FTZB Says Production Equipment Duty-Break Begins When Mfg Application Pending, Etc.
The Foreign Trade Zone Board has issued a memorandum1 stating that the deferred and possibly reduced duty benefits provided by the FTZ Act2 for imported merchandise admitted into a FTZ for use as production equipment begins when the FTZ manufacturing/processing application is pending approval.
The FTZB also states that production equipment duty benefits are limited to manufacturing operations, and do not extend to equipment admitted for warehousing or distribution operations.
“Production Equipment” Duty Benefit Begins When Application Pending
The Board states that neither the FTZ Act nor Congress indicated that the production equipment duty benefit should be limited to manufacturing operations that have already received approval to operate under FTZ procedures. Congress intended to encourage manufacturing operations through the use of zone procedures, and the ability to admit production equipment to the zone while the manufacturing application is pending appears to be consistent with this intent. 3
Full duties due if application denied. However, if the application for zone manufacturing is subsequently denied, the provision would not be applicable and the company would be responsible for the full payment of duties on the production equipment that had been admitted to the zone in its condition as admitted.
No “Production Equipment” Benefits for Zone Warehousing or Distribution
Although the FTZ Act does not define production equipment, congressional documents indicate that the duty-break was intended to benefit production machinery used by U.S. manufacturers to produce merchandise.
The fact that similar types of equipment may be used in both manufacturing and warehousing/distribution operations is immaterial; what is important is the use of the equipment and the operations conducted. To define production equipment more broadly would appear to go beyond what Congress intended.
1The memo is in response to a September 2009 letter submitted by the National Association of Foreign Trade Zones (NAFTZ) advocating the application of production equipment benefits upon application for manufacturing/processing authority. The letter also advocated providing production equipment benefits to equipment used in zone warehousing and distribution.
2The “production equipment” provision in the FTZ Act, 19 USC 81(c)(e), states that merchandise which is admitted into a FTZ for use within such zone as production equipment or as parts for such equipment, shall not be subject to duty until such merchandise is completely assembled, installed, tested, and used in the production for which it was admitted.
3The Board noted that the requirement for the advance approval of manufacturing activity derives from the FTZB regulations.
(FTZB memo, dated 05/21/10)