HQ 219495: Internal Advice Request Regarding the Use of a "Weighted Average Value Method" for Calculating Drawback Claims

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 219495

                                 September 18, 1988

          DRA-4 CO:R:C:E 219495 RB

          CATEGORY: Drawback

          Assistant Regional Commissioner, Operations
          Southwest Region
          U. S. Customs Service
          5850 San Felipe Street
          Houston, Texas 77057

          RE:  Internal Advice Request Regarding the Use of a "Weighted
               Average Value Method" for Calculating Drawback Claims

          Dear Sir:

               This is in reference to your request for internal advice
          dated June 9, 1987, regarding the acceptability of a
          so-called "weighted average value method" for calculating
          same condition drawback claims under 19 U.S.C. 1313(j)(1).
          Your office previously approved the use of this method by a
          company filing its same condition claims in the Southwest
          Region.  However, the company also prepared certificates of
          delivery in the same manner covering imported merchandise
          sold to another party claiming manufacturing drawback under
          19 U.S.C. 1313(b).

               The Pacific Region, where the manufacturing claims are
          filed, has, by memorandum dated March 24, 1987, opposed the
          use of the method in question, following an audit thereof.
          The company responded to the Pacific Region's memorandum by
          letter dated May 4, 1987.  In addition, in a letter dated
          April 12, 1988, the company, through its attorney, raised
          policy and constitutional arguments in order to obtain
          Headquarters ratification of its use of an average value
          methodology.  The company's January 8, 1987, letter,
          initially asking that you seek internal advice in this
          matter, was attached to your submission.

          FACTS:

               A company exclusively imports numerous types of
          semiconductor devices, approximately 15000 individual device
          types in all, falling into 29 different overall product
          lines.  A product line encompasses all those individual
          device types which have certain general characteristics in
          common, although they have different specific functions and
          specifications, as well as markedly different values, from
          one device type to another.  As such, one device type would
          not be fungible with another, nor is it alleged to be (19 CFR
          191.2(l)).


               The company exports about 4-5% of the devices it
          imports, and claims same condition drawback under 19 U.S.C.
          1313(j)(1) in the Southwest Region, using the accelerated
          payment and exporter's summary procedures (19 CFR 191.72; 19
          CFR 191.53; 19 CFR 191.141(d)).  It also supplies imported
          devices to its customer which claims manufacturing drawback
          under 19 U.S.C.  1313(b) in the Pacific Region.  The company
          states that the exported articles claimed under section
          1313(b) are produced by the customer with the very devices
          supplied which give rise to the claim, the devices being
          related thereto by means of their certificate(s) of
          delivery.

               The company, however, uses the existing information on
          its computer system data base to prepare its same condition
          claims as well as the certificates of delivery it issues for
          the devices supplied to its customer.  This data base lists
          the total quantity and value of the devices by product line
          and import entry; it does not record the quantity and value
          of the devices by individual device type.  Hence, the
          specific device types exported, or delivered and used in
          manufacture, are identified for drawback instead by product
          line, and assigned a "weighted average net unit value" which
          is computed by product line from a selected import entry.
          The entry selected for this purpose, notably, may not
          necessarily contain any of the same device types.

               By way of brief illustration, assume that 10 units each
          of device types "A" and "B," dutiable at $5. and $10.
          apiece, are imported under entry "1," and 10 units each of
          device types "B" and "C," dutiable, respectively, at $10. and
          $6. apiece, are imported under entry "2," all the device
          types falling into Product Line "X":  on the computer data
          base, this would be reflected merely as 20 Product Line "X"
          units worth $150.  imported under entry "1," and 20 Product
          Line "X" units worth $160. imported under entry "2." If 5 "C"
          units (dutiable at $6.  apiece) are later exported, entry "1"
          could be used to sustain a {1313(j)(1) claim, with a
          calculated "weighted average net unit value" of $7.50; if
          entry "2" is selected, the "value" would be $8. per unit.
          Either way, there would be a payment of drawback which
          exceeds the duty paid on the exported merchandise.

               The company admits in effect that certain claims may be
          overpaid in this way, but insists that "over time" the use of
          its methodology will be "revenue neutral." In contrast to
          this approach, valuation by individual device type would, at
          present, entail the company's having to retrieve the paper
          invoices which form a part of each import entry. The company
          contends that having to do this would be "costly," and
          prohibitively "time- consuming."


