Court No. 92-08-00575 | Ct. Intl. Trade | Jan 17, 1997
Opinion
This test case involves the proper classification of two 1989 entries of refined liquid hydrocarbon mixtures. The District
Background
In contemplation of their motions for summary judgment, the parties entered into a Joint Stipulation and Order. From the record on the motions for summary judgment, the following undisputed facts and issues appear. Both refined and unrefined crude oil may constitute the type of petroleum product commonly referred to as “naphtha”. As used in the petroleum refining and petrochemical manufacturing industries, the term “naphtha” applies to hydrocarbon mixtures which distill, i.e. vaporize, between 80 degrees Fahrenheit and 440 degrees Fahrenheit. The merchandise at issue possessed chemical properties such that their denomination as “naphthas” would be appropriate under the common meaning and general usage of that term. Although falling within the definition of “naphthas” for the purpose of the HTS subheading Naph-thas (except motor fuel or motor fuel blending stock) (“Naphthas”), the merchandise was susceptible to use as motor fuel blending stock. Liquid hydrocarbon mixtures possessing properties similar to the subject merchandise are commercially suitable for and have been used as motor fuel blending stock; therefore, such use would not have been a fugitive application of the merchandise. It is unascertained but possible that the merchandise was used as motor fuel blending stock and that the purchaser who caused the importation intended to use it as blending stock at the time of importation. The parties agree that Naphthas is an eo no-mine provision and Motor fuel blending stock is an actual use provision.
Clarendon entered both shipments of merchandise under the Naph-thas provision, HTS subheading 2710.00.25, which imposes a duty of 10.5 cents per barrel. The District Director of the U. S. Customs Service liquidated both shipments under the Motor fuel provision, HTS sub-heading2710.00.15, which imposes a duty of 52.5 cents per barrel. In response to Plaintiffs protests, the U.S. Customs Service Headquarters subsequently issued a ruling declaring that the correct classification was under the Motor fuel blending stock provision, HTS subheading 2710.00.18, which also imposes a duty of 52.5 cents per barrel.
In their motions the parties merely contest the meaning and functional operation of subheadings in the tariff schedule and agree that the issue is ripe for summary judgment. Summary judgment is appropriate where “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. ” CIT Rule 56 (d). Since the meaning and function of subheadings in the tariff schedule are purely matters of law (Marubeni America Corp. v. United States, 12 Fed. Cir. (T) _, _, 35 F.3d 530" court="Fed. Cir." date_filed="1994-09-07" href="https://app.midpage.ai/document/marubeni-america-corp-v-united-states-677923?utm_source=webapp" opinion_id="677923">35 F.3d 530, 533 (1994)), the Court is poised to render summary judgment. The statutory presumption of correctness contained in 28 U.S.C. § 2639(a)(1) is inapposite to the Government’s proffered classification. When merchandise is liquidated under a concededly erroneous classification, the presumption of correctness does not attach to the subsequent classification determination made by the U. S. Customs Service (“Customs”). United States v. Magnus, Mabee & Reynard, Inc., 39 CCPA 1, 7, C.A.D. 455 (1951); Abbey Rents v. United States, 79 Cust. Ct. 103" court="Cust. Ct." date_filed="1977-11-28" href="https://app.midpage.ai/document/abbey-rents-v-united-states-2285468?utm_source=webapp" opinion_id="2285468">79 Cust. Ct. 103, 105, 442 F.Supp. 540, 542 (1977); Tomoegawa USA, Inc., v. United States, 12 CIT 112" court="Ct. Intl. Trade" date_filed="1988-02-10" href="https://app.midpage.ai/document/tomoegawa-usa-inc-v-united-states-1800614?utm_source=webapp" opinion_id="1800614">12 CIT 112, 114, 681 F.Supp. 867, 869 (1988). Since Customs liquidated the merchandise as Motor fuel, concedes classification asMotorfuel was erroneous, and presently argues before the Court that Motor fuel blending stock is the applicable provision, Customs’ current position does not enjoy a presumption of correctness.
