FR 37563)) would have limited

the accounting method for identification of merchandise and articles

commingled in storage to FIFO only (47 FR 37565, 37573). The reason

given for the introduction of the FIFO accounting procedure was that

the then existing provision was difficult to administer and

inconsistent with commercial accounting techniques. Section 191.22(c)

was changed to its current form when the final revision was issued as

T.D. 83-212. The change (i.e., permitting other accounting procedures

in addition to FIFO) was made in response to a comment that

identification should not be limited to FIFO. Customs stated, in the

T.D., that the comment was believed to have merit and ``[t]herefore,

other accounting procedures such as `low-to-high,' `identification,'

and `blanket identification' may be used.'' (``Identification'' is

direct or actual identification (i.e., identification without recourse

to an accounting method such as FIFO) and ``blanket identification'' is

similar to lower-to-higher.)

Customs has issued a number of rulings on the accounting procedures

which may be used to identify merchandise or articles for drawback

purposes. In a memorandum dated September 3, 1981 (File: 213253), all

Regional Commissioners were directed to permit the use of FIFO in place

of lower-to-higher identification and 19 CFR 22.4(f) (requiring lower-

to-higher identification) was waived pending the promulgation of

Sec. 191.22(c) in the proposed revision of the Customs Regulations

pertaining to drawback. The reason given for this action was to ``. . .

create savings for both Customs and industry by eliminating an

antiquated procedure which is not cost effective.''

In Customs Service Decision (C.S.D.) 79-252, Customs held that

fungible merchandise commingled in storage or manufacture could be

identified on a FIFO basis for purposes of 19 U.S.C. 1313(b) (see also

C.S.D.'s 79-301 and 79-448). In C.S.D. 82-35, Customs held that when

fungible merchandise belonging to several persons is commingled in

storage, each person could identify for drawback purposes his

withdrawals on a FIFO basis, considering only his inputs and

withdrawals. In C.S.D. 83-54, Customs held that when fungible drawback

and non-drawback products were commingled in storage, withdrawals for

drawback purposes may be identified against the drawback material in

the order of its receipt into the commingled storage facility. In

C.S.D. 84-82, Customs held that when fungible drawback and non-drawback

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 C.S.D. 88-1, Customs held that the use of FIFO for drawback

purposes, as provided for in the above-described rulings, required that

the products be actually commingled in the same tank and that the FIFO

procedure must be applied on a date-by-date basis, as illustrated in

the ruling. (Section 484A, Customs and Trade Act of 1990 (Pub. L. 101-

382; 104 Stat. 629, 707; 19 U.S.C. 1313(p)), provided alternative

monthly accounting procedures for certain crude petroleum and petroleum

derivative products in certain conditions. In its directive

implementing this statute (Customs Directive 3740-006, March 17, 1992),

Customs stated that the legal principles set forth in C.S.D. 88-1 would

continue to apply to articles not provided for in Sec. 484A.)

In 1965 (see T.D. 56487, published in the Federal Register on

September 25, 1965 (30 FR 12280)), Customs published a general drawback

rate for substitution manufacturing drawback under 19 U.S.C. 1313(b)

for crude petroleum and petroleum derivatives. General rates are

manufacturing drawback contracts describing standardized procedures

(e.g., steel, provided for in T.D. 81-74, or piece goods, provided for

in T.D. 83-73). Because the procedures covered in general rates are

standardized, a manufacturer or producer who can comply with the terms

and conditions of the general rate may seek application of the general

rate to its operations through a Customs regional office instead of

having to apply for and obtain approval from Customs headquarters, as

is true of specific substitution manufacturing drawback contracts (see

19 CFR Part 191, Subparts D and B, respectively). Because of its

extreme complexity, the general drawback rate for crude petroleum and

petroleum derivatives is an exception to this practice, requiring

application to Customs headquarters for approval.

