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SONY SAYS ODC TAX ON IMPORTS IN FOREIGN TRADE ZONE UNDERMINES LEGISLATIVE INTENT.

NOV. 6, 1990

SONY SAYS ODC TAX ON IMPORTS IN FOREIGN TRADE ZONE UNDERMINES LEGISLATIVE INTENT.

DATED NOV. 6, 1990
DOCUMENT ATTRIBUTES
  • Authors
    Triano, Donna
    Quaglietta, James J.
  • Institutional Authors
    Sony Corporation of America
  • Cross-Reference
    PS-73-89
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    toxics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 90-7871
  • Tax Analysts Electronic Citation
    90 TNT 228-26

 

=============== SUMMARY ===============

 

ABSTRACT: Sony Corporation has contended that treating imports into a foreign trade zone (FTZ) as "entered into the United States" undermines legislative intent behind a (FTZ) and may cause an inequitable assessment of the tax on ozone-depleting chemicals.

SUMMARY: James J. Quaglietta and Donna Triano of Sony Corporation of America, Park Ridge, N.J., have stated that treating imports into a foreign trade zone (FTZ) as "entered into the United States" undermines the legislative intent behind an FTZ and, for a taxpayer reporting on either the "sales method" or "import method," may cause an inequitable assessment of the tax on ozone-depleting chemicals. They contend this can occur if the taxpayer re-exports the goods that have been taxed under the import method or that are subject to the tax on the sales method, but the title has not passed.

 

=============== FULL TEXT ===============

 

November 6, 1990

 

 

Internal Revenue Service

 

1111 Constitution Avenue, N.W.

 

Room 4429

 

Washington, D.C. 20224

 

 

Attn: CC:CORP:T:R (PS-73-89)

 

 

Re: Ozone Depleting Chemical Excise Tax

 

 

Gentlemen:

Sony Corporation of America respectfully submits the following comments with respect to the Ozone Depleting Chemical (ODC) Excise Tax regulations which were published in the Federal Register on September 6, 1990.

FOREIGN TRADE ZONES (FTZ)

The ODC regulations (regulation section 52.4681-1T(c)) require that products imported into a foreign trade zone are deemed to be entered into the U.S. for purposes of being taxed if the U.S. taxpayer elects to report on the "import method". In the event the taxpayer reports on the "sales method", FTZ goods as entered into the U.S. become subject to taxation WHEN SOLD.

We believe that treating imports into FTZs as "entered into the U.S." undermines the legislative intent of a FTZ and, in the case of a taxpayer reporting either on the sales or import method, may cause an inequitable assessment of the ODC tax. This inequity occurs if the taxpayer re-exports the goods that have, under the "import method", been taxed or, under the "sales method", not met the formality test of passing title outside the U.S.

For the following reasons, we are of the opinion that the ODC tax should not be imposed on ANY product imported into the U.S. which is later re-exported.

Title 19, Chapter 1A, section 81b of the United States Code establishes Foreign Trade Zones. The legislative intent was:

o to facilitate exports from the United States for goods originating in foreign ports and temporarily stored in a U.S. FTZ.

o to admit foreign goods into the U.S. so that U.S. citizens could be involved and, consequently, financially profit from breaking down, repacking and relabeling of goods as well as their combination of American goods. (A.T. Cross Co. v. Sunil Trading Corp., D.C. N.Y. 1079, 467 F. Supp. 47.).

According to a 1988 report issued by the National Association of Foreign Trade Zones, FTZs are estimated to be responsible for over 400,000 U.S. jobs. Accordingly, FTZs are intended to stimulate economic development by encouraging activities in the U.S. could otherwise be conducted outside the U.S.

We believe that taxation of product entering a FTZ is inconsistent with the underlying purposes of a foreign trade zone, i.e., the creation of employment is the U.S. and the facilitation of exports out of the U.S. Subjecting goods passing through FTZs for re- export to the ODC tax would have a chilling affect on the use of FTZs. In our situation, we would re-evaluate the cost-effectiveness of our operations in the FTZ with a view toward moving our export operations offshore, i.e., as in the past.

