HQ W116720 - Coastwise Trade; 46 U.S.C. App. § 883; Commingled Merchandise - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 2006 HQ Rulings > HQ 968346 - HQ W968318 > HQ W116720

Previous Ruling Next Ruling
HQ W116720

September 12, 2006

VES-3-RR:BSTC:CCI W116720 GOB

CATEGORY: CARRIER

Constantine G. Papavizas, Esq.
Winston & Strawn LLP
1700 K Street, N.W.
Washington, D.C. 20006-3817

RE: Coastwise Trade; 46 U.S.C. App. § 883; Commingled Merchandise

Dear Mr. Papavizas:

This letter is in reply to your letter of September 1, 2006 on behalf of Sempra Energy (the "Company"), requesting a ruling with respect to the applicability of 46 U.S.C. App. § 883 (the “Jones Act”) to certain proposed transportation. Our ruling follows.

FACTS:

You describe the pertinent facts as follows:

A Mexican affiliate of our client Sempra Energy (the “Company”) is currently building a Liquefied Natural Gas (LNG) Gasification Terminal in the Baja California region of Mexico (the “Terminal”). The Company plans to commission the Terminal in early 2008. During commissioning and start-up of the facility, LNG will be delivered to the Terminal, gasified and delivered via pipeline to Mexico and the United States.

The total amount of time from initial LNG delivery to completion of commissioning and start-up is estimated to be about 120 days. During this period, the Company is considering having Alaska-source LNG delivered to the terminal in one or several non-U.S. flag vessels but only so long as it is in compliance with the Jones Act. The Alaska-source LNG will be blended with non-U.S.-source LNG (“Blended LNG”) to alter the heat content of each.

There currently are no LNG tank vessels documented in the United States, and there is no prospect of there being a Jones-Act eligible LNG tank vessel for the foreseeable future. . .

Access to LNG supplies for commissioning purposes is generally limited because most LNG is committed on long-term supply contracts. In addition, there are only a few LNG sources which can provide the right heat content to meet California’s gas specifications. Alaska is one of the only sources that is both available for commissioning purposes and contains the needed low heat content that the Terminal can effectively utilize for commissioning and start-up. . . .

As a result, the use of Alaska-source LNG facilitates the earliest start-up date of the Terminal and access to additional gas supply for the western United States beginning in 2008 instead of 2009. Following start-up of the Terminal, all LNG delivered to U.S. customers will be non-U.S. source LNG. Thus, the Jones Act issues only pertain to the commissioning or start-up period.

With respect to the 120-day commissioning period, the Company will execute one or more sales agreements with Mexican customers for the sale of a specified volume of Blended LNG that exceeds the volume of Alaska-source LNG contained in that volume of Blended LNG. Some of the Blended LNG being delivered to Mexican customers may be transported in pipelines that traverse the United States.

On some days during the 120-day start-up period, the volume of Blended LNG delivered from the Terminal may be less than the volume of Blended LNG contracted to be sold to customers in Mexico. When that occurs, U.S.-source gas entering Mexico by pipeline will be borrowed to make-up the shortfall. The borrowed gas will be repaid with Blended LNG when the volume of Blended LNG available exceeds the amount contracted to be sold to Mexican customers.

On certain days, the volume of Blended LNG available for delivery from the Terminal may exceed the volume of Blended LNG that is required by customers in Mexico. When this occurs, the Company may be able to arrange for storage of Blended LNG in the United States. Or the Blended LNG may be delivered to customers in the United States before an equivalent amount of Blended LNG is delivered to Mexican customers, although more Blended LNG will be sold and delivered to Mexican customers than the quantity of Alaska-source LNG contained in the Blended LNG during the commissioning period as a whole.

Alaska-source LNG will be utilized only in compliance with the Jones Act. Advance planning is required to ensure that the Terminal is commissioned on time to meet the needs of customers in the United States and Mexico. . . .

ISSUES:

You have requested out determination with respect to the following issues which you have formulated.

