[Federal Register Volume 59, Number 43 (Friday, March 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5023]


[[Page Unknown]]

[Federal Register: March 4, 1994]


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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 146

RIN 1515-AB20

 

Petroleum Refineries in Foreign Trade Subzones

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

ACTION: Proposed rule.

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SUMMARY: This document invites public comment on a proposed revision of 
the notice of proposed rulemaking published in the Federal Register on 
August 10, 1992 (57 FR 35530), which would add special procedures and 
requirements to the Customs Regulations governing the operations of 
crude petroleum refineries approved as foreign trade subzones. The 
proposed rule is necessary to implement a section of the Technical and 
Miscellaneous Revenue Act of 1988 which amended the Foreign Trade Zone 
Act to make specific provision for petroleum refinery subzones. Customs 
has significantly revised the initial notice of proposed rulemaking as 
a result of the extensive and varied input received from the oil 
refinery and foreign trade zone communities, as well as from other 
interested parties, in response to the initial notice.

DATES: Comments must be received on or before May 3, 1994.

ADDRESSES: Comments (preferably in triplicate) must be submitted to 
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: Legal aspects: Cari Berdut, Entry 
Rulings Branch, (202-482-7040).
    Operational aspects: Louis Hryniw, Office of Regulatory Audit, 
(202-927-1100).

SUPPLEMENTARY INFORMATION:

Background

    On August 10, 1992 (57 FR 35530), Customs published a document in 
the Federal Register, proposing to amend the Customs Regulations to add 
special procedures and requirements governing the operations of crude 
petroleum refineries approved as foreign trade subzones, in 
implementation of section 9002 of the Technical and Miscellaneous 
Revenue Act of 1988, which amended the Foreign Trade Zones Act, 19 
U.S.C. 81c(d), to make specific provision for petroleum refinery 
subzones.
    Briefly, as stated in the August 10, 1992, notice of proposed 
rulemaking, the amendment obviates the need to determine exactly when 
and where in the manufacturing process crude and other feedstocks 
become other products. In so doing, it permits refiners as well as 
Customs to assess the relative value of such multiple products at the 
end of the manufacturing period from which such products were produced, 
when the actual quantities of these products resulting from the 
refining process can be measured with certainty. Also, the amendment 
permits the products refined in a subzone during a manufacturing period 
to be attributed to given crude or other feedstocks introduced into 
production during the period, to the extent that such products were 
producible (could have been produced) therefrom in the quantities 
removed from the subzone.
    By a document published in the Federal Register on September 14, 
1992 (57 FR 41896), Customs extended the public comment period for the 
proposed rule until December 8, 1992. Subsequently, by a document 
published in the Federal Register on November 24, 1992 (57 FR 55198), 
Customs further extended the public comment period until February 8, 
1993, and gave notice of a public meeting which was held on December 15 
and 16, 1992, concerning the proposed amendments.
    As a result of the extensive and varied input received from the oil 
refinery and foreign trade zone communities, as well as from other 
interested parties, in response to the initial notice of proposed 
rulemaking and the public meeting, Customs has decided to significantly 
revise its initial notice, and is requesting additional public comment 
on the revised proposed rule.
    The following discussion includes a summary of the various comments 
received in response to the August 10, 1992, notice of proposed 
rulemaking, together with an explanation and analysis regarding the 
sections proposed to be added, eliminated or further revised. The 
proposed rule as revised is thereafter set forth.

