HQ 222378: Supply of Tax-Free Rum from Puerto Rico to Vessels and Aircraft in Foreign Trade from United States; Foreign Trade Zones; Bonded Warehouse; 19 U.S.C. 1309

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 222378

                       September 10, 1990

CON-13-02/FOR-2-01-CO:R:C:E 222378 PH

CATEGORY:  Foreign Trade Zone

Ms. Mamie E. Pollock
District Director
U.S. Customs Service
Post Office Box 2112
San Juan, Puerto Rico 00903

RE:  Supply of Tax-Free Rum from Puerto Rico to Vessels and
     Aircraft in Foreign Trade from United States; Foreign Trade
     Zones; Bonded Warehouse; 19 U.S.C. 1309

Dear Ms. Pollock:

     With your May 9, 1990, memorandum (File:  SPE-1-DD:CO EQA)
you requested Internal Advice on the legality of the shipment of
tax-free rum from Puerto Rico to a foreign trade zone (FTZ) in
the United States and the subsequent transfer of the rum from the
FTZ to a Customs bonded warehouse for storage before the rum is
transferred to vessels and air carriers which service foreign
countries from the continental United States.  You enclosed a
copy of a letter from Destileria Serralles, Inc. (the
"inquirer"), of Mercedita, Puerto Rico, dated February 22, 1990,
requesting information on such a procedure.  Our ruling follows.

FACTS:

    The inquirer states that it produces and bottles rum in
Puerto Rico.  It is interested in being able to supply tax-free
rum to vessels and air carriers which service foreign countries
from sites in the continental United States.

    In response to an inquiry to the Bureau of Alcohol, Tobacco
and Firearms (BATF) of the Department of the Treasury, the
inquirer has been advised that the BATF is aware of no provision
which would allow bottled spirits to be brought into the United
States for transfer to a Customs bonded warehouse without the
payment of taxes or which would allow the drawback of taxes on
spirits which have been manufactured and bottled in Puerto Rico.
The BATF suggested as an alternative the shipment of the bottled
distilled spirits from Puerto Rico directly to an FTZ, stating
that spirits so shipped to an FTZ would not come within the
jurisdiction of the Internal Revenue Code and the federal excise
tax would not be imposed.  The BATF also suggested that the in-
quirer might wish to examine the feasibility of transferring the
distilled spirits shipped to the FTZ from the FTZ to a Customs
bonded warehouse for storage pending lading for use on vessels or
aircraft.  The BATF suggested that the inquirer might wish to
seek advice from Customs about this alternative.  The inquirer's
letter to Customs of February 22, 1990, seeks such advice.

ISSUES:

    (1)  May Puerto Rican rum upon which federal excise taxes
have not been paid be admitted into an FTZ in the continental
United States and subsequently be withdrawn from the FTZ free of
duties and federal excise taxes for use as supplies by vessels
and air carriers that service foreign countries from sites in the
continental United States?

    (2)  May the Puerto Rican rum described in ISSUE (1) be
transferred from the FTZ to a Customs bonded warehouse pending
lading for use as supplies as described in ISSUE (1)?

LAW AND ANALYSIS:

    Pursuant to section 309(a), Tariff Act of 1930, as amended
(19 U.S.C. 1309(a)), "[a]rticles of foreign or domestic origin
may be withdrawn ... from any [C]ustoms bonded warehouse ... or
from [an FTZ] free of duty and internal-revenue tax" for supplies
of foreign or United States vessels or aircraft "actually engaged
in foreign trade or trade between the United States and any of
its possessions, or between Hawaii and any other part of the
United States or between Alaska and any other part of the United
States."  The inquirer may wish to examine section 1309 more
closely, as it limits the kinds of supplies which may be
withdrawn in certain cases and describes in more detail than the
general description quoted above the vessels and aircraft which
may qualify for treatment under its provisions (see also section
317, Tariff Act of 1930, as amended (19 U.S.C. 1317)).  The
Customs Regulations pertaining to sections 1309 and 1317 are
found in 19 CFR 10.59 through 10.65.

    Under the Foreign Trade Zones Act of 1934, as amended (48
Stat. 998; 19 U.S.C. 81a through 81u), Foreign Trade Zones are
authorized to be established in the United States.  The
privilege of establishing, operating, and maintaining FTZ's is
granted by the Foreign Trade Zones Board (see 19 U.S.C. 81b).  We
are enclosing a copy of the Customs pamphlet, Foreign Trade
Zones, U.S. Customs Procedures and Requirements, for the general
information of the inquirer.

