Policy Guidance

September 28, 2016
James Swanson
Director, Cargo Security and Controls
Cargo and Conveyance Security, Office of Field Operations
U.S. Customs & Border Protection 1300 Pennsylvania Ave., NW Washington, DC 20229

Dear Mr. Swanson,

At your request, I am writing to provide guidance on whether certain customs procedures that apply to merchandise under the U.S. foreign-trade zones (FTZs) program could apply to merchandise that is never physically present in a FTZ. To address this matter, we have examined, in particular, customs procedures authorized by 19 USC 81 c (“Exemption from Customs Laws of Merchandise Brought into Foreign Trade Zone”) and the customs procedure authorized by 19 USC 1484(i) (“Special Rule for Foreign-Trade Zone Operations” -commonly referred to as the FTZ “weekly entry” procedure).

19 USC 81 c authorizes specific customs procedures for merchandise that is “brought into a zone” and subsequently “exported, destroyed, or sent into customs territory of the United States therefrom” -with a “zone” defined in 19 USC 81 a(i) as “a foreign-trade zone as provided in this chapter,” i.e., as provided in the Foreign-Trade Zones Act (the FTZ Act) ( 19 USC 81 a-81 u ). 19 USC 1484(i) authorizes the particular customs procedure identified in 19 USC 1484(i)( 1) for merchandise that is “withdrawn from a foreign-trade zone” -with 19 USC 1484(i)(4) defining a “foreign-trade zone” as “a zone established pursuant to the Act of June 18, 1934, commonly known as the Foreign Trade Zones Act (19 U.S.C. 81 a et seq.).”

In addition to authorizing certain special customs procedures applicable to FTZs, the FTZ Act established the Foreign-Trade Zones Board as the agency authorized by Congress to “grant to corporations the privilege of establishing, operating, and maintaining foreign-trade zones in or adjacent to ports of entry under the jurisdiction of the United States” (19 USC 81a(b)). The Act sets out requirements for any application · submitted to the FTZ Board requesting establishment of a FTZ, including ( emphasis added):

     § 81f. Application for establishment and expansion of zone
     (a)Application for establishment; requirements Each application shall state in detail 
     (1) The location and qualifications of the area in which it is proposed to establish a zone.
 

The FTZ Act also sets the standard for the FTZ Board to apply in determining whether to authorize a proposed FTZ, stating ( emphasis added):

     § 81 g. Granting of application
     If the Board finds that the proposed plans and location are suitable for the accomplishment of the purpose of a foreign trade zone under this chapter, and
that the facilities and appurtenances which it is proposed to provide are sufficient it shall make the grant.

The FTZ Board’s regulations implementing the FTZ Act reinforce the statutory structure cited above through the following definitions:

Foreign-trade zone (FTZ or zone) includes one or more restricted-access sites,
including subzones, in or adjacent (as defined by Sec. 400.11(b)(2)) to a CBP
port of entry, operated as a public utility (within the meaning of Sec. 400.42)
under the sponsorship of a zone grantee authorized by the Board, with zone
operations under the supervision of CBP. (15 CFR 400.2(h))

And:

Zone site (site) means a physical location of a zone or subzone. A site is
composed of one or more generally contiguous parcels of land organized and
functioning as an integrated unit, such as all or part of an industrial park or airport
facility. (15 CFR 400.2(z))

A significant portion of the FTZ Board’s regulations is then devoted to the process and procedures regarding applications to establish or modify FTZ sites and subzones.

In the context of the statutory provisions cited above, as well at the FTZ Board’s regulations implementing the FTZ Act, it is clear that a FTZ is inherently comprised of one or more physical locations authorized by the FTZ Board pursuant to the application process established by the FTZ Act. As delineated above, the customs procedures of 19 USC 81 c apply only to merchandise that is “brought into a zone” and subsequently “exported, destroyed, or sent into customs territory of the United States therefrom,” and the customs procedure of 19 USC 1494(i) applies only to merchandise “withdrawn from a foreign-trade zone.” In each of those statutory provisions, “a zone” or “a foreign-trade zone” is a FTZ site(s) authorized by the FTZ Board - i.e., a specific, physical location(s) that the FTZ Board has authorized pursuant to the application process of the FTZ Act.

