HQ 225353: North American Free Trade Agreement Act (NAFTA); Same Condition Drawback; Unused Merchandise Drawback; Accounting Procedures to Determine Origin of Fungible Goods; 19 U.S.C. 1313(j)(4); 19 U.S.C. 3333; Section 203, Public Law 103-182; 19 CFR 181.45(b); 19 CFR Part 181, Appendix, Schedule X Dear Mr. Brown:

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 225353

                          July 15, 1994

DRA-4-CO:R:C:E 225353 PH

CATEGORY:  Drawback

Mr. J. W. Brown
Gulf Coast Drawback Services, Inc.
20501 Katy Freeway, Suite 214
Katy, Texas 77450

RE: North American Free Trade Agreement Act (NAFTA); Same
    Condition Drawback; Unused Merchandise Drawback; Accounting
    Procedures to Determine Origin of Fungible Goods; 19 U.S.C.
    1313(j)(4); 19 U.S.C. 3333; Section 203, Public Law 103-182;
    19 CFR 181.45(b); 19 CFR Part 181, Appendix, Schedule X
 
Dear Mr. Brown:

    In your letter of April 14, 1994, you request a ruling on
the applicability of the inventory methods provided for in the
Appendix to Part 181 of the Customs Regulations as they relate to
drawback under 19 U.S.C. 1313(j).  Our ruling follows.  (As I
understand you have been advised by the Chief of the Entry
Rulings Branch, Mr. William G. Rosoff, this is not a NAFTA
advance ruling (see 19 CFR Part 181, Subpart I, and in
particular, 19 CFR 181.92(b)(6)).)

FACTS:

    You cite section 181.45(b) of the Customs Regulations (19
CFR 181.45(b)) and the Appendix to Part 181 of the Customs
Regulations, Addendum B of Part II of Schedule X.  You ask that
we address the question of whether the inventory methods provided
for in these provisions are to be applied to "a company-wide
inventory of all like products" or to "individual inventory
location(s)".

ISSUE:

    For purposes of drawback under 19 CFR 181.45(b), do the
inventory methods provided for in the Appendix to Part 181,
Schedule X, apply to a company-wide inventory of all like
products or to individual inventory locations?
LAW AND ANALYSIS:

    Section 203 of the North American Free Trade Agreement
(NAFTA) Act (Public Law 103-182; 107 Stat. 2057, 2086; 19 U.S.C.
3333), provides for the treatment of goods subject to NAFTA
drawback.  Under section 203(a), such goods do not include, among
other things--

    (2)  A good exported to a NAFTA country in the same
    condition as when imported into the United States.  For
    purposes of this paragraph--

       (A)  processes such as testing, cleaning, repacking, or
       inspecting a good, or preserving it in its same
       condition, shall not be considered to change the
       condition of the good, and

       (B)  except for a good referred to in paragraph 12 of
       section A of Annex 703.2 of the Agreement [i.e., certain
       agricultural goods; this exception is assumed not to be
       applicable to the goods under consideration] that is
       exported to Mexico, if a good described in the first
       sentence of this paragraph is commingled with fungible
       goods and exported in the same condition, the origin of
       the good may be determined on the basis of the inventory
       methods provided for in the regulations implementing this
       title.

    Section 203(c) of the NAFTA Act amended 19 U.S.C. 1313(j) by
the addition of a new paragraph (4) providing that:

    Effective upon the entry into force of the [NAFTA], the
    exportation to a NAFTA country ... of merchandise that is
    fungible with and substituted for imported merchandise,
    other than merchandise described in paragraphs (a) through
    (8) of section 203(a) of that Act, shall not constitute an
    exportation for purposes of paragraph (2) [i.e., section
    1313(j)(2), providing for substitution unused merchandise
    (formerly same condition) drawback].

    The Customs Regulations issued under the authority of the
NAFTA Act were promulgated by Treasury Decision (T.D.) 94-1,
published in the Federal Register on December 30, 1993 (58 FR
69460).  Subpart E of Part 181 of the Customs Regulations (19 CFR
Part 181, Subpart E) provides for drawback and other duty-
deferral programs under NAFTA.  Section 181.45(b) provides for
claims under 19 U.S.C. 1313(j)(1) and provides, in part, as
follows:

    (b)  Claims under 19 U.S.C. 1313(j)(1) for goods in same
    condition.  ...

       (2)  Commingling of fungible goods.

          (i)  General.  Commingling of completely fungible
          goods in inventory, such as parts, is permissible (see
           191.141(e) of this chapter) but one must identify
          entries for designation for same condition drawback;
          the origin of the goods shall be determined on the
          basis of the inventory methods set forth in the
          appendix to this part.

    The inventory management methods referred to in the above
provision are found in Schedule X of the Appendix to Part 181. 
Except as described below, Schedule X does not specifically
address the issue raised in this case.

    One of the approved methods of inventory management is the
specific identification method, under which the person involved
is required to physically segregate, in materials or finished
goods inventory, the originating materials that are fungible
materials from non-originating materials that are fungible
materials, or the originating goods that are fungible goods from
non-originating goods that are fungible goods.  This indicates
that in the other authorized inventory management methods (FIFO,
LIFO, and average), the materials or finished goods are not
physically segregated (i.e., they are commingled).  The provision
cited by the inquirer (Addendum B of Part II of Schedule X) does
specifically address the issue under consideration.  The
introduction to the examples set forth in this Addendum states:

    The following "examples" are based on the figures set out in
    the table below and on the assumption that Exporter A
    acquires originating Good A and non-originating Good A that
    are fungible goods and physically combines or mixes Good A
    before exporting those goods to the buyer of those goods. 
    [Emphasis added.]

Thus, these examples are clearly conditioned on the physical
commingling of the goods in inventory.

    The applicable statutory provision (section 203(a)(2)(B) of
the NAFTA Act) explicitly requires goods to be commingled as a
condition precedent to determining the origin of the goods on the
basis of the authorized inventory methods.  The Customs
Regulations issued under this statutory provision (19 CFR
181.45(b)(2)(i)) explicitly condition the use of the authorized
inventory methods to determine the origin of goods upon the
commingling of the goods.  The examples in Schedule X of the
Appendix which you cite specifically assume the physical
combination or mixing of originating and non-originating goods. 
"Commingle" is defined as "to mix or mingle together; combine"
(The Random House Dictionary of the English Language (1973), p.
296; see also, Webster's New World Dictionary, Third College
Edition (1988), p. 280).

    Accordingly, the answer to the issue raised is clear.  For
purposes of drawback under 19 CFR 181.45(b), the inventory
methods provided for in the Appendix to Part 181, Schedule X,
require that the goods which are to be identified by those
methods must be commingled (i.e., they apply on the basis of
individual inventory locations and not to a company-wide
inventory of all like products at different locations).  This is
so because in the latter case (i.e., that involving the company-
wide inventory of all like products at different locations) the
goods, by definition, are not commingled which, as shown above,
is a condition precedent to the use of the described inventory
methods.

HOLDING:

    For purposes of drawback under 19 CFR 181.45(b), the
inventory methods provided for in the Appendix to Part 181,
Schedule X, require that the goods which are to be identified by
those methods must be commingled (i.e., they apply to individual
inventory locations and not to a company-wide inventory of all
like products at different locations).

    The Office of Regulations and Rulings will take steps to
make this decision available to Customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Lexis, Freedom of Information Act and other
public access channels 60 days from the date of this decision.

                           Sincerely,




                           John Durant, Director
                           Commercial Rulings Division