Duty-Free Stores

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 19, 113 and 144

RIN 1515-AB86

Duty-Free Stores

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

ACTION: Proposed rule.

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SUMMARY: This document proposes to amend the Customs Regulations

principally with respect to duty-free stores in order to reduce the

overall paperwork burden for proprietors thereof as well as for

Customs. In particular, for purposes of Customs audit of, and control

over, such facilities, greater reliance would be placed on the use of

records generated and maintained by proprietors and importers in the

ordinary course of business, instead of on the use of specially

prepared Customs forms. The proposed amendments would provide

[[Page 28809]]

benefits in this regard to other classes of Customs bonded warehouses

as well.

DATES: Comments must be received on or before August 5, 1996.

ADDRESSES: Written comments (preferably in triplicate) must be

submitted to the U.S. Customs Service, ATTN: Regulations Branch,

Franklin Court, 1301 Constitution Avenue, NW., Washington, DC 20229,

and may be inspected at the Regulations Branch, 1099 14th Street, NW.,

Suite 4000, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Michael Jackson, Customs Management

Center, Seattle, (206-553-6944).

SUPPLEMENTARY INFORMATION:

Background

By a final rule document published in the Federal Register as T.D.

92-81 on August 20, 1992 (57 FR 37692), the Customs Regulations were

amended to designate duty-free stores as a new class of Customs bonded

warehouse, and to incorporate operating procedures for the

administration of these facilities.

However, in letters dated October 6 and 13, 1992, a major trade

association voiced a number of concerns with respect to the final rule.

Prompted by these correspondences, Customs, by a document published in

the Federal Register (57 FR 47409) on October 16, 1992, delayed the

October 19, 1992, effective date of the final rule until further

notice, in order to review various aspects of the duty-free store

rules. Before any changes could be made to the final rule, however,

Customs concluded that its indefinite suspension was legally

inoperative and proceeded to reinstate the original effective date

thereof, by a document published in the Federal Register (58 FR 29349)

on May 20, 1993.

After lengthy study, Customs has now determined that specific

revisions to the duty-free store regulations are in order. The proposed

changes would also provide some benefits to other classes of bonded

warehouses, and are intended to reduce the overall paperwork burden

both for warehouse proprietors and for Customs.

Discussion of Principal Changes

The following sections of the Customs Regulations would be amended:

Secs. 19.1, 19.2, 19.4, 19.6, 19.11, 19.12, 19.35, 19.36, 19.37, 19.39,

113.63, 144.34, 144.36, 144.37, 144.39 and 144.41.

Proposed Changes to Part 19

A sentence would be added to Sec. 19.1(a)(9) to clarify that all

distribution warehouses used exclusively to provide individual duty-

free sales locations and storage cribs with conditionally duty free

merchandise are also Class 9 warehouses.

Section 19.1(c) would be deleted. While language concerning

warehouse security would be added to Sec. 19.4(b)(6), warehouse

construction requirements will not be set forth in the regulations. The

warehouse construction is a factor that will be considered by the port

director in deciding whether to approve the application.

Section 19.2(a) would be amended to require that all bonded

warehouse applicants have available an inventory control and

recordkeeping system procedures manual. Also, the application would

have to include a certification that the inventory control and

recordkeeping system meets the requirements of Sec. 19.12.

Section 19.2(b) would be modified to specify that the procedures

for inventory control, recordkeeping and delivery methods must be set

forth in the proprietor's procedures manual which must be furnished to

Customs upon request.

References to Sec. 19.3 (e) and (f) would be deleted from

Sec. 19.2(g).

Sections 19.4 and 19.12 would be reformatted to move the storage

and security requirements from Sec. 19.12 and consolidate them in

Sec. 19.4. Section 19.12 would be devoted to the inventory control and

recordkeeping system requirements.

The heading of Sec. 19.4 would be changed to ``Customs and

proprietor responsibility and supervision over warehouses'', and two

subsections would be added: (a) Customs supervision and (b)

``Proprietor responsibility and supervision. Subsection (b) is divided

into nine sections: (1) Supervision, (2) Customs access, (3)

Safekeeping of merchandise and records, (4) Records maintenance, (5)

Record retention in lieu of originals, (6) Warehouse and merchandise

security, (7) Storage conditions, (8) Manner of storage, and (9)

Miscellaneous responsibilities. The intent of these proposed changes is

to clarify the proprietors' responsibilities.

Proposed Sec. 19.4(a), entitled ``Customs supervision'', and

proposed Sec. 19.4(b)(2), entitled ``Customs access'', contain the

current Sec. 19.4 language relating to Customs supervision over

warehouses.

The requirements of current Sec. 19.12(b)(1), concerning

supervision by the warehouse proprietor, would be moved to

Sec. 19.4(b)(1) and expanded to cover all activities that a bonded

warehouse proprietor is authorized to perform.

The restrictions on unauthorized disclosure of proprietary

information would be moved from current Sec. 19.12(a)(7) to

Sec. 19.4(b)(3). The last sentence in current Sec. 19.12(a)(7) has been

deleted because the consequence of unauthorized disclosure is covered

by Sec. 19.3(e)(8).

Proposed Sec. 19.4(b)(4) summarizes the proprietor's

responsibilities relating to records maintenance.

Proposed Sec. 19.4(b)(5), dealing with the retention of copies of

records in lieu of the originals, provides proprietors with the

convenience of storing required records on microfilm, microfiche, CD

ROM (compact disk, read-only memory), or other medium. Those approved

for this storage method could do so any time after the final withdrawal

of merchandise covered by the entry to which the records pertain. Duty-

free store operators could use the aforementioned means to store sales

ticket information after six months from the date of sale. This

provision would greatly reduce the physical space required to maintain

the volumes of hard-copy originals. Proprietors would be required to

provide authenticated copies upon demand for audit purposes. Approval

would be obtained from the appropriate regulatory audit field director.

Proposed Sec. 19.4(b)(6), concerning warehouse and merchandise

security, incorporates the requirements of current Sec. 19.12(b) (3)

and (4) relating to security of warehouses and bonded tanks. Specific

reference to T.D. 72-56 is replaced with references to more general

security standards.

The ``safe and sanitary storage'' requirements would be moved from

Sec. 19.12(b)(5) to Sec. 19.4(b)(7). The sentences concerning prompt

removal of trash and waste and prohibition of fires would be deleted

because Customs believes that the first sentence in this paragraph

provides adequate coverage.

Proposed Sec. 19.4(b)(8), entitled ``Manner of storage'', is based

on current Sec. 19.12(b)(6), and would allow proprietors to store

merchandise covered by a single entry number or unique identifier in

more than one location within the warehouse, provided the inventory

control system could identify the quantities in each location upon

demand by Customs. It also provides regulatory recognition of First-In-

First-Out (FIFO) inventory control systems for the first time.

Section 19.6(a)(1) would be amended to change the time requirement

for filing a discrepancy report from two business days to five business

days.

Section 19.6(d)(1) would be amended to allow a duty-free sales

enterprise to use a blanket permit for withdrawal for transportation to

another port.

[[Page 28810]]

Section 19.6(d)(2) would be amended to reflect a new cross-

reference.

Section 19.6(d)(4), entitled ``Blanket permit summary'', would be

redesignated as Sec. 19.6(d)(5). A proposed new Sec. 19.6(d)(4) would

add a provision describing procedures under which blanket withdrawals

for aircraft and vessel supplies from more than one warehouse entry

could be combined on one Customs Form 7512.

Section 19.11(h) would be amended to change the phrase ``saleable

units'' to ``smallest irreducible unit'', for purposes of

clarification. Under the provisions for blanket permit to destroy, the

phrase ``upon receipt'' would be deleted. Goods may be determined

``nonsaleable'' long after receipt. The dollar amount covered by a

blanket permit for destruction would be increased from $100 to less

than 5 percent of the value of the merchandise at the time of entry or

$1250, whichever is less, in its undamaged condition. This increase is

being proposed in order to reduce the number of permits for destruction

that would otherwise be required under the circumstances.

Proposed Sec. 19.12 is based on the inventory control and

recordkeeping requirements in current Sec. 19.12 which would thus be

modified to more clearly describe the proprietor's responsibilities and

what constitutes an adequate inventory control and recordkeeping

system.

Proposed Sec. 19.12(c)(1) includes the requirement for a proprietor

receipt for merchandise transported to his warehouse by himself or his

agent, as provided for by T.D. 94-81. Proposed changes to subsection

(d)(1) and (d)(2) clarify the requirements for accounting for

merchandise entered in the warehouse.

Proposed Sec. 19.12(d)(3) modifies existing requirements relating

to theft, shortage, overage or damage. To accommodate proprietors, the

proposed modification extends the time for providing written

confirmation for any theft, overage, extraordinary shortage or damage

from two business days to five business days after the discrepancy is

discovered. The definition of extraordinary shortage or damage would be

expanded to cover missing merchandise on which duties and taxes in

excess of $100 are due. The time for paying applicable duties and taxes

on thefts and shortages would be extended from 10 business days after

discovery to 20 calendar days following the end of the calendar month

in which the shortage is discovered.

