HQ 558983 - Application for Further Review of Protest No. 3801-94-106710 concerning the applicability of subheading 9801.00.10, HTSUS, to Ford Taurus Station Wagons; detrimental reliance; uniform and established practice; 19 U.S.C. 1315(d); Article 509; NAFTA - United States International Trade Commision Rulings

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HQ 558983

June 29, 1995

CLA-2 R:C:S 558983 WAS

CATEGORY: CLASSIFICATION

U.S. Customs Service
District Director
477 Michigan Avenue
Room 200
Detroit, MI 48226

RE: Application for Further Review of Protest No. 3801-94-106710 concerning the applicability of subheading 9801.00.10, HTSUS, to Ford Taurus Station Wagons; detrimental reliance; uniform and established practice; 19 U.S.C. 1315(d); Article 509; NAFTA

Dear Sir/Madame:

This is a decision on an application for further review of the above-referenced protest which was timely filed by Steuart & Parker, on behalf of Mr. Philip Trupiano, of Auto Enterprises, Inc., against your decision regarding denial of duty-free treatment under subheading 9801.00.10, HTSUS, of Ford Taurus Station Wagons (1994 models). The subject merchandise was entered on March 29, 1994 through the port of Detroit and was liquidated on August 19, 1994. We had an opportunity to meet with counsel on March 10, 1995, to further discuss this matter. Counsel submitted additional information dated April 11, 1995, which was considered in rendering our decision. Our decision follows.

FACTS:

The merchandise which is subject to this protest consists of 1994 Ford Taurus model vehicles imported from Canada. Protestant submits that the vehicles were assembled in U.S. foreign trade zones ("FTZ") (assembly plant in Chicago, Illinois, foreign trade subzone 22B) and then shipped directly from the FTZ to Canada where they were used primarily as rental vehicles prior to being imported into the U.S. Upon entry into the U.S., the vehicles were classified under heading 8703, HTSUS, and assessed a duty rate of 2.5 percent ad valorem. Protestant claims that the vehicles should be eligible for duty-free treatment under subheading 9801.00.10, HTSUS, when they are returned to the U.S. and contests Customs denial of duty-free treatment for the subject entries.

Protestant states that the vehicles entered into the commerce of Canada in many cases as a result of purchases by rental car companies for incorporation into their fleets. Protestant further states that after a certain period of time many of these vehicles are then purchased by U.S. Department of Transportation-licensed importers, such as protestant, for reimportation into the U.S. These vehicles are then serviced to satisfy U.S. DOT standards and sold for use in the U.S. market.

Protestant submits that there is no legal basis which allows Customs to advance the rate of duty for these vehicles. Furthermore, protestant claims that there is no legal basis which disallows the payment of a lower duty rate and that in accordance with U.S. law, the North American Free Trade Agreement and the NAFTA Implementation Act, the vehicles of this protest are not vehicles to which the 2.5 percent ad valorem rate of duty should apply. Protestant claims that upon the importation of the subject vehicles back to the U.S., duty should be assessed only on the vehicle's foreign content, and not on the value of the entire vehicle. Protestant contends that the only foreign content which is incorporated into the subject vehicles is the radio which comprises less than one percent of the total value of each vehicle.

ISSUES:

(1) Whether the vehicles which are produced in a foreign trade zone from U.S. and foreign components exported directly from the FTZ to Canada and then imported into the U.S. are entitled to duty exemption under the NAFTA or under subheading 9801.00.10, HTSUS.

(2) Whether there is a uniform and established practice to provide duty-free treatment under subheading 9801.00.10, HTSUS, to vehicles which are produced in a FTZ from U.S. and foreign components, exported directly from the FTZ and then imported into the U.S.

(3) Whether protestant has substantiated its claim for detrimental reliance. LAW AND ANALYSIS:

I. Duty-free Treatment

A. NAFTA Eligibility

The sixth proviso to section 3 of the Foreign Trade Zone Act ("FTZA") of June 18, 1934 (49 Stat. 9) as amended, states as follows:

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. (Emphasis added).

