DEPARTMENT OF THE TREASURY
AGENCY: U.S. Customs Service, Department of the Treasury.
19 CFR Part 146
Interpretation of Exportation for Purpose of Foreign-Trade
53 FR 52411
December 28, 1988
ACTION: Final interpretive rule.
SUMMARY: This document gives notice of Customs final determination that
imported merchandise cannot be considered to be exported pursuant to the
Foreign-Trade Zones Act when it is sent to a foreign-trade zone in the
United States for manufacturing. Accordingly, two Customs rulings, C.S.D.
84-97, republished as C.S.D. 85-10, as well as ORR letter ruling 218551,
which permitted this expressly to obtain the payment of duty drawback or
to cancel a temporary importation bond, are revoked as being without
support in the law.
EFFECTIVE DATE: February 27, 1989.
FOR FURTHER INFORMATION CONTACT: William G. Rosoff, Entry Rulings
TEXT: SUPPLEMENTARY INFORMATION:
Foreign-trade zones (zones) are secured areas within the United States
to which certain foreign and domestic merchandise may be brought for some
purposes without being subject to the Customs laws of the United States.
Their purpose is to attract and promote international trade and commerce.
The Foreign-Trade Zones Act of 1934, as amended (19 U.S.C. 81 a-u) ("the
FTZA") provides for the establishment and regulation of foreign-trade zones
in the U.S. Section 3 of the Act (19 U.S.C. 81c), allows foreign and
domestic merchandise to be brought into a zone without being subject to the
Customs laws of the U.S. The fourth proviso to that section expressly
provides that for the purpose of the drawback laws, the warehousing laws
and the laws on temporary importations under bond, merchandise may be
considered exported, when admitted into a zone for the sole purpose of
exportation, destruction or storage. Part 146, Customs Regulations (19 CFR
Part 146), governs the admission of merchandise into a zone; the
manipulation, manufacture, destruction, or exhibition of merchandise in a
zone; the exportation of merchandise from a zone; and the transfer of
merchandise from a zone into the customs territory.
Schedule 8, Part 5, Subpart C, Tariff Schedules of the United States
(TSUS; 19 U.S.C. 1202), provides for temporary importations under bond
(TIB's). Under these provisions, merchandise to be repaired, altered or
processed in the U.S., may be admitted into the U.S. under bond without the
payment of duty, provided the merchandise is exported within one year from
the date of importation. If merchandise entered under a TIB is not exported
before the expiration of the bond period, liquidated damages in the amount
of the bond may be assessed against the importer.
Section 313, Tariff Act of 1930, as amended (19 U.S.C. 1313), provides
for the refund of customs duty on certain imported merchandise. This refund
is known as "drawback," and is generally dependent on exportation of the
imported merchandise or an article manufactured from the imported
Section 101.1(k), Customs Regulations (19 CFR 101.1(k)), defines
"exportation" as a severance of goods from the mass of things belonging to
this country with the intention of uniting them with the mass of things
belonging to some foreign country.
On June 22, 1984, Customs issued ORR ruling letter 216727, which held
that merchandise that is imported under a temporary importation bond (TIB),
processed in the customs territory of the U.S. as defined in General
Headnote 2, TSUS, and @ 101.1(e), Customs Regulations (19 CFR 101.1(e)),
and then transferred into a U.S. zone for manufacturing is "considered"
exported. Accordingly, merchandise manufactured in a zone may be entered
from the zone for consumption upon payment of proper duty. It is implicit
in this ruling that because shipment of merchandise to a zone for the
purpose of manufacture is considered an exportation, a TIB covering such
merchandise could be cancelled or a claim for drawback perfected upon the
transfer of the merchandise.
The ruling was published as C.S.D. 84-97 on June 24, 1984 (18 Cust. Bull.
1069), and republished on February 13, 1985 (19 Cust. Bull. 509), as C.S.D.
85-10. ORR letter ruling 218551 dated January 29, 1986, also followed the
reasoning of C.S.D. 84-97/C.S.D. 85-10, for purposes of duty drawback.
In response to a petition from three domestic trade associations,
comprised of U.S. steel and automotive parts manufacturers, which requested
the revocation of these rulings as being contrary to law and prejudicial to
their members' competitive posture, Customs decided that comments should
first be solicited before making a final determination in this matter.
