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HQ 230840

September 30, 2005

RR:CR:DR 230840 EMS

Miller & Company P.C.
4929 Main Street
Kansas City, MO 64112
ATTN: Marshall V. Miller

RE: Ruling request; 19 U.S.C. § 81a; foreign trade zone; 19 C.F.R. §§ 146.21- 146.26; FIFO variation; 19 C.F.R. § 191.14; GAAP; zone status

Dear Mr. Miller:

This is in reply to your correspondence dated January 14, 2005, seeking a ruling on behalf of your client, Heidelberger Druckmaschinen AG, for the authorization of its proposed accounting and recordkeeping procedures for the removal of spare parts from a foreign trade zone (FTZ). Your most recent submission is intended to provide sufficient information for Customs and Border Protection (CBP) to issue a ruling in response to your request, which was originally submitted on March 24, 2003.

Your original submission contained a request for confidentiality, which you withdrew on June 19, 2003 in a letter to CBP. Accordingly, confidential treatment is not granted to the information contained therein, which you incorporated by reference into your correspondence dated January 15, 2005. We also note that your office submitted a request for reconsideration on September 5, 2003, but failed to provide the additional information requested by CBP in a timely manner.

After receiving your submission on January 15, 2005, we then granted your request for a meeting via teleconference on February 24, 2005. We have reviewed all of your submissions regarding this ruling request in reaching our decision, which follows below.


Heidelberger Druckmaschinen AG (HDAG), a manufacturer of printing machinery, is headquartered in Germany. Together with its United States office, Heidelberg USA, Inc. (HUSA), HDAG intends to establish an “Americas Logistics Center” (Center) in a general purpose FTZ facility. The Center will store and sell spare parts for its printing machines to customers in the United States, Canada, Mexico, and Central and South America. The Center’s inventory will consist primarily of foreign spare parts that can be made available for sale and shipment to customers located in the Americas. In addition, that inventory will also include any such parts that were returned after having been sold and shipped to its U.S. customers. The zone users

“Zone users” refers to both Heidelberger Druckmaschinen AG (HDAG) and its U.S. office, Heidelberg U.S.A., Inc (HUSA). anticipate that 15-18% of the spare parts sold to U.S. customers will be returned within a few days after shipment from the Center. Given the likelihood of merchandise returns from its U.S. customers, the zone users seek CBP authorization of certain inventory identification, tracking, and management methodologies, all of which are described below.

With regard to inventory control, the zone users will assign a unique identifier number (UIN) to each type of spare part stored in the Center. Per an automated system, the UIN will consist of the part number and designation of the unique warehouse type. The unique warehouse type will indicate the zone status of the spare parts. Goods returned to the facility by U.S. customers, or otherwise purchased from a U.S. vendor, will be in domestic (D) status, meaning that they are tax-paid upon entry into the zone. Other spare parts will be foreign merchandise of nonprivileged foreign (NPF) status or privileged status (PF) status, the latter status applying only to merchandise subject to antidumping or countervailing duty orders. While the ruling request did not address whether merchandise in privileged foreign (PF) status would enter the FTZ, Counsel for HDAG agreed, in a teleconference on February 24, 2005, that it is possible and that such merchandise would constitute a separate category of inventory for a given part number in its inventory management system. For storage purposes, all spare parts sharing the same part number will also be stored in the same bins at the Center, irrespective of the unique warehouse type, i.e., zone status.

For the record identity of the merchandise, the zone users propose that an independent zone operator will manage the Center’s inventory in accordance with the first-in, first-out (FIFO) accounting methodology. FIFO requires that the zone users ship the oldest inventory first. However, the zone users seek CBP’s authorization to modify FIFO on the basis of the unique warehouse type, with systemic preferences based on where the spare parts will be shipped. For sales to U.S. customers, the zone users intend to ship the oldest available spare parts in D status, even if there are older spare parts in NPF/PF status at the Center for a given part number. For sales to customers outside the United States, the zone users intend to ship the oldest spare parts in PF and NPF status, respectively, even if there are older spare parts in D status at the Center for a given part number. According to the zone users,
although the parts are fungible for Customs purposes, it allows the inventory management system to identify the zone status for FTZ tracking purposes and ensures that on shipment from the zone of a product number (UIN)[,] FIFO is being consistently applied within the zone status.

This variation of FIFO creates a scenario whereby the oldest parts identified in the Center’s inventory will not always be shipped first. ISSUE:

Whether the zone users may treat fungible merchandise as separate categories of inventory under FIFO?