T.D. 56487 promulgated the general drawback rate for crude

petroleum and petroleum derivatives by adding it to the Customs

Regulations then pertaining to drawback (19 CFR 22.6(g-1); Sec. 22.6

then contained the general drawback rates). (When Part 22 of the

Customs Regulations was revised into Part 191, the general drawback

rates were not included in the revised regulations, as not being of

sufficient general applicability for such inclusion. Thereafter,

general drawback rates were published separately as T.D.'s. The general

drawback rate for crude petroleum and petroleum derivatives, formerly

in 19 CFR 22.6(g-1), was published, without substantive change, as T.D.

84-49.) T.D. 56487 provided for a monthly period of manufacture, unless

a different period was authorized. T.D. 56487 was issued after very

thorough review by the government and after the public was given an

opportunity to comment (see Notice of Proposed Rule Making, published

in the Federal Register on June 16, 1965 (30 FR 7756)).

In the Notice of Proposed Rule Making for T.D. 56487, the reasons

given for promulgation of the general drawback rate were to meet the

complex problems of refiners who produce large groups of widely

diversified petroleum products and to provide a better basis for the

proper allowance of drawback on such products, and to ensure compliance

with the applicable statutory provision (19 U.S.C. 1313(b)). Although

the T.D. permitted the designation for drawback of imported crude

petroleum or petroleum derivatives used at one refinery of a refiner as

the basis for the allowance of drawback on petroleum products

manufactured or produced at another refinery of the same refiner, the

T.D. applied to manufacture or production of the latter, or substitute

merchandise, on a refinery-by-refinery basis.

A basic feature of T.D. 56487 was that refiners could, at their

option, attribute to designated imported crude petroleum or petroleum

derivatives a quantity of an exported petroleum product in excess of

the quantity of that petroleum product actually produced from either

the designated imported crude petroleum or petroleum derivative or the

crude petroleum or petroleum derivative that was substituted for the

designated import. This feature, called ``producibility,'' permits

drawback to be claimed on a given quantity of designated imported crude

petroleum or petroleum derivatives up to the quantity of an exported

petroleum product which could have been produced from the designated

imported crude petroleum or petroleum derivatives. Under the

producibility concept, as provided for in T.D. 56487, a refiner is not

required to establish that the exported articles were actually produced

from the substituted crude petroleum or petroleum derivatives; the

refiner need only show that the exported articles could have been

produced from the designated imported crude petroleum or petroleum

derivative.

The application of the producibility concept to petroleum refinery

operations is illustrated in the following example, quoted from the

ruling published as T.D. 78-419.

Suppose that 100 barrels of crude petroleum are refined into 10

products in equal amounts, including 10 barrels of motor gasoline.

One half of the crude is imported duty-paid, which can be designated

for drawback, and one half (50 barrels) is domestic of the same kind

and quality. Only the motor gasoline is exported.

The production standards for petroleum, unlike those for most

chemicals, are subject to variation at the election of the refiner.

In other words, the refiner could have produced 91 barrels of motor

gasoline from 100 barrels of crude [i.e. Class III], had he wanted

to.

To require the refiner to designate a quantity of imported crude

sufficient to have produced concurrently each product actually

produced, whether or not exported, would either require him to

designate more than the 50 barrels of imported crude that was used,

or to accept drawback on only 5 barrels (one-half) of the total

quantity of motor gasoline exported.

On the other hand, disregarding the nonexported products for the

purpose of determining the quantity of imported crude to designate,

it is clear that up to 91 percent of the 50 barrels of imported

crude could have been refined into motor gasoline. Therefore, the

refiner would have to designate only slightly more than 10 barrels

of imported crude to cover all of the motor gasoline exported. This

is the Treasury Department position.

