#### HQ H017863

August 21, 2008

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# CLA-02 IT:RR:CTF:VS 017863 NL

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# CATEGORY: CLASSIFICATION

Antonio Bauza Santos, Esq.

Angel Marrero Murga, Esq.

Goldman, Antonetti & Cordova, P.S.C.

American International Plaza, 14^th^ Floor

250 Munoz Rivera Avenue

Hato Rey, Puerto Rico 00918

RE: Ethyl Alcohol for Fuel Use; CBERA; Section 423, Tax Reform Act of
1986, as amended; 19 U.S.C. 2703(a)(1)(B); Puerto Rico; FTZ; Insular
Possession; Customs Territory; 9901.00.50, HTSUS

Dear Sirs:

This is in reply to your request of September 20, 2007, for a
prospective ruling concerning the importation into the U.S. of certain
dehydrated ethyl alcohol for fuel use (ethanol). A telephone conference
was held on February 26, 2008. We received a supplemental submission
dated March 26, 2008.

FACTS:

A corporation organized under the laws of Puerto Rico will import
hydrous ethyl alcohol from Brazil and other origins for use as a raw
material in a dehydration plant. The plant would be located in a Foreign
Trade Zone (FTZ) in Puerto Rico. In the plant, the hydrous ethyl alcohol
would be converted by azeotropic distillation to anhydrous fuel grade
ethyl alcohol (ethanol). You are seeking a ruling that such fuel grade
ethanol, when entered from the Puerto Rico FTZ for consumption in the
U.S., is eligible for duty-free treatment under the Caribbean Basin
Economic Recovery Act (CBERA) and the Tax Reform Act of 1986, as
amended. Current general duty is 1.9%; fuel grade ethanol is subject to
additional duty (excise tax) of 14.27 cents per liter.

ISSUE:

Is ethanol from, e.g., Brazil, eligible for duty-free treatment under
CBERA when entered following dehydration in a foreign trade zone in
Puerto Rico?

LAW & ANALYSIS

The CBERA provides, in pertinent part, that:

(1) Unless otherwise excluded from eligibility by this chapter, and
    subject to section 423 of the Tax Reform Act of 1986, the duty-free
    treatment provided under this chapter shall apply to any article
    which is the growth, product, or manufacture of a beneficiary
    country if --

> \* \* \*

\(B\) the sum of (i) the cost or value of the *materials produced* in a
beneficiary country or two or more beneficiary countries, plus (ii) the
direct costs of processing operations performed in a beneficiary country
or countries is not less than 35 per centum of the appraised value of
such article at the time it is entered.

19 U.S.C. 2703(a)(1).

Section 423 of the Tax Reform Act, as amended by the Steel Trade
Liberalization Act of 1989 (Pub. L. 101-221, section 7(a), 103 Stat.
1890 (1989)), provides that ethyl alcohol or a mixture thereof must be
an "indigenous product" of the beneficiary country to be eligible for
CBERA tariff treatment. Specifically, section 423 provides, in pertinent
part, that:

(a) ". . . no ethyl alcohol or a mixture thereof may be considered \--.

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(2) for purposes of section 213 of the Caribbean Basin Economic Recover
    Act, to be---

    A.  an article that is wholly the growth, product, or manufacture of
        a beneficiary country,

    B.  a new or different article of commerce which has been grown,
        produced, or manufactured in a beneficiary country,

    C.  a material produced in a beneficiary country, or

    D.  otherwise eligible for duty-free treatment under this Act as the

> growth, product, or manufacture of a beneficiary country;
>
> unless the ethyl alcohol or mixture thereof is an indigenous
>
> product of that ... beneficiary country.

Pursuant to section 423(c)(3)(A),

> Ethyl alcohol and mixtures thereof that are only dehydrated within an
> insular possession or beneficiary country...shall be treated as being
> indigenous products of that possession or country only if the alcohol
> or mixture, when entered, meets the applicable local feedstock
> requirement.

After the ethyl alcohol is dehydrated, the definition refers to it as
"dehydrated alcohol and mixtures."

Congress, in amending 19 U.S.C. 2703(a)(1) to be "subject to section 423
of the Tax Reform Act of 1986," as amended, prescribed a unified scheme
for tariff treatment of ethyl alcohol under the CBERA. [See]{.underline}
[National Corngrowers Ass'n v. Von Raab]{.underline}, 650 F. Supp. 1007
(CIT 1986), [aff'd]{.underline}, 814 F.2d 651 (Fed. Cir. 1987). As noted
by the Court, the purpose of section 423 mandated "the use of specified
percentages of locally fermented alcohol in ethanol mixtures to be
imported free into the United States." 650 F. Supp. at 1011. The Court
found that if there was a requirement, in order to obtain duty-free
treatment, to first demonstrate that ". . . dehydration is a substantial
transformation, in addition to meeting the dictates of § 423 . . .
\[this\] would virtually guarantee that no fuel ethanol could be
imported duty-free unless it was entirely produced and distilled in a
Caribbean Basin nation." 650 F. Supp. at 1011. In effect, section 423
provides that for ethanol, the "product of" requirement is to be
satisfied by dehydration, which makes the merchandise "indigenous". The
other CBERA requirements are satisfied if the local feedstock
requirement (to the extent applicable) is met.

