HQ H161256 May 15, 2014 OT:RR:CTF:ER H161256 PTM Edward T. Fox U.S. Customs and Border Protection Assistant Port Director Port of New York / Newark – Tactical Operations Division 1210 Corbin St. Elizabeth, NJ 07201 Dear Mr. Fox, We are writing in response to your request for internal advice dated April 12, 2011. Your request concerns whether the proprietor of a class 9 (duty-free) bonded warehouse may sell merchandise for domestic consumption. FACTS: A class 9 bonded warehouse operator (herein the “Operator”) operates a duty-free retail store located in New York City. The approval to operate a class 9 bonded warehouse was issued by U.S. Customs and Border Protection (“CBP”) Port of New York/Newark on December 22, 2004. In your request for internal advice, you state that as of the date of the request for internal advice, the Operator has not filed any permit-to-transfers or made any entries. Further, CBP records indicate that no bonded merchandise has been stored in this bonded warehouse for a period of more than two years. The approved application covers the procedures for duty-free sales of merchandise at the warehouse including the receipt, storage, exhibition, warehousing and distribution of jewelry and watches. The approved application contains procedures to ensure that conditionally duty-free merchandise is delivered to purchasers that are departing the United States. The Operator explains that foreign travelers visiting Manhattan will visit the duty-free retail store to place orders for duty-free merchandise at the warehouse. The merchandise is delivered to the air or sea port where the customer will depart the United States with the merchandise. Merchandise that is not claimed is redelivered to the warehouse via courier. The Operator states that due to changes in business conditions, it now wishes to sell merchandise to customers domestically in addition to duty-free merchandise to customers departing the United States. You wish to know whether a class 9 bonded warehouse operating as a retail store may sell goods on which no duties or taxes have been paid for domestic purchase, if entry is made and duties are paid. The Operator provided a copy of its proposed Operations Manual that describes the process for withdrawing un-entered merchandise from the retail store. In the event that a customer decides to purchase an item from the class 9 bonded warehouse and take delivery in the United States, as opposed to exporting it from the customs territory of the United States, an entry for consumption and warehouse withdrawal would be filed by the Operator. The Operator will wait until CBP has authorized release of the merchandise before it would be delivered to the customer. Upon sale of the merchandise to the customer, the Operator prepares a warehouse withdrawal for consumption that details the merchandise to be withdrawn from the store and prepares a consumption entry. The Operator has its customs broker file the consumption entry and warehouse withdrawal through CBP’s Automated Broker Interface. CBP reviews the CBP Forms 3461 / 7501 and determines eligibility for release. The broker notifies the operator upon receipt of CBP’s authorization for release of the merchandise by transmitting an electronic copy of the CBP Form 3461 with the assigned entry number and CBP authorization. The customer is then authorized to pick up the merchandise at the retail store. Duties owed on the merchandise are paid electronically to CBP by the Operator within ten business days after release of the merchandise. You state that the CBP Port of New York / Newark will review all operational aspects of the class 9 bonded warehouse, ensure that that the bond maintained by the Operator is sufficient, and conduct periodic compliance reviews. ISSUE: Whether a class 9 Warehouse may sell merchandise for domestic consumption if a consumption entry is filed and any applicable duties and fees are paid. LAW AND ANALYSIS: The Trade and Competiveness Act of 1988 (Pub. L. 100-418) amended section 555(b) of the Tariff Act of 1930 to provide for statutory and regulatory control of duty-free enterprises, requiring the legacy Customs Service to establish a separate class of bonded warehouses for duty-free enterprises. Class 9 bonded warehouses operate as “duty-free stores” that sell duty-free merchandise to purchasers departing the customs territory of the United States. The statutory authority for establishing duty-free stores is set forth in Title 19, United States Code, section 1555(b), which provides, in relevant part: (b) Duty-free sales enterprises. (1) Duty-free sales enterprises may sell and deliver for export from the customs territory duty-free merchandise in accordance with this subsection and such regulations as the Secretary may prescribe to carry out this subsection. * * * (3) Each duty-free sales enterprise--      (A) shall establish procedures to provide reasonable assurance that duty-free merchandise sold by the enterprise will be exported from the customs territory; The statute states that “[t]he term ‘duty-free merchandise’ means merchandise sold by a duty-free sales enterprise on