The quantity of a given petroleum product which could have been

produced from a given quantity of crude petroleum or petroleum

derivative is determined on the basis of ``Industry Standards of

Potential Production on a Practical Operating Basis.'' These standards

were published in T.D. 66-16. The standards listed the quantity of 17

petroleum products which could have been produced from four classes of

crude petroleum and 12 petroleum derivatives (e.g., the producibility

percentages for class III crude petroleum for motor gasoline and

aviation gasoline are 91 and 40 respectively, meaning that 91 gallons

of motor gasoline or 40 gallons of aviation gasoline could be produced

from 100 gallons of class III crude petroleum).

In addition to establishing procedures for the use of the concept

of producibility for the refining of crude petroleum and petroleum

derivatives, T.D. 56487 divided crude petroleum and petroleum

derivatives into classes for purposes of determining same kind and

quality. (In order to claim drawback under 19 U.S.C. 1313(b) on the

exportation of articles manufactured from domestic or other merchandise

substituted for designated imported merchandise, the designated

imported merchandise and the substituted merchandise must be of the

same kind and quality.) Four classes, based on API gravity, were

established. Crude petroleum in any one class would be considered as

being of the same kind and quality as any other crude petroleum

included in the same class and any named petroleum derivative in any

class would be considered as being of the same kind and quality as the

same named derivative in the same class. As stated above, under T.D.

56487, a refiner was not required to establish that the crude petroleum

or petroleum derivative used to produce the exported article was of the

same kind and quality as the designated imported crude petroleum or

petroleum derivative; the refiner was required to establish that this

could have been the case. (I.e., If a refiner used different classes of

crude petroleum during a production period subject to different

standards of producibility, the refiner was required to establish only

that a sufficient quantity, taking into consideration the applicable

standards of producibility, of crude petroleum of the same class as the

designated imported crude petroleum was used in the refinery during the

period; not that it was actually used for the production of exported

article.)

Distribution of drawback among the products produced during a

production period under T.D. 56487 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. (E.g., If, under T.D. 56487, crude petroleum was used to

produce 50 barrels of motor gasoline valued at $30 per barrel, 25

barrels of distillate oils valued at $20 per barrel, and 25 barrels of

all other petrochemical products valued at $80 per barrel, the drawback

factors would be: motor gasoline--.75; residual oils--.5; and all other

petrochemical products--2.) The quantity of crude petroleum which may

be designated for the exportation of a particular product is determined

by multiplying the quantity of the article exported by the drawback

factor. (E.g., In the above example if 10 barrels of motor gasoline

were exported, 7.5 barrels of crude petroleum could be designated; if

10 barrels of petrochemical products were exported, 20 barrels of crude

petroleum could be designated.)

T.D. 56487 emphasized the statutory requirement that the total

amount of drawback allowed may never exceed 99 percent of the duty paid

on the designated imported merchandise. To ensure compliance with this

requirement, the T.D. provided that the exportation of a given quantity

of a manufactured product affords a proper basis for the allowance of

drawback only to the extent that the product could have been produced

in that quantity (together with the quantities of related products

produced concurrently) from the designated imported crude petroleum or

petroleum derivatives. The T.D. provided that this requirement meant

that such concurrent production must be practicably possible by

ordinary manufacturing techniques.

T.D. 56487 contained explicit accounting procedures for

manufactured articles. When the inventory of a particular product

contained product with different drawback factors (e.g., if the

inventory of motor gasoline was from more than one month's production,

each month's quantity could have a different drawback factor),

withdrawals from the inventory for exports were required to be ``[f]rom

lowest [factor] on hand'', withdrawals for drawback deliveries (i.e.,

for further manufacture resulting in a product on which drawback could

be claimed) were required to be ``[from] lowest on hand after exports

are deducted'', and withdrawals for domestic (non-drawback) shipments

were required to be ``[f]rom earliest on hand after [withdrawals for

export and drawback deliveries] are deducted.''

The basis for the above accounting procedures is explained in the

Notice of Proposed Rule Making for T.D. 56487, in which it is stated,

``[t]he total amount of drawback allowable * * * shall be computed by

multiplying the quantity of product exported by the drawback factor for

that product, with due consideration for the `lower-to-higher'

principle established in [19 CFR 22.4(f)].'' (Emphasis added.)