Duty-free tariff treatment for dehydrated fuel use ethanol under CBERA
is implemented under subheading 9901.00.50, Harmonized Tariff Schedule
of the United States (HTSUS). The U.S. Notes accompanying subheading
9901.00.50 specify that

> ...duty-free treatment shall be accorded to ethyl alcohol or a mixture
> thereof when entered from an insular possession or beneficiary
> country...

U.S. Note 3, Subchapter I to Chapter 99, HTSUS.

We note that both section 423 of the 1986 Tax Relief Act, as amended,
and the HTSUS provisions refer to "insular possession" without
distinction. Nothing in these provisions establishes different treatment
for a product of Puerto Rico as compared with any other U.S. insular
possession. We therefore understand that the duty-free treatment for
dehydrated ethyl alcohol or mixtures would be available for any such
product that becomes a product of any U.S. insular possession, including
Puerto Rico before entering the Customs territory of the U.S.

Uniquely, Puerto Rico is a U.S. insular possession that for tariff
purposes is within the Customs Territory of the U.S. [See]{.underline}
Section 101.1, CBP Regulations (19 CFR 101.1). However, a Foreign Trade
Zone, including one within Puerto Rico, is considered as being outside
the Customs territory of the U.S, and the general tariff laws of the
U.S. do not apply except as specified. 19 U.S.C. §81c; 19 CFR 146.1(a).
Therefore, merchandise produced in a Puerto Rico Foreign Trade Zone is
merchandise that is a growth, product or manufacture of Puerto Rico
provided an applicable rule of origin is satisfied. In the case of
dehydrated ethanol and mixtures for fuel use, section 423 specifies that
dehydration of hydrous ethanol results in merchandise that is an
"indigenous" product of the place where the dehydration takes place.
Without doubt, "indigenous" is to be taken as having a meaning
equivalent to "growth, product or manufacture" for the purposes of CBERA
and subheading 9901.00.50. Therefore, fuel use ethanol and mixtures are
indigenous products of Puerto Rico when dehydrated there.

Prior CBP rulings make clear that production of merchandise in a Foreign
Trade Zone will result in merchandise that is considered a product of
the country in which the zone is situated. In C.S.D. 81-44, CBP ruled
that for drawback purposes, manufacturing in a Foreign Trade Zone is
manufacturing in the United States, and considered it irrelevant that
the zone was outside the Customs territory of the U.S. In HQ 735399
(December 22, 1993), CBP ruled that for country of origin marking
purposes, foreign parts that underwent substantial transformation in a
U.S. FTZ lost their foreign identity and were exempted from the marking
requirements of section 304, Tariff Act as amended (19 USC 1304).
Finally, in HQ W967896 (February 5, 2008), Customs ruled, again for
marking purposes, that a blend of sugar and gelatin that underwent
substantial transformation in a U.S. FTZ became a product of the U.S.
for marking purposes. These rulings confirm that for tariff purposes,
production in a Puerto Rico FTZ would result in a product of Puerto Rico
which was produced outside the Customs territory of the U.S.

Based on the foregoing, ethyl alcohol and mixtures, for fuel use, would
be considered products of Puerto Rico when dehydrated in a Puerto Rico
foreign trade zone. Although the feedstock used for such products was
produced in hydrous form in Brazil, which is not a CBERA beneficiary
country, dehydration in Puerto Rico results in an indigenous product of

Puerto Rico. Such fuel use ethanol, when entered from a Puerto Rico
foreign trade zone into the Customs territory of the U.S. in Puerto
Rico, is eligible for duty-free tariff treatment under subheading
9901.00.50, HTSUS, provided that the ethyl alcohol or mixture also
satisfies the local feedstock requirement as set forth in U.S. Note 3(c)
to subchapter I, Chapter 99, HTSUS.

HOLDING:

Brazilian-origin ethyl alcohol is considered an indigenous product of
Puerto Rico when dehydrated in a foreign trade zone in Puerto to produce
fuel use ethyl alcohol and mixtures. The merchandise will be eligible
for duty-free treatment under CBERA when entered into the Customs
territory of the U.S., provided the merchandise also satisfies the
applicable local feedstock requirement.

A copy of this ruling letter should be attached to the entry documents
filed at the time the goods are entered. If the documents have been
filed without a copy, this ruling should be brought to the attention of
the CBP officer handling the transaction

Sincerely,

Monika R. Brenner, Chief

Valuation & Special Programs Branch