In sum, our analysis of the applicability of the customs procedures in question finds no basis for the application of the procedures of 19 USC 81 c to merchandise that is not “brought into” a specific, physical FTZ site(s) authorized by the FTZ Board and subsequently “exported, destroyed, or sent into customs territory of the United States therefrom” or for the application of 19 USC 1484(i) to merchandise that is not “withdrawn from” a specific, physical FTZ site(s) authorized by the FTZ Board. If you have any additional questions in this regard, please do not hesitate to contact me.

Sincerely,

Andrew McGilvray
Executive Secretary

Memo to:    FTZ Grantees

From:         Andrew McGilvray, Executive Secretary

Date:         September 8, 2010

Re:            Production Equipment Provision

Background

In 1996, the FTZ Act (19 U.S.C. 81a-u) was amended to allow for the deferral and possible reduction of duties on production equipment imported into a Foreign-Trade Zone until such time as it is put into use as production equipment in the zone. 

Clarification on the use of the production equipment provision, as it is known, was subsequently provided to CBP and FTZ grantees through a memo by the Acting Executive Secretary in 2000. The clarification provided in that memo concerned aspects of the provision where questions and issues had arisen up to that point. The memo indicated that the provision applied to production equipment for use in Board authorized activity, and that the equipment would be evaluated in its condition as completed production equipment for customs purposes when it was ready to be put into use. 

Recently, questions have arisen on the applicability of the provision in certain instances as well as the general interpretation of the phrase “production equipment”. This memo is intended to clarify and address those issues. 

Production Equipment Provision in the FTZ Act (19 U.S.C. 81(c)(e)) 

“Production equipment 
(1) In general
Notwithstanding any other provision of law, if all applicable customs laws are complied with (except as otherwise provided in this subsection), merchandise which is admitted into a Foreign­-trade zone 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.”

Discussion

Applicability of the Provision. On September 21, 2009, the National Association of Foreign­-Trade Zones (NAFTZ) submitted a letter which argued, in part, that the legislation amending the FTZ Act did not preclude the use of the production equipment provision by companies located within zone space “pending approval of manufacturing authority” (i.e., prior to the Board’s completion of its review of the applications from companies requesting such authority). In May 2010, NAFTZ further argued that - for a company for which manufacturing authority had not yet been approved by the FTZ Board - it should not be necessarily for the company to have its application pending before the FTZ Board in order to begin to make use of the production equipment provision. These interpretations do appear to be consistent with both the language in the Act and the legislative history. The “Reason for Change” section of the Senate Report (No. 104-393, 10/1/1996) states:

“The Committee believes that, by allowing a manufacturer to assemble, install, and test the equipment before duties would be levied, export production in the United States in FTZs will be encouraged.” 

There is no indication in the reports or in the statute itself that Congress intended to limit the provision to manufacturing operations that have already received approval from the Board to operate under FTZ procedures or that have an application pending requesting such approval. The FTZ Act does not mandate that manufacturing activity receive prior approval from the FTZ Board; the requirement for advance approval of manufacturing activity derives from the regulations put forth by the FTZ Board. In the statute, Congress established a general framework for the program while allowing for such operational requirements to be specified by the Board. As such, Congress would not necessarily have addressed the timing of manufacturing-related applications or approvals in amending the FTZ Act to include the production equipment provision (since no requirement exists in the Act for case-by-case advance approval of manufacturing operations). Therefore, in the context of the Act, the fact that Congress did not address the issue of timing does not seem to be indicative of Congressional intent with regard to timing. 

This interpretation is also consistent with the analysis conducted in 2000. The 2000 memo indicated that, “The provision applies only to production equipment and equipment components that are for use in conducting FTZ Board authorized activity.” The issue that led to the assessment in 2000 was the applicability of the provision to an operation located within an approved zone site that was not active or using zone procedures. The response, therefore, focused on Board authorization to address the fact that the provision is intended for companies using zone procedures and that authorization from the Board is generally required for manufacturing/processing activity. 

