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HQ 225903

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January 9, 1995

FOR-2-06-CO:R:C:E 225903 WR

CATEGORY: FOREIGN TRADE ZONE

Director, Office of Trade Operations
Office of Commercial Operations
U.S. Customs Service

RE: 19 U.S.C. 81c(a) Dutiable Status of Articles made in FTZ when returned to the U.S.

Dear Sir:

This is in reference to your request for internal advice on the dutiable status of automobiles made with foreign components in a foreign trade zone if imported after being exported from the zone.

FACTS:

Automobiles are made in a foreign trade zone using some parts of foreign origin. Those parts were admitted into the zone in either privileged foreign status or nonprivileged foreign status. After manufacture, the automobiles were exported to Canada without any duty having been paid on those parts. After that exportation, the automobiles are imported into the United States.

ISSUE:

Whether the sixth proviso to section 3 of the Foreign Trade Zones Act (19 U.S.C. 81 c(a)) requires duty to be assessed on the full value of an automobile made in a zone, exported and then imported into the U.S.

LAW AND ANALYSIS:

The relevant statutory language is the sixth proviso to section 3 of the act of June 18, 1934 (48 Stat. 999) as amended. The sixth proviso was added by the act of June 17, 1950 (64 Stat. 246). The statute is known as the Foreign Trade Zones Act. The proviso states:

That articles produced or manufactured in a zone and exported therefrom shall on subsequent importation into the customs territory of the United States be subject to the import laws applicable to like articles manufactured in a foreign country, except that articles produced or manufactured in a zone exclusively with the use of domestic merchandise, the identity of which has been maintained in accordance with the second proviso of this section may, on such importation, be entered as American goods returned.

The legislative purpose of the proviso is found in S. Rpt. 1107 of September 26, 1949 on H.R. 5332. With respect to the proviso the report stated:

This section would also add a new sixth proviso to clarify the duty and tax status of articles which, after having been produced or manufactured in a zone and exported to a foreign country, are subsequently imported into customs territory of the United States. The proviso would make such articles dutiable and taxable as if manufactured in a foreign country. There is an exception, however, which would permit the free entry as American goods returned of any articles which had been produced or manufactured in a zone exclusively with the use of privileged domestic merchandise, that is, merchandise upon which the duty and tax, if any, had already been paid and the identity of which had been maintained in accordance with the second proviso to section 3 of the act.

Customs implemented the statutory provisions by the promulgation of regulations by T.D. 53010 (1952) which amended the Customs Regulations of 1943 by adding section 30.14 (n). The text of that regulation was repromulgated as 19 CFR 30.14(o) (1961 ed); 19 CFR 146.46(e)(1971 ed.) and 19 CFR 146.67(e): The relevant text has remained the same since its inception in 1952.

An argument has been made that the words "be subject to the import laws applicable to like articles manufactured in a foreign country" are to be construed to mean like articles made in the specific country from which the article is sent back to the United States. Under that construction, the article made in a zone with foreign components would become an article of the country of re-exportation simply by passing through that country. It is believed that some of the automobiles involved have engines, transmissions, radios and other components of Japanese manufacture. Under the proposed interpretation, the exportation to Canada would convert those Japanese components, on which no duty was ever paid, into a Canadian-origin automobile which would be entitled to be entered duty-free under the North American Free Trade Agreement (NAFTA). Thus, such an automobile could be exported from a zone into Canada and then re-imported into the United States free of duty. Another possible consequence is that such an automobile be made in a zone, exported to France, duty-free and then re-imported into the United States through Canada, again free of duty.

The legal underpinning for that argument is said to be the case of Mount Washington Tanker Co. v. U.S., 505 F. Supp. 209, 1 CIT 32 (1980), Affd. 665 F. 2d. 340, 69 CCPA 23 (1981 ). The case involved a construction of the words "repairs made in a foreign country" in 19 U.S.C. 1466(a). Under that law there was no need for the courts to determine whether the repairs were made in a specific foreign country because the assessment of duty under that law did not depend on the site of the repairs. In that case the court held that repairs made by Swedish workers in Subic Bay, Singapore, Bahrain and on the high seas were not made in the United States for the purpose of 19 U.S.C. 1466. The courts found that the purpose of the law was to protect U.S. shipyards and U.S. labor. The courts held that the repairs would be dutiable under those words if the owner of a U.S. - registered ship chose to forego the use of available U.S. labor to make the repairs. The proposition that "foreign country" means a specific foreign country is simply not found in either court's opinion. Moreover, in view of the appellate's court's caution at 69 CCPA 28 against reliance on mechanical applications of text to find statutory intent, reliance on the Mount Washington Tanker Co, decisions as a key to the interpretation of 19 U.S.C. 81c(a) is misplaced.

With respect to protection of U.S. labor and capital, the interpretation that the country of re-exportation becomes the country of origin is anomalous. It is unclear how the conversion of Japanese parts into a duty-free Canadian automobile by transshipment of that automobile from a zone through Canada and back to the United States would protect the makers of automobile parts in the United States that compete with the Japanese parts.