          ISSUE:

               Whether a "weighted average value method," as defined and
          employed in the circumstances of this case, is acceptable as a
          means of calculating claims under the same condition drawback
          law, 19 U.S.C. 1313(j)(1), or under the substitution
          manufacturing drawback law, 19 U.S.C. 1313(b).

          LAW AND ANALYSIS:

               Under same condition drawback, 19 U.S.C. 1313(j)(1), in
          pertinent part, "[i]f imported merchandise on which was paid
          any duty...because of its importation...is exported...then
          upon such exportation...99 per centum of the amount of...such
          duty...so paid shall be refunded as drawback" (emphasis
          added).  The mandatory regulations which implement the law in
          this respect provide that:  "An exporter-claimant who desires
          to export merchandise with drawback under 19 U.S.C.
          1313(j)...shall...  identify the import entry...under which
          the merchandise was imported into the United States" (19 CFR
          191.141(b)(1)), and, if the entry contains different
          merchandise, shall "identify with respect to that import
          entry ...the imported duty-paid merchandise" on which
          drawback is claimed (19 CFR 191.22(b)(2); and see 19 CFR
          191.141(e)).

               Similarly, under substitution manufacturing drawback, 19
          U.S.C. 1313(b), in pertinent part, if imported duty-paid and
          domestic or duty-free merchandise of the same kind and
          quality are used in the manufacture or production of
          articles, then upon the exportation of any such articles,
          drawback may be allowed, but "the total amount of drawback
          allow[able]...shall not exceed 99 per centum of the duty paid
          on such imported merchandise" (emphasis added) (also see 19
          CFR 191.2(b); 19 CFR 191.32(a)(1)).

               The plain language of the statute and attendant
          regulations, therefore, definitively precludes the use
          of an average value methodology for claiming same condition
          or manufacturing drawback on exported merchandise or
          articles, in circumstances where, as here, the use of such
          averages could result in an overallowance of drawback on the
          claim, i.e., a payment in excess of 99 per centum of the duty
          paid on the particular merchandise which is exported under
          {1313(j)(1), or received and used under {1313(b), and which
          may thus properly constitute the underlying focal point of
          the claim.  Each claim must, of course, comply with the law
          and regulations in this regard, whether it is filed on a
          single export shipment, or, periodically, on numerous ones,
          as drawback claims frequently are.


               Accordingly, against this backdrop, the company's
          representation that "over time" its method will be "revenue
          neutral" is without legal significance.  And,
          parenthetically, it is, in any event, so broad and indefinite
          as to essentially lack meaning.

               In short, the problem in this case, fundamentally, is
          that the information currently included on the company's
          computer data base, and used to prepare same condition claims
          and certificates of delivery (see 19 CFR 191.22(e)), is
          simply not sufficient for drawback purposes.  The specific
          device types in fact exported, or delivered and used in
          manufacture, which could lawfully qualify as the basis for a
          {1313(j)(1) or (b) drawback claim herein, cannot be
          identified, and the amount of duty attributable thereto
          ascertained, with respect to the import entry or entries
          under which they were imported, as required by law and
          regulation, in order to obviate a statutorily impermissible
          overallowance of drawback.

               Records which ensure against such an overallowance must
          consequently be used to support drawback claims,
          notwithstand- ing that doing so may be "costly and
          nonremunerative" (Bayer, Pretzfelder & Mills, Inc. v. United
          States, 39 Cust. Ct. 107, 110-111 (1957)). The Pacific Region
          has observed in this context that other companies dealing
          with this kind of merchandise have been able to maintain
          accessible records by device type and import entry
          satisfactory in its view to establish drawback compliance.

               It should be mentioned that Customs has, over the years,
          consistently disallowed proposals made along the very same
          lines as those advanced herein (see, e.g., Bureau letter
          dated January 10, 1963, to Supervising Customs Agent (SCA),
          Baltimore, re:  Burlington Industries, Inc.; Bureau letter
          dated May 23, 1951, to SCA, New Orleans, re: Haspel Brothers,
          Inc.).


                                Policy Considerations


               From the foregoing discussion, it may readily be seen
          that, contrary to the company's contention, the legal
          permissibility of its weighted average approach to claiming
          drawback is hardly a "close call," thereby undermining the
          foundation for the argument made in its attorney's April 12,
          1988, letter that drawback claims using its average value
          procedure should be permitted as a matter of policy.  Yet,
          even if the resolution of this case were in doubt, this would
          not lawfully enable an approval of the company's drawback
          recordkeeping.  It has been repeatedly averred that "[a]ny
          doubt arising in the decision of a drawback case in the
          construction of the statute and regulations must be decided
          in favor of the Government" (Border Brokerage Co. v. United
          States, 53 Cust. Ct. 6, 10 (1964); Nestle's Food Co. (Inc.)
          v.  United States, 16 Ct. Cust. Appl. 451, 455 (1929); Swan &
          Finch Co. v. United States, 190 U.S. 143, 146 (1903)).