The Foreign Trade Zones Act of 1934, as amended (19 U.S.C. §§ 81a-u), provides for the establishment and regulation of FTZs, the purpose of which is to attract and promote international trade and commerce. Merchandise brought into a FTZ is exempt from Customs laws unless and until it enters the Customs territory of the United States. To this end, Part 146 of the CBP regulations (19 C.F.R. Part 146) governs the admission of merchandise into a zone, its removal from the zone, and, among other things, its manipulation, manufacture, or exhibition while in the zone.

The identification of merchandise in the FTZ is regulated by 19 C.F.R. § 146.23(a)(1), which requires the zone users to assign to all merchandise that enters the FTZ either a zone lot number or unique identifier, which can be used to identify and trace merchandise stored at the facility. In this case, certain spare parts will be fungible, meaning that the spare parts are, for commercial purposes, identical and interchangeable in all situations. 19 C.F.R. § 146.1(b). For identification purposes, the applicant intends to assign a UIN to the spare parts stored at the Center. As previously described, the UIN will consist of the part number associated with a warehouse ID, which designates zone status.

Because the spare parts are fungible merchandise, 19 C.F.R. § 146.23(a)(2) also provides that such merchandise may be identified by an inventory method authorized by CBP, and which is consistently applied. The applicant purports to implement FIFO using its unique identifier system, an inventory method authorized by CBP for purposes of this subpart. See C.S.D. 81-62 dated Aug. 28, 1980. The CBP regulations define FIFO as
the method by which fungible merchandise or articles are identified by recordkeeping on the basis of the first merchandise or articles received into the inventory. Under this method, withdrawals are from the oldest (first-in) merchandise or articles in the inventory at the time of withdrawal.

19 C.F.R. § 191.14(c)(1).
The CBP regulations define FIFO in Part 191, for drawback purposes. The FIFO method and the parameters set forth in § 191.14 for the authorization of other accounting methods, as well as subsequent agency interpretations thereof, are equally applicable to foreign trade zones (FTZs), to the extent that they do not conflict with the regulations contained in Part 146. Further, the appendix to Part 181, governing the North American Free Trade Agreement (NAFTA), defines and illustrates FIFO in Schedule X, consistent with Part 191. Indeed, drawback and FTZs are complementary. When Congress limited drawback in the North American Free Trade Agreement Implementation Act, Pub. L. No. 103-182, 107 Stat. 2057 (1993), it imposed the same restrictions on FTZs. See H. Rep.103-361, Part I pp. 38-40 (Nov. 15, 1993). More recently, Congress amended the statute governing FTZs as part of the implementation of drawback provisions under the United States-Chile Free Trade Agreement Implementation Act, Pub. L. No. 108-77, 117 Stat 909, § 203 (2003). The use of FIFO in a FTZ permits the removal of commingled merchandise from the FTZ based on the date of its entry into the FTZ. HQ 211647 dated Aug. 28, 1980 (authorizing the use of FIFO in a FTZ). Accordingly, there is no requirement for the physical segregation of fungible merchandise, but accounting records must reflect that the first of the fungible merchandise admitted into the zone is the first to be removed therefrom. See Customs and Border Protection, U.S. Dep’t of Homeland Security, Pub. No. 0000-0559, Foreign Trade Zone Manual 83 (2003). The zone users’ description of the inventory methodology, characterized as a “modified” FIFO methodology, does not treat commingled, fungible spare parts as a single inventory. The proposed identification by a UIN differentiating spare parts that share the same part number on the basis of zone status creates two separate inventory categories for merchandise, which is, by definition, fungible. See 19 C.F.R. § 146.1(b) (meaning “merchandise which for commercial purposes is identical and interchangeable in all situations”).

FIFO requires that fungible merchandise be treated as a single inventory and the zone users are prohibited from artificially treating fungible merchandise as two separate categories based on zone status under FIFO. When an order is placed for a spare part, FIFO requires that the zone users must withdraw the oldest merchandise in its inventory records for that part number, regardless of the zone status indicated by the warehouse ID component of its UIN. Instead, the zone users in this case seek to bypass the prima facie requirement that the first merchandise admitted into the zone must be the first withdrawn for sales to U.S. customers by substituting newer fungible merchandise in D status for older merchandise that is in NPF/PF status. We note that the identification of inventory under the FIFO method is neither permitted for substitution purposes, per 19 C.F.R. § 191.14(a), “When substitution is authorized, merchandise or articles may be substituted without reference to this section, under the criteria and conditions specifically authorized in the statutory and regulatory provisions providing for the substitution.” 19 C.F.R. § 191.14(a). nor do the regulations that govern FTZs provide for the use of substitution on any basis (including zone status).