Nor does the Court extend to Customs’ routine classification decisions the ordinary measure of indulgence afforded to an agency’s discretionary activities. Crystal Clear Industries v. United States, 13 Fed. Cir. (T) _, _n.*, 44 F.3d 1001" court="Fed. Cir." date_filed="1995-01-09" href="https://app.midpage.ai/document/crystal-clear-industries-v-united-states-686574?utm_source=webapp" opinion_id="686574">44 F.3d 1001, 1003 n.* (1995) (“Our agreement with the opinion of the CIT does not extend to the suggestion that a routine classification dispute is entitled to special deference under Chevron, U.S.A., Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837" court="SCOTUS" date_filed="1984-06-25" href="https://app.midpage.ai/document/chevron-u-s-a-inc-v-natural-resources-defense-council-inc-111221?utm_source=webapp" opinion_id="111221">467 U.S. 837, 104 S. Ct. 2778, 81 L.Ed.2d 694 (1984)).” In rendering its decision the Court “must consider whether the government’s classification is correct, both independently and in comparison with the importer’s alterna
Discussion
The parties agree that Plaintiffs merchandise possessed chemical properties such that classification was technically possible under either one of the competing subheadings. The language of subheading 2710.00.25 excludes blending stock from its domain: Naphthas (except motor fuel or motor fuel blending stock). An Explanatory Note to the blending stock provision, Additional U.S. Note 4 to Chapter 27 of the HTS, defines Motor fuel blending stock to mean “any product (except naphthas of subheading 2710.00.25) * * (emphasis added) The fulcrum of the controversy is the disputed means by which an importer may obtain classification under one or the other subheading. Plaintiff contends that proof of actual use is relevant and required if and only if the importer seeks classification under Motor fuel blending stock-, otherwise, merchandise such as the hydrocarbons at issue fall within the eo nomine Naphthas provision. The Government contends that such merchandise is initially captured by the Motor fuel blending stock provision, and that proof of actual use for a purpose other than blending stock is required to obtain classification under the lower Naphthas rate.
The language giving rise to the requirement of an actual use showing appears in connection with the Motor fuel blending stock provision: Motor fuel blending stock is a product “derived primarily from petroleum, shale oil, or natural gas, whether or not containing additives, to be used for direct blending in the manufacture of motor fuel.” Additional U.S. Note 4 to Chapter 27 of the HTS (emphasis added). When words such as “to be used for” appear in connection with a tariff subheading, classification under that subheading is dependent on a demonstration of actual use. 2 Ruth F. Sturm, Customs Law and Administration, § 53.3(b), at 25 (3d ed. 1996). The Government concedes that Motor fuel blending stock is an actual use provision. Def.’s Reply to Pl.’s Opp’n. to Def.’s Cross-Mot. Summ. J. at 2. When classification is dependent upon actual use, the importer must satisfy certain conditions: HTS Additional U.S. Rule of Interpretation 1(b) declares that
a tariff classification controlled by the actual use to which the imported goods are put in the United States is satisfied only if such use is intended at the time of importation, the goods are so used and proof thereof is furnished within 3 years after the date the goods are entered.
