HQ 221059: Protest and Application for Further Review No. 1001-3-009097; warehouse; shortage of distilled spirits; 19 CFR 158.3;19 CFR 159.4; Manual Supplement 3260-03

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 221059

                        November 7, 1990

PRO-2-02 CO:R:C:E 221059 C

CATEGORY:  Entry/Liquidation 

Area Director of Customs
U.S. Customs Service
New York Seaport

RE:  Protest and Application for Further Review No. 1001-3-
009097; warehouse; shortage of distilled spirits; 19 CFR 158.3;
19 CFR 159.4; Manual Supplement 3260-03

Dear Sir:

     This responds to the referenced protest, approved for
further review on November 3, 1988.  The protest pertains to
several entries against which increased duties were assessed in
the amount of $112,288.17 for various violations described in the
protest as follows:

          1. The importer failed to file a CF 5931 with
          Customs Quantity Control for merchandise found
          short, as required by 19 CFR 158.3;

          2. the importer failed to provide proof of
          transportation and/or exportation for various
          uncertified CF 7512's, as required under the entry
          bond;

          3. the importer failed to file certificates of use
          for various uncertified CF 7506's (vessel
          supplies), as required under the bond;

          4. the importer failed to provide withdrawal
          documentation and proof of payment and/or
          exportation for merchandise removed from the
          warehouse but not accounted for, as required under
          the bond.

     The protest, as submitted, lacks a complete, comprehensive
explanation of the facts.  Consequently, our understanding of the
scenario in question is set forth below with reservation.  For
the purposes of this protest, we will treat the following
scenario as accurate.  Our response is formulated on this basis.

          The protestant imported and entered for warehouse
          distilled spirits in bottle containers packed in
          cases. The protestant withdrew the merchandise for
          consumption, as well as for other purposes.
          Apparently, a shortage of merchandise was evident.
          The protestant did not file certain documents, as
          desired/expected by Customs. Consequently, Customs
          imposed liability against protestant for increased
          duty and taxes. Protestant asserts that it is not
          so liable because its liability is limited to the
          quantity of merchandise withdrawn for consumption,
          and, therefore, it is not liable for duty and
          taxes on any measure of shortage that occurred
          while the merchandise was in the warehouse. 
          Customs asserts that the merchandise in question
          does not qualify for the favored treatment urged
          by protestant, and that, therefore, both
          protestant, as importer, and the warehouse
          proprietor are liable for shortages under their
          respective bonds.

     The issue presented appears to focus on a shortage of
distilled spirits occurring while the spirits were in the
warehouse.  Protestant and Customs disagree over how such
shortage should be treated with respect to duty and tax
liability.  Protestant stated the following in its protest
submission: "We protest the liquidation of this entry with the
assessment of duty and internal revenue tax on four cases of
distilled spirits that were not entered or withdrawn for
consumption."  You concluded your remarks on the protest by
stating that "Customs acted well within its authority in
assessing increased duties and taxes for the importer's failure
to adhere to 19 CFR 158.3 as well as the terms of his entry
bond."  Section 158.3 of the Customs Regulations (CR) provides
for an allowance in the assessment of duties for lost or missing
packages.  The regulation requires the filing of a CF 5931.  It
is unknown how the shortage, or loss, occurred.

     The protestant cites Customs Manual Supplement 3260-03
(dated April 16, 1980), CSD 81-82, and Customs Regulation
159.4(a) to support its position.  Essentially, protestant urges
that distilled spirits are accorded favored treatment under the
regulations, such that an importer of distilled spirits is not
liable for shortages that occur while the spirits are in the
warehouse.  You appear not to disagree with the substance of the
above authorities, but, rather, assert that they apply only to
distilled spirits packed in bulk containers, or "bulk distilled
spirits," not to protestant's non-bulk, bottled and cased liquor.

     We agree with protestant's application of the above
authorities to the scenario of this case.  Customs, through the
Secretary of the Treasury, promulgated {159.4(a) of the Customs
Regulations.  It provides, in relevant part, that duties and
internal-revenue taxes on alcoholic beverages provided for in
headings 2207 and 2208 of the Harmonized Tariff Schedule of the
United States (HTS) "shall be collected only on the number of
proof gallons and fractional parts thereof entered or withdrawn
for consumption."  19 CFR 159.4(a).  (The bottled distilled
spirits that are subject of the instant case are classifiable
under heading 2208.)  No distinction is made between bulk and
non-bulk spirits.  Yet, the regulation goes on to specifically
address "distilled spirits in bulk" that are transferred to
bonded distilled spirits plants.  Based on the structure and
language of the regulation, it is clear that the foregoing
provision (pertaining to alcoholic beverages under headings 2207
and 2208, HTS) is not limited to bulk spirits.