Because the “modified” FIFO method proposed in this case is not in compliance with the regulatory criteria for FIFO, the zone users must demonstrate an alternative basis upon which CBP may authorize its use, per T.D. 98-16, 63 Fed. Reg. 15287 (March 31, 1998), as discussed below. In T.D. 98-16, CBP clarified that 19 C.F.R. § 191.14 is intended to establish the accounting methods which may be used to identify merchandise or articles for drawback purposes, See id. and is intended to be consistent with T.D. 95-61: “Rulings issued prior to the effective date of these regulations may not be resorted to unless consistent with § 191.14 and T.D. 95-61.” 60 Fed. Reg. 41804 (Aug. 14, 1995).

T.D. 95-61 specifically authorized the use of FIFO, and also set forth the criteria for accounting methods used for identification of merchandise, requiring that those methods be consistent with commercial accounting procedures and accounting procedures generally used by the drawback claimant. In addition, T.D. 95-61 permitted the authorization of accounting methods, other than those enumerated therein, so long as that method was revenue neutral or favorable to the Government. We note that § 191.14(b)(4) requires that the records maintained for the identification of merchandise must comport with generally accepted accounting principles (GAAP).

In support of the proposed accounting method, the applicant relies primarily on two prior CBP decisions, HQ 219087 dated November 12, 1986 and HQ 224628 dated January 10, 1994. Both of these decisions were issued prior to T.D. 98-16, and thus they may not be resorted to unless the accounting procedures described therein are consistent with the definition of FIFO set forth in 19 C.F.R. § 191.14 or the principles enumerated in T.D. 95-61 for the authorization of accounting procedures. In both prior decisions, CBP authorized the use of accounting procedures that permitted the segregation of fungible merchandise on the basis of zone status, a practice that is inconsistent with FIFO, as defined in 19 C.F.R. § 191.14. Thus the zone users’ proposed accounting method would find support in these rulings only to the extent that they comport with the principles set forth in T.D. 95-61 and the current CBP regulations.

In HQ 219087, CBP authorized a proposed accounting method that protected the revenue of the United States. For that subzone, the accounting procedure involved the segregation of fungible pigment on the basis of its zone status and withdrawals were credited uniformly and consistently on a FIFO basis against the different statuses of pigment “in order to assure payment of the duty at the higher rate.” This meant that the higher duty rate for NPF status pigment would be assessed on printing ink that was imported into the United States, in lieu of the lower duty rate for printing ink, which would apply if its production in the subzone were credited to pigment in D status. This method is consistent with T.D. 95-61’s requirement that an accounting method must be either revenue neutral or favorable to the Government.

Unlike HQ 219807, however, the proposed method in this case will not result in the zone users paying the higher rate of duty. In fact, the proposed accounting method assures that, whenever possible, withdrawals will be made on the basis of record identity and for sales to U.S. customers, the zone users would bypass older merchandise which is in NPF status that would be subject to duties if imported into the United States. Instead, the zone users would import newer merchandise in D status, which would not be subject to duties upon entry into the United States. Merchandise that has previously been transferred from the Center for sales to U.S. customers and which is later returned to the Center will be in D status. Merchandise in D status may be imported into the United States free of quotas, duty, or tax. 19 C.F.R. § 146.43(c). Logically, the zone users have a pecuniary interest in assuring that merchandise in D status is sold to U.S. customers. In contrast, merchandise in NPF or PF status is dutiable upon importation into the United States, so the zone users would benefit by selling this merchandise to non-U.S. customers, and conserving the inventory in D status for sales to its U.S. customers. The zone users counter that the proposed methodology is revenue neutral, claiming that
the traditional UIN inventory system would frequently require double, triple, or more duty payments on the same merchandise. It is not appropriate to structure a method that requires overpayment of Customs duties. The proposed method would in most instances mean duty payment occurs only once in a fixed structure.

However, the CBP regulations establish liability for duties upon any subsequent re-importation of merchandise, even if duties were already paid on a prior importation of that merchandise. 19 C.F.R. § 141.2.

FIFO does not require the overpayment of duties; it merely requires that the oldest inventory in the FTZ must be the first to be transferred out of it, and there is no basis upon which FIFO should be modified in this case. The alleged overpayment of Customs duties does not appear to be an “overpayment” at all, given that the CBP regulations require that duty be paid on each subsequent importation of merchandise from the Center into the United States. Further, the proposed modification of FIFO would not be revenue neutral because the zone users seek to avoid the payment of duties, that would otherwise be due to the Government under FIFO, by electing not to import into the United States the oldest merchandise in its inventory when that merchandise is not in D status.

The other case upon which the zone users rely, HQ 224628, does not implicate the principle of revenue neutrality because it involved the protection of the zone users’ statutory entitlement to the duty-free exportations of jet fuel under 19 U.S.C. § 1309. There, CBP authorized the use of an accounting procedure that permitted numerous airlines to commingle their fuels, in both D and NPF status, in a FTZ at an airport, for the purpose of fueling their respective planes on a daily basis. The FTZ was operated by an independent third party and the zone users’ sought CBP’s authorization of an accounting methodology which would identify the fuel removed from the commingled storage such that fuel in D status would be considered removed for use on domestic flights and fuel in NPF/PF status would be considered removed for use on flights qualifying for duty-free treatment under 19 U.S.C. § 1309.