    Section 3 of the Foreign Trade Zone Act of 1934, as amended
(19 U.S.C. 81c), provides in pertinent part that:

        Foreign and domestic merchandise of every
        description, except such as is prohibited by
        law, may, without being subject to the [C]ustoms
        laws of the United States, except as otherwise
        provided in this chapter, be brought into [an
        FTZ] and may be stored, sold, exhibited, broken
        up, repacked, assembled, distributed, sorted,
        graded, cleaned, mixed with foreign or domestic
        merchandise, or otherwise manipulated, or be
        manufactured except as otherwise provided in
        this chapter, and be exported, destroyed, or sent
        into [C]ustoms territory of the United States
        therefrom, in the original package or otherwise;
        but when foreign merchandise is so sent from [an
        FTZ] into [C]ustoms territory of the United
        States it shall be subject to the laws and
        regulations of the United States affecting
        imported merchandise;

    The fourth proviso to 46 U.S.C. 81c provides, in pertinent
part, that:

        ... under the rules and regulations of the
        controlling Federal agencies, articles which have
        been taken into a zone from [C]ustoms territory
        for the sole purpose of exportation, destruction
        ..., or storage shall be considered to be
        exported for the purpose of--

            (1) ...

            (2) the statutes and bonds exacted for
            the payment of draw-back, refund, or
            exemption from liability for internal-
            revenue taxes and for the purposes of the
            internal-revenue laws generally and the
            regulations thereunder.

        ...  Such articles may not be returned to
        [C]ustoms territory for domestic consumption
        except where the [FTZ] Board deems such return to
        be in the public interest ....

    The Customs Regulations which provide for the administration
and interpretation of this and other laws relating to FTZ's are
found in 19 CFR Part 146.  Under 19 CFR 146.31, "[m]erchandise of
every description may be admitted into [an FTZ] unless prohibited
by law."  The procedures for applying for admission of
merchandise into an FTZ are found in 19 CFR 146.32.

    The status of merchandise in an FTZ is governed by 19 CFR
Part 146, Subpart D.  Under 19 CFR 146.43(a), domestic status may
be granted to merchandise upon which, in addition to certain
other requirements, "all internal-revenue taxes, if applicable,
have been paid."  Pursuant to 19 CFR 146.44(a) in this Subpart:

        [m]erchandise taken into [an FTZ] for the sole
        purpose of exportation, destruction ..., or
        storage will be given zone-restricted status on
        proper application.  That status may be requested
        at any time the merchandise is located in [an
        FTZ] but cannot be abandoned once granted.
        Merchandise in zone-restricted status may not be
        removed to Customs territory for domestic
        consumption except where the [FTZ] Board
        determines the return to be in the public
        interest.

The procedures for applying for zone-restricted status are found
in 19 CFR 146.44(b).

    The transfer of merchandise from an FTZ is governed by 19 CFR
Part 146, Subpart F.  Under section 146.67, "[a]ny merchandise in
[an FTZ] may be exported directly therefrom (without transfer
into Customs territory) upon compliance with the procedures of
[19 CFR 146.67(b)]."  Merchandise in an FTZ may also be
transferred to Customs territory for transportation to and
exportation from a different port (see 19 CFR 146.67(c)).  It is
specifically provided in 19 CFR 146.69 that "[a]ny merchandise
which may be withdrawn duty and tax free in Customs territory
under [19 U.S.C. 1309 or 1317 and 19 CFR 10.59 through 10.65] may
similarly be transferred from [an FTZ], regardless of its zone
status, under those statutes and regulations."  Section 146.69
provides the procedures for transfer of merchandise from an FTZ
to a qualified vessel or aircraft either for lading in the FTZ or
for transportation through Customs territory to the qualified
vessel or aircraft.  Under 19 CFR 146.70(c), "[z]one restricted
merchandise may be transferred from [an FTZ] to a Customs bonded
warehouse for storage pending exportation."  The procedures for
such a transfer are also provided for in section 146.70(c).

    The statutory authority for the establishment of Customs
bonded warehouses is found in section 555, Tariff Act of 1930, as
amended (19 U.S.C. 1555).  This statute provides, in part, that
"[e]xcept as otherwise provided ..., bonded warehouses shall be
used solely for the storage of imported merchandise ...."
Section 557, Tariff Act of 1930, as amended (19 U.S.C. 1557),
which concerns the entry of merchandise for warehouse, provides,
in part, that:

        [a]ny merchandise subject to duty, with [certain
        exceptions irrelevant in this case,] may be
        entered for warehousing and be deposited in a
        bonded warehouse at the expense and risk of the
        owner, importer, or consignee.  Such merchandise
        may be withdrawn, at any time within 5 years from
        the date of importation, for consumption upon
        payment of the duties and charges accruing
        thereon at the rate of duty imposed by law upon
        such merchandise at the date of withdrawal; or
        may be withdrawn for exportation or for
        transportation and exportation to a foreign
        country ... without the payment of duties ....

