HQ 222782: Application for further review of Protest #3201-9-100140concerning duties paid on barrels of crude oil subject tovolumetric expansion

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 222782

                           May 2, 1991




FOR-2-05 CO:R:C:E 222782 TLS

CATEGORY: Entry; Protests

District Director
U.S. Customs Service
P.O. Box 1641
Honolulu, Hawaii  96813

RE: Application for further review of Protest #3201-9-100140
concerning duties paid on barrels of crude oil subject to
volumetric expansion


Dear Sir:

     We have received your memorandum dated August 2, 1990,
requesting further review of the above-mentioned protest.  We
have considered the points you have raised as well as those of
the importer.  Our comments are detailed below.

FACTS:

     The protestant operates a foreign-trade subzone (FTZ) in
Hawaii.  It admits, among other things, barrels of crude oil into
the zone under privileged foreign (PF) status.  The crude oil is
processed into various petroleum products once admitted to the
FTZ.  Some of the oil is vulnerable to volumetric expansion due
to the refining process used in those cases.  Volumetric
expansion or shrinkage is a commonly-known phenomenon that occurs
when the molecular structure of a petroleum product changes,
causing that product to increase (or decrease) in volume while
maintaining the same weight.

     The Honolulu district has maintained a policy of charging
duties on the petroleum products after factoring in the increase
in volume due to volumetric expansion or shrinkage.  This results
in the protestant paying duties on a volume measurement beyond
that originally posted for the petroleum as it is admitted into
the zone if expansion occurs.  Customs Honolulu claims that the
accounting method used for the Hawaiian Independent Refinery,
Inc. (HIRI) accounts for petroleum in volume, which tends to
expand (or shrink), rather than by weight, which remains
constant.  The protestant argues that the volume measurement of
the crude oil as it is admitted into zone should be determinative
of how much duties are paid on the entry.

ISSUE:

     Whether petroleum that is vulnerable to volumetric expansion
during processing should be dutiable at its volume measurement at
the time it is admitted to a foreign trade zone under privileged
foreign status or at its measurement after expansion (or
shrinkage) might have occurred.

LAW AND ANALYSIS:

     The Foreign Trade Zone Act (19 U.S.C. 81 et. seq.) is the
controlling statute for FTZ operations.  Section 81c of the
Tariff Act of 1930 provides, in part, the following;

     ...whenever [foreign] privilege (status) shall be
     requested and there has been no manipulation or
     manufacture effecting a change in tariff
     classification, the appropriate customs officer shall
     take under supervision any lot or part of a lot of the
     foreign merchandise and cause it to be appraised and
     taxes determined and duties liquidated thereon.  19
     U.S.C. 81c (1990). (emphasis added.)

Section 146.65 of the Customs Regulations provides that
privileged foreign merchandise will be subject to classification
according to, inter alia, quantity, at the rate of duty in force
on the date of filing for the status.  It further states that
dutiable value shall be determined by the transaction price of
the merchandise leading to the admittance of the goods to the
zone.  19 CFR 146.65(b)(2) (1990).  These provisions establish
the authority of the appropriate customs officials to appraise
and account for the admitted goods so that duty might be charged. 
They also seem to establish that the duties should be based on
the status of the merchandise at the time it is admitted to the
zone.  At any rate, they do not indicate an accounting for a
possible change in status after admittance.  In fact, 19 CFR
146.41(e) provides that merchandise under privileged foreign
status remains under that designation even if physical changes
have occurred through the manufacturing process.

     In the present case, the changes that sometimes occur do so
as a result of the refining process that takes place in the zone. 
The process could lead to a higher net volume than that
originally documented in the zone operator's original application
for admittance.  This does not take place until after the
privileged foreign status has been placed on the merchandise,
however.  To the extent that such status is unconditional and
cannot be changed under these circumstances, the question is
whether all other determinations, rate of duty in particular, is
fixed consistent with the status.

     Customs has addressed this issue before.  A 1979 Customs
Service Decision held that foreign merchandise taken into an FTZ
and given the status of foreign privileged merchandise is
dutiable at the rate effective on the date of application for
status.  C.S.D. 79-464 (June 5, 1979).  The Service further held
that this is true even if the merchandise is changed in form by
manipulation or manufacture while in the zone.  Id.  The only
exception to this rule is waste from privileged foreign
merchandise is considered nonprivileged foreign merchandise under
19 CFR 146.42(b).  This provision is outlined under section
146.41(e) of the Customs Regulations as discussed above.

     In the present case, the merchandise, crude oil, was
admitted to the zone upon application and received privileged
foreign status.  The crude is to be refined while in the zone and
several petroleum products are to be produced from the refining
process.  The protestant contends that the crude oil is
vulnerable to a phenomenon called "volumetric expansion," in
which the process used to refine the oil into petroleum products
causes the total volume of the sum of all the products combined
to expand from the original volume of the crude oil.  For
example, 100 gallons of crude oil could produce 110 gallons of
petroleum products because of volumetric expansion.  The validity
of this fact is corroborated by a technical report published by
the American Petroleum Institute.  The report reads in pertinent
part as follows:

     Processing Gain- the volumetric amount by which total
     output is greater than input.  This difference is due
     to the processing of crude oil into products which, in
     total, have a lower specific gravity than the crude oil
     processed.  Therefore, in terms of volume (barrels),
     the total output of products is greater than input. 
     American Petroleum Institute, Standard Definitions for
     Petroleum Statistics, Technical Report No. 1 (4th ed.
     1988).

Your office contends that the duty charged in this case should be
based upon the total volume of the products that are produced
from the crude oil rather than from the volume of the crude oil
itself.  We disagree.

     The law is well stated on this issue.  Both section 146.65
and 146.41 of the Customs Regulations provide in plain terms that
merchandise admitted to an FTZ under privileged foreign status is
dutiable at the rate applicable at the time of application for
status and such status cannot be changed once designated except
for one provision under section 146.42.  That exception,
concerning waste from manipulation or manufacture of privileged
foreign merchandise in a zone, does not apply in this case. 
There is no waste involved here.  Furthermore, C.S.D. 79-464
follows the letter of the stated law and finds no other
exceptions or qualifications.  We find none applicable to the
present case as well.  Therefore, we must find that the crude oil
in this case is dutiable on the quantity admitted into the
foreign trade zone at the rate effective on the date of
application to the zone.  Such rate cannot be changed once
foreign privileged status is designated.

     We understand the concern for maintaining a true and
accurate accounting system for the FTZs.  To the extent that your
office wishes to ensure the accuracy of the system under these
circumstances, the actual physical amounts leaving the zone after
processing can be checked against the corresponding amounts
admitted to the zone through conversion tables.  Relative value
calculations should be adhered to when checking the total volume
of the end products against the volume of the crude from which it
was derived.

HOLDING:

     The crude oil admitted to the foreign trade zone under
privileged foreign status is dutiable at the rate in effect on
the date of application for such status and cannot be changed
after the status has been designated.  This remains true even if
the volume of the crude oil is changed through manipulation or
manufacture while in the zone.  You are instructed to allow this
protest in full.

                              Sincerely,




                              John Durant, Director