Discussion of Comments

    Comment: Most commenters favor deletion of proposed Sec. 146.92(a), 
involving the definition of ``Assay''.
    Response: Customs agrees. Laboratory analyses are sufficient to 
verify feedstock characteristics and provide API gravity.
    Comment: Most commenters indicated that the cumulative entry 
activity report defined in proposed Sec. 146.92 (c) is only required in 
the Houston District and, therefore, favor its deletion because the 
information is already contained in the subzone activity report.
    Response: Upon further consideration, Customs has determined to 
delete proposed Sec. 146.92 (c), (d), (h) and (l), involving the report 
in question, as well as certain related reports, specifically, the duty 
and user fee report, the inventory disposition report, and the product 
shipment report, all of which were principally addressed in proposed 
Sec. 146.96 which, as a result, is also deleted from the proposed rule.
    Comment: Commenters indicated that the definition in proposed 
Sec. 146.92(e) concerning ``feedstock'' should be expanded to include 
natural gas and other hydrocarbons to comply with EPA regulations.
    Response: Customs agrees and has so modified the wording of 
proposed Sec. 146.92(e) (now redesignated as Sec. 146.92(b)).
    Comment: Many commenters noted that proposed Sec. 146.92(f) 
defining ``final product'' should also include products consumed in the 
zone.
    Response: Customs agrees with this suggestion and has so changed 
proposed Sec. 146.92(f) (now redesignated as Sec. 146.92(d)).
    Comment: Most commenters indicated that fungibility is already 
defined in Sec. 146.1(b), and that a definition for this term is not 
needed in the proposed subpart if the assay requirement is deleted.
    Response: Customs agrees. Proposed Sec. 146.92(g) has been 
eliminated.
    Comment: A majority of commenters propose that the ``manufacturing 
period'' coincide with the normal accounting cycle.
    Response: After reviewing the comments, particularly those of the 
Congressional sponsors of the legislation, Customs is convinced that a 
literal interpretation of the statutory language would not be 
appropriate. Therefore, proposed Sec. 146.92(i) (now redesignated as 
Sec. 146.92(e)) dealing with this matter has been reworded. The 
definition allows an operator to make the attribution of a final 
product either during the period in which the final product was 
produced (even if not consumed or removed from the refinery subzone 
during that same period) or the period in which the final product was 
consumed or removed from the zone (even if the final product was made 
in a prior period). The selection of the method is at the operator's 
option, but once selected, the method must be used consistently.
    Comment: Most commenters suggested that they should be permitted to 
use standard product values, based on published prices.
    Response: Customs agrees that standard product values, based on 
published prices, may be utilized, but that this must be done on a 
consistent basis. Thus, proposed Sec. 146.92(j) (now redesignated as 
Sec. 146.92(g)), involving the price of products in the subzone, has 
been reworded.
    Comment: Most commenters suggested rewording proposed 
Sec. 146.92(n) which defined the ``relative value'' of products 
produced in the subzone.
    Response: The definition of ``relative value'' proposed by the 
commenters has been included in proposed Sec. 146.92(n) (now 
redesignated as Sec. 146.92(i)) because it states the same information 
as the proposed regulation, albeit more succinctly.
    Comment: Many commenters noted that, generally, the ``time of 
separation'' will coincide with the ``manufacturing period''.
    Response: Customs agrees that the ``time of separation'' coincides 
with the ``manufacturing period''. Therefore, proposed Sec. 146.92(p) 
(now redesignated as Sec. 146.92(k)) defining the time of separation 
has been modified accordingly.
    Comment: Most commenters favor deletion of proposed Sec. 146.92(q) 
which defines the term ``unique identifier'' (UIN) because this term is 
already defined in Sec. 146.1(b)(19).
    Response: Customs agrees and, therefore, this definition has been 
deleted.
    Comment: Most commenters proposed eliminating proposed 
Sec. 146.93(a)(1) regarding the use of the UIN (unique identifier) 
because this matter is already covered elsewhere in part 146.
    Response: Customs agrees that existing Sec. 146.22 adequately 
addresses this matter, and, therefore, paragraphs (a), (a)(1) and 
(a)(2) of proposed Sec. 146.93 have been eliminated.
    Comment: A number of commenters suggested that proposed 
Sec. 146.93(b)(1) be deleted because zone admittance is already covered 
in subpart C of part 146.
    Response: Customs agrees. Proposed Sec. 146.93(b)(1) has been 
deleted.
    Comment: Most commenters suggest deletion of the requirement that 
domestic feedstock be assigned a UIN, as provided in proposed 
Sec. 146.93(c)(1), because existing regulations do not require that a 
Customs Form (CF) 214 be filed on domestic feedstocks.
    Response: Customs agrees that a CF 214 is not required, and, 
therefore, proposed Sec. 146.93(c)(1) has been deleted. Nevertheless, 
it must be noted that a domestic feedstock must be assigned a UIN under 
existing regulations.
    Comment: A few commenters suggested that references to T.D. 66-16 
concerning the attribution of final product to given feedstock be 
eliminated from proposed Sec. 146.93(d)(1) because this is already 
discussed elsewhere in the proposed regulations.
    Response: Customs agrees and, therefore, the proposed language has 
been duly modified and the section redesignated as proposed 
Sec. 146.93(a)(1). Also, proposed Sec. 146.93(d)(2) (now redesignated 
as Sec. 146.93(a)(3)) dealing with attribution using alternative 
inventory control has been revised to make reference to the use of 
FIFO; the use of FIFO is illustrated in an Appendix which has been 
added to the revision of proposed subpart H. In addition, proposed 
Sec. 146.93(d)(3) dealing with ``stock in process'' has been deleted, 
in concert with the deletion of this term from the definition section; 
in its place, a new proposed Sec. 146.93(a)(2) makes reference to the 
use of actual production records in attributing product to feedstock.
    Comment: Commenters suggested that products consumed within the 
zone should be included in proposed Sec. 146.93(e).
    Response: This suggestion has been incorporated in proposed 
Sec. 146.93(e) (now redesignated as Sec. 146.93(b)).
    Comment: Commenters objected to the language of proposed 
Sec. 146.94(a) regarding the introduction of feedstock into the 
refining process because they believe it requires a direct 
identification system.
    Response: The commenters have misread this section, the purpose of 
which is to establish the amount and identity of the feedstocks 
available for attribution during each manufacturing period. The 
proposed language has been modified to eliminate any such 
misunderstanding.
    Comment: Most commenters suggested deletion of the sentence, ``This 
date establishes the end of the manufacturing period.'', in proposed 
Sec. 146.94(b).
    Response: Given the proposed definition of ``manufacturing period'' 
this suggested change has been adopted.
    Comment: Commenters indicated that the language contained in 
proposed Sec. 146.94(c) regarding the removal of product from a 
refinery subzone is specific to a calendar week. However, an accounting 
period may be greater than a week.
    Response: While a manufacturing or accounting period may be greater 
than a week, there is no authority to permit a consumption entry 
covering products removed from a zone to exceed one week. Thus, the 
language of Sec. 146.94(c) remains in substance as originally proposed. 
However, Customs will reevaluate the possibility of permitting monthly 
entries, in light of the Customs modernization portion of the recently 
passed North American Free Trade Agreement Implementation Act, 
particularly Sec. 637.
    Currently, a refiner who desires to make attributions on the basis 
of a monthly manufacturing or accounting period must attribute and make 
any required relative value calculation by attributing current removals 
or consumptions to final products that were produced in a prior 
manufacturing or accounting period. A refiner who reports removals and 
consumption on a weekly basis and who elects to attribute a final 
product that is removed or consumed, in the same week that it is 
produced, must make the appropriate attribution and relative value 
calculation for that week.
    Comment: Commenters noted that attribution is more appropriately 
dealt with in proposed Sec. 146.99 (now redesignated as proposed 
Sec. 146.96), rather than in proposed Sec. 146.95 titled ``Feedstock 
inventories''.
    Response: Customs agrees with the comments that attribution can be 
dealt with more appropriately in proposed Sec. 146.99 (now redesignated 
as Sec. 146.96); therefore, proposed Sec. 146.95 concerning feedstock 
inventories has been deleted. Proposed Sec. 146.97 titled 
``producibility'' is now renumbered as Sec. 146.95.
    Comment: Commenters suggested deleting the last sentence and four 
reports listed in proposed Sec. 146.96 concerning a subzone activity 
report.
    Response: As already stated above, this proposed section has been 
deleted in its entirety.
    Comment: Commenters noted that proposed Sec. 146.97(a) must provide 
for products consumed within the subzone.
    Response: Customs agrees with the comments that proposed 
Sec. 146.97(a) must provide for consumption within the zone. Therefore, 
appropriate language has been included in proposed Sec. 146.97(a) (now 
redesignated as Sec. 146.95(a)).
    Comment:  Comments indicated that, as currently worded, proposed 
Sec. 146.98(a) is limited to operators using producibility.
    Response: Proposed Sec. 146.98(a) (now redesignated as 
Sec. 146.93(c)) has been modified to avoid any misunderstanding in this 
respect.
    Comment: Commenters stated that attributions are binding except for 
adjustments needed upon reconciliation.
    Response: Proposed Sec. 146.99(a) (now redesignated as 
Sec. 146.96(a)) has been modified to address this concern. 
Reconciliation is limited to changes in amounts, and mathematical and 
clerical errors, but does not include changes in the identity of the 
feedstock.
    Comment: Commenters noted that other inventory control methods are 
already covered in proposed Sec. 146.93(d)(2), so there is no need for 
proposed Sec. 146.99(c).
    Response: Customs has decided to essentially revise former proposed 
Sec. 146.99(c) and to make it the subject of a new Sec. 146.97 
regarding the approval of other recordkeeping systems for subzone oil 
refinery operations. As already noted above, proposed Sec. 146.93(d)(2) 
(now redesignated as Sec. 146.93(a)(3)) has been revised to refer 
exclusively to the use of the FIFO method of inventory accounting.
    Comment: Commenters also indicated that the proposed regulations do 
not take into account the three relative value methods listed in 
proposed Sec. 146.98(b). Commenters also pointed out that the proposed 
regulation does not provide a mechanism to attribute consumption within 
the zone.
    Response: Customs agrees and has determined to eliminate proposed 
Sec. 146.98(b) from the revised proposed rule; and proposed 
Sec. 146.98(c) is now redesignated as Sec. 146.93(e). In addition, as 
previously emphasized, revised Secs. 146.93, 146.95 and 146.96 now 
provide for consumption within the subzone. Moreover, Customs has 
decided to add an Appendix to proposed subpart H as revised in order to 
give detailed examples of attribution as well as the relative value 
calculation.