The following new requirements would be added by Customs under

proposed Sec. 19.12(d)(3) in order to clarify that the proprietor

should ensure that the following actions are taken when discovered

discrepancies occur: (1) An entry must be filed for all overages within

five business days of the date of discovery; (2) When cumulative

thefts, shortages or overages under a specific entry or unique

identifier total one percent or more of the value of the merchandise or

cumulative duties and taxes are in excess of $100, the reporting and

payment requirements of this paragraph must be met; (3) All shortages

and overages must be recorded in the inventory control and

recordkeeping system at the time of discovery, whether or not they must

be reported to Customs at that time; (4) Duties and taxes applicable to

any non-extraordinary shortage or damage, and not required to be paid

earlier, shall be submitted at the time the Customs Form 300 is due or

at the time the certification of preparation of the annual

reconciliation report is due.

A proposed new Sec. 19.12(d)(4)(ii), entitled ``Review'', the

substance of which is currently set forth in Sec. 19.12(a)(4), would

change the permit file folder filing requirement for entries after

final withdrawal from 30 business days to 30 calendar days. This is

intended to provide greater ease in calculating the due date.

In an effort to reduce paperwork requirements for both warehouse

proprietors and Customs, proposed Sec. 19.12(d)(4)(iii), contains new

provisions which would allow for exemption from maintaining the permit

file folder (PFF), if the proprietor has a system which can provide a

summary of all transactions relating to an entry, appropriately cross-

referenced to supporting documents which are readily retrievable.

Proposed Sec. 19.12(d)(4)(iv) would also allow port directors to accept

formal notification of final withdrawal in lieu of submission of the

PFF or entry activity summary and only require submission of the PFF or

alternative documentation on a selective basis. Failure to provide

requested documentation would result in reinstatement of the

requirements to maintain PFFs and to submit the PFF to Customs upon

final withdrawal. This change would eliminate the current requirement

that the proprietor maintain records in a specified method required by

Customs and would allow the proprietor to use his normal recordkeeping

system to satisfy Customs requirements. It would also allow the port

director the option to review the number of permit file folders or the

approved alternative system on a selective basis.

Proposed Sec. 19.12(d)(5) would add a new requirement that

proprietors must take at least an annual physical inventory, report any

discrepancies discovered to the port director, record appropriate

adjustments in the inventory control and recordkeeping system, and make

any required entries and payments to Customs. The proprietor would have

to advise Customs in advance of dates that the inventories would be

taken so that Customs could observe or participate in the inventory

process, if deemed necessary.

Although many warehouses currently use the FIFO inventory method

for fungible merchandise, the current regulations do not provide any

guidance for use of inventory control systems other than direct

identification by Customs entry number. The acceptability of a FIFO

inventory system has been recognized by Customs since issuance of

C.S.D. 83-63, 17 Cust. Bull. 869 (1983), but the regulations were never

revised to cover FIFO systems. Proposed Sec. 19.12(f) is based on

appropriate sections of the Bonded Warehouse Manual and would

incorporate requirements into the regulations governing an acceptable

FIFO inventory control system.

Proposed Sec. 19.12(g) contains the requirement for the annual

warehouse proprietor submission currently set forth in

Sec. 19.12(a)(5). A provision is added to allow use of an alternative

format if prior written approval is obtained from the Customs field

director of regulatory audit. Additional instructions are included for

proprietors who have merchandise covered by one entry, but stored in

multiple locations as provided for under proposed Sec. 144.34.

To reduce paperwork requirements for the proprietor and handling by

Customs, proposed Sec. 19.12(h) discontinues the requirement to file a

Customs Form 300, Warehouse Proprietor's Submission, for class 2,

importers' private bonded warehouses and classes 4, 5, 6, 7, 8 and 9

warehouses if the warehouse proprietor and the importer are the same

party. Instead, under the proposed revision, they must prepare a

reconciliation report at the end of each fiscal year which will be kept

on file. A certification would have to be sent to the field director,

regulatory audit, stating that the reconciliation has been performed

and is accurate.

Proposed Sec. 19.12(i) requires all proprietors to perform an

annual internal review of the inventory control and recordkeeping

system, and to prepare and maintain on file a report

[[Page 28811]]

identifying deficiencies discovered and the corrective action taken.

Proposed Sec. 19.12(j) provides special instructions for

preparation of the Customs Form 300 or reconciliation when merchandise

transferred from one warehouse continues to be accounted for under the

original warehouse entry rather than under a rewarehouse entry, as

provided for under proposed Sec. 144.34(c).

In proposed Sec. 19.13(g), specific reference to T.D. 72-56 is

replaced with reference to the more general security standards

contained in proposed Sec. 19.4(b)(6).

Section 19.13a would be modified to delete the reference to

Sec. 19.12(a) and substitute references to Secs. 19.4(b) and 19.12.

Section 19.13a(b) would be modified to delete the reference to

Sec. 19.12(a)(5) and substitute reference to Sec. 19.12(g).

Section 19.35(c), entitled ``Integrated locations'', would be

modified to accommodate duty-free stores which do not have inventory

control systems which automatically reduce inventory balances on a real

time basis. Proposed Sec. 19.35(c) would allow multiple noncontiguous

sales and crib locations to be treated by Customs as one location if

inventory records are updated no less frequently than at the end of

each business day to reflect that day's activity. Integrated locations

are defined as separate sales and storage locations within a close

proximity to one another, e.g., multiple outlets at an airport. Under

the proposed revision, language is added to allow the proprietor

discretion in determining if integrated status is desired and the word

``will'' is replaced with ``may'' in ``* * * may be treated by Customs

as one location * * *''.

Section 19.35(f) would be modified to delete the reference to

Sec. 19.12(b)(3) and substitute a reference to Sec. 19.4(b)(6).

Section 19.36(e) would be modified by deleting the requirement that

purchasers know whether or not a commodity is either duty-paid or U.S.-

origin.

Section 19.36(g) would be modified to replace the reference to

Sec. 19.12(a) with Sec. 19.12 (d), (e) and (f).

Section 19.37(a), dealing with crib operations, would be modified

by deleting the word ``small'' in the first sentence. Concerning the

amount of goods which may be stored in a crib, the phrase, ``* * *

limited to an amount estimated to be a two weeks' supply * * *'',

appearing in the fourth sentence of Sec. 19.37(a) would be removed, and

the following phrase would be added in its place: ``* * * an amount

requested by the proprietor which is commercially necessary for the

delivery operations for a period, if approved by the port director.''.

Section 19.39(c)(2), entitled ``Passenger delivery'', would be

modified by deleting the last three sentences to eliminate the

requirement for airline officials to certify the proprietor's

certificate of lading. It is the proprietor's responsibility to

establish procedures to ensure exportation. The regulation as currently

written creates an undue burden on both the proprietor and the airline.

Section 19.39(c)(3), entitled ``Aircraft delivery'', would be

modified to include the statutory language that duty-free purchases

must be laden on board the same aircraft on which the passenger will

depart. It is the proprietor's obligation to establish procedures

satisfactory to the port director to provide reasonable assurance of

exportation.

A proposed new Sec. 19.39(c)(4)(ii) would be added to clarify that

unit-load delivery methods could be used only on the same aircraft as

the passenger who purchased the conditionally duty-free merchandise

will depart the United States. Existing paragraphs (c)(4) (ii)-(iv) of

Sec. 19.39 would be renumbered.

A revision of paragraph (c)(5) of Sec. 19.39 is proposed to

establish procedures to handle deliveries of duty-free merchandise to

passengers whose flights have to be rescheduled by the airline. Customs

believes that the rescheduling of a cancelled or aborted flight should

not require the proprietor to retrieve the goods until the passenger

departs on the rescheduled flight. The Customs Service believes that

the revenue risk is minimal because the passenger has no control over

rescheduling a flight that is cancelled by the airline. Merchandise

would only be delivered to a passenger who has already bought a ticket

that usually is far in excess of any possible duty savings. Customs

believes that to monitor the period between the cancellation of the

passenger's original flight and the departure of the passenger on the

rescheduled flight is wasteful of Customs and trade resources because

of that risk assessment. With respect to merchandise delivered to an

airline on behalf of a passenger who fails to board the flight, the

proprietor must coordinate with the airline to establish a procedure to

retrieve the merchandise because in that situation the passenger has

acted contrary to the stated intention to export the goods and there is

no reason to believe that the passenger will reschedule a different

flight.

Also, Sec. 19.39(e) would be modified by adding the phrase, ``or

bonded carriers'', after the reference to ``licensed cartmen''. See

T.D. 94-81, 59 FR 51496.

Warehouse Withdrawals and Rewarehouse Entries

An extensive change to the procedures governing transfers of

warehoused merchandise is proposed.

Currently, the procedure to transfer warehoused merchandise

requires the transfer to be done by Customs bonded cartage operators or

carriers. The transfer in the same port may require a rewarehouse entry

into the destination warehouse when both warehouses are within the same

port. A rewarehouse entry is required if the transfer is between

warehouses in different ports. The current procedure will be retained

in Sec. 144.34 (a) and (b).