1. Whether the Jones Act is violated if blended LNG is transported in pipelines that traverse the United States to be delivered to Mexican customers?

2. Whether the Jones Act is violated if blended LNG is transported to the United States for storage in the United States and is not delivered to any U.S. customers until such time as an amount of blended LNG is sold and delivered to Mexican customers that exceeds the amount of Alaska-source LNG contained in the blended LNG?

3. Whether the Jones Act is violated if blended LNG delivered to the United States exceeds the amount of Alaska-source LNG on those days when available blended LNG exceeds the requirements of Mexican customers provided that (a) the amount of blended LNG first sold to Mexican customers will exceed the amount of Alaska-source LNG contained in the blended LNG; and (b) the amount of blended LNG sold and delivered to Mexican customers will exceed the amount of Alaska-source LNG contained in the blended LNG during the specified time period (120 days for start-up and commissioning)?

LAW AND ANALYSIS:

Generally, the coastwise laws prohibit the transportation of passengers or merchandise between points in the United States embraced within the coastwise laws in any vessel other than a vessel built in, documented under the laws of, and owned by citizens of the United States. A vessel that is built in, documented under the laws of, and owned by citizens of the United States, and which obtains a coastwise endorsement from the U.S. Coast Guard, is referred to as "coastwise-qualified."

The coastwise laws generally apply to points in the territorial sea, which is defined as the belt, three nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline.

Title 46, United States Code Appendix, § 883 (46 U.S.C. App. § 883), provides in part that no merchandise shall be transported between points in the United States embraced within the coastwise laws, either directly or via a foreign port, or for any part of the transportation, in any vessel other than a coastwise-qualified vessel (see above).

Section 4.80b(a), Customs and Border Protection (“CBP”) Regulations (19 CFR § 4.80b(a)), promulgated pursuant to 46 U.S.C. App. § 883, provides as follows:

§ 4.80b Coastwise transportation of merchandise.

Effect of manufacturing or processing at intermediate port or place. A coastwise transportation of merchandise takes place, within the meaning of the coastwise laws, when merchandise laden at a point embraced within the coastwise laws (“coastwise point”) is unladen at another coastwise point, regardless of the origin or ultimate destination of the merchandise.

In determining whether merchandise which is transported from one point in the United States to a point in a foreign country and then to another point in the United States is subject to the prohibition in section 883 by virtue of being transported between coastwise points "via a foreign point," we have relied upon the holding of the Supreme Court in The Bermuda, 70 U.S. 514 (1865). In that decision, the Supreme Court held that:

A transportation from one point to another remains continuous, so long as intent remains unchanged, no matter what stoppages or transshipments intervene. [70 U.S. at 553.]

The Supreme Court went on to reaffirm the longstanding rule that:

... [E]ven the landing of goods and payment of duties does not interrupt the continuity of the voyage of the cargo, unless there be an honest intention to bring them into the common stock of the country .... [70 U.S. at 554.]

The Attorney General of the United States relied upon The Bermuda in his consideration of the application of section 883 to certain transportation. In 34 Op. Att'y Gen. 335 (1924) (see also, 32 Op. Att'y Gen. 350 (1920), concerning the transportation of fish from Alaska to United States point via Vancouver, British Columbia, Canada), the Attorney General considered the applicability of section 883 to the transportation of grain from Chicago or Milwaukee to a Canadian port in non-coastwise-qualified vessels. The grain was unladen into an elevator where it remained for an indefinite time until it was loaded into railroad cars for transportation by rail to points in New England. In some instances the grain had already been sold for delivery at an American port when it reached the Canadian port, while in other instances there was an existing intent to ship the grain to the Canadian elevator for storage in anticipation of demands for future deliveries for domestic consumption in Canada, for export abroad, or for sale and delivery in the United States.