Consequently, on March 4, 1988, Customs published a notice of this effect
in the Federal Register (53 FR 6996), and by subsequent notice on May 11,
1988 (53 FR 16730), the comment period was extended until June 17, 1988.
Discussion of Comments
In all, 98 comments from the public were received in response to the
notice, 90 of which advocate the retention of the rulings, seven advocating
their revocation. Substantial Congressional interest was also generated on
both sides of this issue. One comment, which is beyond the scope of the
notice, recommends that the term "exportation" in the Customs Regulations
be expanded for drawback purposes to include imported duty-paid merchandise
sent to the Virgin Islands. Comments Favoring Retention
Virtually all those commenting in favor of retention state that the
rulings promote the underlying policy of the Foreign-Trade Zones Act, as
amended, 19 U.S.C. 81a-u (FTZA), to encourage domestic manufacturing and
employment, and that revocation of the rulings could have the opposite
effect. In particular, motor vehicle manufacturers located in special-
purpose zones, or subzones, contend that they could be forced to transfer
to foreign plants certain operations now performed on their behalf in this
country by companies not using zones. The consequence of revocation
according to this view would, if anything, be the importation directly to
zones of more elaborate components already finished.
Although a number of commenters insist that no legal issue is involved,
only one of "policy," various legal arguments in support of the rulings are
advanced by several commenters. It is initially asserted that the rulings
find justification, as they themselves set forth, in the plain general
language of section 3 of the FTZA, as amended, 19 U.S.C. 81c(a), which
allows foreign and domestic merchandise of every description, except that
prohibited by law, to be brought to a zone and manufactured; merchandise
entered under a temporary importation bond (TIB) for initial processing,
could thus lawfully be sent to a zone for manufacturing, and would thereby
be considered exported, as required to satisfy the statutory bond
requirement; and duty-paid merchandise would similarly be considered
exported as necessary for drawback purposes if placed in a zone subject to
the third proviso to section 3, which requires that domestic, including
duty-paid, merchandise be treated as foreign, if its identity in the zone
These commenters also perceive the rulings as founded upon a concept of
actual exportation, albeit as modified by Customs, which has been done from
time to time assertedly to accommodate changing technology and business
conditions. For example, merchandise sent to the Trust Territory of the
Pacific Islands, T.D. 56545(3), and merchandise assembled into a
communications satellite sent into permanent orbit in outer space, T.D.
68-206(1), have been stated to be exported for drawback purposes,
notwithstanding that neither destination constitutes a foreign country, and
@ 101.1(k), Customs Regulations (19 CFR 101.1(k)), in line with long
settled judicial precedent, dictates, in part, that to be exported there
be an intent to unite the goods with the commerce of "some foreign country."
In any event, these commenters distinguish the fourth proviso to section
3 of the FTZA, which expressly allows merchandise to be regarded as
exported, by declaring that this proviso is limited to its specific
purposes (exportation, storage or destruction), and that is not concerned
with merchandise intended for manufacture in a zone.
In addition, the following arguments are made: inasmuch as the FTZA was
amended in October 1984, subsequent to C.S.D. 84-97 (85-10), and again in
October 1986, subsequent to ORR Ruling 218551, without adverse impact on
either ruling, Congress has impliedly acquiesced in and accepted them; it
has not been demonstrated that the rulings are "clearly wrong" as required
by @ 177.10(b), Customs Regulations (19 CFR 177.10(b)); the March 4, 1988,
notice of reconsideration (53 FR 6996) does not give the public a fair
opportunity to understand the issues and comment meaningfully -- it should
be withdrawn and a new notice published.
Comments Favoring Revocation
Those commenting in favor of revocation state that the rulings are
without foundation in the FTZA, that, indeed, the only authority for
considering merchandise exported under the Act is contained in the fourth
proviso to section 3 thereof, which limits the merchandise so sent to
exportation, storage or destruction, and prohibits its manufacture. Some of
these commenters also observe that the rulings in effect confer de facto
zone status upon domestic (nonzone) businesses which supply zone users,
without an application for zone status having been approved by the Foreign-
Trade Zones (FTZ) Board at the Department of Commerce, as required by law.
Also, the three trade associations comprised of steel and automotive
parts manufacturers, which originally petitioned for revocation, contend
that the rulings facilitate the importation and domestic consumption of
foreign steel and automotive parts at lower rates of duty than would
otherwise be possible, at variance with the Congressional intent underlying
both the TIB provisions and the drawback statute, and adversely affecting
their members' competitive posture.