The 2000 memo did not address the aspect of timing. A company that is building a plant within an existing zone site and applying (or preparing to apply) for FTZ manufacturing authority for that operation will often be admitting production equipment into the new facility for installation and testing prior to completion (or sometimes initiation) of the Board’s manufacturing review. The intent of Congress was to encourage manufacturing operations through the use of zone procedures. The ability to admit production equipment to the zone while the manufacturing application is pending or under development appears to be consistent with this intent. However, if the application for zone manufacturing is subsequently denied or actual (bona fide)  “production” under zone procedures does not follow the assembly of the “production equipment,” 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. 

Definition of “Production Equipment”. The amendment to the FTZ Act in 1996 used the phrase “production equipment” to describe the merchandise at issue, but did not provide a definition of the phrase. The September 2009 NAFTZ letter also urged that the language of the provision be interpreted broadly to include equipment used in both manufacturing and warehousing activity. The letter argued that: 

•    The same type of equipment is used in both manufacturing and warehouse/distribution types of operations.
•    The language in the legislation is broad; therefore, it applies to any and all machinery and equipment for use in any and all FTZ activities. The text of the bill did not explicitly limit the scope to manufacturing operations only.
•    The phrase “production equipment” was intentionally chosen over “manufacturing equipment” to broaden the scope of the provision beyond manufacturing to include all activity that may occur within a zone.
•    A dictionary definition of manufacturing is “to make ( wares or other products) by hand, by machinery, or by other agency; to work as raw or partly wrought materials, into suitable forms for use; to fabricate, to invent, also to produce mechanically.” The definition for production is, by contrast, “the act or process of producing, bringing forth or exhibiting to view … ” Therefore, the term “production equipment” should include any merchandise used for purposes other than manufacturing, including warehousing, displaying, processing or exhibiting.
•    There is no indication that Congress intended to limit the benefit to manufacturers.

Since the legislation amending the FTZ Act did not define the phrase “production equipment,” this memo will examine the Congressional Report and Record and documents produced on this issue prior to the passage of the legislation to attempt to discern the intent of Congress. 

The “Reason for Change” section of the Senate Report (No. 104-393, 10/1/1996) regarding the amendment to the Act to include the production equipment provision contains the following language: 

“The provision allows for the duty on imported production equipment and components installed in a U.S. FTZ or subzone to be deferred until use of the equipment for production begins. The Committee believes that, by allowing a manufacturer to assemble, install, and test the equipment before duties would be levied, export production in the United States in FTZs will be encouraged.” [ emphasis added] 

The plain language interpretation of the above would indicate that the provision was intended to apply specifically to manufacturing operations. While the initial reference to production does not provide clarification on the meaning of the term, it is immediately followed by a reference to manufacturing. Similar language is also included in several instances in the Congressional Record. From this, it generally appears that the term “production” was used interchangeably with the word “manufacturing” to refer to the operations that would benefit from the provision. 

Even assuming that the term “production” was deliberately chosen to broaden the scope from “manufacturing”, it would appear from dictionary definitions of the term “production” that the intended definition was “to make or create an article”. Under the assumption that the term “production” is broader than “manufacturing”, the reasonable conclusion is that the term was chosen to include manufacturing and processing activities within a zone, both of which were defined in the FTZ Regulations in effect at the time and involve activities that result in the creation of new articles, at least as defined by HTSUS classification or eligibility for entry. Dictionary definitions of production that include phrases such as “exhibiting and bringing forth” apply to uses of the term in situations such as the theater, and not to commercial activities. 

On January 4, 1995, Senator Inouye, advocating for the amendment to the FTZ Act, made the following statements (from the Congressional Record, Senate 293) (emphasis added): 

“This bill does not relieve any manufacturer operating in a U.S. foreign trade zone or subzone of its obligation to pay all applicable duties on such equipment, but rather it would allow these firms to defer the payment of duty until the equipment begins commercial operations.” 

“This legislation provides several practical advantages for U.S. manufacturers.” 

” … it will remove an unnecessary economic burden on U.S. manufacturers … “ 

“Further, it will help preserve the American manufacturing base … “ 

Senator Inouye used the phrase “production equipment” to refer to the merchandise that receives the benefit from the legislation. However, he consistently describes the companies that could use the provision as “manufacturers” and appears to be supporting the provision as a means to assist the competitiveness of U.S. manufacturers. At the same time, there is no mention of other types of companies or activities that may benefit from the provision. 

