Substitution of Petroleum Derivative and Drawback of MPF

November 18, 2004

Substitution Petroleum Derivatives and Drawback of Merchandise Processing Fees:

Texport and the Bureau of Customs and Border Protection’s Amended Regulations

Eric W. Lander

Some goods enter the United States for consumption. Others goods enter and go unused, are rejected, or are transformed through a manufacturing process--these goods, or substitute goods, are then often exported. Congress allows exporters of these goods to receive a refund or "drawback" of up to 99 percent of "any duty, tax, or fee imposed under Federal law because of [the merchandise’s] importation." 19 U.S.C. § 1313(j)(2). The statute further provides for substitution drawback if the exported goods are "commercially interchangeable with such imported merchandise." Id. The completed, transformed, or substituted goods must be exported within three years from the date of importation of the merchandise. Drawback enables a domestic manufacturer to export to and compete in foreign markets without having to compensate for the increased cost of doing business stemming from the duty paid on imported raw materials or merchandise used in the manufacture of the exported goods.

In Texport Oil v. United States, 185 F.3d 1291 (Fed. Cir. 1999), a case argued by Barnes, Richardson & Colburn, the Court of Appeals for the Federal Circuit ruled on several issues relating to drawback on petroleum products. Of importance here is the Federal Circuit’s decision regarding the issue of whether payments of the Merchandise Processing Fee ("MPF") were imposed "because of importation" and thus subject to the drawback rules under 19 U.S.C. § 1313(j)(2). A merchandise processing fee is a fee assessed as a percentage of the value of the imported goods and collected for the processing of merchandise that is formally entered or released into the United States. See 19 U.S.C. § 58c(a)(9)(A). The Texport appeals court agreed with the Court of International Trade on this issue, determining that the MPF was eligible for drawback. According to Texport, 19 U.S.C. § 1313(j)(2) authorizes drawback refunds when (1) the fee paid is "any duty, tax, or fee assessed under Federal law" and (2) the fee is assessed "because of importation." In this case, in contradistinction to the disagreement as to the harbor maintenance tax, the court concluded and the parties did not seem to dispute that these conditions were met for MPF.

The issue then came before the United States Bureau of Customs and Border Protection ("CBP") as to how it would amend its regulations to make them consistent with Texport. In 2002, the CBP amended the Customs Regulations §§ 191.3 and 191.51 so that MPF are eligible to be claimed as unused merchandise drawback. See 67 Fed. Reg. 48,547 (July 25, 2002). Then in October of 2003, CBP once again proposed amending its regulations this time to encompass drawback on the substitution of finished petroleum derivatives. See 68 Fed. Reg. 56,804 (October 2, 2003). After accepting comments on the proposed amendments, CBP adopted these new regulations without change on October 7, 2004. See 69 Fed. Reg. 60,082; 19 C.F.R. § 191.171(c).

In amending the regulations CBP reasoned that the statutory language applicable to unused merchandise drawback equally applied to substitution drawback of finished petroleum derivatives. Subsection (p) of 19 U.S.C. § 1313 provides for drawback of substituted petroleum derivatives. That subsection also limits drawback to an amount that would be available had the "claim qualified for drawback under subsection (j)." The link between subsection (p) and (j), according to CBP, signifies that drawback is payable under either provision pursuant to the same formula.

Under the Texport case and now the CBP regulations, importers of petroleum derivatives who substitute "an article . . . of the same kind and quality" in the manufacturing process will be eligible for drawback, including MPF, when the substitute article is exported. According to 19 C.F.R. § 191.51(b)(2), when seeking drawback for a MPF paid, the claimant must apportion the fee to that merchandise that provides the basis for drawback. The drawback claimant must first determine the relative value ratio for each line item of the Customs Form 7501. This is calculated by dividing the value of the line item subject to the MPF by the total value of the subject merchandise subject to the MPF. Next, the drawback claimant is required to apportion the MPF to each line item by multiplying the relative value ratio, the result of step one, by the amount of MPF paid on each line item. The third step involves determining the portion of the fee attributable to each line item that is eligible for drawback by multiplying the result of step two by .99. Finally, the MPF eligible for drawback per unit of merchandise is calculated by dividing the results of step three for a particular line item by the number of units in that line item. See 19 C.F.R. § 191.51(b)(2).