FTZB Issues Final Rule Revising FTZ Regs (Part II – Subzone Designation)

The Foreign Trade Zones Board has issued a final rule, effective April 30, 2012¹, to comprehensively revise and update the Foreign Trade Zone regulations in 15 CFR Part 400. Key revisions in the final rule pertain to activities in and procedures for zones in which an imported component is combined with one or more other components to create a different finished product, and expedited access to FTZ benefits for U.S. manufacturers.

The final rule, in response to comments received by the FTZB, contains many substantive changes from the proposed rule. Changes from the proposed rule include: (1) a new definition of production which, as in the proposed regulations, replaces the manufacturing/processing concepts from the prior regulations; (2) an entirely new two-stage advance approval process, instead of the proposed elimination of advance approval except in cases of tariff inversion, AD/CV & section 337 proceedings, and scrap or waste; (3) new separate processes for obtaining production authority and subzone designation, as well as a simpler and quicker process for obtaining subzone designation; (4) changes to the public utility and uniform treatment provisions from the proposed rule; and (5) provisions for fines only in cases of late annual reports and uniform treatment violations (i.e., production-related violation fines will only be assessed by U.S. Customs and Border Protection (CBP) and not the FTZB).

This is Part II of a multi-part series of summaries of the final rule, and highlights the separation of the subzone approval process from the production approval process, as well as the shorter three to five month processing time for subzone applications. (See ITT’s Online Archives 12022903 for Part I -- Production Approval. See future issues for additional summaries of the final rule.)

Subzone Approval Process Separated from Production Approval

The new regulations completely separate the application and approval process for subzone designation from the process for production authority. According to the FTZB, this change was made directly in response to comments received. The FTZB states that the creation of distinct subzone and production processes is due to the prevalence of companies using subzones for non-production activities. Companies wishing to obtain production authorization and subzone designation may apply/notify concurrently.

New Faster Process for Approval of Subzone Designation

In conjunction with the separation of subzone and production approval, the final rule provides for a 5-month processing time for applications for subzone designation. The new application largely mirrors the minor boundary modification (MBM) request², with the exception of a requirement that legal authority be demonstrated. A 3-month processing time is available provided that the subzone is subject to the sponsoring zone’s activation limit.³ Grantees may also convert an Alternative Site Framework (ASF) usage-driven site into a subzone through the MBM process.

Specifically, the new subzone application process includes:

Streamlined Application. The new application format prescribed in 15 CFR 400.25¹ requires grantees to submit: (1) the name of the operator; (2) the nature of the activity; (3) the address and physical size of the proposed subzone location; (4) a site plan map; (5) an environmental aspects statement; (6) a statement of site ownership (or right to use the site); (7) a commitment to satisfy the requirements for CBP automated systems; and (8) documents demonstrating legal authority. For any production activity to be conducted at a proposed subzone, the separate requirements of the production authorization procedure must be met.

5-Month Processing Time. The new regulations specify that applications for subzone designation will generally be processed within five months, and include the publication of a notice in the Federal Register and a 40-day public comment period. As the subzone approval process has been separated from the production approval process, applications will now be evaluated under the same “demonstration of need” standard as general-purpose applications.

(Under the prior regulations, subzones are evaluated using the same standard of policy and economic factors as a production application evaluation.)

3-Month Processing Time if Subject to Sponsor Zone’s Activation Limit. The new regulations delegate authority to approve subzone designation to the Executive Secretary on the condition that such approved subzones will be subject to the activation limit for the zone in question. The FTZB states that this is due to the fact that, as CBP has already authorized the area subject to activation, there is no need for the full FTZB to review the application. In these cases, the new regulations prescribe a 3-month timeline to process the applications.

Expedited Conversion of Usage-Driven Sites to Subzones. The final rule modifies the regulations to allow for designation as a subzone, using the MBM process, of all or part of an existing zone site, or a site that qualifies for usage-driven status, so long as the subzone activity remains subject to the activation limit for the zone in question. MBMs are generally processed within 30 days of receipt of a completed request.

According to the FTZB, the conversion of usage-driven sites to subzones using the MBM process will not be subject to the fees normally associated with subzone applications.

New Regulations Explicitly Allow Multi-Site Subzones

The final rule amends the definition of subzone at 15 CFR 400.2(s) (19 CFR 400.2(n) of the prior regulations) to specifically allow multi-site subzones. While the prior regulations state that subzone means a special-purpose zone established as an adjunct to a zone project for a limited purpose, the new regulations state that subzone means a site (or group of sites) established for a specific use.

¹While the final rule is effective April 30, 2012, sections 400.21-400.23 (Application to establish a zone, Notification for production authority, and Application for production authority, respectively), 400.25 (Application for subzone designation) and 400.43(f) (certain waivers regarding uniform treatment), which contain information collection requirements that have not yet been submitted for OMB review, will be effective at a later date. In addition, the final rule has certain sections (e.g., regarding uniform treatment) where compliance must occur no later than two years after the April 30, 2012 effective date of the final rule.

²A zone boundary modification could be considered minor if it involves substituting similar space, the proposed activity is similar to that previously authorized, and the change is consistent with the zone plan approved by the FTZB. A minor modification may be authorized by the Executive Secretary (in contrast to a major modification, which requires action by the entire FTZB).

³Activation Limit is defined in the new regulations as “the size of the physical area of a particular zone or subzone authorized by the FTZB to be simultaneously in activated status with CBP pursuant to 19 CFR 146.6. The activation limit for a particular zone/subzone is a figure explicitly specified by the FTZB in authorizing the zone (commonly 2000 acres) or subzone or, in the absence of a specified figure, the total of the sizes of the approved sites of the zone/subzone.”

(See ITT’s Online Archives 12022730 for summary of FTZB issuance of final rule and webinar series to provide education on the new regulations.

See ITT’s Online Archives 12022109 for initial summary of FTZB final rule. See ITT’s Online Archives 12021744 for summary of OMB approving this final rule, just two days after extending its review.

See ITT’s Online Archives 10123022 (part I), 11010325 (part II), and 11010630 (part III) for multi-part series of summaries of proposed FTZ rule. See also ITT’s Online Archives 11071819 for summary of trade’s comments on the proposed regulations, which supported the underlying goals of the revisions but stated that the proposed rule must be revised, clarified, and made less burdensome.)

FTZB’s unofficial summary of key provisions of the revised regulations, full text of the revised regulations, as well as side-by-side comparison of the final, proposed, and prior regulations are available here.

FTZB contact - Andrew McGilvray (202) 482-2862

ITA Contact - Matthew Walden (202) 482-2963