[Federal Register Volume 60, Number 155 (Friday, August 11, 1995)]
[Rules and Regulations]
[Pages 40995-40997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19911]



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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 191

[T.D. 95-61]


Accounting Procedures for Drawback

AGENCY: Customs Service, Department of the Treasury.

ACTION: Final interpretive rule.

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SUMMARY: This document gives notice that Customs is amending the 
general drawback rate (or contract) for crude petroleum and petroleum 
derivatives (Treasury Decision (T.D.) 84-49) to permit first-in-first-
out (FIFO) accounting for exports and drawback deliveries of petroleum 
products with different drawback factors which are commingled in 
inventory. Customs is also revoking a published ruling (Customs Service 
Decision (C.S.D.) 84-82) under which identification of merchandise and 
articles for drawback purposes is permitted on a ``higher-to-lower'' 
basis. However, drawback claimants operating under properly approved 
specific drawback rates may continue to claim drawback using higher-to-
lower accounting procedures, as provided for in C.S.D. 84-82, if the 
drawback rates under which they are operating expressly provide for the 
use of such procedures, until such rates are modified, with notice to 
the rate holders.

EFFECTIVE DATE: The amendment of T.D. 84-49 and the revocation of 
C.S.D. 84-82 will be effective as to drawback entries or claims 
properly filed with Customs on or after November 9, 1995, unless there 
is a prior approved properly-executed contract.

FOR FURTHER INFORMATION CONTACT: Paul Hegland, Entry Rulings Branch, 
Office of Regulations and Rulings, 202-482-7040.

Background

    Section 313, Tariff Act of 1930, as amended (19 U.S.C. 1313), 
authorizes ``drawback''. Drawback is a refund or remission, in whole or 
in part, of a Customs duty, internal revenue tax, or fee. There are a 
number of different kinds of drawback authorized under law, including 
manufacturing and unused merchandise drawback. Under section 1313(a), 
drawback is authorized when imported merchandise is used in the 
manufacture of articles which are exported or destroyed. Under section 
1313(j)(1), drawback is authorized when imported merchandise is 
exported or destroyed without having been used in the U.S. Sections 
1313(b) and (j)(2) respectively provide for the substitution of other 
merchandise (whether imported or domestic) for the imported merchandise 
in manufacturing and unused merchandise drawback. Section 1313(l) 
provides that the allowance of drawback shall be subject to compliance 
with such rules and regulations as the Secretary of the Treasury shall 
prescribe.
    The regulations pertaining to drawback are found in part 191 of the 
Customs Regulations (19 CFR part 191). Under the Customs Regulations 
(19 CFR part 191, subparts B and D), manufacturers or producers of 
articles intended for exportation with drawback under section 1313(a) 
or (b) must apply for and obtain approval of a drawback rate (sometimes 
called a drawback contract) describing the manufacturing or production 
operations covered and setting forth the conditions which are to be met 
to obtain drawback.
    Subpart D of part 191 of the Customs Regulations (19 CFR part 191, 
subpart D) authorizes general drawback rates for certain common 
manufacturing operations. A general drawback rate for substitution 
manufacturing drawback under section 1313(b) for crude petroleum and 
petroleum derivatives is provided for in T.D. 84-49, 18 Cust. Bull. 
149. This general drawback rate was initially promulgated by T.D. 
56487, which added the rate to the Customs Regulations then pertaining 
to drawback (see 19 CFR 22.6(g-1) (1983)). The general rate for crude 
petroleum and petroleum derivatives now in T.D. 84-49 is substantively 
the same as the rate formerly contained in the Customs Regulations.
    The features and procedures of, as well as the background to, T.D. 
84-49 and its predecessor (see 19 CFR 22.6(g-1)(1983), as promulgated 
by T.D. 56487) were extensively described in the June 28, 1994, Federal 
Register (59 FR 33322) notice inviting public comment on the subject of 
this document. Under T.D. 84-49, distribution of drawback among the 
products produced during a period of production is based on the 
relative values of all products manufactured or produced during the 
production period, as of the time of separation of the products. The 
time of separation of the products is considered to be the monthly 
period of production. Relative values are stated in terms of drawback 
factors, which attach to each of the products manufactured or produced 
during the production period. An example of the calculation of these 
drawback factors was given in the June 28, 1994, Federal Register 
notice.
    Because the relative value of the petroleum products which may be 
produced under T.D. 84-49 may vary from month to month, the drawback 
factors for a particular product produced under the procedures in T.D. 
84-49 may also vary from month to month. The T.D. contains explicit 
procedures to account for such variances. When the inventory of a 
particular product contains product with different drawback factors 
(e.g., if the inventory of a product was from more than one month's 
production, each month's quantity could have a different drawback 
factor), withdrawals from the inventory for exports are required to be 

