HQ 219492: Dutiability of foreign crude oil used as fuel in a refinery subzone.

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                                   HQ 219492


                                  July 3, 1989

          FOR-1-CO:R:C:E 219492

          CATEGORY:  Foreign Trade Zones

          Mr. Hector Diaz
          Conoco, Inc.
          Post Office Box 2197
          Houston, Texas 77252

          RE:  Dutiability of foreign crude oil used as fuel in a refinery
               subzone.

          Dear Mr. Diaz:

               This is to follow up on your letters dated November 18, 1986
          and our response of March 3, 1987, which concern the dutiability
          of foreign crude oil used as fuel in a foreign trade zone (FTZ)
          and the appropriateness of Conoco's proposed inventory control
          system.

          FACTS:

               Conoco Oil Company requested a ruling on the issue of
          whether foreign crude oil imported into a foreign trade subzone,
          partially processed and refined and therein consumed as a
          secondary and supplemental source of fuel in the refining
          process, would be exempt from duty.  At the time the request was
          made, Conoco had an application for a refinery subzone pending
          before the FTZ Board.  Conoco proposed to use gas, produced at
          three different stages in the refining process, as an energy
          supply for the refinery's heater furnace.

               Some of the gas, produced in the distillation unit, would be
          a direct byproduct of the crude oil fed into that unit; the
          remaining gas, produced in the fluid catalytic cracker and the
          coker, would be a byproduct of the hot oil left over from the
          distilling of the crude oil in the distillation unit.  All of the
          gas would be a derivative of the imported foreign crude oil.  The
          streams of gas channeled back to the heater furnace for feedstock
          would be measured and controlled throughout the refining process.

               Conoco Oil Company submitted a proposed inventory control
          system for approval by the Customs Service.  The subzone
















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          application was approved by the FTZ Board in December, 1988.
          Certain conditions, including a provision that foreign crude oil
          used as fuel for the refinery process shall be dutiable, were
          attached to the grant.

          ISSUE:

               1)  Whether derivatives of foreign crude oil imported into a
          refinery subzone, that are used therein as a secondary source of
          fuel in the refining process, are exempt from duty
          notwithstanding the fact that the subzone grant requires that
          foreign crude oil used as fuel for the refinery process shall be
          dutiable; and

               2)  Whether the inventory control system submitted by Conoco
          meets the Customs Service's requirements.

          LAW AND ANALYSIS:

               The issue of whether Conoco would be permitted to use
          partially processed and refined crude oil free of duty as a
          secondary source of fuel in the refining process within the zone,
          was effectively addressed in the subzone grant dated December 16,
          1988.  Specifically, the FTZ Board, exercising its broad powers
          to place restrictions on zone activity, stated that foreign crude
          oil used as fuel for the refinery shall be dutiable.  This
          restriction would appear to apply to distillates of imported
          crude oil as well as to the crude oil itself, because a narrower
          interpretation would all but render the restriction meaningless:
          it may not be possible to use raw crude oil as a fuel source, and
          if duty were assessed only on crude oil, the zone operators could
          import other fuels into the zone or use processed crude products
          to circumvent the restriction.  Any questions on this
          interpretation should be referred to the FTZ Board.

               You cite Hawaiian Independent Refinery v. United States, 81
          Cust. Ct. 117 (1978) (HIRI) as precedent for the proposed fuel
          use by Conoco.  That case held, in part, that foreign crude oil
          imported into a foreign trade zone, partially processed and
          refined and therein consumed and used as a secondary and
          supplemental source of fuel in a refining process, was not
          subject to duty under the Tariff Schedules of the United States.
          Although the circumstances are similar, several factors would
          militate against the application of the holding of HIRI to the
          Conoco subzone:  first, while the court noted that the Hawaiian
          subzone grant was in no way conditioned upon use of duty-paid
          fuel to serve as a source of heat in the refining process,
          Conoco's grant does contain such a condition.  Furthermore, as
          footnote 11 of the decision and the 36th Annual Report of the












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          Foreign Trade Zones Board to the Congress observed, the HIRI
          refinery's total dependence on foreign sources of fuel was unique
          and, as such, the zone grant would not be precedential for
          similar zone sites in the continental United States.  In
          contrast, Conoco's subzone is situated on the U.S. mainland in
          the midst of a readily available supply of domestic energy
          resources.  C.S.D. 79-418 indicated that the ruling in HIRI would
          apply strictly to the factual situation in that case, and the
          differences outlined above demonstrate that its application would
          be inappropriate in the Conoco subzone.

               The court went on to state that it was not deciding whether
          the use to which the oil was put was an authorized activity under
          the Foreign Trade Zones Act; it emphasized that that was the task
          of the FTZ board.  The recent decision in Nissan Motor Mfg.
          Corp., U.S.A. v. United States, 693 F.Supp. 1183, Slip Op. 88-108
          (CIT 1988) did, however, attempt to address what constituted a
          permissible activity within a subzone.  The court in Nissan
          reviewed the Foreign Trade Zones Act and the relevant legislative
          history and found that machinery and related capital equipment
          imported to produce merchandise in a foreign trade zone were
          subject to duty.  Although this case is currently under appeal,
          we find the trial court's interpretation of the dutiability of
          production equipment under the Foreign Trade Zones Act to be an
          indication that that the activity proposed by Conoco would be an
          impermissible operation.

               Finally, it is the policy of the U.S. Customs Service to
          allow individual zones to adopt their own inventory control
          systems within the guidelines established by the government.  See
          Treasury Decision 86-16.  Inventory guidelines are set out in
          Subpart B, Part 146 of the Customs Regulations (19 CFR 146).  A
          zone operator may seek a non-binding ruling from the district or
          a binding ruling from Customs headquarters on a particular aspect
          of a proposed inventory control and recordkeeping system, but
          Customs will not review any system in its entirety to render an
          opinion as to whether it meets all of the requirements of 19 CFR
          146.

          HOLDING:

               1)  A restriction placed on the zone grant by the FTZ board
          controls and a prohibition against use of crude oil as duty-free
          fuel in a foreign trade subzone applies to derivatives of crude
          oil.

               2)  The Customs Service will review particular aspects of a
          proposed inventory control system at the request of the zone













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          operator, but will not review any system in its entirety to
          render an opinion as to whether it meets all the requirements of
          19 CFR 146.

                                              Sincerely,




                                              John Durant
                                              Director, Commercial
                                              Rulings Division