An alternative procedure for merchandise in Class 2 or Class 9

warehouses is proposed in a new paragraph (c) to Sec. 144.34. Under the

alternative, the merchandise would be treated as remaining in the

warehouse in which it was originally entered for warehouse. The

importer and the proprietor of that warehouse would be liable for

duties and for the proprietor's custodial responsibilities,

respectively. To ensure that the parties in interest are fully aware of

their responsibilities, the proposal requires the importer, all

proprietors, and their sureties to sign the application to use the

alternative procedure. Section 113.63 would be revised by adding new

paragraphs (a)(4) and (b)(4), and by revising paragraph (d), in order

to secure the obligors' custodial performance here.

The primary attribute of the proposed alternative is the

eligibility requirement that the applicant have a centralized inventory

control system so that Customs is able to spot check and verify the

status of warehoused merchandise, by location, at all times. Although

the proposal requires that each warehouse location keep subordinate or

secondary records of merchandise at the location, the concept of the

proposal is that the importer and the warehouse into which the

merchandise was first entered remain liable as though the merchandise

was present in that warehouse. That concept, implemented by the

required centralized inventory system, is expected to ensure that

Customs can administer its obligations to protect the revenue and

ensure that no merchandise is released from Customs custody before any

required charge, such as a lien, has been satisfied.

The alternative would eliminate the documentary transfers of

liability for custodians because conceptually the

[[Page 28812]]

warehoused merchandise is treated as not having left the original

warehouse. For that reason, no significant change to Sec. 144.39 is

proposed as a result of the alternative to the procedures in paragraphs

(a) and (b) of Sec. 144.34.

Section 144.36(c) would be substantially revised to allow for

withdrawals for transportation from a single warehouse, via a single

conveyance, consigned to the same consignee and to be deposited into a

single warehouse to be combined on one Customs Form 7512. The exemption

contained in proposed Sec. 144.34(c), addressed above, would be

incorporated into Secs. 144.36 (f) and (g).

The signature requirement on sales tickets contained in

Sec. 144.37(h)(2)(v) would be deleted for all purchases. Also, the

address requirement would be deleted for all purchases except alcoholic

beverages in quantities in excess of 4 liters and cigarettes in

quantities in excess of 3 cartons.

Section 144.37(h)(3) would be modified by deleting the reference

``Sec. 19.6(d)(4)'' and substituting a reference to ``Sec. 19.6(d)(5)''

in place thereof.

Section 144.41(c), entitled ``Combining separate shipments'', would

be modified and expanded to allow multiple withdrawals from a single

warehouse which are transported on a single conveyance to be

rewarehoused, at the proprietor's discretion, as one or more

rewarehouse entries. To ensure the five-year provision of 19 U.S.C.

1557 is met, the combined rewarehouse entries will assume the import

date of the oldest warehouse entry in the new combined entry. This

provision will reduce the number of rewarehouse entry transactions at

the receiving port.

Comments

Before adopting the proposed amendments, consideration will be

given to any written comments that are 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 1.4), and

Sec. 103.11(b), Customs Regulations (19 CFR 103.11(b)), on regular

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

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

Washington, DC.

Regulatory Flexibility Act and Executive Order 12866

For the reasons set forth in the preamble, pursuant to the

provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it

is certified that, if adopted, the proposed amendments will not have a

significant economic impact on a substantial number of small entities.

Accordingly, the proposed amendments are not subject to the regulatory

analysis or other requirements of 5 U.S.C. 603 or 604. Nor would the

proposed amendments result in a ``significant regulatory action'' under

E.O. 12866.

Paperwork Reduction Act

The collection of information in this document is contained in

Secs. 19.2, 19.4, 19.6, 19.11, 19.12, 19.36, 19.37, 19.39, 144.36,

144.37 and 144.41. This information is required and will be used to

ensure the exportation of merchandise from duty-free stores and other

Customs bonded warehouses, and to otherwise satisfy the requirements of

law and the protection of the revenue. This notice of proposed

rulemaking is intended to simplify recordkeeping requirements for duty-

free stores and other Customs bonded warehouses. The likely respondents

and/or recordkeepers are business or other for-profit institutions.

The collection of information contained in this notice of proposed

rulemaking has already been approved by the Office of Management and

Budget (OMB) under 1515-0005. An Inventory Control Worksheet will be

submitted to OMB, which will reflect any changes in the information

collection burdens occasioned by this rule, together with a request for

a suitable extension of the existing approval.

Estimated annual reporting and/or recordkeeping burden: 61,000

hours.

Estimated average annual burden per respondent/recordkeeper: 10

hours.

Estimated number of respondents and/or recordkeepers: 10,000.

Estimated annual frequency of responses: On-Occasion.

Comments on the collection of information should be sent to the

Office of Management and Budget, Attention: Desk Officer of the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503. A copy should also be sent to the

Regulations Branch, Office of Regulations and Rulings, U.S. Customs

Service, 1301 Constitution Avenue, NW., Washington, DC 20229. Comments

should be submitted within the time frame that comments are due

regarding the substance of the proposal.

Comments are invited on: (a) Whether the collection is necessary

for the proper performance of the functions of the agency, including

whether the information shall have practical utility; (b) the accuracy

of the agency's estimate of the burden of the collection of the

information; (c) ways to enhance the quality, utility, and clarity of

the information to be collected; and (d) ways to minimize the burden of

the collection of information on respondents, including through the use

of automated collection techniques or other forms of information

technology.

Drafting Information

The principal author of this document was Russell Berger,

Regulations Branch, U.S. Customs Service. However, personnel from other

offices participated in its development.

List of Subjects

19 CFR Part 19

Customs duties and inspection, Imports, Exports, Warehouses.

19 CFR Part 113

Customs bonds.

19 CFR Part 144

Customs duties and inspection, Imports, Warehouses.

Proposed Amendments

It is proposed to amend parts 19, 113 and 144, Customs Regulations

(19 CFR parts 19, 113 and 144) as set forth below.

PART 19--CUSTOMS WAREHOUSES, CONTAINER STATIONS AND CONTROL OF

MERCHANDISE THEREIN

1. The general authority citation for part 19 and the specific

authority for Secs. 19.1, 19.6, 19.11, and 19.35-19.39 would continue

to read as follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 20,

Harmonized Tariff Schedule of the United States), 1624;

Section 19.1 also issued under 19 U.S.C. 1311, 1312, 1555, 1556,

1557, 1560, 1561, 1562;

Section 19.6 also issued under 19 U.S.C. 1555;

* * * * *

Section 19.11 also issued under 19 U.S.C. 1556, 1562;

* * * * *

Sections 19.35-19.39 also issued under 19 U.S.C. 1555;

* * * * *

2. It is proposed to amend Sec. 19.1 by adding a sentence at the

end of paragraph (a)(9) to read as set forth below, and by removing

paragraph (c).

Sec. 19.1 Classes of customs warehouses.

(a) * * *

(9) * * * All distribution warehouses used exclusively to provide

individual

[[Page 28813]]

duty-free sales locations and storage cribs with conditionally duty-

free merchandise are also Class 9 warehouses.

* * * * *

3. It is proposed to amend Sec. 19.2 by revising its heading, by

adding three sentences at the end of paragraph (a), and by revising

paragraphs (b)(2) and (g), to read as follows:

Sec. 19.2 Applications to bond.

(a) * * * The applicant must prepare and have available at the

warehouse a procedures manual describing the inventory control and

recordkeeping system that will be used in the warehouse. A

certification by the proprietor that the inventory control and

recordkeeping system meets the requirements of Sec. 19.12 will be

submitted with the application. The physical security of the facility

must meet the approval of the port director.

(b) * * *

(2) A description of the store's procedures, which includes

inventory control, recordkeeping, and delivery methods. These

procedures must be set forth in the proprietor's procedures manual.

Such manual and subsequent changes therein must be furnished to the

port director upon request. The procedures in the manual shall provide

reasonable assurance that conditionally duty-free merchandise sold

therein will be exported;

* * * * *

(g) The port director shall promptly notify the applicant in

writing of his decision to approve or deny the application to bond the

warehouse. If the application is denied the notification shall state

the grounds for denial. The decision of the port director will be the

final Customs administrative determination in the matter.

4. It is proposed to revise Sec. 19.4 to read as follows:

Sec. 19.4 Customs and proprietor responsibility and supervision over

warehouses.

(a) Customs supervision. The character and extent of Customs

supervision to be exercised in connection with any warehouse facility

or transaction provided for in this part shall be in accordance with

Sec. 161.1 of this chapter. Independent of any need to appraise or

classify merchandise, the port director may authorize a Customs officer

to supervise any transaction or procedure at the bonded warehouse

facility. Such supervision may be performed through periodic audits of

the warehouse proprietor's records, quantity counts of goods in

warehouse inventories, spot checks of selected warehouse transactions

or procedures or reviews of conditions of recordkeeping, storage,

security, or safety in a warehouse facility.

(b) Proprietor responsibility and supervision.--(1) Supervision.

The proprietor shall supervise all transportation, receipts,

deliveries, sampling, recordkeeping, repacking, manipulation,

destruction, physical and procedural security, conditions of storage,

and safety in the warehouse as required by law and regulations.

Supervision by the proprietor shall be that which a prudent manager of

a storage and manipulation facility would be expected to exercise.

(2) Customs access. The warehouse proprietor shall permit access to

the warehouse by any Customs officer.