[[Page 40996]]
from lowest factor on hand, withdrawals for drawback deliveries (i.e., 
for further manufacture resulting in a product on which drawback could 
be claimed) are required to be from lowest on hand after exports are 
deducted, and withdrawals for domestic (nondrawback) shipments are 
required to be from earliest on hand after withdrawals for export and 
drawback deliveries are deducted.
    The above accounting procedures were based on the accounting 
requirements for drawback applicable at the time that the general 
drawback rate was initially promulgated, as fully described in the June 
28, 1994, Federal Register notice. The general requirements in the 
Customs Regulations for records, storage, and identification pertaining 
to drawback are now found in 19 CFR 191.22. Section 191.22(c) 
authorizes the identification for drawback purposes of commingled lots 
of fungible merchandise or articles by applying FIFO accounting 
principles or any other accounting procedure approved by Customs. 
Customs has issued a number of rulings on the accounting procedures 
which may be used to identify merchandise or articles for drawback 
purposes. Those rulings and the background to them were extensively 
described in the June 28, 1994, Federal Register notice. In one of 
those rulings, Customs Service Decision (C.S.D.) 84-82, 18 Cust. Bull. 
1036, Customs held that when fungible drawback and nondrawback input 
was placed in commingled storage, withdrawals for drawback purposes 
could be identified on a higher-to-lower basis against the drawback 
input commingled therein.
    In the June 28, 1994, Federal Register notice, Customs furnished 
notice that it had been requested to amend T.D. 84-49 to permit the 
accounting for withdrawals for export and for drawback deliveries from 
the inventory of a particular product containing product with different 
drawback factors on the basis of FIFO or higher-to-lower. In the June 
28, 1994, Federal Register notice, Customs stated that it believed that 
the proposal to amend T.D. 84-49 to permit the accounting on a FIFO 
basis in the described situation had merit. In the interest of 
administrative simplicity, Customs stated that it believed that the 
order of such withdrawals should continue to be the same (i.e., first 
exports, then drawback deliveries, then domestic shipments). In regard 
to the proposal to amend T.D. 84-49 to permit the described accounting 
on a higher-to-lower basis, however, Customs stated that T.D. 84-49 
should not be amended to permit such accounting. Customs also stated 
that C.S.D. 84-82, the only published Customs ruling permitting higher-
to-lower accounting for drawback purposes, as well as any unpublished 
Customs rulings to the same effect, should be revoked. The reasons for 
these conclusions were fully described in the June 28, 1994, Federal 
Register notice.
    In the June 28, 1994, Federal Register notice, Customs invited 
comments on the proposed changes. Four commenters responded to the 
notice. After review of these comments, Customs has decided to proceed 
as proposed (i.e., to amend T.D. 84-49 to permit the described 
accounting on a FIFO basis and to revoke C.S.D. 84-82). In regard to 
the latter, it is Customs position that unless substitution is 
specifically provided for in the law, accounting methods used to 
identify merchandise or articles for drawback purposes must be revenue 
neutral or favorable to the Government. Other criteria for evaluating 
such accounting methods include consistency with commercial accounting 
procedures, consistency with the accounting procedures generally used 
by the drawback claimant, and ease of administration. The comments 
received are discussed below.