Conclusion

    After careful consideration of the comments received and further 
review of the matter, it has been determined to republish the proposal 
with the modifications noted and to allow interested persons an 
additional opportunity to submit comments on the proposal. Also, 
Customs has determined to add definitions in the revised proposed rule 
for ``feedstock factor'', ``petroleum refinery'', and ``refinery 
operating unit'', and to eliminate the definitions for ``protection of 
the revenue'' and ``stock in process'' formerly set forth in proposed 
Sec. 146.92(m) and (o), respectively. Commenters on the original 
proposal need not resubmit their comments. They will be considered 
along with any new comments received in response to this notice.

Comments

    In developing the final regulations, any written comments 
(preferably in triplicate) that are timely submitted to Customs will be 
given consideration, along with the comments already submitted in 
response to the August 10, 1992, notice of proposed rulemaking. 
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)), during regular 
business days between the hours of 9 a.m. and 4:30 p.m., at the 
Regulations Branch, 1099 14th Street, NW., suite 4000, Washington, D.C.

Regulatory Flexibility Act and Executive Order 12866

    For the reasons explained in the peamble to the prior notice of 
proposed rulemaking and to this document, pursuant to the provisions of 
the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it is hereby 
certified that the proposed amendments set forth in this document, if 
adopted, will not have a significant economic impact on a substantial 
number of small entities. Accordingly, they are not subject to the 
regulatory analysis or other requirements of 5 U.S.C. 603 and 604. This 
proposed rule is not a ``significant regulatory action'' under E.O. 
12866.

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking is in Secs. 146.93-146.97. The respondents would be 
businesses. The information is necessary in order to effectively 
supervise and control the activities of oil refineries operating in 
foreign trade subzones, and to ensure compliance with the requirements 
of law as well as the protection of the revenue.
    The collection of information contained in this notice of proposed 
rulemaking has already been approved by the Office of Management and 
Budget (OMB) under 1515-0189, in connection with the prior notice of 
proposed rulemaking.