              Constitutional Argument - Uniformity, Due Process Clauses


               The company also maintains, through its attorney's April
          12, 1988, letter, that the Uniformity Clause of the U.  S.
          Constitution (Art. 1, {8, Cl. 1) compels the Pacific Region
          to follow the Southwest Region in authorizing drawback on the
          weighted average value methodology; and that "by
          substantially benefitting those who have had their drawback
          claims allowed at Houston, the Customs Service would have
          incurred an obligation to grant an equal benefit to those
          whose drawback claims are" filed elsewhere.  To fail to do
          so, would, according to the company, be violative of a
          concept of equal protection under the Due Process Clause of
          the Fifth Amendment.

               Whether the Uniformity Clause, which deals by its
          specific terms with the laying and collection of duties,
          would also be applicable to drawback under 19 U.S.C. 1313 is,
          at best, problematic, none of the cases cited in the
          attorney's April 12 letter establishing that it would be.
          But assuming arguendo that the Uniformity Clause would apply
          to drawback under {1313, the precise argument advanced on
          behalf of the company in this regard has, at any rate,
          already been considered in a duty assessment context by the
          Court of International Trade in F.W. Myers & Co.  v. United
          States, 9 CIT 19, 615 F. Supp. 569, 570 (1985), and been
          conclusively repudiated:

               This argument fails to consider that, by protesting the
               classification of its merchandise and bringing this
               action plaintiff is ensuring uniformity of
               classification for this merchandise henceforth.....The
               fact that identical merchandise was classified
               differently at another port has no bearing on the
               proceedings before this Court...There is no reason,
               therefore, for the Court to adopt contrary assessments
               made at a different port and thus subrogate the
               contested resolution of the classification issue set
               forth herein (emphasis added) (615 F. Supp. at 573).


               The company's Fifth Amendment argument is predicated
          principally upon Supreme Court decisions which in fact
          addressed the Equal Protection Clause of the Fourteenth
          Amendment, relating to state action (Sioux City Bridge Co.
          v.  Dakota Cty., 260 U.S.  441 (1923); Iowa-Des Moines
          National Bank v. Bennett, 284 U.S.  239 (1931)).
          Specifically, these decisions were rooted in "intentional
          discrimination" perpetrated by state tax officials who
          assessed certain taxpayers as prescribed by law, while
          illegally undertaxing others similarly situated.
     
                Accordingly, even assuming, in the first place,that a
          concept of equal protection under the Fifthe Amendment could
          be determinative of a claimant's rights under {1313, again a
          doubtful point, and one plainly unsubstantiated by the cases
          cited in the attorney's April 12 letter, such proposition
          would, in any event,  lack support in the instant case, for
          there has been no intentional discrimination by Customs
          officials here (cf.  American Express Co. v. United States,
          67 Cust. Ct. 141, 152-153 (1971), aff'd., 60 CCPA 86, 100
          (1973) (concept of equal protection under Fifth Amendment
          held not applicable to Secretary's findings under
          countervailing duty statute, 19 U.S.C.  1303, but even if it
          were, the absence of proof of discrimination would deprive it
          of support in the case at bar)).  In the present case,
          unbeknownst to the Pacific Region, the company's drawback
          claims were approved in the Southwest Region on the basis of
          weighted average values, due to an error of judgment.  And
          "mere errors of judgment do not support a claim of
          discrimination" (Sioux City, supra, 447).

               There is no constitutional ground compelling Customs to
          allow the drawback entries of the company's customer, filed in
          the Pacific Region, which are dependent upon certificates of
          delivery prepared by the company on the same basis.

          HOLDING:

               A "weighted average value method," as defined and
          employed in the circumstances of this case, is not acceptable
          as a means of calculating claims under the same condition
          drawback law, 19 U.S.C. 1313(j)(1), or under the substitution
          manufacturing drawback law, 19 U.S.C. 1313(b).


                                        Sincerely,

                                       John A. Durant
                                       Director
                                       Commercial Rulings Division