The rate of duty applicable to imported articles is governed by General Notes 1 and 3; Harmonized Tariff Schedule of the United States (HTSUS)(19 U.S.C. 1202).

General Note 1 states that all goods provided for in this schedule and imported into the Customs Territory of the United States from outside thereof are subject to duty or exempt therefrom as prescribed in General notes 3 and 4 inclusive. An automobile imported into the United States from Canada is covered within the scope of General Note 1 whether or not it was made in a zone. Since General Note 4 covers products of countries designated as beneficiary developing countries for the purpose of the Generalized System of Preferences and there is no evidence such automobiles qualify under that general note, the focus must be on General Note 3.

General Note 3(a)(I), HTSUS, states that except as provided in subparagraph (iv) of this paragraph, the rates of duty in column 1 are the rates of duty applicable to all products other than those of countries enumerated in paragraph (b) of this note. Subparagraph (iv) covers products of U.S. insular possessions and paragraph (b) covers products of nine Communist countries. There is no evidence to suggest that either subparagraph (iv) or paragraph (b) applies.

Under subparagraph 3(a)(ii), the general most-favored-nation rates are made applicable to products of those countries described in subparagraph 3(a)(I) which are not subject to special tariff treatment under subparagraph 3(a)(iii). Thus, a product of a foreign trade zone which, by virtue of the sixth proviso to 19 U.S.C. 81c(a), is not entitled to be under Chapter 98, Subchapter I, HTSUS, as provided by 19 CFR 146.67(e), is dutiable at the most-favored-nation rates, unless one of the special rules apply.

It has been suggested that when the vehicles are entered into the United States from Canada they would be originating goods and thus entitled to preferential tariff treatment under the North American Free Trade Agreement.

Section 202(a) of the North American Free Trade Agreement Implementation Act ( Act of December 8, 1993, 107 Stat. 2057, Pub. L. 103-182) provides in pertinent part as follows:

SEC. 202 RULES OF ORIGIN

(a) ORIGINATING GOODS --

(1) IN GENERAL -- For purposes of implementing the tariff treatment and quantitative restrictions provided for under the Agreement, except as otherwise provided in this section, a good originates in the territory of a NAFTA country if-- xxx

(B) (I) each nonoriginating material used in the production of the good--

(I) undergoes an applicable change in tariff classification set out in Annex 401 of the Agreement as a result of production occurring entirely in the territory of one or more of the NAFTA countries; or

(II) where no change in tariff classification is required, the good otherwise satisfies the applicable requirement so for such Annex; and

(ii) the good satisfies all other applicable requirements of this section;

© the good is produced entirely in the territory of one or more of the NAFTA countries exclusively from originating materials; xxx

In this instance, it is argued that Section 202(a)(1 ) is met by virtue of the operations that are performed in the U.S. Foreign Trade Zone. However, there is specific statutory language which governs the tariff treatment of goods under these circumstances. Section 202(a)(2)(A) provides as follows:

(2) SPECIAL RULES--

(A) FOREIGN TRADE ZONES-- Subparagraph (B) of paragraph (1) shall not apply to a good produced in a foreign trade zone or subzone (established pursuant to the Act of June 18, 1934, commonly known as the Foreign Trade Zones Act) that is entered for consumption in the customs territory of the United States.

Thus the statute contemplates that goods which meet the applicable rule of origin by virtue of operations performed in a United States Foreign Trade Zone will not be regarded as originating upon entry for consumption into the United States. !n this case, it is clear that the operations performed in the zone will not render the vehicles originating based on the change in tariff classification that occurs to the nonoriginating materials in the zone.

It is claimed that the limitation in Section 202(a)(2)(A) is not applicable in this case. Specifically, the inquirer claims that the originating status of the goods is based on the claim that the vehicle is produced entirely in the territory of one or more of the NAFTA countries exclusively from originating materials, under Section 202(a)(1 )(C), except for certain foreign materials which are claimed to be less than 7 percent of the value of the good and are therefore de minimis under Section 202(e). That Section implements Article 405.1 of the Agreement which, in pertinent part, provides:
x x x; a good shall be considered to be an originating good if the value of all non-originating materials used in the production of the good that do not undergo an applicable change in tariff classification set out in Annex 401 is not more than seven percent of the transaction value of the good, adjusted to a F.O.B. basis, or, if the transaction value of the good is unacceptable under Article 1 of the Customs Valuation Code, the value of all such non-originating materials is not more than seven percent of the total cost of the good, x x x

Under the terms of the above provision, the de minimis concept operates only where the materials which are claimed to be de minimis do not undergo an applicable change in tariff classification set out in Annex 401. In this instance the nonoriginating materials do undergo the applicable tariff shift in issue and are not eligible under the terms of the de minimis provision.