Estimated total annual reporting and/or recordkeeping burden: 18,824 
hours
Estimated average annual burden per respondent and/or recordkeeper: 
2,353 hours
Estimated number of respondents and/or recordkeepers: 8
Estimated annual frequency of responses: 52

    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attention: Desk officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, D.C. 20503, with copies to the U.S. Customs 
Service at the address previously specified.

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 in Part 146

    Customs duties and inspection, Exports, Foreign trade zones, 
Imports, Reporting and recordkeeping requirements.

Proposed Amendment

    For the reasons set forth in the preamble, it is proposed that part 
146, Customs Regulations (19 CFR part 146) be amended as follows:

PART 146--FOREIGN TRADE ZONES

    1. The general authority citation for part 146 is revised to read 
as follows:

    Authority: 19 U.S.C. 66, 81a-u, 1202 (General Note 17, 
Harmonized Tariff Schedule of the United States), 1623, 1624.
* * * * *
    2. It is proposed to amend part 146 by adding a new subpart H 
thereto to read as follows:

Subpart H--Petroleum Refineries in Foreign Trade Subzones

Sec.
146.91  Applicability.
146.92  Definitions.
146.93  Inventory control and recordkeeping system.
146.94  Records concerning establishment of manufacturing period.
146.95  Producibility.
146.96  Methods of attribution.
146.97  Approval of other recordkeeping systems.

Appendix to Subpart H--Examples of Attribution and Relative Value

Subpart H--Petroleum Refineries in Foreign Trade Subzones


Sec. 146.91  Applicability.

    This subpart applies only to a petroleum refinery (as defined 
herein) engaged in refining petroleum in a foreign trade zone or 
subzone. This subpart also applies only to feedstocks (crude petroleum 
and derivatives thereof) which are introduced into production in a 
refinery subzone. Further, the provisions relating to zones generally, 
which are set forth elsewhere in this part, including documentation and 
document retention requirements, and entry procedures, such as weekly 
entry, shall apply as well to a refinery subzone, insofar as applicable 
to and not inconsistent with the specific provisions of this subpart.


Sec. 146.92  Definitions.

    The following definitions are applicable to this subpart H:
    (a) Attribution. ``Attribution'' means the association of a final 
product with its source material by application of:
    (1) Actual operating records;
    (2) Producibility under T.D. 66-16; or
    (3) Other Customs approved method.
    (b) Feedstocks. ``Feedstocks'' means crude petroleum or 
intermediate product that is used in a petroleum refinery to make a 
final product.
    (c) Feedstock factor. ``Feedstock factor'' means the relative value 
of final products utilizing T.D. 66-16 (see Sec. 146.92(h)), and which 
takes into account any loss or gain.
    (d) Final product. ``Final product'' means any petroleum product 
that is produced in a refinery subzone and thereafter removed therefrom 
or consumed within the zone.
    (e) Manufacturing period. ``Manufacturing period'' means a period 
selected by the refiner which shall not exceed a calendar month, for 
which attribution to a source feedstock must be made and, if required, 
a relative value assigned for every final product made, consumed in or 
removed from the refinery subzone.
    (f) Petroleum refinery. ``Petroleum refinery'' means a facility 
that refines a feedstock listed on the top line of the tables set forth 
in T.D. 66-16 into a product listed in the left column of the tables 
set forth in T.D. 66-16.
    (g) Price of product. ``Price of product'' means the average per 
unit market value of each final product for a given manufacturing 
period or the published standard product value if updated each month.
    (h) Producibility. ``Producibility'' is a method of attributing 
products to feedstocks for petroleum manufacturing in accordance with 
the Industry Standards of Potential Production set forth in T.D. 66-16.
    (i) Relative value. ``Relative value'' means a value assigned to 
each final product attributed to the separation from a privileged 
foreign feedstock based on the ratio of the final product's value 
compared to the privileged foreign feedstock's duty.
    (j) Refinery operating unit. ``Refinery operating unit'' means a 
unit in a refinery in which feedstock is processed such as a 
distillation tower, cracking tower or reformer.
    (k) Time of separation. ``Time of separation'' means the 
manufacturing period in which a privileged foreign status feedstock is 
deemed to have been separated into two or more final products.


Sec. 146.93  Inventory control and recordkeeping system.

    (a) Attribution. (1) Producibility. The producibility method of 
attribution requires that records be kept to attribute final products 
to feedstocks which have been introduced into a refinery operating unit 
during the current or prior manufacturing period.
    (2) Actual production records. An operator may use its actual 
production records as provided for under Sec. 146.96(b) of this 
subpart.
    (3) Other inventory method. An operator may use the FIFO (first-in, 
first-out) method of accounting (see Sec. 191.22(c) of this chapter). 
The use of this method is illustrated in the Appendix to this subpart.
    (4) Feedstock not eligible for attribution. Feedstock admitted into 
the refinery subzone, until it is introduced into a refinery operating 
unit in the subzone, is not eligible for attribution to any final 
product.
    (b) Consumption or removal of final product. Each final product 
that is consumed in or removed from a refinery subzone must be 
attributed to a feedstock introduced into a refinery operating unit 
during the current or a prior manufacturing period. Each final product 
attributed as being produced from the separation of a privileged 
foreign status feedstock must be assigned the proper relative value as 
set forth in paragraph (c) of this section.
    (c) Relative value. A relative value calculation is required when 
two or more final products are produced as the result of the separation 
of privileged foreign status feedstock. Ad valorem and compound rates 
of duty must be converted to specific rates of duty in order to make a 
relative value calculation.
    (d) Consistent use required. The operator must use the selected 
method and the price of product consistently (see Sec. 146.92(g)) of 
this subpart).