Specifically, 19 U.S.C. § 1309(a)(1)(C) provides an exemption from Customs duties and internal revenue tax for, inter alia, articles of foreign or domestic origin withdrawn from a FTZ for supplies of “aircraft registered in the United States and actually engaged in foreign trade.” In Citgo Petroleum Corp. v. United States, 24 Ct. Int’l Trade 333, 104 F. Supp. 2d 106, 110 (2000), the Court of International Trade (CIT) relied on a broad Congressional purpose in exempting airlines from the payment of Customs duties, per 19 U.S.C. § 1309. The CIT’s analysis in that case substantiates the rationale for CBP’s prior authorization of the accounting methodology described in HQ 224628, which would have permitted the airlines involved to capitalize upon the stautory exemption set forth in 19 U.S.C. § 1309.

In the instant case, there is no such statutory entitlement to duty-free importation for spare parts for printing presses. Instead, the justification for the proposed accounting method entails the “unique circumstances” of the zone users’ business practices, i.e., that its U.S. customers will return approximately 15-18% of the spare parts that they purchase to the Center. The economic impact of the customer return policy on the revenues gained or lost by the zone users is not a persuasive basis for authorizing the modification of FIFO to treats lots of fungible merchandise as separate inventories.

An additional distinction from HQ 224628 is that the accounting method in that case involved the facilitation of CBP compliance through consistency of recordkeeping for both CBP and general business purposes. The accounting method authorized by CBP in HQ 224628 was consistent with inventory records maintained by the airlines for general business purposes. In this case, the zone users appear to create an inventory and recordkeeping system that discriminates based on zone status, solely for Customs purposes. The sample product history report, balance on hand part query, and annual reconciliation report list many part numbers twice, differentiating the merchandise based on zone status, which is either D or NPF. However, for other business and tax purposes, it is unclear as to whether the zone users will treat fungible merchandise as a single category of inventory, regardless of its zone status.

At best, the documents submitted for our review are inconclusive with respect to the records kept by the zone users in the ordinary course of business. While Counsel alleges, “the records system described in our ruling request is the same for business and CBP records, “ Counsel indicated in a teleconference with our office that records kept for tax purposes will not differentiate on the basis of zone status, but will treat all fungible merchandise as a single category of inventory. Thus, CBP cannot conclude that the zone users have established that the inventory records prepared and used in the ordinary course of business can be reconciled with those described in the FACTS section, which treat fungible merchandise as separate categories of inventory, on the basis of zone status.

Furthermore, we note that CBP regulations require compliance with GAAP for records kept pursuant to any accounting method authorized by CBP. See 191.14(b)(4). Treating fungible merchandise as separate categories of inventory for Customs purposes only does not comport with the GAAP, specifically with regard to consistency in recordkeeping. If inventory records kept in the ordinary course of business treat receipts and withdrawals as being from the same inventory, those inventory records must be used, and receipts into or withdrawals from the same inventory may not be accounted for separately for Customs purposes. See 19 C.F.R. § 191.14(b)(2). While variations of FIFO are permissible under the GAAP and may even provide a sufficient audit trail, as described below, we note the absence of any statutory or regulatory provision that specifically permits “modifying” FIFO so that the spare parts in “D” status would be shipped to U.S. customers prior to older spare parts in NPF or PF status.

The second and third provisos to 19 U.S.C. § 81c require safeguarding of the record identity for goods admitted into the FTZ, especially if domestic goods are to qualify for this statutory exemption from Customs duties upon importation into the United States. CBP regulations further establish liability for duties upon reimportation of goods: [d]utiable merchandise imported and afterwards exported, even though duty thereon may have been paid on the first importation is liable for duty on every subsequent importation into the Customs territory of the United States. 19 C.F.R. § 141.2. The zone users propose to manage the inventory in a manner that facilitates the evasion of the legal consequences of reimportation per 19 U.S.C. § 81c(a) and 19 C.F.R. § 141.2. In this case, we note the absence of a specific statutory entitlement to an exemption from Customs duties (as shown in HQ 224628) and any evidence that the zone users treat fungible merchandise as separate categories of inventory for business and tax purposes.


The proposed accounting methodology does not export first the oldest item of fungible merchandise from the FTZ, and thus it is neither consistent with the definition of FIFO or the criteria for its modification under T.D. 98-16.

Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.


William G. Rosoff, Chief
Entry Process and Duty Refunds Branch

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