Discussion of Comments

    Comment: The use of FIFO accounting for T.D. 84-49, as proposed in 
the June 28, 1994, Federal Register notice, is not opposed. However, in 
the interest of maximum flexibility in accounting for drawback, higher-
to-lower accounting should also be permitted for the described 
accounting in T.D. 84-49.
    Response: In regard to the comment on FIFO accounting for T.D. 84-
49, this document is proceeding as proposed and amending T.D. 84-49 to 
permit such accounting. In regard to permitting higher-to-lower 
accounting for the described purposes in T.D. 84-49, such accounting 
would not be revenue neutral or favorable to the Government (i.e., 
withdrawals for drawback purposes (exports or drawback deliveries) 
would always be from the highest drawback factor first, thus always 
resulting in the greatest amount of drawback). Furthermore, higher-to-
lower accounting methods are not consistent with commercial accounting 
procedures nor, based on information submitted to Customs by a 
representative of the petroleum industry, are they consistent with the 
accounting methods generally used by that industry. Therefore, Customs 
is not permitting higher-to-lower accounting for the described purposes 
in T.D. 84-49.
    Comment: Customs should make it clear that T.D. 56487 (the 
predecessor of T.D. 84-49) is not authoritative on the issue of 
producibility, particularly that of proportional deductions.
    Response: The June 28, 1994, document did not, and was not intended 
to, comment on the authoritativeness of T.D. 56487 on the issue of 
producibility or the issue of proportional deductions (see 19 CFR 
22.6(g-1)(5)(1983) and T.D. 84-49, paragraph (5)). No change was 
proposed in this regard.
    Comment: C.S.D. 84-82 should not be revoked. Higher-to-lower 
accounting procedures are consistent with the purposes of the drawback 
law and adequately protect the revenue and should continue to be 
allowed to be used for drawback. Drawback claimants under section 
1313(b) are able to substitute any eligible merchandise of the same 
kind and quality as eligible imported merchandise received and put into 
production. This should continue.
    Response: This comment appears to be based on a misunderstanding of 
the proposal to revoke C.S.D. 84-82. The proposal would not (and could 
not) change the current statutory provision allowing a drawback 
claimant to substitute any eligible merchandise of the same kind and 
quality as the designated imported merchandise to use in manufacture or 
production of the exported articles. In this regard, Customs notes the 
amendment of section 1313(b) by the North American Free Trade Agreement 
(NAFTA) Implementation Act, Title VI, section 632 (Pub. L. 103-182; 107 
Stat. 2057, 2192-2193), specifically providing for the substitution of 
any other merchandise (whether imported or domestic) for the imported 
duty-paid merchandise designated for drawback under section 1313(b). 
The same is true of substitution unused merchandise drawback under 
section 1313(j)(2) (i.e., any merchandise (whether imported or 
domestic) may be substituted for the designated imported merchandise, 
provided that the lots of merchandise are commercially interchangeable 
and that the other requirements of the law are met).
    The revocation of C.S.D. 84-82 would apply to the identification by 
accounting procedures of merchandise or articles in situations where 
the law does not authorize substitution. For example, except in the 
case of petroleum derivatives under certain circumstances, the drawback 
law does not authorize the substitution of articles on which drawback 
is claimed under the manufacturing drawback law (section 1313 (a) or 
(b)) for other 