Sec. 146.94  Records concerning establishment of manufacturing period.

    (a) Feedstock charged into a refinery operating unit. The operator 
must record the date and amount of each feedstock charged into a 
refinery operating unit during each manufacturing period.
    (b) Final product consumed in or removed from subzone. The operator 
must record the date and amount of each final product consumed in, or 
removed from the subzone.
    (c) Consumption or removal. The consumption or removal of a final 
product during a week may be considered to have occurred on the last 
day of that week for purposes of attribution and relative value 
calculation instead of the actual day on which the removal or 
consumption occurred, unless the refiner elects to attribute using the 
FIFO method (see Example II to Appendix to this subpart).
    (d) Gain or loss. A gain or loss that occurs during a manufacturing 
period must be taken into account in determining the attribution of a 
final product to a feedstock and the relative value calculation of 
privileged foreign feedstocks. Any gain in a final product attributed 
to a nonprivileged foreign status feedstock is dutiable if entered for 
consumption unless otherwise exempt from duty.
    (e) Determining gain or loss; acceptable methods.
    (1) Converting volume to weight. Volume measurements may be 
converted to weight measurements using American Petroleum Institute 
conversion factors to account for gain or loss.
    (2) Calculating feedstock factor to account for volume gain. A 
feedstock factor may be calculated by dividing the value per barrel of 
production per product category by the quotient of the total value of 
production divided by all feedstock consumed. This factor would be 
applied to a finished product that has been attributed to a feedstock 
to account for volume gain.
    (3) Calculating volume difference. Volume difference may be 
determined by comparing the amount of feedstocks introduced for a given 
period with the amount of final products produced during the period, 
and then assigning the volume change to each final product 
proportionately.


Sec. 146.95  Producibility.

    (a) Industry standards of potential production. The industry 
standards of potential production on a practical operating basis 
necessary for the producibility attribution method are contained in 
tables published in T.D. 66-16. With these tables, a subzone operator 
may attribute final products consumed in, or removed from, the subzone 
to feedstocks during the current or a prior manufacturing period.
    (b) Attribution to product or feedstock not listed in T.D. 66-16. 
For purposes of attribution, where a final product or a feedstock is 
not listed in T.D. 66-16, the operator must submit a proposed 
attribution schedule, supported by a technical memorandum, to the 
appropriate district director. If an operator elects to show 
attribution on a producibility basis, but fails to keep records on that 
basis, Customs shall use the operator's actual operating records to 
determine attribution and any necessary relative value calculation.


Sec. 146.96  Methods of attribution.

    (a) Producibility. (1) General. A subzone operator must attribute 
the source of each final product. The operator is limited in this 
regard to feedstocks introduced into a refinery operating unit during 
the current or a prior period. Attribution of the final products is 
allowable to the extent that the quantity of such products could have 
been produced from such feedstocks, using the industry standards of 
potential production on a practical operating basis, as published in 
T.D. 66-16. Once attribution is made for a particular product, that 
attribution is binding. Subsequent attributions of feedstock to product 
must take prior attributions into account. Each refiner shall keep 
records showing each attribution.
    (2) Attribution to privileged foreign feedstock; relative value. If 
a final product is attributed to the separation of a privileged foreign 
feedstock, their relative values must be assigned.

    Example. An operator who elects to attribute on a monthly basis 
files the following estimated removal of final products for the 
first week in September:


Jet Fuel (deemed exported on international flights)..........     20,000
Gasoline:                                                               
  Domestic Consumption.......................................     15,000
  Duty-free certified as emergency war material..............     10,000
Petroleum coke exportations..................................     10,000
Distillate for consumption...................................      5,000
Petrochemicals exported......................................    10,000 
                                                              ----------
      Total removals.........................................    70,000 
                                                                        

    Because it does not elect to make attributions for feedstocks that 
were charged to operating units during the same week, the operator 
attributes the estimated removals to final products made during August 
from the following feedstocks:


Class II PF (privileged foreign) crude.......................     20,000
Class III PF crude...........................................     35,000
Class III D (domestic) crude.................................     20,000
Class III NPF (nonprivileged foreign) crude..................    20,000 
                                                              ----------
                                                                 95,000 
                                                                        

    During August the operator produced from those feedstocks:


Jet..........................................................     35,000
Gasoline.....................................................     40,000
Petroleum Coke...............................................     10,000
Distillate...................................................      5,000
Petrochemicals...............................................    15,000 
                                                              ----------
                                                                105,000 
                                                                        

There is a gain: 105,000-95,000=10,000

    Using the tables in T.D. 66-16, the following choices are available 
for attribution: 

----------------------------------------------------------------------------------------------------------------
                                                                                  Petroleum                     
                                      Charged        Jet       Gasoline   --------------------------    Petro-  
                                                                              Coke      Distillate    chemical  
----------------------------------------------------------------------------------------------------------------
Class II PF Crude.................       20,000       13,000       17,200        4,400       17,200        5,000
Class III PF Crude................       35,000       24,500       31,850       14,000       31,150       10,150
Class III D Crude.................       20,000       14,000       18,200        8,000       17,800        5,800
Class III NPF Crude...............       20,000       14,000       18,200        8,000       17,800       5,800 
----------------------------------------------------------------------------------------------------------------