Federal regulations have formalized these requirements: under the heading “Rate of Duty Dependent Upon Actual Use”, the Code of Federal Regulations provides that in order for entries to qualify under an actual use provision, the importer must: (1) file a declaration of intended use upon entry or enter the article under an actual use provision of the HTS (19 C.F.R. § 10.134); (2) maintain records showing the actual use of the merchandise (19 C.F.R. § 10.137); and (3) provide within three years
An importer has an incentive to satisfy an actual use provision only when that classification affords a lower rate of duty. The controversy before the Court arises from the apparently unique circumstance that the actual use provision at issue imposes a higher rate of duty than the alternative provision applicable in this case. This odd circumstance has resulted from historical events. While the precursor to the HTS, the Tariff Schedules of the United States (“TSUS”), was originally in force, naphtha entries were eligible for classification under three subheadings inter alia: Naphthas (TSUS Part 10, Schedule 4, item 475.35, which carried a rate of duty at .25 cents per gallon); Motor fuel (TSUS Part 10, Schedule 4, item 475.25, which carried a rate of duty at 1.25 cents per gallon); and Benzenoids (TSUS Part 1, Schedule 4, item 407.16, which carried a rate of duty at 1.7 cents per pound plus 13.6 percent ad valorem). This original TSUS scheme created a “benzenoid anomaly” with respect to naphtha entries which were used as blending stock but incidentally contained more than de minimis amounts of benzenoid due to the catalytic process by which they were manufactured: by virtue of TSUS Headnote 1, Part 10, Schedule 4, such merchandise was classified under the Part 1 Benzenoids item rather than under a Part 10 item. This directive caused benzenoid naphtha blending stocks to suffer an effective rate of duty up to fifteen times higher than that imposed on entries of finished motor fuel itself.
Pursuant to a study and recommendation by the United States International Trade Commission (“Possible Effects of and Recommendations Concerning the Proposed Tariff Reclassification of Catalytic Naphthas and Other Motor Fuel Blending Stocks”, USITC Publication 1686,Final Rep. on Inv. 332-203, (1985)) (“ITC Report”), Congress enacted the Motor fuel blending stock actual use provision as item 475.27 in order to rectify the benzenoid anomaly. Under the new provision, benzenoid naphthas like the entries at issue in this case could escape the excessive Benzenoids rate if actual use as blending stock was shown, but they nevertheless remained subject to five times as much duty as entries under
One main problem with the Government’s position is that entries may not be classified as Motor fuel blending stock without the required actual use showing. Certification of actual use is a mandatory precondition for classification under an actual use provision. Czarnikow-Rionda Co. v. United States, 66 Cust. Ct. 431" court="Cust. Ct." date_filed="1971-06-08" href="https://app.midpage.ai/document/czarnikow-rionda-co-v-united-states-8120050?utm_source=webapp" opinion_id="8120050">66 Cust. Ct. 431, 328 F. Supp. 487, (1971), aff'd 60 CCPA 6, 468 F.2d 211" court="C.C.P.A." date_filed="1972-11-02" href="https://app.midpage.ai/document/czarnikow-rionda-co-v-united-states-6824192?utm_source=webapp" opinion_id="6824192">468 F.2d 211 (1972) (since plaintiff did not comply with the certification mandate, it failed to satisfy the actual use provision and the fact that the imported merchandise was further refined or improved consistently with the actual use requirement was irrelevant); J. E. Bernard & Co., Inc. v. United States, 80 Cust. Ct. 111" court="Cust. Ct." date_filed="1978-05-23" href="https://app.midpage.ai/document/j-e-bernard--co-v-united-states-8120713?utm_source=webapp" opinion_id="8120713">80 Cust. Ct. 111, 118 (1978) (“[E]ven though a product is actually used in the manner contemplated by an actual use provision, it may be classified under that provision only if the mandate of the general interpretative rule [requiring certification] has been complied with”). The Government is not entitled to classify an entry under an actual use provision absent the requisite showing any more than an importer is entitled to actual use classification without making the requisite showing. Based upon the U. S. Rules of Interpretation, the relevant regulations in the Code of Federal Regulations, and judicial precedent, Customs incorrectly determined that Plaintiffs merchandise should have been classified asMotorfuel blending stock, as Plaintiff did not satisfy the mandatory requirements for actual use classification.