Further examination of the documents that preceded the legislation sheds additional light on the use and origins of the phrase “production equipment” in this context. In 1982, the U.S. Customs Service issued a ruling on this topic, which was later revisited in 1988. The latter ruling contains the following: 

” … under a ruling published as CSD 82-103, foreign manufactured production machinery to be brought into a zone, free of duty, to be used as production machinery to make other articles. That ruling allowed a manufacturer to defer the payment of duty until the machinery was used.” (Revocation of CSD 82-103, 11/30/1988) 

This language contains two points of note. First, as in the Congressional language, the types of companies affected are “manufacturers”. Second, the term “production machinery” is used, and is further refined by the phrase “to make other articles.” Combined with the word “manufacturer” in the second sentence, the implication seems to be that “production machinery” is used by manufacturers to make products. The legislation amending the FTZ Act to allow for a benefit on “production equipment” was made, in part, in response to the ruling above, revoking a prior Customs ruling that had allowed companies to take the production equipment benefit in zones. 

The revocation of CSD 82-103 cited above was triggered by a court case decided on August 16, 1988. In the decision, the court indicated that the issue involved,” … machinery and related capital equipment imported to produce merchandise in a foreign trade zone … ” (Nissan Motor Mfg. Corp., U.S.A. v. United States). The court decision uses this phrase interchangeably with “production machinery” and “production equipment”. It appears that the term “production” was being used to refer to machinery and equipment used to produce merchandise. 

The NAFTZ letter also argued that the use of some of the same types of equipment in both manufacturing and distribution operations supports the broader interpretation of the phrase. While similar types of equipment may be used in the different operations, the ultimate use of that equipment will differ, and it appears that the focus of the legislation was on the use of the equipment and the operations conducted and not on the type of equipment itself. 

The language in the Congressional Report and Record on the amendment to the FTZ Act, as well as earlier language on which the legislation was based, appears to support a conclusion that the intent of the production equipment provision was to benefit U.S. manufacturers. The record does not appear to suggest that the intention of Congress was to apply the term “production equipment” more broadly than to machinery/equipment which is used to make other articles. There is no indication that Congress intended to provide this benefit to warehouse and distribution operations, and the plain language in the Congressional Report and Record supports the interpretation that manufacturers producing merchandise were the intended target. To define production equipment more broadly would appear to go beyond what Congress intended. 

Conclusion: 

In summary, it appears from the language in the statute and legislative history that the intent of the production equipment provision in the FTZ Act was to encourage manufacturing through the use of zone procedures. As a result, it appears that the ability to admit production equipment to the zone while a manufacturing application is pending or under development is consistent with the intent of Congress. However, if an application for zone manufacturing is subsequently denied or actual (bona fide) “production” under zone procedures does not follow the assembly of the “production equipment,” 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. 

With regard to the applicability of the provision to warehouse and distribution operations, a plain ­language reading of the statute and legislative history provides no indication that Congress intended to extend this benefit to such operations. The language in the Congressional Report and Record support the interpretation that manufacturers were the intended target of the legislation. To define production equipment more broadly would appear to go beyond what Congress intended. 

February 14, 2000

Memo For:  Foreign-Trade Zone Grantees
    U.S. Customs Service Port Directors

From:    Dennis Puccinelli
    Acting Executive Secretary

Re: Clarification of Production Equipment Provision

Section 81c(e) of the FTZ Act allows zone users to admit production equipment that is intended for use in Board authorized FTZ activity. Payment of duty would be deferred until such equipment goes into use as production equipment as part of FTZ activity, at which time the equipment is entered for consumption as completed equipment. Alternatively, production equipment that is not for use within a zone may continue to be treated as normal merchandise. Section 81c(e) is interpreted as follows:

1. The provision applies only to production equipment and equipment components that are for use in conducting FTZ Board authorized activity. For example, a subzone that is authorized by the FTZ Board to produce automobiles would be able to admit to the subzone equipment related to the production and distribution of automobiles at that facility.

2. The provision applies only to merchandise that can be specifically identified as production equipment or equipment components. It does not apply to general materials (such as steel mill products) that are used in the installation of production equipment or in the assembly of equipment. It also does not apply to materials used in the construction or modification of the plant that houses the equipment. (A good test would be to ask whether the article would otherwise be classified as an equipment component if it were immediately entered for consumption.)