(3) Safekeeping of merchandise and records. The proprietor is

responsible for safekeeping of merchandise and records concerning

merchandise entered in Customs bonded warehouses. The proprietor or his

employees shall safeguard and shall not disclose proprietary

information contained in or on related documents to anyone other than

the importer, importer's transferee, or owner of the merchandise to

whom the document relates or their authorized agent.

(4) Records maintenance.--(i) Maintenance. The proprietor shall:

(A) Maintain the inventory control and recordkeeping system in

accordance with the provisions of Sec. 19.12 of this part;

(B) Retain all records required in this part and defined in

Sec. 162.1(a) of this chapter, pertaining to bonded merchandise for 5

years after the date of the final withdrawal under the entry; and

(C) Protect proprietary information in its custody from

unauthorized disclosure.

(ii) Availability. Records shall be readily available for Customs

review at the warehouse. In addition, a proprietor may keep records at

another location for Customs review, but only if the proprietor first

receives written approval for such storage from the port director.

(5) Record retention in lieu of originals. A warehouse proprietor

may utilize alternative storage methods in lieu of maintaining records

in their original formats, if such storage is approved by Customs under

paragraph (b)(5)(i) of this section. For Customs purposes, original

records may be stored in alternate form at any time after the final

withdrawal under the entry to which these records pertain, except that

duty-free store operators may store original sales tickets in alternate

form at any time beginning six months after date of sale. If the

proprietor chooses to use alternative storage methods, the following

conditions must be met:

(i) Approval. The proprietor may request approval to maintain

records in an alternative format by writing and describing the system

of storage, the conversion techniques used and the security safeguards

to be employed to prevent alteration, to the director of the regulatory

audit field office closest to the party's headquarters operation. If

satisfied that the alternative storage proposed will ensure the

accuracy and availability of the records when required, the director

will grant written approval.

(ii) Retention of reproductions. The proprietor shall retain and

keep available an original and one duplicate of each microfilm,

microfiche, cd ROM (compact disk, Read-Only Memory), or other storage

medium used, for five years from the date of the final withdrawal under

the entry to which these records pertain. Duty-free store operators

must keep alternate storage media containing sales tickets for five

years from the date of the final withdrawal or five years from the date

of the sale, whichever is shorter.

(iii) Hard-copy reproductions. The proprietor must have the

capability of making direct hard-copy reproductions of the data stored

on the microfilm, microfiche, cd ROM, or other storage medium. The

proprietor shall bear the expense of making hard-copy reproductions of

any or all records required by any proper official of the U.S. Customs

Service for the audit or inspection of books and records.

(iv) Standards required for reproducing records. Proprietors shall

maintain the integrity of the original records by insuring that copies

are true reproductions of the original records and serve the purpose

for which such records were created. The following shall be observed:

Copies shall contain all significant record detail shown on the

original; copies of the record shall be so arranged, identified, and

indexed that any individual document or component of the records can be

located with reasonable facility; any indexes, registers, or other

finding aids shall be contained on the storage medium at the beginning

of the records to which they relate; each time reproductions are made,

a written certification will be executed by a responsible company

official (see Sec. 191.6(a) of this chapter; the same parties who have

authority to sign drawback documents are ``responsible company

officials'' for purposes of this section), stating that the

reproductions stored on the microfilm,

[[Page 28814]]

microfiche, cd ROM, or other storage medium constitute a true, complete

and accurate reproduction of the original documents; and the proprietor

shall maintain and make available a manual describing procedures for

reproducing original records on alternative storage media and controls

in effect for assuring completeness and accuracy of the reproductions.

The procedures shall incorporate reasonable controls for assuring

accuracy and completeness of alternative records. The proprietor is

responsible for assuring that these controls are executed each time

original records are reproduced.

(v) Revocation of alternative record storage method. Failure to

maintain the records in accordance with these conditions and

requirements will constitute a breach of the proprietor's bond and may

result in the revocation by Customs of the privilege of maintaining

records in a form other than the original format.

(6) Warehouse and merchandise security. The warehouse proprietor

shall maintain the warehouse facility in a safe and sanitary condition

and establish procedures adequate to ensure the security of all

merchandise under Customs custody stored in the facility. The warehouse

construction will be a factor that will be considered by the port

director in deciding whether to approve the application. The facility

shall be built in such a manner as to render it impossible for

unauthorized personnel to enter the premises without such violence as

to make the entry easy to detect. If a portion of the facility is to be

used for the storage of non-bonded merchandise, the port director shall

designate the means for effective separation of the bonded and non-

bonded merchandise, such as a wall, fence, or painted line. All inlets

and outlets to bonded tanks shall be secured with locks and/or in-bond

seals.

(7) Storage conditions. Merchandise in the bonded area shall be

stored in a safe and sanitary manner to minimize damage to the

merchandise, avoid hazards to persons, and meet local, state, and

Federal requirements applicable to specific kinds of goods. Aisles

shall be established and maintained, and doors and entrances left

unblocked for access by Customs officers and warehouse proprietor

personnel.

(8) Manner of storage. Packages shall be received in the warehouse

and recorded in the proprietor's inventory and accounting records

according to their marks and numbers. Packages containing weighable or

gaugeable merchandise not bearing shipping marks and numbers shall be

received under the weighers or gaugers numbers. Packages with

exceptions due to damage or loss of contents, or not identical as to

quantity or quality of contents shall be stored separately until the

discrepancy is resolved with Customs. Merchandise received in the

warehouse shall be stored in a manner directly identifying the

merchandise with the entry, general order, or seizure number; using a

unique identifier for inventory categories composed of fungible

merchandise accounted for on a First-In-First-Out (FIFO) basis; or

using a unique identifier for inventory categories composed of fungible

merchandise accounted for using another approved alternative inventory

method.

(i) Direct identification. The warehouse proprietor shall mark all

shipments for identification, showing the general order or warehouse

entry number or seizure number and the date of the general order,

entry, or delivery ticket in the case of seizures. Containers covered

by a given warehouse entry, general order or seizure shall not be mixed

with goods covered by any other entry, general order or seizure.

Merchandise covered by a given warehouse entry, general order or

seizure may be stored in multiple locations within the warehouse if the

proprietor's inventory control system specifically identifies all

locations where merchandise for each entry, general order or seizure is

stored and the quantity in each location. The proprietor must provide,

upon request by a Customs officer, a record balance of goods,

specifying the quantity in each storage location, covered by any

warehouse entry, general order, or seizure so a physical count can be

made to verify the accuracy of the record balance.

(ii) FIFO. A proprietor may account for fungible merchandise on a

First-In-First-Out (FIFO) basis instead of specific identification by

warehouse entry number, provided the merchandise meets the criteria for

fungibility and the recordkeeping requirements contained in Sec. 19.12

of this part are met. As of the beginning date of FIFO procedures, each

kind of fungible merchandise in the warehouse under FIFO shall

constitute a separate inventory category. Each inventory category shall

be assigned a unique number or other identifier by the proprietor to

distinguish it from all other inventory categories under FIFO. All of

the merchandise in a given inventory category shall be physically

placed so as to be segregated from merchandise under other inventory

categories or merchandise accounted for under other inventory methods.

The unique identifier shall be marked on the merchandise, its

container, or the location where it is stored so as to clearly show the

inventory category of each article under FIFO procedures. Merchandise

covered by a given unique identifier may be stored in multiple

locations within the warehouse if the proprietor's inventory control

system specifically identifies all locations where merchandise for a

specific unique identifier is stored and the quantity in each location.

The proprietor must provide, upon request by a Customs officer, a

record balance of goods, specifying the quantity in each storage

location, covered by any warehouse entry, general order, or seizure so

a physical count can be made to verify the accuracy of the record

balance.

(iii) Other alternative inventory methods. Other alternative

inventory systems may be used, if Customs approval is obtained.

Importers or proprietors who wish to use an alternative inventory

method other than FIFO must apply to Customs Headquarters, Office of

Regulations and Rulings, for approval.

(9) Miscellaneous responsibilities. The proprietor is responsible

for complying with requirements for transport to his warehouse,

deposit, manipulation, manufacture, destruction, shortage or overage,

inventory control and recordkeeping systems, and other requirements as

specified in this part.

5. It is proposed to amend Sec. 19.6 by revising the fourth

sentence of paragraph (a)(1), paragraph (d)(1), and the sixth sentence

of paragraph (d)(2), by redesignating paragraph (d)(4) as (d)(5) and by

adding a new paragraph (d)(4), to read as follows:

Sec. 19.6 Deposits, withdrawals, blanket permits to withdraw and

sealing requirements.

(a)(1) Deposit in warehouse. * * * A copy of any joint report of

discrepancy shall be made within five business days of agreement and

provided to the port director on the appropriate cartage documents as

set forth in Sec. 125.31 of this chapter. * * *

* * * * *

(d) Blanket permits to withdraw. (1) General. (i) Blanket permits

may be used to withdraw merchandise from bonded warehouses for:

(A) Delivery to individuals departing directly from the Customs

territory for exportation under the sales ticket procedure of

Sec. 144.37(h) of this chapter (Class 9 warehouses only);

(B) Aircraft or vessel supplies under section 309 or 317, Tariff

Act of 1930, as amended (19 U.S.C. 1309, 1317); or

(C) The personal or official use of personnel of foreign

governments and

[[Page 28815]]

international organizations set forth in subpart I, part 148 of this

chapter; or

(D) A combination of the foregoing.