We also believe that the distinction of where title passes (under the "sales method") is irrelevant as to whether the ODC tax applies to goods exported outside of the U.S., i.e., not used within the U.S. Specifically, it is difficult to understand why the ODC tax would apply to export sales if title passes in the U.S. and would not apply to export sales if title passes outside the U.S. This distinction clearly shows that form, and not the substance, of the transaction would control. We feel this is an artificial distinction since in both cases the goods are destined for export. We could change our terms with our customers so that title passes outside the U.S. and avoid the ODC tax, but, based upon the volume of our transactions, this would cause an administrative burden on our method of doing business. If the focus of the IRS's concern is that products sold where title passes within the U.S. will not, in fact, be exported, we point out that shipping documents would support and justify actual export transactions. Moreover, the entire operation of the FTZ is under the close supervision of U.S. Customs officials. To this end, Customs officials alone control access to the goods once they are within the FTZ and supervise all repacking, relabeling and combinations which take place in the zone. (A.T. Cross Co. v. Sunil Trading Corp., supra.). See also Title 19,Chapter 1A, section 81a -- section 81u which provide for strict supervision by the U.S. Customs Service of goods in a FTZ. Accordingly, potential IRS concern to document export transactions by requiring F.O.B. destination is unwarranted.

We recognize that section 4682(e)(2) defines the "U.S." by reference to section 4612(a)(4), and that section 4612(a)(4)(C) defines FTZs to be part of the U.S. for tax purposes. However, we feel that it would be extremely inconsistent based on the intent of Congress in creating FTZs to include goods shipped into FTZs as taxable for ODC purposes. We urge the Treasury to use its regulation writing authority to deal with this incongruous treatment on an equitable basis.

SPECIAL RULES FOR ARTICLES ASSEMBLED IN THE U.S.

We commend the Service for addressing the problem of articles assembled in the U.S., but suggest additional rules to assist taxpayers in administering the reporting of the parts/components/subassemblies. Essentially, the problem here may result in an interpretation that raises the potential that several parts/components/subassemblies incorporated into a finished product could be taxed at a total amount far greater than the tax on the finished product itself.

We feel that regulation section 52.4682-3T(e)(3)(ii) should be clarified and that the special rule should provide a "short-out" approach to determine the amount of parts/components/subassemblies used in a finished product.

SUGGESTED CLARIFICATION

In order to provide for an appropriate interpretation in this regard, we suggest that the regulations be clarified by using the following language:

An importer that assembles finished PRODUCTS in the U.S. may compute the amount of tax imposed on the imported taxable PARTS/COMPONENTS/SUBASSEMBLIES which are incorporated into the finished PRODUCT by using the Table ODC weight specified for the PRODUCT instead of the Table ODC weights specified for the PARTS/COMPONENTS/SUBASSEMBLIES.

ADDITIONAL ALTERNATIVE "SHORT CUT" METHOD

It is a recordkeeping nightmare to keep track of which parts/components/subassemblies are incorporated into a finished product. We, therefore, suggest that a "short cut" method be adopted. This method would rest on two presumptions which we feel would be acceptable to the IRS --

1) The importer can reasonably identify and link specific parts/components/subassemblies to a finished product.

2) At least one part/component/subassembly is included in a finished product.

We suggest the following paragraph be added to Reg. sec. 52.4682 --

If an importer can identify and link specific parts/components/subassemblies to a finished product by, for example, having a separate facility which imports the products for assembly used only at that facility, then the importer will be presumed to incorporate one part/component/subassembly of the relevant parts into the finished product unless the importer can establish and substantiate a more appropriate alternative ratio of part/component/subassembly to finished product.

We are pleased to have had the opportunity to comment on these regulations and hope that these comments will serve to assist the IRS and taxpayers in implementing fair and equitable ODC tax rules.

If you have any questions or seek clarification of these recommendations, please call.

Very truly yours,

 

 

James J. Quaglietta

 

Donna Triano

 

Corporate Tax Department

 

Sony Corporation of America

 

Park Ridge, New Jersey
DOCUMENT ATTRIBUTES
  • Authors
    Triano, Donna
    Quaglietta, James J.
  • Institutional Authors
    Sony Corporation of America
  • Cross-Reference
    PS-73-89
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    toxics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 90-7871
  • Tax Analysts Electronic Citation
    90 TNT 228-26
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