    Relative value factors are calculated: 

----------------------------------------------------------------------------------------------------------------
                                                                                                      Feedstock 
                                                          Barrels    Value/barrels       Value         factors  
----------------------------------------------------------------------------------------------------------------
Gasoline..............................................       40,000             $25      $1,000,000        .9117
Jet Fuel..............................................       35,000              23         805,000        .8388
Distillate............................................        5,000              20         100,000        .7294
Petroleum Coke........................................       10,000              10         100,000        .3647
Petrochemicals........................................       15,000              40         600,000      1.4587 
                                                       -------------                ----------------            
                                                            105,000  ..............       2,605,000             
Gain..................................................      -10,000      2,605,000                              
                                                       -----------------------------                            
      Total...........................................       95,000       \1\95,000                             
----------------------------------------------------------------------------------------------------------------
\1\Equals $27.42 average value p/bbl.                                                                           
                                                                                                                


Using the feedstock factor                                                                                      
 the refiner makes the                                                                                          
 following attributions:                                                                                        
                                                                                                                
Jet Fuel.....................       24,192  (20,291 feedstock attributed to Class III PF Crude.)                
                                    10,808  --Class III NPF Crude (attribution of 9066 solely for purpose of    
                                             accounting for the amount of NPF used).                            
                              -------------                                                                     
                                    35,000                                                                      
Gasoline.....................        5,000  (4,559 feedstock attributed to Class III PF Crude.)                 
                                     5,000  --Class III NPF Crude (attribution of 4599 solely for purpose of    
                                             accounting for the amount of NPF used).                            
                                    15,000  (13,676 feedstock attributed.)                                      
                              -------------                                                                     
                                    25,000                                                                      
Petroleum Coke...............        8,418  (3,070 feedstock attributed to Class II PF Crude.)                  
                                     1,582  --Class III NPF Crude (attribution of 577 solely for purpose of     
                                             accounting for the amount of NPF used).                            
                              -------------                                                                     
                                    10,000                                                                      
Distillate...................        5,000  (3,647 feedstock attributed to Class III Domestic.)                 
Petrochemicals...............        3,975  (5,800 feedstock attributed to Class III NPF Crude solely for       
                                             purpose of accounting for the amount of NPF used).                 
                                     6,025  (8,789 feedstock attributed to Class III PF Crude.)                 
                              -------------                                                                     
                                    10,000                                                                      
                                                                                                                

    (b) Actual production records. An operator may use the actual 
refinery production records to attribute the feedstocks used to the 
removed or consumed products. Customs shall accept the operator's 
recordation conventions to the extent that the operator demonstrates 
that it actually uses the conventions in its refinery operations. 
Whatever convention is elected by the operator, it must be used 
consistently in order to be acceptable to Customs.

    Example. If the operator mixes three equal quantities of 
material in a day tank and treats that product as a three-part 
mixture in its production unit, Customs will accept the resulting 
product as composed of the three materials. If, in the alternative, 
the operator assumes that the three products do not mix and treats 
the first product as being composed of the first material put into 
the day tank, the second product as composed of the second material 
put into the day tank, and the third product as being composed of 
the third material put into the day tank, Customs will accept that 
convention also.


Sec. 146.97  Approval of other recordkeeping systems.

    (a) Approval. An operator must seek approval of another 
recordkeeping procedure by submitting the following to the Director, 
Office of Regulatory Audit:
    (1) An explanation of the method describing how attribution will be 
made when a finished product is removed from or consumed in the 
subzone, and how and when the feedstocks will be decremented;
    (2) A mathematical example covering at least two months which shows 
the amounts attributed, all necessary relative value calculations, the 
dates of consumption and removal, and the amounts and dates that the 
transactions are reported to Customs.
    (b) Failure to comply. Requests received that fail to comply with 
paragraph (a) of this section will be returned to the requester with 
the defects noted by the Director, Office of Regulatory Audit.
    (c) Determination by Director. When the Director, Office of 
Regulatory Audit, determines that the recordkeeping procedures provide 
an acceptable basis for verifying the admissions and removals from or 
consumption in a refinery subzone, the Director will issue a written 
approval to the applicant.

Appendix to Subpart H--Examples of Attribution and Relative Value

I. Attribution Using Producibility

Day 1

    Transfer, within the refinery subzone, from one or more storage 
tanks to the crude distillation unit:

50,000 pounds privileged foreign (PF) class II crude oil
50,000 pounds PF class III crude oil
50,000 pounds domestic status class III crude oil

Day 20

    Removal from the refinery subzone for exportation of 50,000 
pounds of aviation gasoline.
    The period of manufacture for the aviation gasoline is Day 1 to 
Day 20. The refiner must first attribute the designated source of 
the aviation gasoline.
    In order to maximize the duty benefit conferred by the zone 
operation, the refiner chooses to attribute the exported aviation 
gasoline to the privileged foreign status crude oil. Under the 
tables for potential production (T.D. 66-16), class II crude has a 
30% potential, and class III has a 40% potential. The maximum 
aviation gasoline producible from the class II crude oil is 15,000 
pounds (50,000  x  .30). The maximum aviation gasoline producible 
from the privileged foreign status class III crude oil is 20,000 
pounds (50,000  x  .40). The domestic class III crude would also 
make 20,000 pounds of aviation gasoline.
    The refiner could attribute 15,000 pounds of the privileged 
foreign class II crude oil, 20,000 pounds of the privileged foreign 
class III crude oil, and 15,000 pounds of the domestic class III 
crude oil as the source of the 50,000 pounds of the aviation 
gasoline that was exported; 35,000 pounds of class II crude oil 
would be available for further production for other than aviation 
gasoline, 30,000 pounds of privileged foreign class III crude oil 
would be available for further production for other than aviation 
gasoline, and 35,000 pounds of domestic status class III crude oil 
would be available for further production, of which up to 5,000 
pounds could be attributed to aviation gasoline.