The parenthetical in the eo nomine subheading for naphthas expressly excludes motor fuel blending stock from its purview. Based on this language the Government argues,
Thus, the merchandise classifiable under [the Naphtha subheading] is the merchandise which is not * * * actually used as motor fuel blending stock * * *. [T]o qualify for classification under subheading 2710.00.25 as naphthas, the importer must demonstrate that the merchandise is not * * * motor blending stock, and to make*65 this demonstration, the importer must satisfy the requirements of Additional U.S. Rules of Interpretation 1(b).
Def.’s Cross-Mot. Summ. J. at 13. “The sole issue to be decided is whether the imported merchandise is subject to the requirements of actual [non-]use [as blending stock] as a result of the limiting language of the naphtha provision.” Def.’s Reply to Pl.’s Opp’n. to Def.’s Cross-Mot. Summ. J. at 2. Plaintiff asserts that if Congress had intended the Naph-thas provision to operate as an actual non-use provision, it would have explicitly required certification of non-use just as it has done under U.S. Note 2 to Subchapter I of Chapter 99 of the HTS, pursuant to which an importer may certify uses of ethyl alcohol as “other than liquid motor fuel” in order to avoid additional duties imposed under HTS subheading 9901.00.50. “Plainly, if Congress wished to impose a certification of non-use as a prerequisite to classification of a naphtha, it was perfectly capable of doing so. Congress simply did not do so here and there is nothing in the legislative history, the notes or the statute, to suggest it did [wish to do so].” Pl.’s Opp’n to Def.’s Cross-Mot. Summ. J. at 13.
The limiting language in the Naphthas subheading does not give rise to an actual non-use provision: the exclusionary parenthetical must be viewed as relating to the lexicon of the tariff schedule itself. Under the applicable rules and definitions, even if a naphtha entry is used as blending stock, it is not Motor fuel blending stock unless actual use is certified. The parenthetical therefore excludes only that merchandise which has been classified under Motor fuel blending stock pursuant to an actual use showing. Moreover, there is absolutely no precedent for construing limiting language in an eo nomine provision as signifying Congressional intent to create an actual non-use provision. The Government may not infer actual non-use requirements where none of the triggering language appears anywhere in the tariff schedule or its interpretative notes. The Government’s attempt to assume the role of a legislative body by inventing an actual non-use provision out of an eo nomine provision is necessarily rejected.
The conclusion that the exclusionary language in the Naphthas subheading does not per se create an actual non-use provision may also be understood on a more theoretical level. Motor fuel blending stock may function as a legal fiction: even if a naphtha is actually used as blending stock, it is not necessarily called Motor fuel blending stock under the HTS. Chief use provisions may also operate as legal fictions: an entry is actually utilized inconsistently with an applicable chief use provision; nevertheless, it is classified according to the chief use of like merchandise in the United States. Pacific Guano & Fertilizer Co. v. United States, 15 Ct. Cust. 218" court="C.C.P.A." date_filed="1927-06-06" href="https://app.midpage.ai/document/pacific-guano--fertilizer-co-v-united-states-6828832?utm_source=webapp" opinion_id="6828832">15 Ct. Cust. 218 (1927) (despite plaintiffs proof that its merchandise was actually used as fertilizer, classification was proper under the chief use provision for animal feed); United States v. Colibri Lighters (U.S.A.) Inc., 47 CCPA 106 (1960) (despite plaintiffs proof that merchandise was exclusively used as table lighters, classification was proper under the chief use provision for pocket lighters). These types of legal
The practical reality of the motor fuel manufacturing industry as detailed in the ITC Report supports the view that the parenthetical exclusion of blending stock does not indicate Congressional intent to exclude all naphthas used as motor fuel blending stock from the Naphthas category. The Government argues that “the ITC seemed to be trying to insure that no blending stock entered at the naphtha rate” (Def.’s Cross-Mot. Summ. J. at 14), and that this “intent” should currently be honored. The Customs Headquarters Ruling in connection with the subject entries also manifests the opinion that no blending stock should enter under Naphthas:
The definition of motor fuel blending stock [appearing in Additional U.S. Note 4 to Chapter 27 of the HTS] states that the provision does not cover naphtha classifiable as naphtha. Therefore, Customs recognizes that there are two types of naphtha for classification purposes: naphtha which does not have the characteristics of a blend stock would be classifiable as naphtha; however, naphtha which does have the characteristics of a blend stock would be classified as blend stock * * *.