Therefore, a good made in a foreign trade zone using all, or some foreign parts, would not be entitled to treatment as American Goods returned by virtue of the sixth proviso to 19 U.S.C. 81c(a). As an imported good, U.S. General Notes 1 and 3, HTSUS, control its tariff treatment. As noted above, the exportation to Canada would not result in entitlement to the tariff treatment under NAFTA. The good would be dutiable under the most-favored-nation rates.

The next question is whether the value of the American components, if any, can be deducted from the dutiable value. As noted above, the relevant regulation, which has been virtually unchanged since 1952, implements the sixth proviso to 19 U.S.C. 81c(a) by providing that such goods are treated as though wholly of foreign origin.

Inasmuch as the regulation was promulgated in its current form pursuant to public notice and comment (see for example T.D. 86-16) it is unlikely that it can be challenged for a procedural defect. The argument that the regulation exceeds Congressional intent in making American parts dutiable is met by reference to similar tariff provisions.

The sixth proviso to 19 U.S.C. 81 c(a) parallels the provisions of subheading 9801.00.80, HTSUS (19 U.S.C. 1202). Under that provision articles previously exported from the United States which had been made in a Customs bonded warehouse or under subheading 9813.00.05, HTSUS, and exported without duty being paid are subject to the duty of like articles not previously exported. The predecessors to subheading 9801.00.80, HTSUS, were item 804.00, TSUS and paragraph 1615(f), Tariff Act of 1930. Only an article of Canadian origin is free of duty under subheading 9801.00.80, HTSUS. See also U.S. Note 2, Chapter 98, HTSUS. which makes prior importations irrelevant unless there is an express exemption. We have determined that the mere passage through Canada's economy would not turn an automobile made in a zone with non-NAFTA parts into a duty-free Canadian automobile.

The only provision for deduction of the value of American materials from an imported article (other than an article entitled to the provisions of Chapter 98, Subchapter I, HTSUS) is subheading 9802.00.80, HTSUS. The predecessor provision was item 807.00, TSUS. See Tariff Classification Study, Explanatory and Background Materials, Schedule 8, pages 3-10 November 15, 1960, and

Conversion of the Tariff Schedules of the United States into the Harmonized System, October 1986. The provision illustrates the Congressional intent to limit the benefit of deduction. The value of the American pads were included in the imported articles' dutiable value in the cases set forth below. As such, the provisions of 19 CFR 146.67(e) do no more than parallel the express Congressional purpose set forth in subheadings 9801.00.80 and 9802.00.80, HTSUS, and their predecessors. A review of several judicial decisions further shows the effect of the Congressional limitation to make a U.S. good fully dutiable if it falls outside the eligibility criteria.

The case of The Rubberset Co. v. U.S., 73 Cust. Ct. 107 (1974) upheld the denial of a deduction for the value of American-made nylon filaments or bristles used to make imported paint brushes.

The Court of International Trade in Proctor & Gamble Distributing Co. v. U.S, 11 CIT 450 (1987), denied deduction of the value of an American-made inner diaper core from an imported diaper because the use of the material failed to meet the requirements of item 807.00, TSUS.

Likewise, in Samsonite Corp. v. U.S., 702 F. Supp. 908, 12 CIT 1146 (1988), Aff'd 889 F. 2d. 1074, 8 Fed. Cir. 9 (1989) the court held that it was proper to include the value of American-made steel strips in the dutiable value of imported luggage. The strips simply did not meet the criteria set by item 807.00, TSUS.

In General Motors v. U.S., 976 F. 2d. 716 (Fed. Cir. 1992) the Court of Appeals reversed the trial court and upheld the denial to deduct the value of sheet metal automobile components made in the United States on the importation of the automobiles because the components did not qualify under item 807.00, TSUS.

These cases show that the fact of American origin in an imported article that is otherwise dutiable at the most-favored-nation rates does not automatically result in a deduction from the value of the American component from the dutiable value. With respect to an article made in a zone, unless it is made exclusively with identified American goods, it is not entitled to treatment as American goods returned. As in the situation of American components under subheading 9802.00.80, HTSUS, the fact of American origin will not result in a deduction from the value of those components unless there is a statutory provision which so provides and we are aware of no such statute. Consequently, we conclude that 19 CFR 146.67(e) does not exceed the statutory scheme set by the sixth proviso to 19 U.S.C. 81 c(a) and General Notes 1 and 3, HTSUS.

HOLDING:

An automobile that is made in a foreign trade zone with some foreign parts and which is exported without the payment of duty on its foreign content is dutiable on its full value at the appropriate most-favored-nation rate of duty on its importation back into the United States. Such an automobile does not qualify for duty-free treatment under the North American Free Trade Agreement.

The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

John Durant, Director
Commercial Rulings Division


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See also:

• Tariff No.: 9801.00.80 - Previously exported articles except aircraft, dutiable upon return
• Tariff No.: 9802.00.80 - U.S. articles assembled abroad, which have not lost their physical identity or have not advanced in value or improved in condition abroad
• Tariff No.: 9813.00.05 - Articles to be repaired, altered or processed (including processes which result in articles manufactured or produced in the United States)