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HQ 220851

November 3, 1988

FOR-2-03-CO:R:C:E 220851 BC

CATEGORY: FOREIGN TRADE ZONE

Mr. George Roberts
District Director
U.S. Customs Service
Honolulu, Hawaii

RE: Dutiability of diesel fuel introduced into a foreign-trade subzone for use in the production of goods when such fuel is purchased from another subzone operator and transferred from one subzone to the other.

Dear Mr. Roberts:

This is in response to your request for internal advice, dated September 9, 1988, wherein you explained that Maui Pineapple Company, operator of Subzone 9D, intends to purchase fuel from Hawaiian Independent Refinery, operator of Subzone 9A, for use in its production process within the subzone. The fuel will be transferred from one zone to the other. Maui Pineapple Company requested a ruling regarding the tax and duty implications involved in the transaction.

FACTS:

A company operates a foreign-trade subzone (FTZ) within which it carries on the manufacturing/production of goods. In order to supply its own energy needs, the company is installing generators in the zone. The company intends to desist from purchasing energy from the local utility company, instead to run its generators on diesel fuel purchased from another subzone operator. The diesel fuel is produced by this latter subzone operator within its subzone. The company intends to have the fuel transferred under bond from one subzone to the other free from tax and duty liability.

ISSUE:

Whether diesel fuel, purchased by one subzone operator from another subzone operator, can be transferred free of taxes and duty from the subzone wherein it was produced to the subzone wherein it will be used to fuel generators which operate a manufacturing process.

LAW AND ANALYSIS:

Customs Regulations permit the transfer of articles from one FTZ to another (19 CFR 146.66). However, in view of the fact that the company seeks to admit the diesel fuel into the zone for the purpose of fueling its generators which operate its production apparatus in the zone, this fuel cannot be accorded the duty exemption provided in Section 3 of the Foreign Trade Zones Act of 1934 (19 U.S.C. 81c) (FTZA). As a consequence, an entry for consumption would have to be filed, as set forth in Customs Regulations 146.62(a) and 146.62(b)(2) (19 CFR 146.62(a), 146.62(b)(2)). Although the diesel fuel in question will be transferred from one zone to another, it will be "considered to have been constructively transferred to the Customs territory...". (19 CFR 146.61).

C.S.D. 79-418 held that production equipment is not admissible into an FTZ free of duty. The United States Court of International Trade recently held that production machinery and related capital equipment introduced into an FTZ are not exempt from duty. Nissan Motor Mfg. Corp., U.S.A. v. United States, Slip Op. 88-108, 22 Cust. Bull., No. 39, p.32. The holding of Hawaiian Independent Refinery v. United States, 81 Cust. Ct. 117, C.D. 4777 (1978), is not applicable to the facts of the proposed transaction since the proposed transaction involves the within- zone consumption of fuel which was not created/produced within the zone (as in the referenced case), but was imported from outside the zone. C.S.D. 79-418 expressly limited the holding of Hawaiian Independent Refinery to the particular facts of that case, a proposition acknowledged with approval in Nissan Motor Mfg.

19 U.S.C. 81o(e) provides an exemption from state and local ad valorem taxes on tangible personal property imported into an FTZ from outside the United States. This provision appears to be inapplicable to the facts of the proposed transaction since the diesel fuel in question is not within the meaning of "merchandise" contained in the FTZA and codified in 19 U.S.C. 81a through 81u. Outside of the foregoing, we do not herein attempt to offer interpretations impacting on the laws of any state.

HOLDING:

The transfer of diesel fuel from one FTZ, wherein it was produced, to another FTZ, wherein it will be used in the production of other articles (or products), is permitted under the Customs Regulations, but will involve the assessment and payment of duties as required upon the admission into an FTZ of
production and related capital equipment, including supplies or similar products used in the production process.

Sincerely,

John Durant, Director

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