FTZ Operator Does Not "Possess" Cars for Substitution Drawback

Jan. 11, 2022
By: Meaghan E. Vander Schaaf

CBP recently weighed in on the issue of “possession” in terms of substitution unused drawback (19 U.S.C. § 1313(j)(2)(C)(ii)) in HQ H302869. Customs ultimately found that acting as an FTZ operator does not satisfy the “possession requirement” of the substituted merchandise as required for substitution unused drawback merchandise claims. 

In the proposed transaction considered by CBP, BMW of North America, LLC (“BMW NA”) operates a foreign trade subzone (FTZ) which holds motor vehicles owns and exported by BMW Manufacturing Co., LLC. (“BMW MC”). BMW MC would waive its right to claim drawback on the designated merchandise and BMW NA would make the drawback claims. BMW NA would substitute the exported motor vehicles owned by BMW MC for motor vehicles imported and duty paid by BMW NA. BMW NA wanted CBP to confirm that BMW NA could satisfy the possession requirement under 19 U.S.C. § 1313(j)(2), because BMW NA operated the FTZ where the motor vehicles owned by BMW MC were stored prior to exportation.

The answer was no. First CBP reviewed the language of the requirements, noting that substitution unused merchandise drawback per 19 U.S.C. § 1313(j)(2) requires, inter alia, that the exported merchandise on which drawback is to be claimed,

is in the possession of, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback under this paragraph, . . . . 

19 U.S.C. § 1313(j)(2)(C)(ii). In analyzing this provision, the agency reviewed the legislative history of drafting the provision, the past Customs interpretations of the provisions, and the application of these to specific situations similar to the one proposed by BMW NA.

First, CBP found that Congress never intended to create a “market” for drawback rights. Citing H.R. Rep. No. 103-361(I), at 131 (1993), Customs found that the party claiming drawback,

“must either have paid the duties on the imported merchandise or have received from the person who imported and paid the duties on the imported merchandise a certificate of delivery for the imported merchandise, commercially interchangeable merchandise, or any combination thereof.”

Next, CBP reviewed the agency’s own interpretation of the “possession” requirement under 19 U.S.C. § 1313(j)(2). Citing C.S.D. 85-52 (Aug. 16, 1985). See also HQ 225166 (Apr. 10, 1996)., CBP found the term to mean “complete control over the articles or merchandise on premises or locations where the possessor can put the articles or merchandise to any use chosen.” CBP also reviewed certain circumstances where drawback may be claimed when the substituted merchandise is in the physical custody of another, such as bailment, if the claimant maintains complete control and dominion over the merchandise. However, CBP noted that physical custody of the merchandise is only an indication of guardianship, but “the key element in establishing possession… is that the possessor has ‘complete control’ and dominion over the exported merchandise.” (Citing HQ 225166, dated Apr. 10, 1996)).

In the end, CBP determined that Congress and CBP have consistently held that the requirement that a drawback claimant per 19 U.S.C. § 1313(j)(2) must both own and have control over the substituted goods. While BMW NA may have physical control of the merchandise, physical control is not equivalent to “possession” or complete dominion and control within the meaning of 19 U.S.C. § 1313 (j)(2). The owner of the goods retains dominion and control over the goods while the goods are entrusted to another, the bailee, and the bailee, such as an FTZ operator has any rights to the goods beyond that of a bailee. Consequently, in proposed transaction the FTZ operator BMW NA cannot not satisfy the “possession requirement” of the substituted motor vehicles as required for substitution unused drawback merchandise claims filed pursuant to 19 U.S.C. § 1313(j)(2). 

If you have questions about this ruling or about the requirements for drawback, please contact an attorney at Barnes, Richardson & Colburn.

 China Publishes Export Control White Paper

Jan. 11, 2022
By: Michael N. Coopersmith

On December 29, 2021, the State Council’s Information Office of the People’s Republic of China (China) published a white paper offering a wide-ranging analysis of China’s current export control legal and regulatory framework. The paper was published almost exactly one year after the implementation of the PRC Export Control Law in December of 2020. Following the release of the white paper the Chinese Ministry of Commerce (“MOFCOM”) issued a companion statement, while an unidentified MOFCOM official later gave an interview to Chinese media discussing both the white paper and the general importance of the PRC Export Control Law. Taken together the moves seem to indicate that Beijing remains serious about the further development of its own export control framework.

As previous discussed, the PRC Export Control Law can be seen in many regards as the Chinese equivalent of the US Export Administration Regulations (EAR). The Law lays the groundwork for controlling and ultimately limiting the export of both dual-use goods as well as military and defense goods, while mandating that a series of “control lists” are to be developed. With this in mind, and despite the Law going into effect more than one year ago, such lists have still yet to be published, meaning the ultimate impact imposed by the Law on exporters of Chinese goods cannot not be fully understood until all such lists are made public.

While the scope of controlled goods remains an unknown, the Law is clear as to the repercussions that may follow a violation. Under the Law those deemed to have exported controlled items without prior approval may be subject to item confiscation and fines of up to RMB 5 million or ten times the value of confiscated funds can be enforced, with the Law further stating that any violation(s) “shall be dealt with and punished” and that anyone found to have violated these provisions “shall be investigated for criminal responsibility.”

While the newly published white paper never directly references the United States, the paper makes clear that one key driver of Beijing’s recent push to further develop export controls is a series of external economic “challenges” it feels it is facing. According to an unofficial translation of the paper, as well as the follow-up MOFCOM statement, the “abuse of export control measures” and the “unreasonable implementation of discriminatory restrictive measures” currently being imposed by “individual countries” represents a key concern of Beijing’s, with a MOFCOM official later telling Chinese media that other nations have been “fabricating reasons out of thin air, using state power to intervene in normal trade and market transactions, and repeatedly abusing export control as a means of suppressing and bullying.” While the ultimate meaning of these statements cannot be entirely assumed, it does appear reasonably likely that they serve as a direct response to a recent tightening of export controls imposed by the US upon China

While it is yet to be seen if a substantial tightening of Chinese export control laws will come to fruition in the near future, if at all, it appears as if Beijing views the development of its own export control regime as an important step towards securing its economic interests. If you have any questions relating to export controls do not hesitate to contact an attorney at Barnes, Richardson & Colburn LLP.