It is Customs’ position that regardless of the intent (or lack thereof) of the importer at entry, if naphtha has the characteristics of a blend stock, it is classifiable as such.
U.S. Cust. H.Q. Rul. 088032, December 23, 1991. The Government advances this position before the Court: “As long as the naphtha has the ‘characteristics of blendstock’ or naphtha with such specifications has significant use as blendstock, the merchandise is subject to the actual [non-]use requirement.” Def.’s Reply to Pl.’s Opp’n to Def.’s Cross-Mot. Summ. J. at 7. In addition to burying the mandatory actual use requirements under the rug,'this stance sweeps much more broadly than Con
In admonishing against the adoption of a chief use provision for motor fuel blending stock, the ITC declared, “Adoption of a chief-use provision for motor fuel blending stock would supersede with [sic] the existing [eo nomine] provision for naphthas of TSUS item 475.35, because the bulk of naphthas, including nonbenzenoid naphthas covered by this item, are used in motor fuel blending.” ITC Report at 54 (emphasis added). This is an unequivocal statement that the eo nomine Naphthas provision covered nonbenzenoid naphthas used in motor fuel blending. In following the ITC’s recommendation to promulgate an actual use rather than a chief use blending stock provision, Congress ensured that nonbenze-noid naphthas could continue to enter under the Naphthas provision even if they were used in their common blending stock application. This fact refutes the Government’s position that the exclusionary language in the Naphthas provision was designed to ensure that no naphtha used as blending stock entered under Naphthas. Because the TSUS Naph-thas item encompassed nonbenzenoid naphthas, the bulk of which were used in motor fuel blending, it is clear that Congress intended the parenthetical to exclude only benzenoid naphthas that had escapedBenzenoid classification by dint of an actual use showing as blending stock. Since such a showing would entail its very classification as Motor fuel blending stock, the amendment of the Naphthas provision parenthetically to exclude “motor fuel blending stock” was indeed a highly technical one. These observations demonstrate that the Government’s position is far too broad as well as incorrect: there is no basis in the tariff schedule or the legislative history to require a showing that nonbenzenoid naphthas are not used as blending stock before they may be classified as Naph-thas, and the parenthetical exclusion in the Naphthas subheading did not reflect an intent to exclude all blending stock from the Naphthas category.
The Government points out the general rule that where an eo nomine and a use provision compete, the use provision prevails. “[A]s between an eo nomine enumeration and an equally applicable enumeration by use, the use provision is generally (but not always) held to be the more specific.” Novelty Import Co. v. United States, 55 Cust. Ct. 169" court="Cust. Ct." date_filed="1965-09-09" href="https://app.midpage.ai/document/novelty-import-co-v-united-states-8115281?utm_source=webapp" opinion_id="8115281">55 Cust. Ct. 169 (1965). Certainly this rule applies when the competing provision is a chief use provision as in the cases cited by the Government; however, the rule is inapplicable when the competing provision is an actual use provision. As the ITC Report recognized, “Since the TSUS item 475.35 is eo nomine [Naphthas] * * *, it would prevail over the [proposed actual] use provision, thereby maintaining historical treatment of nonbenzenoid naph-thas.” ITC Report at 54. This remark indicates not only the ITC’s correct understanding of tariff term priorities but also corroborates the fact that nonbenzenoid naphthas used as blending stock historically have been entitled to classification under the Naphthas subheading.
