Accounting Procedures for Drawback

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