3. The equipment should be evaluated for Customs duty purposes in its condition when it goes into production (i.e., as complete production equipment), keeping in mind the requirements for evaluating incoming articles subject to antidumping/countervailing (AD/CVD) orders. The FTZ regulations require the election of privileged foreign status, upon admission to the zone, on any incoming merchandise that is subject to AD/CVD orders (15 CFR Sec. 400.33). When such merchandise leaves the zone for U.S. commerce, it will be subject to AD/CVD procedures based on its condition when it arrived at the zone.

4. Production equipment that is not intended for use within a zone for FTZ Board authorized activity may be admitted to a zone as normal merchandise, provided the equipment is entered for consumption or exported prior to its use. Such equipment may be treated as any other type of merchandise. For example, it may admitted to a zone as merchandise for storage and minor manipulation under a zone’s general scope of authority. It may also be assembled, processed or manufactured provided there is specific authority from the FTZ Board (as is the case with any merchandise).

Grantees making applications to the FTZ Board that involve activity that is likely to involve production equipment that may be admitted under the provision (usually subzones) should ensure that the application discusses the potential for use of the provision and include a range of potential savings in the discussion of the overall FTZ saving estimate.

If you have any further questions, you may call me at (202) 482-2862.

MEMO FOR: Foreign-Trade Zone Grantees

FROM: Andrew McGilvray
 Executive Secretary

SUBJECT: Two Current Questions Related to Continued Designation of Certain FTZ Sites

DATE: March 4, 2009

SUMMARY
Under the Foreign-Trade Zones (FTZ) Act of 1934 (the Act), the FTZ Board is authorized to
grant to qualified organizations the privilege of establishing FTZs in or adjacent to customs ports of entry in the United States. Each FTZ is established at one or more sites selected by the “grantee” organization based on the sites’ suitability for FTZ uses.

This document contains the analysis of the FTZ Staff and its legal advisors in applying the FTZ Act and the Board’s regulations to two questions related to continued FTZ designation of sites previously approved by the FTZ Board:

1) Do the FTZ Act and/or regulations give a property owner a right to FTZ designation?
The simple answer to this first question is that the FTZ Act only authorizes the FTZ Board to
grant the “privilege” (not “right”) of FTZ authority to the class of organizations specifically
defined as “grantees” in the FTZ Act. Non-grantee property owners are not mentioned in the
FTZ Act and the Board has no authority to grant them any right or privilege pertaining to FTZ
designation for sites.

2) Can a grantee retain a FTZ site against the wishes of the owner (or other party with the right to use the property — see detailed discussion of Question # 2 below) of the property?
The simple answer to this second question is that if a property owner’s authorization for a
grantee’s use of a site was a basis for the FTZ Board’s approval of the site, then the grantee
should not be able to retain FTZ designation for the site if the property owner no longer wishes the property to be included in the FTZ in question.

More detailed analyses pertaining to these questions follow the “Background” section below.

BACKGROUND
The FTZ Act (19 U.S.C. 81a-81u) delineates the specific powers of the FTZ Board. Section
81b(a) establishes the Board’s primary authority:

The Board is authorized, subject to the conditions and restrictions of this chapter and of
the rules and regulations made thereunder, upon application as hereinafter provided, to
grant to corporations the privilege of establishing, operating, and maintaining foreign-trade zones in or adjacent to ports of entry under the jurisdiction of the United States.

In addition, section 81a(h) of the FTZ Act defines that:

The term “grantee” means a corporation to which the privilege of establishing, operating,
and maintaining a foreign-trade zone has been granted.

 Other authority of the Board provided by the FTZ Act includes issuing regulations (Sec. 81h),
revoking grants for violations of the FTZ Act (Sec. 81r), issuing fines for violations of the FTZ
Act or the Board’s regulations (Sec. 81s), and ordering “the exclusion from the zone of any
goods or process of treatment that in its judgment is detrimental to the public interest, health, or safety” (Sec. 81o(c)). 

The Board’s regulations (15 CFR Part 400) provide further explanation regarding the Board’s
authority and on the relationship between a zone, a zone grantee, and zone sites. The “Authority of the Board” section of the regulations (Sec. 400.11(a)) states in part that, “in accordance with the Act and procedures of this part, the Board has authority to… [i]ssue grants of authority for zones and subzones, and approve modifications to the original zone project…” (Sec. 400.11(a)(2)).