which neither federal duty nor federal tax has been assessed pending exportation from the customs territory.” See 19 U.S.C. §1555(b)(8)(E). Similarly, the CBP regulation 19 C.F.R. §19.35(a) states: “‘conditionally duty-free merchandise’ means merchandise sold by a duty-free store on which duties and / or internal revenue taxes (where applicable) have not been paid.” Purchases of duty-free merchandise must be exported from the customs territory of the United States in order to remain duty-free. See 19 U.S.C. §1555(b)(1). However, the statute does not prohibit the withdrawal of un-entered merchandise from the class 9 warehouse for domestic consumption, provided that entry is made and duties are paid. Per 19 U.S.C. § 1555(b)(3)(C)(ii), duty-free merchandise that is brought back into the customs territory of the United States must be declared and is subject to duty and tax. The statute also states that the class 9 bonded warehouse proprietor: (C) shall display in prominent places within its place of business notices which state clearly that any duty-free merchandise purchased from the enterprise--         (i) has not been subject to any Federal duty or tax,         (ii) if brought back into the customs territory, must be declared and is subject to Federal duty and tax… (Emphasis added). CBP’s regulation §19.35(a) states that “conditionally duty-free merchandise must accompany the individual when leaving the United States.” However, once the merchandise is entered and duties, taxes and fees are assessed, it is no longer “conditionally duty-free merchandise” per the definition set forth 19 C.F.R. §19.35(a), and therefore exportation from the United States is no longer required. Concerning bonded warehouse withdrawals of dutiable merchandise, 19 U.S.C. §1557(a)(1) states, in relevant part that “[s]uch merchandise may with withdrawn…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.” Therefore, merchandise that would qualify for duty-free sales treatment if exported may be entered for consumption, provided that duties and charges are paid and the merchandise is withdrawn for consumption from the class 9 warehouse. The CBP regulations also require that class 9 bonded warehouse proprietors display a sign stating that any conditionally duty-free merchandise purchased from the store “ [i]f brought back to the United States must be declared and is subject to U.S. Federal duty and tax with personal exemption.” See 19 C.F.R. §19.35(e)(2). Consequently, it is impermissible to sell duty-free merchandise from a class 9 bonded warehouse for domestic consumption without entry. Moreover, the statute permits the sale of duty-paid or domestic merchandise in a duty-free store. In 19 U.S.C. §1555(b)(5), the statute clarifies that: This subsection does not prohibit a duty-free sales enterprise from offering for sale and delivering to, or on behalf of, individuals departing from the customs territory merchandise other than duty-free merchandise, except that such other merchandise may not be stored in a bonded warehouse facility other than a bonded facility used for retail sales. Additionally, 19 C.F.R. §19.36(e) provides: (e) Merchandise eligible for warehousing in duty-free stores (Class 9 Warehouses) --(1) In General. Conditionally duty-free merchandise and other merchandise (domestic merchandise and merchandise which was previously entered or withdrawn for consumption and brought into a duty-free store (Class 9 warehouse) for display and sale or for delivery to purchasers can be warehoused in a duty-free store (Class 9 warehouse), but the conditionally duty-free merchandise and other merchandise must be physically segregated from one another, unless one of the following exceptions apply. (Emphasis added). Consequently, there is no prohibition against selling duty-paid merchandise from a class 9 warehouse, provided that it is physically segregated from the merchandise that has not yet been entered. We note that this ruling addresses the narrow question of whether duty free merchandise may be withdrawn from a class 9 bonded warehouse, if entry is made and all duties, taxes and fees are remitted to CBP. This ruling in no way affects the criteria for the establishment of class 9 warehouses set forth in 19 C.F.R. §19.2 and 19 C.F.R. §19.35. Pursuant to 19 C.F.R. §19.2(g), the discretion to approve or deny the application to bond the warehouse lies with the port director of the port where the application was filed. The decision of the port director will be the final administrative determination by CBP in the matter. Id. Nor does this ruling alter the discretion of the port director to revoke or suspend for cause the right of a proprietor to continue the bonded status of the warehouse for any ground specified in 19 C.F.R. §19.3(e). HOLDING: Merchandise that has not been previously entered for consumption may be withdrawn from a class 9 bonded warehouse for sale and domestic use, provided that customs entry is made and applicable duties, taxes and fees are remitted to CBP. No later than 60 days from the date of this letter, the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division