Industry News

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.