[[Page 40997]]
articles. That is, when manufactured articles qualifying for drawback 
are commingled with nonqualifying articles after the former are 
manufactured by a drawback claimant, substitution under the law is not 
authorized. In such situations, identification of merchandise or 
articles for drawback purposes by accounting procedures must be revenue 
neutral or favorable to the Government and the accounting procedures 
should be consistent with the criteria for such accounting procedures 
described above.
    Comment: The drawback law does not require any method of 
identifying fungible duty-paid imported materials which may be 
commingled in storage with other foreign or domestic materials; rather, 
the law delegates authority to the Secretary of the Treasury to 
prescribe appropriate accounting methods by regulation.
    Response: Section 1313(l) of the drawback law provides that the 
allowance of drawback shall be subject to compliance with such rules 
and regulations as the Secretary of the Treasury shall prescribe. Under 
this authority, the agency has already prescribed, inter alia, a 
regulation governing the use of accounting methods (see, 19 CFR 
191.22(c)). As stated above, the final interpretative ruling 
articulates Customs position that in situations where the law does not 
specifically authorize substitution, identification of merchandise or 
articles for drawback purposes by appropriate accounting procedures 
should be consistent with the criteria for such accounting procedures 
described above.
    Comment: The higher-to-lower accounting method promotes 
administrative efficiency because it allows Customs to verify drawback 
claims without inquiring as to the order of withdrawal from commingled 
inventory.
    Response: The drawback statute contains specific time limits (see 
e.g., sections 1313 (i), (b), (c), (j), (p)). Any verification by 
Customs of whether a drawback claimant has complied with the drawback 
law and the regulations issued thereunder must include verification 
that the statutory time-limits were met.
    Comment: If Customs decides to revoke C.S.D. 84-82 and proscribe 
the use of higher-to-lower accounting for drawback, Customs should 
specify a ``cut-off'' date for use of the higher-to-lower method. 
Customs should delay the effective date for this change in position 
because the drawback public may have relied on this ruling in 
establishing its inventory methods for drawback. One commenter suggests 
an implementation period of 3 years.
    Response: Customs is delaying the effective date of the amendment 
of T.D. 84-49 and the revocation of C.S.D. 84-82 for 90 days after the 
publication of this document, the maximum delay provided for in the 
Customs Regulations for a modification or revocation of a ruling (see 
19 CFR 177.9). Customs notes that, in regard to manufacturing drawback, 
a drawback claimant which relied on C.S.D. 84-82 should be able to 
document such reliance in its drawback rate (i.e., in order to be paid 
manufacturing drawback, a claimant must have an approved drawback rate 
(see 19 CFR 191.23 and the general drawback rate for section 1313(a) 
(T.D. 81-234), as well as the sample drawback proposal for section 
1313(b) provided for in 19 CFR 191.21(c), the latter of which contains 
specific sections in which the claimant is instructed to describe its 
inventory procedures)). In such instances (i.e., when a claimant is 
operating under a drawback rate which specifically provides for higher-
to-lower accounting), drawback claimants may continue to use higher-to-
lower accounting procedures, as provided for in their drawback rates, 
until their rates are modified, and notice of the modification is sent 
to the rate holders.

Conclusion

    For the reasons given in the June 28, 1994, Federal Register 
notice, and following careful consideration of the comments received 
and further review of the matter, Customs is taking the actions 
described in the June 28, 1994, Federal Register notice. That is:
    1. T.D. 84-49 is amended to permit the accounting for withdrawals 
from inventory of exports and drawback deliveries on a FIFO basis. The 
order of such withdrawals will continue to be: first exports, then 
drawback deliveries, after which domestic shipments will be accounted 
for on a FIFO basis.
    2. C.S.D. 84-82 is revoked.
    This amendment of T.D. 84-49 and the revocation of C.S.D. 84-82 
will be effective to drawback entries or claims properly filed with 
Customs on or after 90 days from the date of publication in the Federal 
Register. Drawback claimants operating under properly approved drawback 
rates under 19 CFR 191.23 may continue to claim drawback using higher-
to-lower accounting procedures, as provided for in C.S.D. 84-82, if the 
drawback rates under which they are operating specifically provide for 
the use of such procedures, until such rates are modified, and notice 
of such modification is sent to the rate holders.
Michael H. Lane,
Acting Commissioner of Customs.
    Approved: July 6, 1995.
John P. Simpson,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 95-19911 Filed 8-10-95; 8:45 am]
BILLING CODE 4820-02-P