HQ H003776 - Coastwise trade; Continuity of transportation; Merchandise transported to Canada; Returned to United States; New and different product; Commingling; 46 U.S.C. 55102 (formerly 46 U.S.C. App. 883) - United States International Trade Commision Rulings

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HQ H003776

January 12, 2007

VES-3-RR:BSTC:CCI H003776 rb

CATEGORY: CARRIER

Thomas Z. Cheplo
Blank Rome LLP
The WaterGate
600 New Hampshire Avenue, NW.
Washington, DC 20037

RE: Coastwise trade; Continuity of transportation; Merchandise transported to Canada; Returned to United States; New and different product; Commingling; 46 U.S.C. 55102 (formerly 46 U.S.C. App. 883)

Dear Mr. Cheplo:

Your November 28, 2006, letter, with enclosures, requests a ruling on behalf of your client, Dow Chemical Company, to permit a proposed transportation of caustic soda “tank bottom” from Canada to the United States. Our response follows.

FACTS:

A company routinely ships caustic soda by foreign vessel from Freeport, TX, and Plaquemine, LA, to its facility in Trois Rivieres, Canada, where it is commingled in two storage tanks. The caustic soda is intended for sale to companies in Canada. About every 10 years, the tanks are cleaned and the caustic soda residue, called “tank bottom,” is removed. Heretofore, this “tank bottom” has been recycled at the company’s caustic production plant in Canada. However, that plant ceased operation in October 2006, prior to the removal of “tank bottom” from a tank at the Trois Rivieres facility. This “tank bottom” has since been stored in two rail cars. Efforts to sell this “tank bottom” in Canada have been unsuccessful because its chemical composition is markedly different from that of the prime caustic soda. The company now wants to ship this “tank bottom,” either by foreign vessel or rail, to Midland, MI, for use as an agent in a company wastewater treatment plant.

ISSUE:

Whether the caustic soda “tank bottom” may be shipped from Canada to the United States without violating 46 U.S.C. 55102 (formerly 46 U.S.C. App. 883).

LAW AND ANALYSIS:

Under 46 U.S.C. 55102 (recodified from former 46 U.S.C. App. 883; Pub. L. 109-304, October 6, 2006), no merchandise may be transported by water, or by land and water, between points within the United States embraced within the coastwise laws, either directly or by way of a foreign port, or for any part of the transportation, in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States.

This case involves a possible transportation that would take place between two coastwise points (from Freeport, TX, or Plaquemine, LA, to Midland, MI, by way of Canada). To be permissible under section 55102, the continuity of this transportation must have been broken in Canada.

Continuity of Transportation

As stated in 34 Op. Atty. Gen. 355, at 363, when merchandise is transported in a foreign vessel from an American port to a Canadian port “without existing intent on the part of those responsible for the transportation that [the merchandise] shall be transshipped to an American port...[w]hether the subsequent transportation of such [merchandise] to an American port is a violation of [section 55102] must be determined by the existing facts in each case.” Specifically, to avert such a violation, the continuity of the transportation must be affirmatively shown by the existing facts to have been broken in Canada, with no intention on the part of any of the parties involved that the merchandise would subsequently be returned to the United States. Customs Bureau telegram of February 23, 1973 (HQ 100381). In short, there must some affirmative action which reflects an ‘honest intention to bring [the merchandise] into the common stock of [Canada],’ ibid., at 359 (quoting The Bermuda, 70 U.S. 514, at 554 (1866)).

To this latter end, for example, in HQ 100381, supra, which is alluded to and favorably discussed in HQ 104277, of November 20, 1979, two instances of actions were given which, it was said, could be enough to break the continuity of transportation of the involved merchandise (grain): (1) Sale of the grain in Canada to a buyer who takes possession and enters it into the commerce of Canada; or (2) Sale to a foreign buyer who takes possession of the grain which is about to be exported but which is thereafter sold to buyers in the United States “to meet emergency conditions.”

Additionally, in HQ 116518, of August 9, 2005, cited by the company, corn grain was sold to buyers in Japan, and, after being unladed there, the continuity of its transportation was broken when the Japanese Government refused to permit entry of the grain due to its genetic content, of which the Japanese purchasers and the original U.S. sellers had theretofore been unaware “and never would have undertaken the transactions in the first place if they had any knowledge of the [genetic] content.” Similarly, in HQ 116424, of March 25, 2005, also cited by the company, wheat had been sold to a foreign purchaser, and after it had been unladed at the foreign port of destination, the purchaser was unable to use the wheat due to its unintended and accidental failure to meet the necessary, contracted-for specifications, which, due to this mishap, resulted in the wheat being rejected by the purchaser, and its transportation being interdicted, at that foreign destination.

Yet, at variance with the foregoing decisions, the caustic soda “tank bottom” in this case was never sold to any Canadian purchaser, or to any other foreign purchaser; moreover, the gradual buildup, over time, of the caustic soda “tank bottom” was the inevitable outcome - well known in advance - of its anticipated extended storage in the company’s holding tank in Canada. Again, this is in stark contrast with HQs 116518 and 116424, supra, where previously unknown/unintended characteristics concerning the goods were only discovered following their sale to a foreign purchaser; such belatedly-discovered characteristics rendered the goods unuseable in the manner originally intended, and thereby resulted in the subsequent rejection of the goods, by the purchaser in the foreign country.

