Foreign-Trade Zones Board: Use of Domestic Status Merchandise for Activity Approved under the Temporary/Interim Manufacturing (T/IM) Process (A(32c)-02-06)

U.S. Foreign-Trade Zones Board

March 3, 2006

Memo For:  Foreign-Trade Zone Grantees
	U.S. Customs Service Port Directors



From:	Dennis Puccinelli
	Executive Secretary

Re: Use of Domestic Status Merchandise for Activity Approved under the Temporary/Interim Manufacturing (T/IM) Process (A(32c)-02-06)

Summary
A zone grantee has requested clarification about a potential inconsistency between certain CBP restrictions on removal of merchandise from zones and the FTZ Board's restrictions under its new Temporary/Interim Manufacturing (T/IM) procedures. The question arose during a review of an application submitted to the Executive Secretary of the Foreign-Trade Zones Board (the Board) by Georgia Foreign-Trade Zone, Inc., grantee of FTZ 26, requesting T/IM authority within Site 6 of FTZ 26, at the facilities of Perkins Shibaura Engines LLC (Perkins) located in Griffin, Georgia. The application was filed on December 8, 2005.

Background
The FTZ Act allows previously entered merchandise to be admitted to zones in domestic status. The second proviso of the Act (19 USC 81c) provides that imported merchandise on which duties have been paid may be admitted/readmitted to zones for activity, including manufacturing, and emerge from the zone free of duty. The Customs regulations place limitations on such admissions, including a time limit for removal of items entered and a prohibition on further processing after entry (19 CFR §146.71(c) and (d)) in order to prevent zone users from taking advantage of tariff savings beyond the scope of authority intended by FTZ Board actions. In the preamble to the Customs regulations in 1986, when these provisions were adopted, the Customs Service explained, with regard to Section 146.71(d)(2): “The prohibition on further processing was intended to avoid abuse of this privilege by an assortment of schemes designed to circumvent high duty rates or import restrictions.”

In 2005, as part of the Administration’s initiative to assist small and medium sized manufacturers, the FTZ Board approved a new, fast-track process to review and authorize manufacturing – with specific limitations – in existing foreign-trade zones and subzones (FTZ Board Order 1347, 69 FR 52857, 8/30/2004). The new process delegated authority to the Executive Secretary to approve Temporary/Interim Manufacturing in existing zones and subzones for a period of two years, provided the activity was found to be sufficiently similar to activity recently approved by the FTZ Board. However, the delegation of authority included a limitation that a given T/IM case can only authorize 20 inputs, 10 inverted tariffs, and five finished products for full FTZ benefits. This limitation means that zone operators need to make entry for consumption on any additional foreign inputs beyond the limited number approved under the T/IM authority prior to those additional inputs' transformation through the T/IM-related manufacturing process.

Discussion
We reviewed the FTZ Board=s approval of the T/IM process under Board Order 1347 and the accompanying FTZ staff report. The intent of the FTZ Board action in Order 1347 was to provide FTZ users quick access to FTZ manufacturing procedures. One of the trade offs for the accelerated case processing was limiting the number of products and inputs that could be approved under the T/IM process. Thus, the FTZ Board’s action has created a situation in which zone users might need to take steps to place certain merchandise (i.e., foreign-status inputs beyond the number authorized by the T/IM approval) in domestic status prior to the authorized manufacturing to comply with the FTZ Board-mandated limitations.

All inputs beyond the limited number specifically approved under the T/IM process would need to be in domestic status before they could be used in a T/IM manufacturing operation. This can be done in two ways. One is to make entry for consumption on the foreign inputs not approved for the T/IM operation as the inputs are withdrawn from the FTZ inventory. The other is to make entry for consumption on such foreign merchandise before the merchandise arrives at the zone. Based on information from current and prospective zone users, the latter option, requiring certain inputs to be entered before being admitted to the zone, can make inventory control more complicated and costly. Often, an incoming shipment will contain both products eligible for zone admission and products for which immediate entry needs to be made. This is inefficient and costly and can give rise to other problems. In a recent case, local CBP staff advised against such a procedure.

Requiring users to make entry on certain imported inputs prior to admission denies them the use of zone procedures for storage, a benefit to which all zone users normally have access. Our review of Board Order 1347 indicates that the FTZ Board did not intend to remove this standard FTZ use for small and medium sized manufacturers making use of the T/IM procedure. Nor did the Board intend to add a potentially costly procedure. In fact, adding inefficient or costly procedures would be contrary to the goal of Board Order 1347, which was expressly intended to reduce burdens and costs for small and medium manufacturers in zones.

The course of action that is most consistent with the intent of the FTZ Board’s action approving the T/IM procedure – and with the scope of authority of all approved T/IM operations – is to allow parties to first admit all foreign merchandise to a zone for a T/IM operation and then make entry for consumption prior to their transformation through manufacturing on foreign inputs that were not specifically included in the T/IM approval. We found no evidence that this process would result in a scheme to avoid higher duty rates or of an intent to conduct activity beyond the scope of authority. It does not appear that zone users would derive a significant benefit from the procedure. The savings would only involve duty deferral, which is normally permitted for all zone operations. Again, we note that zone users are not seeking to increase savings, but rather to comply with certain limitations mandated by the FTZ Board for the T/IM process.

Finding
I find that, pursuant to Section 400.32(c) of the FTZ Board regulations (15 CFR Part 400), FTZ Board approvals of T/IM operations for zone users include authority to initially admit foreign merchandise beyond the limited number specifically approved for full T/IM benefits. Such merchandise would be stored in the zone/subzone and, prior to transformation through T/IM-related manufacturing activity, such merchandise would be allowed to be entered for consumption without physically being removed from the zone and would be allowed to remain in the zone in domestic status for use in the T/IM manufacturing process under FTZ procedures.