Day 21

    Transfer, within the refinery subzone, from one or more storage 
tanks to the crude oil distillation unit:

50,000 pounds PF status class I crude oil
50,000 pounds PF status class IV crude oil

Day 30

    Removal from the refinery subzone:

30,000 pounds of motor gasoline for consumption
10,000 pounds of jet fuel sold to the US Air Force for use in 
military aircraft
10,000 pounds of aviation gasoline sold to a U.S. commuter airline 
for domestic flights
    10,000 pounds of kerosene for exportation

    To the extent that the crude oils that entered production on Day 
1 are attributed as the designated sources for the products removed 
on Day 30, the period of manufacture is Day 1 to Day 30. If the 
refiner chooses to attribute the crude oils that entered production 
on Day 21 as the designated sources of the products removed on Day 
30 using the production standards published in T.D. 66-16, the 
manufacturing period is Day 21 to Day 30. This 30 choice will be 
important if a relative value calculation on the privileged foreign 
status crude oil is required, because the law requires the value 
used for computing the relative value to be the average per unit 
value of each product for the manufacturing period. Relative value 
must be calculated if a source feedstock is separated into two or 
more products that are removed from the subzone refinery. If the 
average per unit value for each product differs between the 
manufacturing period from Day 1 to Day 30 and the manufacturing 
period from Day 21 to Day 30, the correct period must be used in the 
calculation.
    In order to minimize duty liability, the refiner would try to 
attribute the production of the exported kerosene and the sale of 
the jet fuel to the US Air Force to the privileged foreign crude 
oils. For the same reason, the refiner would try to attribute the 
removed motor gasoline and the aviation gasoline for the commuter 
airline to the domestic crude oil.
    Accordingly, the refiner chooses to attribute up to 5,000 pounds 
of the domestic status class III crude as the source of the 10,000 
pounds of aviation gasoline removed from the subzone refinery for 
the commuter airline. Since no other aviation gasoline could have 
been produced from the crude oils that entered production on Day 1, 
the refiner must attribute the remainder to the crude oils that 
entered production on Day 21. Again, using the production standards 
from T.D. 66-16, the class I crude could produce aviation gasoline 
in an amount up to 10,000 pounds (50,000  x  .20). Likewise, the 
class IV crude oil could 31 produce aviation gasoline in an amount 
up to 8,500 pounds (50,000  x  .17).
    The refiner selects use of the class I crude as the source of 
the aviation gasoline. The refiner could attribute up to 27,300 
pounds (35,000--5,000  x  .91) of the domestic class III crude oil 
as the source of the motor gasoline. This would leave 2,700 pounds 
of domestic class III crude available for further production for 
other than aviation gasoline or motor gasoline. The remaining motor 
gasoline removed (also 2,700 pounds) must be attributed to a 
privileged foreign crude oil. The refiner selects the privileged 
foreign class II crude oil that entered production on Day 1 as the 
source for the remaining 2,700 pounds of motor gasoline.
    This would leave 32,300 pounds of privileged foreign class II 
crude oil available for further production, of which no more than 
27,400 pounds could be designated as the source of motor gasoline. 
The refiner attributes the jet fuel that is removed from the 
refinery subzone for the US Air Force for use in military aircraft 
to the privileged foreign class II crude oil. The refiner could 
attribute up to 20,995 pounds of jet fuel from that class II crude 
oil (32,300  x  .65). Designating that class II crude oil as the 
source of the 10,000 pounds of jet fuel leaves 22,300 pounds of 
privileged foreign class II crude oil available for further 
production, of which up to 10,995 pounds could be attributed as the 
source of the jet fuel. Because the motor gasoline and the jet fuel, 
under the foregoing attribution, would be considered to have been 
separated from the privileged foreign class II crude oil, a relative 
value calculation would be required.
    The jet fuel is eligible for removal from the subzone free of 
duty by virtue of 19 U.S.C. 1309(a)(1)(A). The refiner could 
attribute the privileged foreign class II crude oil as being the 
source of 9,812 pounds of jet fuel (22,300  x  .44). The refiner 
chooses to attribute the privileged foreign class III crude oil as 
the source of the jet fuel. The refiner could attribute to that 
class III crude oil up to 15,000 pounds of kerosene (30,000  x  
.50).

II. Attribution on a FIFO Basis

Day 1-5

    Transfer, within the Refinery Subzone, from one or more storage 
tanks into process 150 barrels of Privileged Foreign (PF) Class II 
crude oil, equivalent to 50,000 pounds.

Day 6

    Removal from the refinery subzone 119 barrels of residual oils 
to customs territory, equivalent to 40,000 pounds.
    Since the operator uses the FIFO method of attribution, as the 
product is removed from the subzone, or consumed or lost within the 
subzone, attribution must be to the oldest feedstock available for 
attribution. Accordingly, the 40,000 pounds (119 barrels) of 
residual oils will be attributed to 40,000 pounds of the PF Class II 
crude oil from Day 1-5.