In exchange for the benefit afforded by actual use provisions, importers are burdened to declare, track, and certify the actual use of the merchandise. These burdens eliminate the ministerial hardships that would be visited upon Customs if verification of actual use were its own responsibility. This allocation of benefit and burden dovetails the political intent to reward favored use with importers’ selfish incentives and efficient Customs administration. In affirming the trial court’s decision in Czarnikow-Rionda, the appellate court recognized this salutary confluence:
We concur with the lower court’s finding that the language of [the temporary tariff item] indicates an intention to follow the imported merchandise into consumption, thus bringing into play the actual use requirements * * *. The view we take coincides with the policy expressed by the Tariff Commission in the Tariff Classification*69 Study [Submitting Report, 1960] * * * that, in view of the burdens imposed on customs officers and importers, merchandise which must be so followed into consumption should be that which is to be accorded more favorable treatment than like merchandise not so used.
60 CCPA at 9, 468 F.2d at 214. According to Plaintiff, the Government contorts the logic and policy behind the provisions at issue. The Government submits that its position is consistent both with the logic of actual use provisions and the policy expressed by the Tariff Commission and embraced by the courts:
This is exactly the Customs Service’s position here: to be accorded the more favorable treatment (relative to the blendstock provision) as “naphtha (except motor fuel or motor fuel blending stock),” the non-fuel and non-blending stock uses must be ascertained and certified. Thus, even if the more favorable rate is in a provision which is not the one of the pair that has the word or phrase which invokes actual use, classification under the more favored provision requires that the merchandise be followed into commerce to ascertain its actual use.
Def.’s Cross-Mot. S. J. at 20. The Government’s argument is unpersuasive. First, the italicized language from the appellate decision in Czarni-kow-Rionda quoted above states that when classification under a particular tariff heading involves following the merchandise into consumption, it is merchandise which is used consistently with that very heading which should be accorded the more favorable tariff treatment. In contrast, the Government’s position is that merchandise which is not used consistently with the actual use provision in question should be accorded more favorable treatment under an entirely different eo nomine tariff provision. The Government’s reading frustrates Congressional intent to accord relatively favorable treatment to merchandise described by the actual use provision and attempts to bootstrap the eo nomine Naphthas provision into an actual non-use provision for naphthas susceptible to blending stock applications.
The Government’s stance in this case is inconsistent with its apparent position in two other of Plaintiff’s actions suspended hereunder. In one of those actions (Glencore Marketing, Inc. v. United States, Court No. 95-01-00097), Plaintiff entered as Naphthas a liquid hydrocarbon mixture containing over 50% of a single type of hydrocarbon compound. Customs liquidated the naphthas under Other hydrocarbon mixtures, HTS subheading 2710.00.60, dutiable at 7% ad valorem. As a “protective measure” Plaintiff certified use as petrochemical feedstock in an attempt to qualify under the Naphthas provision. Customs refused to reliquidate the entry. In the other action (Glencore Marketing, Inc. v. United States, Court No. 95-03-00237), Plaintiff entered a similar hydrocarbon mixture as Motor fuel blending stock. Again Customs liquidated the naphthas under Other hydrocarbon mixtures. The importer was able to showuse as blending stock for 151,000 out of 153,000 barrels
Not only did Customs’ unpredictable administration of the tariff provisions at issue in this case deprive Plaintiff of notice and fair warning, but Customs’ construction of those tariff provisions are incorrect as a matter of law because they are inconsistent'with the plain meaning of the tariff schedule, the relevant interpretative notes, the Code of Federal Regulations, judicial precedent, and legislative history.
Conclusion
Customs incorrectly determined that Plaintiffs merchandise should have been classified under the actual use Motor fuel blending stock provision, HTS subheading 2710.00.18. Classification under Motor fuel blending stock is improper unless the importer chooses to seek such classification and affords the mandatory indicia of intent and actual use. Plaintiff exercised its prerogative not to afford those proofs and therefore was entitled to classification under Naphthas (except motor fuel and motor fuel blending stock), HTS subheading 2710.00.25. On the stipulated facts of this case, Plaintiff is entitled to summary judgment.