The remaining authority described in 15 CFR 400.11 involves prescribing rules and
regulations concerning zones (Sec. 400.11(a)(1)), approving manufacturing and processing
activity in zones and subzones (Sec. 400.11(a)(3)), making determinations on matters requiring Board decisions under the regulations (Sec. 400.11(a)(4)), deciding appeals in regard to certain decisions of the Commerce Department’s Assistant Secretary for Import Administration or the Executive Secretary (Sec. 400.11(a)(5)), inspecting the premises, operations and accounts of zone grantees and operators (Sec. 400.11(a)(6)), requiring zone grantees to report on zone operations (Sec. 400.11(a)(7)), reporting annually to the Congress on zone operations (Sec. 400.11(a)(8)), restricting or prohibiting zone operations (Sec. 400.11(a)(9)), imposing fines for violations of the Act and the regulations (Sec. 400.11(a)(10)), revoking grants of authority for cause (Sec. 400.11(a)(11)) and determining, as appropriate, whether zone activity is or would be in the public interest or detrimental to the public interest (Sec. 400.11(a)(12)).

In addition, the “Definitions” section of the regulations (Sec. 400.2) includes the
statements that the “[z]one grantee is the corporate recipient of a grant of authority for a zone
project” (Sec. 400.2(p)) and that “[z]one project means the zone plan, including all of the zone
and subzone sites that the Board authorizes a single grantee to establish” (Sec. 400.2(r)). 

ANALYSIS

Question # 1 Do the FTZ Act and/or Regulations Give a Property Owner a Right to FTZ
Designation?

The first issue to examine in detail has a potential impact on the ability of a number of grantees to manage their zone projects effectively. Until recent decades, individual FTZs tended to have only one site — or, at most, a small number of sites — and the sites were often owned by the grantee (such as a port or airport authority). However, grantees have increasingly been proposing to the FTZ Board inclusion of non-grantee owned sites; such sites have often been justified based on projections of FTZ use. Under the FTZ Act and the Board’s regulations, nongrantee owned land may be approved as zone sites. However, the question that we are seeking to address is whether the non-grantee owner of land within an approved FTZ has any right to the FTZ designation of the land under the FTZ Act or regulations. A related question is whether there is any bar or limitation under the FTZ Act or regulations to a grantee proposing removal of FTZ designation from such a non-grantee owned site.

The starting point in assessing the question of whether there are non-grantee rights to FTZ
designation is evaluating the scope of the Board’s authority to make grants of FTZ designation.

The FTZ Act indicates that the sole relevant authority of the FTZ Board is the Board’s primary
authority as delineated in section 81b(a): “The Board is authorized… to grant to corporations the privilege of establishing, operating, and maintaining foreign-trade zones…” The FTZ Act also states that “a corporation to which the privilege of establishing, operating, and maintaining a foreign-trade zone has been granted” is termed a “grantee” (section 81a(h)). Based on the plain language of these sections of the FTZ Act, the only corporations to which the FTZ Board is authorized “to grant… the privilege of establishing, operating, and maintaining foreign-trade zones” are “grantees.” The FTZ Board’s regulations are clear in reinforcing the language of the FTZ Act regarding the authority of the Board. Specifically, the regulations state that the Board “has authority… to [i]ssue grants of authority for zones and subzones, and approve modifications to the original zone project” (Sec. 400.11(a)(2)) and that the “[z]one grantee is the corporate recipient of a grant of authority for a zone project” (Sec. 400.2(p)), with a zone project defined as “including all of the zone and subzone sites that the Board authorizes a single grantee to establish” (Sec. 400.2(r)).

The FTZ Act and the Board’s regulations are consistent and unambiguous in expressing that the Board’s authority is to grant to “grantees” the “privilege of establishing, operating, and
maintaining foreign-trade zones.” The FTZ Act and regulations do not reflect any other
authority relative to approving FTZ sites. As described above, the regulations state that the
grantee is “the corporate recipient of a grant of authority” for “all of the zone and subzone sites that the Board authorizes a single grantee to establish.” In this context, the Board has no legal authority to grant authority related to the establishment of any FTZ site to any entity other than a grantee.