Day 10

    Transfer, within the refinery subzone, from one or more storage 
tanks 4 barrels of domestic motor gasoline blend stock, equivalent 
to 1,000 pounds to motor gasoline blending tank.

Day 6-15

    Transfer, within the refinery subzone, from one or more storage 
tanks into process 320 barrels of Domestic Class III crude oil, 
equivalent to 100,000 pounds.

Day 16

    Removal from the refinery subzone 14 barrels of asphalt to 
customs territory, equivalent to 5,000 pounds.
    The 5,000 pounds of asphalt will be attributed to 5,000 pounds 
of PF Class II crude oil from Day 1-5.

Day 17

    Removal from the refinery subzone, 324 barrels of motor gasoline 
to customs territory, equivalent to 81,000 pounds.
    The 81,000 pounds of motor gasoline will be attributed to 1,000 
pounds of domestic motor gasoline blend stock from Day 10, to the 
remaining 5,000 pounds of PF Class II crude oil from Day 1-5 and 
75,000 pounds of domestic Class III crude oil from Day 6-15.

Day 16-20

    Transfer, within the refinery subzone, from one or more storage 
tanks into process 169 barrels of Privileged Foreign (PF) 34 Class 
III crude oil, equivalent to 50,000 pounds.

Day 22

    Removal from the refinery subzone, 214 barrels of jet fuel for 
exportation, equivalent to 60,000 pounds.
    The 60,000 pounds of jet fuel will be attributed to the 
remaining 25,000 pounds of domestic Class III crude oil from Day 6-
15 and 35,000 pounds of PF Class III crude oil from Day 16-20.

Day 21-25

    Transfer, within the refinery subzone from one or more storage 
tanks into process, 143 barrels of domestic Class I crude oil, 
equivalent to 50,000 pounds.

Day 30 (End of Manufacturing Period)

    It is determined that during the manufacturing period just 
ended, that 34 barrels of fuel, equivalent to 10,000 pounds was 
consumed, and 5 barrels of oil, equivalent to 1,500 pounds was 
irrecoverably lost as provided in Sec. 146.53(c)(1)(iv) of this 
part, in the refining production process within the refinery 
subzone.
    The 10,000 pounds of fuel consumed will be attributed 10,000 
pounds of PF Class III crude oil from Day 16-20. The 1,500 pounds of 
oil lost in the refining production process will be attributed to 
1,500 pounds of PF Class III crude oil from Day 16-20. The remaining 
3,500 pounds of PF Class III crude oil from Day 16-20 will be the 
first to be attributed during the next manufacturing period.

III. Relative Value Calculation

    Because privileged foreign feedstocks transferred into process 
during Day 1-5 and Day 16-20 have two or more products attributed to 
them, each feedstock will require a relative value calculation.
    Relative value calculation for UIN Day 1-5, 50,000 pounds, 
equivalent to 150 barrels. 

----------------------------------------------------------------------------------------------------------------
                                                                                                           G    
                                  A lbs      B bbls     C $/bbl    D product   E feedstock    F r.v.    dutiable
                                                                     value       factor        bbl        bbl   
----------------------------------------------------------------------------------------------------------------
Residual, Oil Po;............       40,000        119      15.00        1,785        .9047        108        108
Asphalt......................        5,000         14      13.00          182        .7840         11         11
Motor Gasoline...............        5,000         20      26.00          520       1.5682         31        31 
                              ----------------------------------------------------------------------------------
      Totals.................       50,000        153  .........        2,487  ...........        150       150 
----------------------------------------------------------------------------------------------------------------
A=Pounds Attributed.                                                                                            
B=Equivalent Barrels.                                                                                           
C=Price of Product.                                                                                             
D=B x C.                                                                                                        
E=C/(Total of Column D/Attributed Crude BBLS).                                                                  
Residual Oil Feedstock Factor=15.00/(2,487/150)=.9047.                                                          
F=B x E.                                                                                                        
G=Dutiable Barrels.                                                                                             

    Since all products attributed to the 50,000 pounds (150 BBLS) of 
PF Class II crude entered customs territory duty equals $7.88 (150 
x  .0525).
    Relative value calculation for UIN Day 16-20, 46,500 pounds 
equivalent to 157 barrels. 

----------------------------------------------------------------------------------------------------------------
                                                                    Product    R.V. factor              Dutiable
                                   Lbs        Bbls       $/bbl       value                  R.V. bbl      bbl   
----------------------------------------------------------------------------------------------------------------
Jet Fuel.....................       35,000        125      27.00        3,375       1.1030        138          0
Fuel.........................       10,000         34      12.00          408       0.4902         17          0
Consumed Process Loss........        1,500          5      12.00           60       0.4902          2          0
                              ----------------------------------------------------------------------------------
    Totals...................       46,500        164  .........        3,843  ...........        157         0 
----------------------------------------------------------------------------------------------------------------

    Since jet fuel was exported, no duty is applicable. Fuel consumed 
for refinery process was consumed within the subzone premises and did 
not enter customs territory, thus no duty is applicable. Likewise, the 
process loss occurred entirely within the subzone. Therefore, no duty 
is applicable.
Samuel H. Banks,
Acting Commissioner of Customs.
    Approved: February 28, 1994.
John P. Simpson,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 94-5023 Filed 3-3-94; 8:45 am]
BILLING CODE 4820-02-P