HQ 557735 - Applicability of U.S. Note 2(b), subchapter II, Chapter 98, HTSUS, to footwear from the Dominican Republic - United States International Trade Commision Rulings

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HQ 557735

May 27, 1994

CLA-2 CO:R:C:S 557735 WAS

CATEGORY: CLASSIFICATION

Ms. Catherine DeBease
Conversations de Chaussures
14 N. Park Street
Watertown, MA 02172

RE: Applicability of U.S. Note 2(b), subchapter II, Chapter 98, HTSUS, to footwear from the Dominican Republic

Dear Ms. DeBease:

This is in reference to your letter dated November 5, 1993, requesting a ruling on the applicability of U.S. Note 2(b), subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS) ("Note 2(b)"), to textile footwear from the Dominican Republic.

FACTS:

You state that you plan on producing a fabric footwear line in the Dominican Republic. You claim that you previously manufactured these shoes in Thailand and intend to transfer operations to the U.S., while using a stitching facility in the Dominican Republic to process the footwear upper. You state that the operations to be performed in the Dominican Republic are as follows: All upper fabrics will be combined in the U.S. and will arrive on rolls in the Dominican Republic. In the Dominican Republic, the fabric will be cut into patterns, stitched and assembled into the footwear upper. In addition, the socklining for the footwear will be cut in the Dominican Republic. These components will be shipped to the U.S.

The operations to be performed in the U.S. are as follows: Materials will be cut for the midsole, heel padding and arch in the U.S. Finally, the unassembled components will be glued together, the sole will be laid, the sock will be inserted into the lining, and the footwear will be marked. You also state that any pattern or mold work involved in the production of the footwear will take place in the U.S.

In addition, you state that additional materials such as binding ribbon, thread and elastic may be supplied to the factory in the Dominican Republic to complete the upper.

Finally, under another proposed scenario, you state that the outsole may be produced in the Dominican Republic, and both the upper and socklining components will be shipped to the U.S. for final assembly.

ISSUE:

Whether the footwear and footwear parts which are produced in the Dominican Republic from U.S. materials as described above, are eligible for duty-free treatment under Note 2(b).

LAW AND ANALYSIS:

Section 222 of the Customs and Trade Act of 1990 (Public Law 101-382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS, to provide for the duty-free treatment of articles (other than textile and apparel articles, and petroleum and petroleum products) which are assembled or processed in a Caribbean Basin Economic Recovery Act (CBERA) beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin. This amendment was effective with respect to goods entered on or after October 1, 1990.

Note 2(b) provides as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum, provided for in heading 2709 or 2710) may be treated as a foreign article, or as subject to duty, if--

(i) the article is--

(A) assembled or processed in whole of fabricated components that are a product of the United States, or

(B) processed in whole of ingredients (other than water) that are a product of the United
States, in a beneficiary country; and

(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country.

As stated in this paragraph, the term "beneficiary country" means a country listed in General Note 3(c)(v)(A).

Although Note 2(b)(i)(A) and (B) are separated by the word "or", it is our opinion that Congress did not intend to preclude free treatment under this provision to an article which is created in a BC both by assembling and processing U.S. fabricated components and by processing U.S. ingredients.

Pursuant to General Note 3(c)(v)(A), HTSUS, the Dominican Republic has been designated as a BC for CBERA purposes. We have previously held that footwear and parts of footwear are eligible articles under Note 2(b). See T.D. 91-88, 25 Cust. Bull. 45 (1991). Customs has followed this position on footwear and parts of footwear in HRL's 555742 dated November 5, 1990, and 555788 dated September 9, 1991. These rulings allowed duty-free treatment under Note 2(b) to footwear and footwear uppers made, at least in part, of textile materials.

In regard to the operations performed in the Dominican Republic, we believe that the assembly and processing of the U.S. materials and ingredients, which consist of cutting fabric to shape, stitching the components together, and assembling the upper and socklining, are encompassed by the operations specified in Note 2(b).

In regard to your question concerning whether duty-free treatment under Note 2(b) will be affected when items such as binding ribbons, thread and elastic are supplied to the Dominican factory, HRL 556013 dated June 17, 1991, is relevant. For purposes of this proposed scenario, we assume that the items which will be supplied to the Dominican Republic factory are not of U.S. origin. In HRL 556013, we found that enema tip assemblies, which were made with U.S. materials as well as adhesive of German-origin, which was used to secure the string ends and cuff of the enema tip assemblies, were eligible for duty-free treatment under Note 2(b). We stated in HRL 556013 that:

[b]ased on the information you submitted, the cost of the adhesive represents approximately one percent of the total cost of the completed article. General Note 7(e)(i), HTSUS, states that, for purposes of the tariff schedule, the term "'wholly of' means that the goods are, except for negligible or insignificant quantities of some other material or materials, composed completely of the named material." It is our determination that although the enema tip assemblies are not made of 100% U.S. components and ingredients, the adhesive constitutes merely an insignificant portion of the entire article and, therefore, the presence of the foreign adhesive would not preclude application of duty-free treatment under Note 2(b).

We have generally held that the presence of foreign-origin materials will not defeat eligibility under this provision where the cost of the foreign materials does not represent more than one percent of the total cost of the completed article and the foreign material is not an integral component of the completed article. See HRL 556013; HRL 556745 dated October 23, 1992. Based upon the limited facts presented, we cannot conclude that functional foreign materials such as thread, binding ribbon and elastic which are used to produce the footwear upper are not integral components of the footwear. Indeed, it appears that under these circumstances, only one component of the upper would be of U.S.-origin, i.e., the fabric. Therefore, we find that the presence of foreign-origin thread, binding ribbon and elastic would preclude eligibility for free entry under Note 2(b).

You also propose to produce the outsoles in the Dominican Republic, and then ship the upper, socklining and outsoles to the U.S. for final assembly. We are assuming, based on the information you have presented, that the outsole is made in the Dominican Republic with foreign materials and is imported into the U.S. along with the upper and socklining. Under these circumstances, as the imported unassembled footwear are not made wholly of U.S. components, as required by Note 2(b), none of the footwear parts, including the upper and socklining, is entitled to Note 2(b) treatment.

HOLDING:

On the basis of the information submitted and assuming that all materials from which the footwear uppers and socklinings are made are in fact of U.S.-origin, we conclude that the footwear uppers and socklinings made in the Dominican Republic wholly from materials of U.S. origin are entitled to duty-free treatment under Note 2(b), upon compliance with the imported directly requirement under Note 2(b) and the documentation requirement set forth in Headquarters telex 9264071 dated September 28, 1990.

If, however, non-U.S. origin binding ribbons, thread and elastic are used to produce the footwear upper, duty-free treatment under Note 2(b) for the upper will be precluded.

Finally, in regard to the outsole, because the imported unassembled footwear is not made wholly of U.S. components, as required by Note 2(b), none of the footwear parts, including the upper and socklining, is entitled to duty-free treatment under Note 2(b).

Sincerely,

John Durant, Director
Commercial Rulings Division

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