    The Customs Regulations governing the entry into, and the
withdrawal of merchandise from a Customs bonded warehouse are
found in 19 CFR Part 144.  The requirements and procedures
relating to entry of merchandise into a Customs bonded warehouse
are in found in Subpart B of that Part.  Under 19 CFR 144.35,
the procedures for the withdrawal from a Customs bonded warehouse
of supplies and equipment for vessels and aircraft are set forth
in Subpart D of Part 144 and 19 CFR 10.59 - 10.65.  We are
enclosing a copy of the Customs pamphlet, U.S. Customs Bonded
Warehouse, for the general information of the inquirer.

    For Customs purposes, Puerto Rico is a part of the Customs
territory of the United States (see General Note 2, Harmonized
Tariff Schedule of the United States Annotated (HTSUSA), and 19
CFR 101.1(e)).  Thus, merchandise brought to the continental
United States from Puerto Rico is not considered to be imported
into the United States for Customs purposes.

    With an exception not relevant in this case, 26 U.S.C.
7652(a)(1) provides that:

        ... articles of merchandise of Puerto Rican
        manufacture coming into the United States and
        withdrawn for consumption or sale shall be
        subject to a tax equal to the internal revenue
        tax imposed in the United States upon the like
        articles of merchandise of domestic manufacture.

    Customs has held, in Legal Determination 80-0072 (publishing
Ruling 712315, dated February 7, 1980), that "Puerto Rican rum
brought to the United States to be withdrawn as vessel supplies
under [19 U.S.C. 1309] may be entered in a Customs bonded ware-
house."  The basis for this holding was that "such merchandise by
its importation to the United States is subject to internal
revenue tax."  The Legal Determination distinguished Customs
Service Decision (C.S.D.) 79-420, which held that Puerto Rican
rum could not be stored in a Customs bonded warehouse, because
the rum which was the subject of the C.S.D. was not subject to
U.S. internal revenue taxes or U.S. duty and the rum which was
considered in the Legal Determination was subject to the internal
revenue tax.

    On the basis of the foregoing, we conclude that rum from
Puerto Rico may be admitted into an FTZ in the continental
United States.  We understand that the BATF has stated that
bottled distilled spirits, which would include rum, shipped from
Puerto Rico directly to an FTZ would not come within the
jurisdiction of the Internal Revenue and federal excise taxes
would not be imposed.  Because internal revenue taxes would not
have been paid on the rum it would be given zone-restricted
status in the FTZ (see 19 CFR 146.43).  The rum could be
withdrawn from the FTZ free of any duties or internal revenue
taxes to be used as supplies of qualified United States and
foreign vessels and aircraft engaged in the trades described in
19 U.S.C. 1309 (including foreign trade and certain trade
between the United States and its possessions, Alaska, or Hawaii)
(see 19 U.S.C. 1309 and 19 CFR 10.59-10.65).  The rum could be
laded on a qualified vessel or aircraft directly from the FTZ or
it could be transported from the FTZ by a bonded cartman,
lighterman, or carrier through Customs territory to be laded on a
qualified vessel or aircraft (19 CFR 146.69).  The rum could also
be transferred to a Customs bonded warehouse for storage pending
exportation (19 CFR 146.70 and Legal Determination 80-0072).
After transfer to the Customs bonded warehouse, the rum could be
withdrawn therefrom free of any duties or internal revenue taxes
to be used as supplies of qualified United States and foreign
aircraft engaged the trades described in 19 U.S.C. 1309 (see
above).

    With regard to shipment of the rum from Puerto Rico to an
FTZ in the United States, the inquirer should be made aware that
Customs has taken the position that an entry for transportation
and exportation (see 19 CFR 1826) is not appropriate because
merchandise sent from Puerto Rico to the United States is not
considered to be imported and is not subject to the requirement
to entry.  We believe that jurisdiction over the procedures
applicable to shipment of the rum from Puerto Rico to the FTZ is
within the BATF and we defer to that Bureau in this regard.

HOLDINGS:

    (1)  Puerto Rican rum upon which federal excise taxes have
not been paid may be admitted into an FTZ in the continental
United States and subsequently withdrawn from the FTZ free of
duties and federal excise taxes for use as supplies by qualified
United States and foreign vessels and aircraft which are actually
engaged in foreign trade or in certain trade between the United
States and its possessions, Alaska, or Hawaii.  The rum could be
laded on a qualified vessel or aircraft directly from the FTZ or
it could be transported from the FTZ by a bonded cartman,
lighterman, or carrier through Customs territory to be laded on a
qualified vessel or aircraft.

    (2)  The Puerto Rican rum described in ISSUE (1) may be
transferred from the FTZ to a Customs bonded warehouse and, after
transfer to the warehouse, may be withdrawn therefrom free of
duties and federal excise taxes for use as supplies by qualified
United States and foreign vessels and aircraft which are actually
engaged in foreign trade or in certain trade between the United
States and its possessions, Alaska, or Hawaii.

                              Sincerely,




                              John Durant, Director
                              Commercial Rulings Division


Enclosures