Customs recently addressed the issue concerning the dutiable status of articles made with foreign components in a Foreign Trade Zone that are imported after having been exported from the zone in C.S.D. 95-3, 29 Cust. Bull. 11 (February 8, 1995). In this case, automobiles were 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 non-privileged foreign status. After manufacture, the automobiles were exported to Canada without any duty having been paid on those parts. After that exportation, the automobiles were imported into the U.S. The issue in C.S.D. 95-3 was whether the sixth proviso to section 3 of the Foreign Trade Zones Act (19 U.S.C. 81c(a)) requires duty to be assessed on the full value of an automobile made in a zone exported and then returned to the U.S. In this decision, Customs held that the automobile is dutiable on its full value at the appropriate most-favored nation rate of duty on its importation back into the U.S. Customs further stated that such an automobile does not qualify for duty-free treatment under the North American Free Trade Agreement.

The argument was made by the importer in C.S.D. 95-3 that the words "be subject to the import laws applicable to like articles manufactured in a foreign country" should be construed to mean like articles made in the specific country from which the article is sent back to the U.S. so that an article made in a zone with foreign components would become an article of the country of reexportation simply by passing through that country. Customs found, however, that this proposed interpretation would lead to the erroneous result whereby the exportation to Canada would convert Japanese components which had been assembled to produce the vehicle, on which no duty was ever paid, into a Canadian-origin automobile which would be entitled to be entered duty-free under the NAFTA. Customs further stated that, 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 that could arise under this scenario was that such an automobile could be made in a zone, exported to France, duty-free and then re-imported into the United States through Canada, again free of duty.

Based on our holding in C.S.D. 95-3, we find in the instant case that vehicles which are manufactured in a FTZ using both U.S. and foreign-origin components, exported to Canada, without any duty having been paid on the foreign-origin components, and subsequently reimported into the U.S. are not considered Canadian-origin vehicles. We are of the opinion that the exportation to Canada does not convert the vehicle which is made in a FTZ using foreign-origin components into a Canadian-origin vehicle merely by passing through that country.

Protestant also argues that the vehicles which are subject to this protest meet the requirements under Section 202(a)(2) of the NAFTA for "originating goods." Section 202(a) of the North American Free Trade Agreement 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 ---

(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 50 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; In this instance, it is argued that the operations performed in the FTZ will qualify the vehicles under Section 202(a)(1) of the NAFTA. 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 (8) of paragraph (1) shall not apply to a good produced in a foreign trade zone or subzone (established pursuant tot eh 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.

With regard to the issue of whether the vehicles which are entered into the U.S. from Canada are considered "originating goods" and thus entitled to preferential tariff treatment under the NAFTA, Customs held in C.S.D. 95-3,

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. In this case, it is clear that the operations which are 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.

Therefore, protestant's claim that the vehicles which are the subject of this protest meet the requirements for "originating goods" under the NAFTA is based on an incorrect interpretation of the statute.

Protestant further maintains that the limitation in Section 202(a)(2)(A) is not applicable in this case. Specifically, protestant claims that since the non-originating components in the vehicle represent less than seven percent, the non-originating components are "de minimis" under Section 202(e), and the car should be considered "originating" for purposes of receiving NAFTA treatment. Section 202(e) implements Article 405.1 of the Agreement which, in pertinent part, provides:
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. . .

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 as set forth in Annex 401. Protestant argues that a foreign radio assembled into a vehicle in a FTZ remains a radio and does not undergo an acceptable tariff shift in the zone. We are of the opinion, however, that the radio enters the zone properly classified as a radio and after it is assembled with other components into the finished vehicle, it leaves the zone as part of a vehicle. Therefore, in the instant case, the nonoriginating materials clearly undergo the requisite change in tariff classification and are therefore, not eligible to be regarded as "de minimis" components under the terms of Section 202(e) of the NAFTA.