Customs has been requested to amend T.D. 84-49 (as stated above,

when the Customs Regulations pertaining to drawback were revised in

1983, the general drawback rate for crude petroleum and petroleum

derivatives was not included in the revised regulations but was

subsequently published, without substantive change from its initial

publication as T.D. 56487, as 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. The basis for this

request is stated to be that when T.D. 56487 was published, Customs

permitted such accounting only on a lower-to-higher basis but now other

bases of accounting, including FIFO and higher-to-lower are permitted.

It is Customs position that the above-described rationale for

amending T.D. 84-49 to permit the accounting on a FIFO basis in the

described situation has merit (although, in the interest of

administrative simplicity, Customs believes that the order of such

withdrawals should continue to be the same; i.e., first exports, then

drawback deliveries, then domestic shipments). The reasons given for

the introduction of FIFO to accounting procedures for drawback still

apply; i.e., that FIFO is less difficult to administer and is

consistent with commercial accounting procedures (see, e.g., Miller's

Comprehensive GAAP Guide (1985), page 2401 et seq., Inventory Pricing

and Methods). The basis for requiring use of the lower-to-higher

accounting procedure in this situation was that that was the only

accounting procedure permitted to be used for drawback at the time.

Customs position has now changed. Furthermore, we note that under T.D.

84-49, there are procedures guaranteeing that the total amount of

drawback allowed may never exceed 99 percent of the duty paid on the

designated imported merchandise, as required by the drawback law.

However, it is Customs position that T.D. 84-49 should not be

amended to permit the accounting on a higher-to-lower basis and,

furthermore, 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.

As described above, when the Customs Regulations on drawback were

revised in 1983 and the use of FIFO, or any other accounting procedure

approved by Customs, was authorized, the applicable provision (19 CFR

191.22(c)) was modified from that proposed in the Notice of Proposed

Rule Making for the revision. In the Notice of Proposed Rule Making,

only FIFO would have been permitted. In the Final Revision it was

explained that this change was in response to a comment which was found

to have merit, and therefore other accounting procedures could be used.

Illustrations of these other accounting procedures were given. The

illustrative accounting procedures (``low-to-high'',

``identification'', and ``blanket identification'') are either as

conservative as the lower-to-higher procedure then permitted or consist

of direct identification without recourse to an accounting system.

Each of the illustrative accounting procedures referred to in the

Final Revision of the Customs Regulations on drawback is either revenue

neutral or favors the Government. When a drawback claimant uses an

accounting system to identify merchandise or articles for drawback

purposes, it does so for its own convenience (i.e., to avoid having to

physically identify the merchandise or articles). It is Customs

position that any accounting procedure authorized under 19 CFR

191.22(c) must be revenue neutral or favorable to the Government.

Furthermore, it is Customs position that any such authorized accounting

procedure must be consistent with commercial accounting procedures, as

is true of FIFO, must be consistent with the accounting procedures

generally used by the drawback claimant, and must be consistent with

ease of administration.

Authority

This notice is published in accordance with Secs. 177.9 and 177.10,

Customs Regulations (19 CFR 177.9, 177.10).

Comments

Before adopting this proposed change in position, consideration

will be given to any written comments timely submitted to Customs.

Comments submitted will be available for public inspection in

accordance with the Freedom of Information Act (5 U.S.C. 552),

Sec. 1.4, Treasury Department Regulations (31 CFR 103.11(b)), on

regular business days between the hours of 9 and 4:30 p.m. at the

Regulations Branch, Franklin Court, 1099 14th Street, NW., Suite 4000,

Washington, DC.

George J. Weise,

Commissioner of Customs.

Approved: June 9, 1994

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 94-15527 Filed 6-27-94; 8:45 am]

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