It should also be noted that the records generated by the FTZ Board since the enactment of the FTZ Act are clear regarding the specific corporations which have been approved as “grantees.” Each grantee to which the FTZ Board has granted authority is specifically identified as such in the official Board Order establishing that grantee’s FTZ, as well as in subsequent Board Orders for that FTZ. Therefore, for example, the City of New York is identified as “the Grantee” in Board Order Number 2 (dated 1/30/1936) establishing FTZ # 1 in New York City, and is identified as the grantee in the subsequent Board Orders for FTZ # 1 to the present day (For example, the City of New York is identified as the grantee of FTZ # 1 in Board Order Number 1010 dated (11/16/1998) which approved the grantee’s application to expand FTZ # 1 to include a new site that included land owned by a non-grantee corporation).

The Board has consistently maintained and made publicly available the official lists of these
authorized grantees, including in its statutorily mandated annual reports to Congress. The
Board’s web site — accessible via www.trade.gov/ftz — contains an up-to-date list of all
authorized grantees. In the statutory and regulatory context delineated above, there is no party other than the grantee with any authority granted by the FTZ Board related to the establishment of FTZ sites. It is worth noting that even the authority which may be granted to grantees is explicitly framed as a “privilege” rather than a “right” in the FTZ Act (Sec. 81b(a)). Accordingly, not even grantees, to which the FTZ Board grants the privilege to establish a FTZ, have rights under the FTZ Act to site designation. It is clear, therefore, that property owners in a site, who are not even mentioned in the FTZ Act, do not have any right to site designation.

Moreover, the Board’s regulations make two other key points on the general issue of FTZ
designation of privately owned land or facilities as it relates to grantees’ management of their
zone projects: 1) private ownership of land or facilities within a FTZ is permitted only to the
extent that “the zone grantee retains the control necessary to implement the approved zone
project” (15 CFR 400.28(a)(8)) and 2) “[z]one grantees shall ensure that the reasonable zone
needs of the business community are served by their zone projects” (15 CFR 400.41). When
taken together with the regulations’ requirement for a justification for any proposed FTZ site (15 CFR 400.23(a)), these sections of the regulations have an impact not only on questions of
whether a grantee initially decides to propose various sites for FTZ designation but on the degree to which such designation is appropriate for the grantee to maintain over time.

A FTZ site is designated by the Board based on a justification submitted by the requesting
grantee. Such a justification, which generally indicates that the proposed site is needed to meet the trade-related needs of the region served by the grantee, commonly incorporates projections of future use. However, such projections inherently are speculative to varying degrees. As such, projected future use may not actually occur. Such a circumstance is a key example of a situation in which a grantee may determine that a designated FTZ site is no longer needed to serve potential FTZ users.

Requesting removal of FTZ designation from unused sites — possibly in combination with
requesting authorization of FTZ designation for one or more other sites which appear to be better suited for meeting evolving trade-related needs — is inherently part of the function of a grantee. As noted above, the FTZ Board’s regulations state that “[z]one grantees shall ensure that the reasonable zone needs of the business community are served by their zone projects.” Ensuring that reasonable zone needs are served involves both proposing new FTZ sites as needed and proposing to remove old FTZ sites that are not needed. (The removal of older FTZ sites is often tied to the addition of new sites because it can be more difficult for a grantee to demonstrate a need for new sites if the grantee has existing inactive older sites — the “Criteria for grants or authority for zones and subzones” section (Sec. 400.23) of the Board’s regulations specifically requires “justification for duplicative sites” (Sec. 400.23(a)(2)).)

In sum, as explained above, the FTZ grantee is the sole party to which the FTZ Board is authorized to grant any authority related to FTZ sites. The FTZ Act and regulations do not even give grantees a right to continued site designation. Therefore, property owners in a site do not have any such right under the FTZ Act or regulations. Further, requesting removal of FTZ designation from certain sites is inherent to the expected functioning of a FTZ grantee. In this context, for a grantee considering whether it can propose removal of FTZ designation from one or more sites based on the grantee’s determination that the sites are no longer necessary to meet the trade-related needs that the grantee is seeking to serve, there is no impediment based on any right of a non-grantee property owner under the FTZ Act or the Board’s regulations (therefore, for example, the grantee would not need to obtain the consent of the owner(s) of land which had been designated as a FTZ site and which the grantee has since determined is no longer appropriate for continued FTZ designation and now proposes to remove from the FTZ).  It is worth noting that grantees are bound by the statutory requirements to operate as a public utility and to offer uniform treatment to users (19 U.S.C. 81n). However, those requirements do not necessarily preclude a grantee’s proposing the removal of FTZ sites.