The Attorney General's opinion was requested as to whether the transportation of the grain in the manner described violated section 883. As to grain which had been consigned through the Canadian port to a point in the United States or which had been shipped with the intention that the grain should ultimately be shipped to a point in the United States, it was the Attorney General's opinion "that such transportation is without a doubt in violation of [section 883]" (34 Op. Att'y Gen. at 357). When there was no intent by the shipper to transship the grain to a United States port or place, it was the Attorney General's opinion that "only general rules of law may be laid down" (34 Op.Att'y Gen. at 362). The general rule of law given by the Attorney General in this case was that "the intention of the shipper is the controlling factor" (34 Op. Att'y Gen. at 363). The Attorney General also stated that:

... [W]hether the facts presented in any particular case come within such rules must be determined by the officer charged with the administration of that Act. [34 Op. Att'y Gen. at 362.]

CBP is "charged with the administration" of 46 U.S.C. App. § 883. We have held, as did the Supreme Court in The Bermuda, that an "honest intention to bring the goods [transported] into the common stock of the [intermediate foreign] country" is required to break the continuity of transportation between coastwise points via a foreign point. We have also held that when, at the time of shipment of merchandise from the United States to an intermediate foreign port, there existed the expectation that a substantial portion of the merchandise would not be consumed in the country of the foreign port, entry through the foreign country's customs and payment of duty is not considered to break the continuity of the transportation when any of the merchandise is transported onward to a second point in the United States. See HQ 109475, dated October 4, 1988.

In HQ 114172, dated June 18, 1998, we determined that the transportation of caustic soda from the United States to Canada on a coastwise-qualified vessel, its commingling in Canada with fungible soda shipped to Canada on non-coastwise-qualified vessels, and its subsequent return by truck to the United States, did not violate 46 U.S.C. App. § 883, provided that adequate records were maintained to show that an amount of the commingled soda equal to the amount transported to Canada on non-coastwise-qualified vessels was first sold foreign. We stated:

The transportation of caustic soda from the United States to Canada on a coastwise-qualified vessel, its commingling in Canada with fungible soda shipped to Canada on non-coastwise-qualified vessels, and its subsequent return by truck to the United States, does not violate 46 U.S.C. App. § 883, provided adequate records are maintained to show that an amount of the commingled soda equal to the amount transported to Canada on non-coastwise qualified vessels is first sold foreign. [Emphases supplied.]

In HQ 115762 dated September 3, 2002, we held that:

The transportation of LNG from Alaska [to Mexico] by a foreign-flag vessel in the proposed scenario does not constitute a violation of 46 U.S.C. App. § 883 if, after the Alaska-source LNG is commingled with the foreign-source LNG and processed into gas form, an amount of product equal to the amount brought from Alaska is first sold in Mexico and remains in Mexico. Adequate records must be maintained to verify that an amount equal to that transported to Mexico on foreign-flag vessels is first sold in Mexico. The failure to maintain such records would subject the Company to penalties for violation of the aforementioned statute. [Emphases supplied.]

In HQ 116515, dated August 9, 2005, we held that:

The transportation of a product on a foreign flag vessel from the U.S. to a foreign facility for blending, with the product subsequently returned to the U.S., does not constitute a violation of 46 U.S.C. App. § 883 provided that: after the U.S.-sourced product is blended with foreign-sourced product, an amount of the blended product at least equal to the amount of U.S.-sourced product is sold to a foreign source at a foreign location prior to the transportation of any of the blended product to the U.S.; complete and adequate records are maintained with respect to all material aspects of the proposed activity; and such records will be promptly made available to Customs and Border Protection officials upon written request. [Last two emphases supplied.]

Pursuant to the above three rulings, the merchandise at issue must be sold in the foreign country prior to the transportation of the merchandise to the United States.

Issue One

We find that there will be no violation of 46 U.S.C. App. § 883 if blended LNG is transported in pipelines that traverse the United States to be delivered to Mexican customers. Such a scenario presents neither a lading nor an unlading at a coastwise point (See 19 CFR 4.80b(a)). Consequently, the mere traversal of the United States is not a movement subject to 46 U.S.C. App. § 883.