(ii) Blanket permits to withdraw may be used only for delivery at

the port where withdrawn and not for transportation in bond to another

port, except for a withdrawal for transportation to another port by a

duty-free sales enterprise which meets the requirements for exemption

as stated in Sec. 144.34(c) of this chapter. Blanket permits to

withdraw may not be used for delivery to a location for retention or

splitting of shipments under the provisions of Sec. 18.24 of this

chapter. A withdrawer who desires a blanket permit shall state in

capital letters on the warehouse entry, or on the warehouse entry/entry

summary when used as an entry, that ``Some or all of the merchandise

will be withdrawn under blanket permit per section 19.6(d), C.R.''

Customs acceptance of the entry will constitute approval of the blanket

permit. A copy of the entry will be delivered to the proprietor,

whereupon merchandise may be withdrawn under the terms of the blanket

permit. The permit may be revoked by the port director in favor of

individual applications and permits if the permit is found to be used

for other purposes, or if necessary to protect the revenue or properly

enforce any law or regulation Customs is charged with administering.

Merchandise covered by an entry for which a blanket permit was issued

may be withdrawn for purposes other than those specified in this

paragraph if a withdrawal is properly filed as required in subpart D,

part 144, of this chapter.

(2) Withdrawals under blanket permit. * * * A copy of the

withdrawal shall be retained in the records of the proprietor as

provided in Sec. 19.12(d)(4) of this part. * * *

* * * * *

(4) Withdrawals under blanket permit for aircraft or vessel

supplies. Multiple withdrawals under a blanket permit for aircraft or

vessel supplies, if consigned to the same daily aircraft flight number

or vessel sailing, may be filed on one Customs Form 7512; however, an

attachment form, developed by the warehouse proprietor and approved by

the port director may be used for all withdrawals. This attachment form

shall provide a sufficient summary of the goods being withdrawn, and

shall include the warehouse entry number, the quantity and weight being

withdrawn, the Harmonized Tariff Schedule of the United States

number(s), the value of the goods, import and export lading

information, the duty rate and amount, and any applicable Internal

Revenue Tax Calculation, for each warehouse entry being withdrawn. A

copy of Customs Form 7512 and the summary attachment must be attached

to each permit file folder unless the warehouse proprietor qualifies

for the permit file folder exemption under Sec. 19.12(d)(4)(iii) of

this part.

* * * * *

6. It is proposed to amend Sec. 19.11 by revising paragraph (h) to

read as follows:

Sec. 19.11 Manipulation in bonded warehouses and elsewhere.

* * * * *

(h) Merchandise which has been entered for warehouse and placed in

a Class 9 warehouse (duty-free store) may be unpacked into its smallest

irreducible unit for sale without a prior permit issued by the port

director. The port director may issue a blanket permit to a duty-free

store for up to one year permitting the destruction of merchandise

covered by any entry and found to be nonsaleable, if the merchandise to

be destroyed is valued at less than 5 percent of the value of the

merchandise at entry or $1250, whichever is less, in its undamaged

condition. Such permit may be revoked in favor of a permit for each

entry and/or destruction whenever necessary to assure proper

destruction and protection of the revenue. The proprietor shall

maintain a record of unpacking merchandise into saleable units and

destruction of nonsaleable merchandise in its inventory and accounting

records.

7. It is proposed to revise Sec. 19.12 to read as follows:

Sec. 19.12 Inventory control and recordkeeping system.

(a) Systems capability. The proprietor shall maintain either manual

or automated inventory control and recordkeeping systems or combination

manual and automated systems capable of:

(1) Accounting for all merchandise transported, deposited, stored,

manipulated, manufactured, smelted, refined, destroyed in or removed

from the bonded warehouse and all merchandise collected by a proprietor

or his agent for transport to his warehouse. The records shall provide

an audit trail from deposit through manipulation, manufacture,

destruction, and withdrawal from the bonded warehouse either by

specific identification or other Customs authorized inventory method.

The records to be maintained are those which a prudent businessman in

the same type of business can be expected to maintain. The records are

to be kept in sufficient detail to permit effective and efficient

determination by Customs of the proprietor's compliance with these

regulations and correctness of his annual submission or reconciliation;

(2) Producing accurate and timely reports and documents as required

by this part; and

(3) Identifying shortages and overages of merchandise in sufficient

detail to determine the quantity, description, tariff classification

and value of the missing or excess merchandise so that appropriate

reports can be filed with Customs on a timely basis.

(b) Procedures manual. (1) The proprietor shall have available at

the warehouse an English language copy of its written inventory control

and recordkeeping systems procedures manual in accordance with the

requirements of this part.

(2) The proprietor shall keep current its procedures manual and

shall submit to the port director a new certification at the time any

change in the system is implemented.

(c) Entry of merchandise into a warehouse.--(1) Identification. All

merchandise collected by a proprietor or his agent for transport to his

warehouse shall be receipted. In addition, all merchandise entered in a

warehouse will be recorded in a receiving report or document using a

Customs entry number or unique identifier if an alternate inventory

control method has been approved. All merchandise will be traceable to

a Customs entry and supporting documentation.

(2) Quantity verification. Quantities received will be reconciled

to a receiving report or document such as an invoice with any

discrepancy reported to the port director as provided in Sec. 19.6(a).

(3) Recordation. Merchandise received will be accurately recorded

in the accounting and inventory system records from the receiving

report or document using the Customs entry number or unique identifier

if an alternative inventory control method has been approved.

(d) Accountability for merchandise in a warehouse.--(1)

Identification of merchandise. The Customs entry number or unique

identifier, as applicable under Sec. 19.4(b)(8), will be used to

identify and trace merchandise.

(2) Inventory records. The inventory records will specify by

Customs entry number or unique identifier if an alternative inventory

control method is approved:

(i) The location of the merchandise within the warehouse;

[[Page 28816]]

(ii) The cost or value of the merchandise, unless the proprietor's

financial records maintain cost or value and the records are made

available for Customs review; and

(iii) The beginning balance, cumulative receipts and withdrawals,

adjustments, destructions, and current balance on hand by date and

quantity.

(3) Theft, shortage, overage or damage. Any theft or suspected

theft or overage or any extraordinary shortage or damage (one percent

or more of the value of the merchandise in an entry or covered by a

unique identifier; or if the missing merchandise is subject to duties

and taxes in excess of $100) shall be immediately brought to the

attention of the port director, and confirmed in writing within five

business days after the shortage, overage, or damage has been brought

to the attention of the port director. An entry for warehouse must be

filed for all overages by the person with the right to make entry

within five business days of the date of discovery. The applicable

duties, taxes and interest on thefts and shortages so reported shall be

paid by the responsible party to Customs within 20 calendar days

following the end of the calendar month in which the shortage is

discovered. The port director may allow the consolidation of duties and

taxes applicable to multiple shortages into one payment. These same

requirements shall apply when cumulative thefts, shortages or overages

under a specific entry or unique identifier total one percent or more

of the value of the merchandise or if the duties and taxes owed exceed

$100. Upon identification, the proprietor shall record all shortages

and overages in its inventory control and recordkeeping system, whether

or not they are required to be reported to the port director at the

time. The proprietor shall also record all shortages and overages as

required in the Customs Form 300 or annual reconciliation report under

paragraphs (f) or (g) of this section, as appropriate. Duties and taxes

applicable to any non-extraordinary shortage or damage and not required

to be paid earlier shall be submitted to the port director at the time

the Warehouse Proprietor's Submission, Customs Form 300 is due or at

the time the certification of preparation of the annual reconciliation

report is due, as prescribed in paragraphs (g) and (h) of this section.

(4) Permit file folders.--(i) Maintenance. Permit file folders

shall be maintained and kept up to date by filing all receipts, damage

or shortage reports, manipulation requests, withdrawals, removals and

blanket permit summaries within five business days after the event

occurs. The permit file folders shall be kept in a secure area and

shall be made available for inspection by Customs at all reasonable

hours.

(ii) Review. When the final withdrawal of merchandise relating to a

specific warehouse entry, general order or seizure occurs, the

warehouse proprietor shall: Review the permit file folder to ensure

that all necessary documentation is in the file folder accounting for

the merchandise covered by the entry; notify Customs of any merchandise

covered by the warehouse entry, general order or seizure which has not

been withdrawn or removed; and file the permit file folder with Customs

within 30 calendar days after final withdrawal, except as allowed by

paragraph (b)(4)(iv) of this section. The permit file folder for

merchandise not withdrawn during the general order period shall be

submitted to the port director upon receipt from Customs of the Customs

Form 6043.

(iii) Exemption to maintenance requirement. Maintenance of permit

file folders will not be required, if the proprietor has an automated

system capable of: satisfactorily summarizing all actions by Customs

warehouse entry; providing upon demand by Customs an entry activity

summary report which lists all individual receipts, withdrawals,

destructions, manipulations and adjustments by warehouse entry and is

cross-referenced to the source documents for each transaction; and

maintaining source documents so that the documents can be readily

retrieved upon request. Failure to provide the entry activity summary

report or documentation supporting the entry activity summary report

upon demand by the port director or the field director of regulatory

audit could result in reinstatement by the port director of the

requirement to maintain the permit file folder for all warehouse

entries. When final withdrawal is made, the proprietor must submit the

entry activity summary report to Customs. Prior to submission, the

proprietor must ensure the accuracy of the summary report and assure

that all supporting documentation is on file and available for review

if requested by Customs.