After a thorough review of the Foreign-Trade Zones Act, its plain meaning
as well as legislative history, Customs is constrained to agree that the
fourth proviso to section 3 of the Act, as amended, 19 U.S.C. 81c(a),
contains the exclusive authority thereunder for considering merchandise sent
to a zone as exported, as required either for cancelling a temporary
importation bond (TIB) (Schedule 8, Part 5, Subpart C, item 864.05, TSUS;
19 U.S.C. 1202), or for obtaining the payment of duty drawback under 19
U.S.C. 1313. The rulings under reconsideration are therefore without support
in the law, and they will be revoked.
Section 3 of the FTZA was amended in 1950 by Pub. L. 81-566 to authorize
manufacturing in a zone, and to add a fourth proviso whereby merchandise
sent to a zone could be considered to be exported in part "for the purpose
of -- * * * the drawback, warehousing, and bonding * * * provisions of the
Tariff Act of 1930 * * *".
To obtain the benefits of the fourth proviso, however, requires
compliance with its restrictions. Merchandise may not be entered from the
zone for domestic consumption absent a finding of public interest by the
FTZ Board, and then only upon payment of a duty equal to that from which
the proviso relieved the merchandise. S. Rept. 81-1107, reprinted in,
1950 U.S. Code Cong. & Admin. News 2533, 2537-2538. In addition, merchandise
subject to the proviso is confined solely to being exported, destroyed or
stored in the zone. On its plain face, the proviso precludes manufacturing,
and this is so even if merchandise subject thereto were destined for actual
exportation. "The benefits would not extend to articles taken into a zone
for manipulation or manufacture prior to exportation." Ibid., 2537.
Nevertheless, the rulings interpret the FTZA as generally allowing
merchandise to also be considered exported for item 864.05 TIB or drawback
purposes, if sent to a zone for manufacturing, following which the products
could be entered for consumption upon payment of "applicable" duty, which
could be considerably less than the duty from which the rulings relieved
It is Customs' view that the rulings are inconsistent with the
prohibition against manufacturing, and to this extent the other restrictions
inherent as well, in the fourth proviso. As such, the rulings result in
the effective partial repeal of the proviso, which runs contrary to "the
elementary canon of construction * * * that a statute * * * be interpreted
so as not to render one part inoperative." Colautti v. Franklin, 439 U.S.
379, 392 (1979); and cf., United States v. United Continental Tuna Corp.,
425 U.S. 164, 169 (1976).
Consequently, except for the fourth proviso, TIB merchandise, because it
must either be exported or destroyed (19 U.S.C. 1557(c)), would be
"prohibited by law" from admission to a zone. See C.S.D. 81-71.
Duty-paid merchandise, though, may ordinarily be admitted to a zone. If
it loses its identity therein, the third proviso prescribes that it be
treated as foreign. But this does not permit such merchandise to be
treated as exported. On the contrary, foreign merchandise in a zone is
imported, and, other than under the fourth proviso, is correctly considered
as such, a fact routinely recognized by Congress in the legislative history
of the statute, and by Customs in its regulations and rulings. See, e.g.,
S. Rept. 905, 73d Cong., 2d Sess., 2 ("[A foreign-trade zone] aims to
foster the dealing in foreign goods that are imported * * *" (emphasis
added)); 19 CFR 146.1(b)(11); C.S.D. 83-21; ORR Ruling 76-0067. Moreover,
a party may not "choose" foreign status for such merchandise pursuant to
the third proviso, as ORR Ruling 218551 improperly allows. See C.S.D.
The rulings in question, C.S.D. 84-97 (85-10), and ORR Ruling 218551,
are not properly founded, in that there is no authority in the FTZA for
"considering" merchandise exported if sent to a zone for manufacturing;
they do not rely upon any notion of actual exportation as defined in the
Customs Regulations, @ 101.1(k), whether modified or otherwise. Even if
the rulings did depend upon a concept of actual exportation, their
attempted justification on this basis would be equally without merit. It
would be fundamentally incompatible with the Congressional and
administrative recognition, supra, that foreign merchandise placed in a
zone is actually imported, not exported, these naturally being mutually
The amendments to the FTZA in October 1984 (19 U.S.C. 81c(b), as amended;
19 U.S.C. 81o(e), as amended; Pub. L. 98-573) and in October 1986 (19 U.S.C.
81c(c), as amended; Pub. L. 99-514), and accompanying legislative history
(reprinted in 1984 U.S. Code Cong. & Admin. News 4910; 1986 U.S. Code Cong.