     Section 159.4(a) was promulgated to implement what is now
Additional U.S. Note 1, Chapter 22, Harmonized Tariff Schedule of
the United States (HTS) (Note 1).  (Under the Tariff Schedules of
the United States (TSUS), Headnote 3, Part 12, Schedule 1.)  Note
1, in part, provides that duty will be assessed against the
quantity of bulk spirits withdrawn from Customs custody.  Both
you and protestant cite this provision in support of your
respective positions.  Yet, this provision applies only to
merchandise imported in bulk containers and transferred in such
containers (or by pipeline) to bonded distilled spirits plants. 
This situation is not applicable to the instant case.  However,
Note 1, again in part, provides that duties imposed on covered
products are imposed only on the quantities subject to internal-
revenue taxes.  Internal-revenue taxes are assessed against
distilled spirits that are subject to such taxes upon withdrawal
of the spirits for consumption.  Thus, duties, like taxes, above,
can be assessed against no more than the quantity of spirits
withdrawn.  This comports with {159.4(a), as above.

     In 1980, when Supplement 3260-03 was issued, {159.4(a) was,
in essential part, the same.  The supplement, applying {159.4(a),
stated the following:

          Distilled spirits are treated differently from any
          other imported commodity in that duties and taxes
          are assessed only on the quantity entered or
          withdrawn for consumption (19 CFR 159.4(a)). Since
          an importer of distilled spirits entered for
          warehouse is liable for any duties and taxes on
          the amount withdrawn therefrom, he is not liable
          for any duties and taxes on shortages that occur
          while the spirits are in the warehouse.

          A warehouse proprietor, on the other hand, is
          responsible for shortages of distilled spirits (as
          he is for shortages of any merchandise) which
          occur while the spirits are in his warehouse.
          Liquidated damages for such shortages may be
          assessed against the proprietor under 19 U.S.C.
          1555 and conditions . . . of [the proprietor's
          warehouse bond].
          
          Shortages of bottled distilled spirits are
          relatively easy to ascertain and measure through
          physical examination of the shipment.  Shortages
          of bulk distilled spirits require quantity
          determination by gauging. 'Bulk distilled
          spirits', for the purpose of this issuance, means
          distilled spirits in a container having a capacity
          in excess of 1 wine gallon.

     Again, in quoted paragraphs 1 and 2 above, no distinction is
made between bulk and non-bulk distilled spirits.  If importers
were deemed liable for non-bulk shortages, that information would
have been set forth in paragraph 1.  Moreover, the underlined
language in the third quoted paragraph further demonstrates
Customs (1980) position that non-bulk spirits qualified for the
same treatment as bulk spirits under the law and regulations to
the extent that liability accrued on no more than the quantity
withdrawn for consumption, for surely if the importer were liable
for shortages occurring to non-bulk spirits, as opposed to bulk
spirits, as you contend, the supplement would have recommended
the procedures for such shortages for the importer's use, not
just for the proprietor's use.  The language of paragraph 3
regarding these procedures, for both bottled and bulk distilled
spirits, is addressed only to the proprietor.  This paragraph,
considered together with paragraphs 1 and 2, clearly supports the
notion that importers are not liable for either bulk or non-bulk
shortages.  

     It is evident from the above quoted paragraphs that the 
hereinbefore submitted interpretation of {159.4(a), as well as
that urged by protestant, is harmonious with Customs
interpretation of the regulation as far back as 1980.

     In CSD 81-82, Customs recognized the correctness of
Supplement 3260-03.  Although the ruling did not contain
reference to {159.4(a), it applied Headnote 3, Part 12, Schedule
1, TSUS, what is now Note 1.  Customs therein stated the
following:

          By virtue of the act of June 8, 1948, Public Law
          612, the substance of which is set forth in
          headnote 3, part 12, schedule 1, . . . (TSUS) (19
          U.S.C. 1202), distilled spirits have been given a
          favored position with respect to payment of duty.
          Duty is payable only on the quantity withdrawn
          from the warehouse for consumption. . . . Thus, in
          the case of distilled spirits, the obligation of
          an importer to pay duty does not accrue on
          importation. As a statutory exception to 19 CFR
          141.1, an importer of distilled spirits is not
          liable for the payment of duty on spirits that are
          missing from the warehouse. However, there is a
          loss to the Government, and that loss is covered
          by the bond of the warehouse proprietor.

Cust. Bull., Vol. 15, p. 901, 903 (1981).

     Again, in CSD 81-82, Customs did not distinguish distilled
spirits from bulk distilled spirits; its statement applied to
both, in affirmance of Supplement 3260-03.  Moreover, there is no
such distinction evident in the language of Public Law 612 (June
8, 1948, 62 Stat. 344, 80th Cong. 2d Sess).

     Based on the foregoing, we conclude that distilled spirits
of the kind in question, classifiable under heading 2208.30.60,
HTS (and classified in 1983 under the predecessor to 2208.30.60,
item 169.2100, TSUS), are subject to {159.4(a), CR.  Qualifying
distilled spirits that are subject to internal-revenue taxes and
withdrawn for consumption are dutiable upon no more than the
quantity withdrawn.  The importer of qualifying distilled
spirits, in either bulk or non-bulk form, is not liable for the
payment of duty and taxes on shortages that occur in the
warehouse.  Where there is a loss to the Government, the
warehouse proprietor's bond secures such loss.

     You are instructed to apply our conclusion to the facts of
this case, review the status of alleged violations and increased
duty and tax assessments, and make appropriate modifications. 
Please notify protestant of this decision, and of your final
determinations based on this decision, as above.




                               Sincerely,




                               John Durant, Director
                               Commercial Rulings Division