(iv) Exemption to submission requirement. At the discretion of the

port director, a proprietor may be allowed to furnish formal

notification of final withdrawal in lieu of the requirement to submit

the permit file folder or entry activity summary within 30 calendar

days of each final withdrawal. If approved to use this procedure the

proprietor could be required by the port director to submit permit file

folders or entry activity summaries on a selective basis. Failure to

promptly provide the permit file folder or entry activity summary upon

request by the port director or the field director of regulatory audit

could result in withdrawal of this privilege.

(5) Physical inventory. The proprietor shall take at least an

annual physical inventory of all merchandise in the warehouse, or

periodic cycle counts of selected categories of merchandise such that

each category is counted at least once during the year, with prior

notification of the date(s) given to Customs so that Customs personnel

may observe or participate in the inventory if deemed necessary. If the

proprietor of a Class 2 or Class 9 warehouse has merchandise covered by

one warehouse entry, but stored in multiple warehouse facilities as

provided for under Sec. 144.34 of this chapter, the facility where the

original entry was filed must reconcile the on-hand balances at all

locations with the record balance for those entries with merchandise in

multiple locations. The proprietor shall notify the port director of

any discrepancies, record appropriate adjustments in the inventory

control and recordkeeping system, and make required payments and

entries to Customs, in accordance with paragraph (d)(3) of this

section. Discrepancies found in a Class 9 warehouse with integrated

locations as set forth in Sec. 19.35(c) will be the net discrepancies

for a specific identifier such that overages within one sales location

will be offset against shortages in another location that is within the

integrated location. A Class 9 proprietor who transfers merchandise

between facilities in different ports without being required to file a

rewarehouse entry in accordance with Sec. 144.34 of this chapter may

offset overages and shortages within the same specific identifier for

merchandise located in stores in different ports.

(e) Withdrawal of merchandise from a warehouse. All bonded

merchandise withdrawn from a warehouse will be accurately recorded

within the inventory control and recordkeeping system. The inventory

control and recordkeeping system must have the capability to trace all

withdrawals back to a Customs entry and to ultimate disposition of the

merchandise by the proprietor.

(f) Special provisions for use of FIFO inventory procedures.--(1)

Notification. A proprietor who wishes to use FIFO procedures for all or

part of the merchandise in a bonded warehouse shall provide the port

director a written certification that: the proprietor has read and

understands Customs FIFO procedures set forth in this section; the

[[Page 28817]]

proprietor's procedures are in accordance with Customs FIFO procedures,

and the proprietor agrees to abide by those procedures; and the

proprietor of a public warehouse will obtain the written consent of any

importer using the warehouse before applying FIFO procedures to their

merchandise.

(2) Qualifying merchandise. FIFO inventory procedures may be used

only for fungible merchandise. For purposes of this section, ``fungible

merchandise'' means merchandise which is identical and interchangeable

for all commercial purposes. While commercial interchangeability is

usually decided between buyer and seller or between proprietor and

importer, Customs is the final arbiter of fungibility in bonded

warehouses. The criteria for determining whether merchandise is

fungible include, but are not limited to, Governmental and recognized

industrial standards, part numbers, tariff classification, value, brand

name, unit of quantity (such as barrels, gallons, pounds, pieces),

model number, style and same kind and quality.

(3) Merchandise specifically excluded. FIFO procedures cannot be

applied to the following merchandise, as well as any other merchandise

which does not comply with the requirements of paragraph (f)(2) of this

section:

(i) Merchandise subject to quota, visa or export restrictions

chargeable to different countries of origin;

(ii) Textile and textile products of different quota categories;

(iii) Merchandise with different tariff classifications or rates of

duty, except where the difference is within the merchandise itself

(such as kits, merchandise in unusual containers) or where the tariff

classification or dutiability is determined only by conditions upon

withdrawal (for example, withdrawal for vessel supplies, bonded wool

transactions);

(iv) Merchandise with different legal requirements for marking,

labelling or stamping;

(v) Merchandise with different trademarks;

(vi) Merchandise of different grades or qualities;

(vii) Merchandise with different importers of record;

(viii) Damaged or deteriorated merchandise;

(ix) Restricted merchandise; or

(x) General order, abandoned or seized merchandise.

(4) Maintenance of FIFO. FIFO procedures used for merchandise in

any inventory category, must be used consistently throughout the

warehouse storage and recordkeeping practices and procedures for the

merchandise. For example, merchandise may not be added to inventory by

FIFO but withdrawn by bypassing certain inventory layers to reach a

specific warehouse entry other than the oldest one. However, this does

not preclude the use of specific identification for some merchandise in

a warehouse entry and FIFO for other merchandise, so long as they are

segregated in physical storage and clearly distinguished in the

inventory and accounting records.

(5) FIFO recordkeeping. In the inventory and accounting records,

the proprietor shall establish an inventory layer for each warehouse

entry represented in each inventory category. The layers shall be

established in the order of time of acceptance of the entry or by the

date of importation of merchandise covered by each applicable warehouse

entry. There shall be no mixing of layering both by time of acceptance

and date of importation in the same warehouse. Records for each layer

shall, as a minimum, show the warehouse entry number, date of

acceptance, date of importation, quantity and unit of quantity. They

shall also show for each entry the type of warehouse withdrawal number

or other specific removal event charged against the entry, by date and

quantity. Each addition to or deduction from the inventory category

shall be posted in the appropriate inventory category within 2 business

days after the event occurs. All FIFO records and documentation shall

consistently use the same unit of quantity within each inventory

category.

(6) Entry requirements. Warehouse entries covering any merchandise

to be accounted for under FIFO must be prominently marked ``FIFO'' on

the face of the entry document. The entry document or an attachment

thereto shall show the unique identifier of each inventory category to

be accounted for under FIFO, the quantity in each inventory category

and the unit of quantity.

(7) Receipts. Any shortages, overages, or damage found upon receipt

shall be attributed to the entry under which the merchandise was

received. FIFO procedures will not take effect until the merchandise is

physically placed in the storage location for the inventory category

represented in the entry.

(8) Manipulation. When manipulation results in a product with a

different unique identifier, the inventory and accounting records shall

show the quantities of merchandise in each inventory category appearing

in the product covered by the new unique identifier. The withdrawal

shall show the unique identifiers of both the materials used in the

manipulation and the product as manipulated. The quantities of the

original unique identifiers will be deducted from their respective

warehouse entries on a FIFO basis when the resultant product is

withdrawn.

(9) Discontinuance of FIFO. A proprietor may voluntarily

discontinue the use of FIFO procedures for all or part of the

merchandise currently under FIFO by providing written notification to

the port director. The notification shall clearly describe the

merchandise, by commercial names and unique identifiers, to be removed

from FIFO. Following notification, the merchandise shall be segregated

in both the recordkeeping system and the physical location by warehouse

entry number and the quantities so removed shall be deducted from the

appropriate FIFO inventory category balances. Merchandise so removed

shall be maintained under the specific identification inventory method.

FIFO procedures which were voluntarily discontinued may be reinstated,

but not for merchandise covered by any warehouse entry for which FIFO

was discontinued.

(g) Warehouse proprietor submission. Except as otherwise provided

in paragraph (h) of this section or Sec. 19.19(b) of this part, the

warehouse proprietor shall file with the field director of regulatory

audit within 45 calendar days from the end of his business year a

Warehouse Proprietor's Submission on Customs Form 300. If the

proprietor of a Class 2 or Class 9 warehouse has merchandise covered by

one warehouse entry, but stored in multiple warehouse facilities as

provided for under Sec. 144.34 of this chapter, the CF 300 shall cover

all locations and warehouses of the proprietor. An alternative format

may be used for providing the information required on the CF 300, if

prior written approval is obtained from the field director of

regulatory audit.

(h) Annual reconciliation.--(1) Report. Instead of filing Customs

Form 300 as required under paragraph (g) of this section, the

proprietor of a class 2, importers' private bonded warehouse, and

proprietors of classes 4, 5, 6, 7, 8, and 9 warehouses if the warehouse

proprietor and the importer are the same party, shall prepare a

reconciliation report within 90 days after the end of the fiscal year

unless the port director authorizes an extension for reasonable cause.

The proprietor shall retain the annual reconciliation report for 5

years from the end of the fiscal year covered by the report. The report

must be available for a spot check or audit by

[[Page 28818]]

Customs, but need not be furnished to Customs unless requested. There

is no form specified for the preparation of the report.