Issue Two

In the three rulings discussed above, we held that there was no violation of 46 U.S.C. App. § 883 where an appropriate amount of the goods was transported to the United States after a corresponding amount of the goods was sold in the foreign country. We decline to depart from this standard.

We find that there will be no violation of 46 U.S.C. App. § 883 if blended LNG is transported to the United States after other blended LNG is sold to Mexican customers provided the amount of Alaska-source LNG in the blended LNG sold to the Mexican customers equals or exceeds the amount of Alaska-source LNG in the blended LNG transported to the United States. This is consistent with our rulings described above. Complete and accurate records must be maintained with respect to all material aspects of the proposed activity. Such records will be promptly made available to Customs and Border Protection officials upon written request. Our determination here does not permit the transportation and storage of blended LNG to the United States prior to the sale of LNG to Mexican customers, which we would deem violative of 46 U.S.C. App. § 883.

Issue Three

In your subsequent correspondence in response to our request for clarification, you elaborate on this issue as follows:

With issue 3, we request CBP’s concurrence that delivery timing for compliance with CBP’s commingling rulings can be achieved on a period of time basis without any U.S. storage involved. So, during the 120-commissioning period taken as a whole, we propose that more Blended LNG will be sold and delivered to Mexican customers than the volume of Alaska LNG. And, the Blended LNG that is sold to Mexican customers will be sold to them before any is sold to U.S. customers. The issue arises because at any particular time during the 120-day period, more Blended LNG may have been delivered to U.S. customers than the volume of Alaska LNG that has been delivered to Mexican customers. This will not be the case by the end of the period. At that point, more Blended LNG will be sold and delivered to Mexican customers than the volume of Alaska LNG taking the period as a whole.

As stated above, we decline to depart from the standard of our previous rulings that there is no violation of 46 U.S.C. App. § 883 where an appropriate amount of the goods is transported to the United States after a corresponding amount of the goods is sold in the foreign country.

Accordingly, as in Issue Two, we find that there will be no violation of 46 U.S.C. App. § 883 if blended LNG is transported to the United States after other blended LNG is sold to Mexican customers provided the amount of Alaska-source LNG in the blended LNG sold to the Mexican customers equals or exceeds the amount of Alaska-source LNG in the blended LNG transported to the United States. Our determination does not permit the latitude you request with respect to the 120-day commissioning period. Such latitude is beyond the scope of our previous rulings and we decline to extend that scope.

HOLDINGS:

1. There will be no violation of 46 U.S.C. App. § 883 if blended LNG is transported in pipelines that traverse the United States to be delivered to Mexican customers. The mere traversal of the United States under these circumstances includes neither a lading nor an unlading at a coastwise point and therefore is not a movement subject to 46 U.S.C. App. § 883.

2. There will be no violation of 46 U.S.C. App. § 883 if blended LNG is transported to the United States after other blended LNG is sold to Mexican customers provided the amount of Alaska-source LNG in the blended LNG sold to the Mexican customers equals or exceeds the amount of Alaska-source LNG in the blended LNG transported to the United States. Complete and accurate records must be maintained with respect to all material aspects of the activity. Our determination here does not permit the transportation and storage of blended LNG to the United States prior to the sale of LNG to Mexican customers, which would be violative of 46 U.S.C. App. § 883.

3. As with Issue Two, there will be no violation of 46 U.S.C. App. § 883 if blended LNG is transported to the United States after other blended LNG is sold to Mexican customers provided the amount of Alaska-source LNG in the blended LNG sold to the Mexican customers equals or exceeds the amount of Alaska-source LNG in the blended LNG transported to the United States. Complete and accurate records must be maintained with respect to all material aspects of the activity. Our determination here does not permit the latitude which you request. A violation of 46 U.S.C. App. § 883 will occur if blended LNG (see above in regard to the Alaska-source requirement) is transported to the United States prior to the time that an appropriate amount of is sold to customers in Mexico.

Sincerely,

Glen E. Vereb
Chief

Previous Ruling Next Ruling