HQ 220851: Dutiability of diesel fuel introduced into a foreign-trade subzone for use in the production of goods when such fuel is purchased from another subzone operator and transferred from one subzone to the other.

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 220851
                                  November 3, 1988



          FOR-2-03-CO:R:C:E 220851 BC

          CATEGORY: Foreign Trade Zones

          Mr. George Roberts
          District Director
          U.S. Customs Service
          Honolulu, Hawaii

          RE:   Dutiability of diesel fuel introduced into a foreign-trade
                subzone for use in the production of goods when such fuel
                is purchased from another subzone operator and transferred
                from one subzone to the other.

          Dear Mr. Roberts:

                This is in response to your request for internal advice,
          dated September 9, 1988, wherein you explained that Maui
          Pineapple Company, operator of Subzone 9D, intends to purchase
          fuel from Hawaiian Independent Refinery, operator of Subzone 9A,
          for use in its production process within the subzone.  The fuel
          will be transferred from one zone to the other.  Maui Pineapple
          Company requested a ruling regarding the tax and duty
          implications involved in the transaction.

          FACTS:

                A company operates a foreign-trade subzone (FTZ) within
          which it carries on the manufacturing/production of goods.  In
          order to supply its own energy needs, the company is installing
          generators in the zone.  The company intends to desist from
          purchasing energy from the local utility company, instead to run
          its generators on diesel fuel purchased from another subzone
          operator.  The diesel fuel is produced by this latter subzone
          operator within its subzone.  The company intends to have the
          fuel transferred under bond from one subzone to the other free
          from tax and duty liability.

          ISSUE:

                Whether diesel fuel, purchased by one subzone operator from
          another subzone operator, can be transferred free of taxes and
          duty from the subzone wherein it was produced to the subzone
          wherein it will be used to fuel generators which operate a
          manufacturing process.













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          LAW AND ANALYSIS:

                Customs Regulations permit the transfer of articles from
          one FTZ to another (19 CFR 146.66).  However, in view of the fact
          that the company seeks to admit the diesel fuel into the zone for
          the purpose of fueling its generators which operate its
          production apparatus in the zone, this fuel cannot be accorded
          the duty exemption provided in Section 3 of the Foreign Trade
          Zones Act of 1934 (19 U.S.C. 81c) (FTZA). As a consequence, an
          entry for consumption would have to be filed, as set forth in
          Customs Regulations 146.62(a) and 146.62(b)(2) (19 CFR 146.62(a),
          146.62(b)(2)).  Although the diesel fuel in question will be
          transferred from one zone to another, it will be "considered to
          have been constructively transferred to the Customs
          territory...". (19 CFR 146.61).

                C.S.D. 79-418 held that production equipment is not
          admissible into an FTZ free of duty.  The United States Court of
          International Trade recently held that production machinery and
          related capital equipment introduced into an FTZ are not exempt
          from duty.  Nissan Motor Mfg. Corp., U.S.A. v. United States,
          Slip Op. 88-108, 22 Cust. Bull., No. 39, p.32.  The holding of
          Hawaiian Independent Refinery v. United States, 81 Cust. Ct. 117,
          C.D. 4777 (1978), is not applicable to the facts of the proposed
          transaction since the proposed transaction involves the within-
          zone consumption of fuel which was not created/produced within
          the zone (as in the referenced case), but was imported from
          outside the zone.  C.S.D. 79-418 expressly limited the holding of
          Hawaiian Independent Refinery to the particular facts of that
          case, a proposition acknowledged with approval in Nissan Motor
          Mfg.

                19 U.S.C. 81o(e) provides an exemption from state and local
          ad valorem taxes on tangible personal property imported into an
          FTZ from outside the United States.  This provision appears to be
          inapplicable to the facts of the proposed transaction since the
          diesel fuel in question is not within the meaning of
          "merchandise" contained in the FTZA and codified in 19 U.S.C. 81a
          through 81u.  Outside of the foregoing, we do not herein attempt
          to offer interpretations impacting on the laws of any state.

          HOLDING:

                The transfer of diesel fuel from one FTZ, wherein it was
          produced, to another FTZ, wherein it will be used in the
          production of other articles (or products), is permitted under
          the Customs Regulations, but will involve the assessment and
          payment of duties as required upon the admission into an  FTZ of












                                       -3-


          production and related capital equipment, including supplies or
          similar products used in the production process.

                                              Sincerely,




                                              John Durant, Director
                                              Commercial Rulings Division