(2) Information required. The report must contain the company name;

address of the warehouse; class of warehouse; date of inventory or

information on cycle counts; a description of merchandise for each

entry or unique identifier, quantity on hand at the beginning of the

year, cumulative receipts and transfers (by unit), quantity on hand at

the end of the year, and cumulative positive and negative adjustments

(by unit) made during the year. If the proprietor of a Class 2 or Class

9 warehouse has merchandise covered by one warehouse entry, but stored

in multiple warehouse facilities as provided for under Sec. 144.34 of

this chapter, the reconciliation shall cover all locations and

warehouses of the proprietor at the same port. If the annual

reconciliation includes entries for which merchandise was transferred

to a warehouse without filing a rewarehouse entry, as allowed under

Sec. 144.34, the annual reconciliation must contain sufficient detail

to show all required information by location where the merchandise is

stored. For example, if merchandise covered by a single entry is stored

in warehouses located in 3 different ports, the annual reconciliation

should specify individually the beginning and ending inventory

balances, cumulative receipts, transfers, and positive and negative

adjustments for each location.

(3) Certification. The proprietor shall submit to the field

director of regulatory audit within 10 business days after preparation

of the annual reconciliation report, a letter signed by the proprietor

certifying that the annual reconciliation has been prepared, is

available for Customs review, and is accurate. The certification letter

must contain the proprietor's IRS number; date of fiscal year end; the

name and street address of the warehouse; the name, title, and

telephone number of the person having custody of the records; and the

address where the records are stored. Reporting of shortages and

overages based on the annual reconciliation will be made in accordance

with paragraph (d)(3) of this section. Any previously unreported

shortages and overages should be reported to the port director and any

unpaid duties, taxes and fees should be paid at this time.

(i) System review. The proprietor shall perform an annual internal

review of the inventory control and recordkeeping system and shall

prepare and maintain on file a report identifying any deficiency

discovered and corrective action taken, to ensure that the system meets

the requirements of this part.

(j) Special requirements. A warehouse proprietor submission (CF

300) or annual reconciliation must be prepared for each facility or

location as defined in Secs. 19.2(a) and 19.35(c) of this part. When

merchandise is transferred from one facility or location to another

without filing a rewarehouse entry, as provided for in Sec. 144.34(c)

of this chapter, the submission/reconciliation for the warehouse where

the entry was originally filed should account for all merchandise under

the warehouse entry, indicating the quantity in each location.

8. It is proposed to amend Sec. 19.13 by revising the fourth

sentence of paragraph (g) to read as follows:

Sec. 19.13 Requirements for establishment of warehouses.

* * * * *

(g) Secure storage. * * * The areas for storage of bonded material

and manufactured products shall be secured in accordance with the

standards prescribed in Sec. 19.4(b)(6) of this part. * * *

* * * * *

9. It is proposed to amend Sec. 19.13a by revising the first

sentence of its introductory text and by revising paragraph (b) to read

as follows:

Sec. 19.13a Recordkeeping requirements.

The proprietor of a manufacturing warehouse shall comply with the

recordkeeping requirements of Secs. 19.4(b) and 19.12.* * *

* * * * *

(b) Take an annual physical inventory of the merchandise as

provided in Sec. 19.12(d)(5) in conjunction with the annual submission

required by Sec. 19.12(g); and

* * * * *

10. It is proposed to amend Sec. 19.35 by revising the introductory

text of paragraph (c) and by revising paragraphs (c)(2) and (f) to read

as follows:

Sec. 19.35 Establishment of duty-free stores (Class 9 warehouses).

* * * * *

(c) Integrated locations. A Class 9 warehouse with multiple

noncontiguous sales and crib locations (see Sec. 19.37(a) of this part)

containing conditionally duty-free merchandise and requested by the

proprietor may be treated by Customs as one location if:

* * * * *

(2) The recordkeeping system is centralized up to the point where a

sale is made so as to automatically reduce the sale quantity by

location from centralized inventory or inventory records must be

updated no less frequently than at the end of each business day to

reflect that day's activity.

* * * * *

(f) Security of sales rooms and cribs. The physical and procedural

security requirements of Sec. 19.4(b)(6) of this part shall be applied

to the security of the sales rooms and cribs by the port director. The

proprietor shall establish procedures to safeguard the merchandise so

as to accommodate the movement of purchasers and prospective purchasers

of conditionally duty-free merchandise contained in duty-free sales

rooms and cribs.

* * * * *

11. It is proposed to amend Sec. 19.36 by revising the last

sentence of paragraph (e) and the third sentence of paragraph (g) to

read as follows:

Sec. 19.36 Requirements for duty-free store operations.

* * * * *

(e) Merchandise eligible for warehousing. * * * However, such

merchandise must be either identified or marked ``DUTY-PAID'' or

``U.S.-ORIGIN'', or similar markings, as applicable, so that Customs

officers can easily distinguish conditionally duty-free merchandise

from other merchandise in the sales or crib area.

* * * * *

(g) Inventory procedure. * * * The inventory shall be reconcilable

with the accounting and inventory records and the permit file folder

requirements of Sec. 19.12(d), (e) and (f) of this part. * * *

12. It is proposed to amend Sec. 19.37 by revising the first and

fourth sentences, and the fifth (and last) sentence of paragraph (a) to

read as follows:

Sec. 19.37 Crib operations.

(a) Crib. A crib means a bonded area, separate from the storage

area of a Class 9 warehouse, for the retention of a supply of articles

for delivery to persons departing from the United States. * * * The

quantity of goods in the crib may be an amount requested by the

proprietor which is commercially necessary for the delivery operations

for a period, if approved by the port director. The port director may

increase or decrease the quantity as deemed necessary for the

protection of the revenue and proper administration of U.S. laws and

regulations, or may order the return to the storage area of goods

remaining unsold.

* * * * *

13. It is proposed to amend Sec. 19.39 by removing the last three

sentences of

[[Page 28819]]

paragraph (c)(2); it is further proposed to amend Sec. 19.39 by

revising the first sentence of paragraph (c)(3), by redesignating

paragraphs (c)(4)(ii), (c)(4)(iii) and (c)(4)(iv), as (c)(4)(iii),

(c)(4)(iv) and (c)(4)(v), respectively, and adding a new paragraph

(c)(4)(ii), and by revising paragraphs (c)(5) and (e), to read as set

forth below:

Sec. 19.39 Delivery for exportation.

* * * * *

(c) * * *

(3) Aircraft Delivery. The merchandise will be delivered by a

licensed cartman for lading as baggage directly on the aircraft on

which the passenger will depart. * * *;

(4) Unit-load delivery. * * *

(ii) Merchandise shall be placed on the aircraft on which the

passenger departs the United States for carriage as passenger baggage;

* * * * *

(5) Cancelled or aborted flights or no-show passengers. (i)

Cancelled or aborted flights. The proprietor shall, upon request, make

available to Customs the purchaser's name and address, the purchaser's

airline ticket number and the identity and quantity of the merchandise

delivered by the proprietor to the purchaser (if the merchandise was

delivered to the airline rather than the passenger, the name of the

airline employee to whom the merchandise was delivered), and the date

and time of that delivery in lieu of retrieving the merchandise for

safekeeping until the purchaser actually departs.

(ii) No-show passengers. A proprietor who delivers merchandise

directly to an airline for delivery to a passenger who does not board

the flight shall establish a procedure to obtain redelivery of that

merchandise from the airline.

* * * * *

(e) Delivery method. Delivery of conditionally duty-free

merchandise to persons for exportation will be made by licensed cartmen

or bonded carriers under the procedures in subpart D, part 125, and

Sec. 144.34(a), of this chapter, or under a local control system

approved by the port director wherein any discrepancy found in the

merchandise will be treated as if it occurred in the bonded warehouse.

* * * * *

PART 113--CUSTOMS BONDS

1. The general authority citation for part 113 would continue to

read as follows:

Authority: 19 U.S.C. 66, 1623, 1624.

* * * * *

2. It is proposed to amend Sec. 113.63 by redesignating paragraph

(a)(4) as (a)(5) and adding a new paragraph (a)(4), by adding a new

paragraph (b)(4), and by revising the first sentence of paragraph (d),

to read as follows:

Sec. 113.63 Basic custodial bond conditions.

(a) * * *

(4) If authorized to use the alternative transfer procedure set

forth in Sec. 144.34(c) of this chapter, to operate as constructive

custodian for all merchandise transferred under those procedures,

thereby assuming primary responsibility for the continued proper

custody of the merchandise notwithstanding its geographical location;

* * * * *

(b) * * *

(4) If authorized to use the alternative transfer procedure set

forth in Sec. 144.34(c) of this chapter, to keep safe any merchandise

so transferred.

* * * * *

(d) * * * If the principal is designated a bonded carrier, or

licensed to operate a cartage or lighterage business, or authorized to

use the alternative transfer procedure set forth in Sec. 144.34(c) of

this chapter, the principal agrees to redeliver timely, on demand by

Customs, any merchandise delivered to unauthorized locations or to the

consignee without the permission of Customs. * * *

* * * * *

PART 144--WAREHOUSE AND REWAREHOUSE ENTRIES AND WITHDRAWALS

1. The general authority citation for part 144 and the specific

authority for Sec. 144.37 would continue to read as follows:

Authority: 19 U.S.C. 66, 1484, 1557, 1559, 1624;

* * * * *

Section 144.37 also issued under 19 U.S.C. 1555, 1562.

2. It is proposed to amend Sec. 144.34 by adding a new paragraph

(c) to read as follows:

Sec. 144.34 Transfer to another warehouse.