Question # 2 – Can a Grantee Retain a FTZ Site Against the Wishes of the Property Owner?

The second issue to address involves designated FTZ sites for which the owners of the properties (or the parties with the right to use the properties. Any discussion under this scenario also should generally apply to situations where the consent of a party other than the property owner has been the basis for meeting the regulations’ “right to use” requirement for FTZ designation of a site but where that party subsequently determines that
designation of the property as a site of the FTZ in question is no longer warranted or desirable) determine that it is no longer warranted or desirable to be a part of the FTZs in question. Such a situation would ordinarily be very easy to deal with: the property owner would coordinate with the grantee so that the grantee could submit a request to the FTZ Board to terminate the site’s FTZ designation. However, on occasion a grantee may be unwilling or unable — at least in a timely fashion (the ability of an owner to remove its property from a FTZ in a timely fashion may be important because continued FTZ designation could lead to additional cost for the property owner or result in other complications) — to request such termination of FTZ designation to meet a property owner’s need. Analysis of this scenario is quite straightforward. The FTZ Board’s regulations require that a grantee demonstrate its “right to use” any site not owned by the grantee or the proposed operator (15 CFR 400.24(d)(3)(i)) in order for the site to be proposed for FTZ designation (to demonstrate the “right to use” a proposed site, it has been common for grantees to present letters from property owners in which the owners indicate their concurrence with proposed FTZ
designation for the land. Given that a grantee is the sole party to which the FTZ Board is
authorized to grant any authority related to FTZ sites, a grantee’s use of a property owner’s
concurrence letter to meet the requirement of 15 CFR 400.24(d)(3)(i) is in no way indicative of
the property owner sharing in any FTZ site authority approved by the FTZ Board). Given that a grantee’s right to use is a key underpinning of any approved designation, demonstration that a grantee no longer has a right to use the site — and that the party with the right to use is opposed to continued designation as a site of the grantee’s FTZ — inherently undercuts continued designation of the site as part of the grantee’s FTZ. In such circumstances, a property owner (or other party with the right to use the site) should be able to resort to a direct request to the FTZ Board for removal of FTZ designation if the grantee has been unable to act in a timely manner on the request from the property owner (or other party with the right to use the site) for the grantee to propose termination of the site’s designation to the FTZ Board (such a direct request to the FTZ Board by the property owner (or other party with the right to
use the site) should effectively be a last resort, and should therefore include full documentation of the steps already taken to obtain action by the grantee on proposing removal of the site in question to the Board). Any process based on such a direct request from a property owner (or other party with the right to use the site) should involve the FTZ Board contacting the affected grantee so that the grantee would have an opportunity to present its perspective on the matter.

CONCLUSION

Based on the analysis above, it is clear that a non-grantee owner of land which has been designated as part of a FTZ has no right to that designation under the FTZ Act and the Board’s regulations. In fact, the grantee has an obligation to manage its FTZ on an ongoing basis in a manner that ensures that trade-related needs are being met. That ongoing management will inherently involve, at times, decisions to request termination of FTZ designation for sites that are no longer needed to serve trade-related needs (based on the grantee’s assessment). However, the analysis also indicates that a grantee should not be able to continue FTZ designation of a property against the wishes of the property owner or the party with the right to use the property. The roles of the two types of parties — grantee and property owner/user — can be seen as complementary, with each contributing an essential element for FTZ designation. The grantee contributes its determination that a site is appropriate for proposed (or continued) FTZ designation. Property owners/users contribute their consent for specific parcels of land to be proposed (or maintained) as FTZ sites. These complementary roles balance the interests and influence of the parties.

The September 2010 FTZ staff’s report recommending minor adjustments to the Alternative Site Framework can be found here - 

The December 2008 FTZ staff report proposing the establishment of an alternative site framework can be found here -