d) Articles Subject to Internal Revenue Code

(a) Residence in Zone - No person shall be allowed to reside within an activated area of a zone except Federal, state, or municipal personnel whose residence is deemed necessary by the FTZB (19 U.S.C. §81o(a)).

(b) Retail Trade – Retail trade without special permit is prohibited within activated portions of foreign-trade zones (15 CFR 400.45).

Definition of "Retail Trade" - "Retail trade" means, generally, sales or offers to sell goods or services in small quantities directly to consumers or to individuals for personal use. If there are any questions on retail trade issues, the Port Director should contact the Board. Consistent with the foregoing definition, the following activities are considered retail trade:

(i) Sales or offers to sell goods at retail in a zone;

(ii) Sales or offers to sell services at retail in a zone (e.g., airline ticket offices, travel agencies, automobile repair shops, household or personal effects storage); or

(iii) Sales or offers to sell services at retail made outside a zone of goods held in or services rendered in a zone.

This restriction applies only to activated areas of the zone and retail trade can be conducted without restriction from any place outside an activated zone area. A violation would occur if retail trade was conducted in an activated area of the zone without Board approval. Retail trade can be conducted from an area within the zone that has been excluded or removed from activation

(1) Penalties for Violations - Violations of the retail trade prohibition may be subject to a fine by the Port Director under 19 U.S.C. §81s and 19 CFR 146.81. Liquidated damages, where applicable, may be imposed in addition to any fines in appropriate cases (Section 13.4 FTZM). The fine may be assessed against the Grantee, or any agent, Operator, officer, or employee thereof, whether or not they are located in the zone, which has responsibility for, or has permitted the violation. All such fines pursuant to 19 CFR 146.81 are subject to review by CBP (19 CFR 146.81(b)). Petitions for relief from the fine may be filed with the Port Director under the provisions of 19 CFR Part 171.

(c) Motor Vehicles Owned by Individuals - Motor vehicles owned by individuals may not be stored, repaired, or sold in a zone in violation of the prohibition against retail trade. Neither may the vehicles owned by individuals be stored, worked on, or processed pending bringing them into compliance with the regulatory requirements of EPA under 40 CFR 85 and 40 CFR 86, 19 CFR 12.73 and the National Traffic Safety Administration (49 CFR Part 555, 49 CFR 567, 49 CFR 568, and 49 CFR 571), if such activities constitute a violation of the prohibition against retail trade. Such activities may be

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conducted by registered importers (RIs) and independent commercial importers (ICIs), motor vehicle manufacturers, motor vehicle wholesalers, and similar parties, so long as the activities do not constitute prohibited retail trade (Telex 10481 dated October 17, 1984, and 2533 dated March 15, 1985, and see Sections 11.5(c) and 11.7(h) FTZM).

(d) Articles Subject to Internal Revenue Service Code – The FTZ Act prohibits the manufacture of alcohol, tobacco and firearms in zones. No operation involving any foreign or domestic merchandise brought into a zone, which operation would be subject to the IRS Code the Customs territory, shall be performed in a zone except those operations (other than rectification of distilled spirits and wines or the manufacture or production of alcohol products unfit for beverage purposes) that were permissible under the FTZ Act before July 1, 1949 (Fifth Proviso, 19 U.S.C. §81c(a)). The FTZ Act has been amended to allow the use of distilled spirits and denatured distilled spirits in certain specified processes (19 §81c (a)).

(1) Internal Revenue Code Provisions Now in Effect - The provisions cited in the Fifth Proviso which are now in effect are those involving:

Original Provision Current Provision

-Tobacco Products Chapter 15 Title 26 U.S.C. §5701 et seq. -Firearms Chapter 25 Title 26 U.S.C. §4181, 26 U.S.C. §4182, and 26 U.S.C. §5801 et seq.

-Alcohol Products Chapter 26 Title 26 U.S.C. 5001 et seq.

All other provisions cited in the Fifth Proviso are repealed or suspended.

(2) Nature of Restriction - Generally, the purpose of the Fifth Proviso is to prohibit the circumvention of any taxes or controls on merchandise imposed by the Internal Revenue Code through activities in a zone, unless the activity was permitted before July 1, 1949. However, the rectification of distilled spirits and wines, and the manufacture of alcohol products unfit for beverage use are prohibited even if they were permitted before July 1, 1949. Since no manufacturing was permitted in zones before July 1, 1949, manufacturing of alcohol products, tobacco products, or firearms is prohibited in zones.

(i) Permitted Activities – TTB generally has jurisdiction in zones and should be notified regarding all operations in zones involving these products, especially those involving any type of manipulation. Though manufacturing is prohibited by statute, certain manipulations may be permitted subject to TTB written approval and the Board concurrence that the activity is a manipulation and not a manufacture.

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