Furthermore, the foreknowledge in this case that some of the soda would inevitably deteriorate into “tank bottom” during the storage period also sharply contrasts with HQ 103281, of January 31, 1978, cited by the company and relied upon in HQ 116424, supra, where gasoline was abruptly and unintentionally contaminated with other fuel while being unladed at the foreign port - an unforeseen accident which effectively severed the continuity of transportation of the gasoline at that foreign port.

Storage/Intent to Sell Caustic Soda in Canada; Occurrence of “Tank Bottom”

Accordingly, merely storing merchandise, with the intent to sell it, in Canada (and not to transship or return it to the United States), as in the instant case, would not, by itself, be sufficient to break the continuity of transportation between coastwise points. See HQ 109475, of October 4, 1988 (continuity of transportation not broken where fertilizer shipped by company to Canadian subsidiary for warehousing and sale in Canada and sales contracts specified “not for resale in the United States”); and HQ 100381, supra (shipment of grain by foreign vessel from United States to Canada “merely for warehousing and eventual sale to Canadian or foreign buyers will subject [the] grain to forfeiture under section 883, title 46, United States Code [now 46 U.S.C. 55102], if thereafter transported to a place in the United States”). See also 32 Op. Atty. Gen. 350 (1920) (transporting frozen fish from Ketchikan to Vancouver and to points in United States was continuous (not broken at Vancouver) since fish merely warehoused in Vancouver “for long periods of time” pending sale and consumption elsewhere and it was generally known that Vancouver was not “ultimate destination” of fish).

In addition, it is equally clear, as already indicated, that the degradation of a portion of the caustic soda herein (into caustic soda “tank bottom”) during prolonged storage would not merge such merchandise into the commerce of Canada so as to terminate the transportation there. Further solidly buttressing this conclusion is HQ 108834, of February 13, 1987, where corn sent from the United States to Canada for storage and export to other foreign markets was, after more than a year in storage, in danger of spoilage. No foreign market existed for the corn at that point, apparently due to its degraded condition, and it was proposed to move the corn by foreign vessel from Canada back to the United States for processing to salvage it. The proposed shipment of the corn to the United States in those circumstances was held to violate the coastwise law. It was thus implicit in HQ 108834 that the degradation of the corn while in storage did not merge such corn into the commerce of Canada so as to effect a break in its transportation.

New and Different Product

Legally, the subject caustic soda “tank bottom” does not represent a new and different product as required within the meaning of 19 CFR 4.80b(a). Plainly, under § 4.80b(a), such a product must actually be manufactured or processed at an intermediate foreign or non-coastwise point; by contrast, the caustic soda “tank bottom” that was removed from the storage tank in Canada did not result from any processing or manufacture of the product. Compare also, HQ 108834, supra (the spoilage/degradation of corn while in storage).

In addition, from a technical standpoint, in comparing the prime caustic soda with the caustic soda “tank bottom,” it has been determined that the “tank bottom” is not a different product, but rather a much lower-grade (soiled) version of the same product (caustic soda solution).

Commingling; Shipment Deemed Returned to Same U.S. Port

Alternatively, the company asks that it be allowed to transport the caustic soda “tank bottom” to either Freeport, TX, or Plaquemine, LA, and that this caustic soda simply be deemed to have been transported back to the same coastwise point from which it was initially shipped to the company’s storage facility in Canada, provided that the amount shipped to that coastwise point does not exceed the amount that was transported therefrom to the storage facility in Canada. (To implicate section 55102, merchandise must be shipped between two coastwise points, rather than back to the same point.) As analogous support for this proposal, the company relies on HQ 114172, of June 18, 1998, HQ 115762, of September 3, 2003, and HQ 116515, of August 9, 2005.

In HQ 114172, however, it was held that a quantity of caustic soda shipped on both coastwise- and non-coastwise-qualified vessels from the United States to Canada and there commingled in storage could be returned to the United States without violating former section 883, provided it could first be documented that an amount of the soda at least equal to that transported on the non-coastwise-qualified vessels was sold foreign (accord, HQs 115762 and 116515, supra).

As such, the ruling in HQ 114172 (and the other two referenced rulings based thereupon) in connection with the commingling of merchandise may not properly be adapted to the current situation. In brief, the paramount purpose underlying the foreign sales requirement which is inextricably imbued in those rulings is that “action must be taken to alleviate Customs’ concern that an amount of the product equal to that transported on non-coastwise-qualified vessels will end up back in this country” (HQ 115762, supra (emphasis added)). Hence, in the case at hand, since all the caustic soda in storage at the company’s facility in Canada was shipped from the United States on foreign (non-coastwise-qualified) vessels, the precedent upon which the company analogously seeks to rely herein would mandate that all its caustic soda in storage be sold foreign, and that none of it be permitted back (anywhere) in the United States without violating section 55102.

HOLDING:

Under the circumstances presented, the subject caustic soda “tank bottom” may not be shipped from Canada to the United States without violating 46 U.S.C. 55102 (formerly 46 U.S.C. App. 883).

Sincerely,

/S/ Glen E. Vereb

Glen E. Vereb

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