& Admin. News 4075), did not to any extent reference or discuss the subject
matter currently under review. In the face of a silent Congressional record,
as here exists, administrative action would, at a minimum, have to be long-
standing before it could be fairly inferred that Congress has acquiesced in
it, and, in this connection, Customs has concluded that the decisions in
C.S.D. 84-97 (85-10), dated June 22, 1984, and ORR Ruling 218551, dated
January 29, 1986, were not "long-standing" at the time of the March 4,
1988, official notice of reconsideration (53 FR 6996). Compare, Toyota
Motor Sales U.S.A., Inc. v. United States, 7 CIT 178, 193-194 (1984),
aff'd., 3 Fed. Cir. 93 (1985) (three-year practice not long-standing).
Moreover, where an agency interpretation of existing legislation is
plainly erroneous, as in the present instance, it is well settled that
Congress must give express consideration or make some specific reference to
the interpretation in the later legislation, in order to ratify it. See,
Kristensen v. McGrath, 179 F.2d 796, 803-804 (D.C. Cir. 1949), aff'd., 340
U.S. 162; United States v. Missouri Pacific Railroad Co., 278 U.S. 269,
280 (1929). Implied repeal, which, as already noted, would otherwise be
the case here, is not a preferred principle of statutory construction.
Jones v. Alfred H. Mayer Co., 392 U.S. 409, 437 (1968).
While a general purpose, or policy, of the FTZA may be said, at least
partly, to be to assist American business and labor through the
encouragement of manufacturing, it must be remembered that the purpose of a
law may properly be achieved only within its established statutory
framework, Moragne v. State Marine Lines, Inc., 398 U.S. 375, 392 (1970),
and cannot sanction the disregard of specific statutory requirements (in
this case, those of the fourth proviso) merely because they are perceived
as inimical or unsuited to achieving this purpose in a particular case.
Commissioner of Internal Revenue v. Gordon, 391 U.S. 83, 91-93 (1968). In
this regard, the rulings under review amount, in fact, to a legislative
amendment, rather than an interpretation, of the FTZ law currently in force,
which is the exclusive province of Congress. Accord, e.g., Petri v. F.E.
Creelman Lumber Co., 199 U.S. 487, 495 (1905).
"Clearly Wrong" Standard
The rulings are not subject to the "clearly wrong" standard of @ 177.10(b)
because they are not rulings regarding a rate of duty or charge within the
contemplation of this regulation, accord, American Air Parcel Forwarding Co.
v. United States, 7 CIT 231, 234-235 (1984) (a ruling relating to the
valuation of merchandise, and not to its classification, held not covered
by @ 177.10(b)); Old Republic Ins. Co. v. United States, 645 F. Supp. 943,
948 (CIT 1986). Nonetheless, it is Customs' view that because the Rulings
are without support in the law, the "clearly wrong" standard would be met
if it were applicable.
There is no need for the publication of another notice of
reconsideration. In addition to the fact that the March 4, 1988, Federal
Register notice (53 FR 6996) fully and fairly articulated the subject
matter concerned, as evidenced by the depth and detail of the many comments
submitted by those participating in this administrative process, another
notice would be unwarranted and pointless in any event because "comments
from the public at large cannot change the essentially legally correct
result." National Juice Products Association v. United States, 628 F. Supp.
978, 994 (CIT 1986).
In view of the foregoing, and following careful consideration of the
comments received and further review of the matter, Customs has determined
to revoke C.S.D. 84-97, C.S.D. 85-10 and ORR letter ruling 218551, inasmuch
as there is no authority in the Foreign Trade Zones Act permitting imported
merchandise to be considered exported when it is sent to a foreign trade
zone in the United States for manufacturing.
The principal author of this document was Russell A. Berger, Regulations
and Disclosure Law Branch, U.S. Customs Service. However, personnel from
other offices participated in its development.
William von Raab,
Commissioner of Customs.
Approved: November 18, 1988.
John P. Simpson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 88-29718 Filed 12-27-88; 8:45 am]
BILLING CODE 4820-02-M