* * * * *

(c) Transfers between integrated bonded warehouses.--(1)

Eligibility.

(i) Only an importer who will transfer warehoused merchandise among

Class 2 and 9 warehouses listed on the application in paragraph (c)(2)

of this section is eligible to participate.

(ii) The importer must have a centralized inventory control system

that shows the location of all of the warehoused merchandise at all

times, including merchandise in transit.

(iii) The importer and its surety must sign the application. If the

application to use this alternative procedure is approved by the

appropriate port director, the importer's entry bond containing the

conditions provided under Sec. 113.62 of this chapter will continue to

attach to any merchandise transferred under these alternative

procedures.

(iv) Each proprietor of a warehouse listed on the application and

each surety who underwrites that proprietor's custodial bond coverage

under Sec. 113.63 of this chapter shall sign the application.

(2) Application. Application must be made in writing to the port

director of the port in which the applicant's centralized inventory

control system exists, with copies to all affected port directors, for

exemptions from the requirements for transfer of merchandise from one

bonded warehouse to another set forth in paragraphs (a) and (b) of this

section. The application must list all bonded warehouses to and from

which the merchandise may be transferred; all such warehouses must be

covered by the same centralized inventory control system. Only blanket

exemption requests will be considered; exemptions will not be

considered for individual transfers. The application may be in letter

form, signed by all participants, and contain a certification to the

port director by the applicant that he maintains accounting records,

documents and financial statements and reports that adequately support

Customs activities.

(3) Operation. An importer who receives approval to transfer

merchandise between bonded warehouses in accordance with the provisions

of this section may, after entry into the first warehouse, transfer

that merchandise to any other warehouse without filing a withdrawal

from warehouse or a rewarehouse entry. The warehoused merchandise will

be treated as though it remains in the first warehouse so long as the

actual location of the merchandise at all times is recorded as provided

under the provisions of this section.

(4) Inventory control requirements. The records required to be

maintained must include a centralized inventory control system and

supporting documentation which meets the following requirements:

(i) Provide Customs upon demand with the proper on-hand balance of

each inventory item in each warehouse

[[Page 28820]]

facility and each storage location within each warehouse;

(ii) Provide Customs upon demand with the proper on-hand balance

for each open warehouse entry and the actual quantity in each warehouse

facility;

(iii) If an alternative inventory system has been approved, provide

Customs upon demand with the proper on-hand balance for each unique

identifier and the quantity related to each open warehouse entry and

the quantity in each warehouse facility;

(iv) Maintain documentation for all intracompany movements,

including authorizations for the movement, shipping documents and

receiving reports. These documents must show the appropriate warehouse

entry number or unique identifier, the description and quantity of the

merchandise transferred, and must be properly authorized and signed

evidencing shipment from and delivery to each location;

(v) Maintain a consolidated permit file folder at the location

where the merchandise was originally warehoused. The consolidated

permit file folder must meet the requirements of Sec. 19.12(d)(4) of

this chapter regardless of the warehouse facility in which the action

occurred. Documentation for all intracompany movements, including

authorizations for movement, shipping documents, receiving reports, as

well as documentation showing ultimate disposition of the merchandise

must be filed in the consolidated permit file folder within seven

business days; and

(vi) Maintain a subordinate permit file at all intracompany

locations where merchandise is transferred containing copies of

documentation required by Sec. 19.12(d)(4) of this chapter and by

paragraph (c)(3)(v) of this section relating to merchandise quantities

transferred to the location. A copy of all documents in the subordinate

permit file folder must be filed in the consolidated permit file folder

within seven business days; no exceptions will be granted to this

requirement. When the final withdrawal is made on the respective entry,

the subordinate permit file shall be considered closed and filed at the

intracompany location to which the merchandise was transferred.

(vii) File the withdrawal from Customs custody at the original

warehouse location at which the merchandise was entered.

(5) Waiver of permit file folder requirements. The permit file

folder requirements of paragraphs (c)(3)(v) and (c)(3)(vi) of this

section may be waived if the proprietor's recordkeeping and inventory

control system qualifies under the requirements of

Sec. 19.12(d)(4)(iii) of this chapter at all locations where bonded

merchandise is stored.

(6) Procedure not available. (i) Liens. The transfer procedures

permitted under paragraph (c) of this section shall not be available

for merchandise with respect to which Customs is notified of the

existence of a lien, as prescribed in Sec. 141.112 of this chapter (see

19 U.S.C. 1564), until proof shall be produced at the original

warehouse location that the lien has been satisfied or discharged.

(ii) Restricted merchandise. Merchandise subject to a restriction

on release such as covered by a licensing, quota or visa requirement,

is not eligible.

3. It is proposed to amend Sec. 144.36 by revising paragraphs (c)

and (f), and by adding the word ``or'' at the end of paragraph (g)(5)

and adding a new paragraph (g)(6) thereafter, to read as follows:

Sec. 144.36 Withdrawal for transportation.

* * * * *

(c) Form. (1) A withdrawal for transportation shall be filed on

Customs Form 7512 in five copies. An extra copy or copies of the

Customs Form 7512 may be required for use in connection with the

delivery of the merchandise to the bonded carrier and, in the case of

alcoholic beverages, two extra copies shall be required for use in

furnishing the duty statement to the port director at destination.

(2) Separate withdrawals for transportation from a single

warehouse, via a single conveyance, consigned to the same consignee,

and deposited into a single warehouse, can be filed on one Customs Form

7512, under one control number, provided that there is an attachment,

to be certified by a Customs officer, providing the information for

each withdrawal, as required in paragraph (d) of this section. This

procedure shall not be allowed for merchandise which is in any way

restricted (for example, quota/visa).

(3) The requirement that a Customs Form 7512 be filed and the

information required in paragraph (d) of this section be shown shall

not be required if the merchandise qualifies under the exemption in

Sec. 144.34(c).

* * * * *

(f) Forwarding procedure. The merchandise shall be forwarded in

accordance with the general provisions for transportation in bond

(Secs. 18.1 through 18.8 of this chapter). However, when the alternate

procedures under Sec. 144.34(c) are employed, the merchandise need not

be delivered to a bonded carrier for transportation, and an entry for

transportation (Customs Form 7512) and a rewarehouse entry will not be

required.

(g) Procedure at destination. * * *

(5) * * *; or

(6) Deposited into the proprietor's bonded warehouse or duty free

store warehouse without rewarehouse entry as required in Sec. 144.41,

if the merchandise qualifies for the exemption specified in

Sec. 144.34(c).

* * * * *

4. It is proposed to amend Sec. 144.37 by revising paragraph

(h)(2)(v), and by revising the fourth sentence and the sixth (and last)

sentence of paragraph (h)(3), concluding text, to read as follows:

Sec. 144.37 Withdrawal for exportation.

* * * * *

(h) * * *

(2) * * *

(v) The full name and address of the purchaser. However, the port

director may waive the address requirement for all merchandise except

for alcoholic beverages in quantities in excess of 4 liters and

cigarettes in quantities in excess of 3 cartons; and

* * * * *

(3) Sales ticket register. * * * The sales ticket register shall be

included in the permit file folder with or in lieu of the blanket

permit summary, as provided in Sec. 19.6(d)(5) of this chapter. * * *

In lieu of placing a copy of sales tickets in each permit file folder,

the warehouse proprietor may keep all sales tickets in a readily

retrievable manner in a separate file.

5. It is proposed to amend Sec. 144.39 by revising its first

sentence to read as follows:

Sec. 144.39 Permit to transfer and withdraw merchandise.

With the exception of merchandise transferred under the procedures

of Sec. 144.34(c), if all legal and regulatory requirements are met,

the appropriate Customs officer shall approve the application to

transfer or withdraw merchandise from a bonded warehouse by endorsing

the permit copy and returning it to the applicant. * * *

6. It is proposed to amend Sec. 144.41 by revising paragraph (c) to

read as follows:

Sec. 144.41 Entry for rewarehouse.

* * * * *

(c) Combining Separate shipments. (1) Separate shipments consigned

to the same consignee and received under separate withdrawals for

transportation may be combined into one rewarehouse entry if the

warehouse withdrawals are from the same original warehouse entry.

(2) Shipments covered by multiple warehouse entries, and shipped

from a

[[Page 28821]]

single warehouse under separate withdrawals for transportation, via a

single conveyance, may be combined into one rewarehouse entry if

consigned to the same consignee and deposited into a single warehouse.

This procedure shall not be allowed for merchandise which is in any way

restricted (for example, quota/visa). The combined rewarehouse entry

shall have attached either copies of each warehouse entry package which

is being combined into the single rewarehouse entry or a summary with

pertinent information, that is, the date of importation, commodity

description, size, HTSUS and entry numbers, for all entries withdrawn

for consolidation as one rewarehouse entry. Any combining of separate

withdrawals into one rewarehouse entry shall result in the rewarehouse

entry being assigned the import date of the oldest entry being combined

into the rewarehouse entry.

(3) Combining of separate shipments shall be prohibited in all

other circumstances.

* * * * *

Michael H. Lane,

Acting Commissioner of Customs.

Approved: April 8, 1996.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 96-14125 Filed 6-5-96; 8:45 am]

BILLING CODE 4820-02-P