B. Subheading 9801.00.10, HTSUS, Eligibility

Subheading 9801.00.10, HTSUS, provides for the free entry of U.S. products that are exported and returned without having been advanced in value or improved in condition by any means while abroad, provided the documentary requirements of section 10.1, Customs Regulations (19 CFR 10.1), are met. The courts have held that, while some change in the condition of the product while it is abroad is permissible, operations which either advance the value or improve the condition of the exported product render it ineligible for duty-free entry upon return to the U.S. Border Brokerage Co, Inc. v. United States, 65 Cust. Ct. 50, C.D. 4052, 314 F. Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970). Moreover, compliance with section 10.1(a) is mandatory and a condition precedent to recovery unless compliance has been waived or is impossible. Maple Leaf Petroleum, Ltd. v. United States, 25 CCPA 5, T.D. 48976 (1937). The basis for waiver of the required documentation is predicated upon the district director being satisfied by the production of other evidence as to the U.S.-origin of the merchandise and its eligibility under subheading 9801.00.10, HTSUS.

Customs has interpreted the sixth proviso to section 3 of the FTZA to mean that any good which is exported from a zone that has not had duty paid on the foreign merchandise incorporated into the good is fully dutiable upon any subsequent importation into the U.S. Moreover, a good which is produced in an FTZ will not be considered a good of U.S. origin unless the good is exported, duty paid from a zone, prior to being reimported into the U.S., or unless the good produced in the FTZ is comprised wholly of domestic materials. In Headquarters Ruling Letter (HRL) 553240, a truck was assembled in a foreign trade zone, using both "privileged domestic" and "privileged foreign parts." The truck was withdrawn from the foreign trade zone on a weekly formal entry covering the production of additional trucks. Duties were paid on the assembled foreign merchandise having privileged foreign zone status upon withdrawal of the truck from the FTZ for domestic consumption during 1982. The truck was subsequently exported to Germany and reimported into the U.S. We held in HRL 553240 that since the truck was first transferred to the Customs territory of the U.S., and duties were paid on the foreign components, prior to being exported to Germany, upon return to the U.S., the truck was eligible for duty-free treatment under the American Goods Returned provision. Customs concluded that the foreign merchandise used in the assembly of the truck had lost its foreign character and was considered to have been substantially transformed by being merged into the assembled truck. "The merger occurred in the FTZ located in the U.S. and the substantial transformation was complete when the truck was entered for consumption in the U.S. and duties paid on the privileged foreign merchandise." This position was followed in HRL 556976 dated June 9, 1994, in which Customs concluded that engines produced as a result of a substantial transformation of foreign and domestic parts in an FTZ established in the U.S. and entered from the FTZ for consumption before being exported to Japan were considered "article[s] manufactured within the Customs territory of the U.S.", and, therefore, "products of the U.S." for purposes of subheading 9802.00.80, HTSUS, and section 10.12(e), Customs Regulations (19 CFR 10.12(e)). Accordingly, as there is no evidence that the vehicle in the instant case was exported, duty paid from the zone prior to being reimported into the U.S., the vehicle which is produced in the zone from U.S. and foreign-origin components is not considered a good of U.S.-origin for purposes of eligibility under subheading 9801.00.10, HTSUS.

II. Uniform and Established Practice

Protestant alleges that Customs has failed to comply with the requirements of 19 U.S.C. 1315(d) which concerns the effective date of administrative rulings resulting in higher rates. Section 1315(d) provides as follows:

No administrative ruling resulting in the imposition of a higher rate of duty or charge than the Secretary of Treasury shall find to have been applicable to imported merchandise under an established and uniform practice shall be effective with respect to articles entered for consumption or withdrawn from warehouse for consumption prior to the expiration of thirty days after the date of publication in the Federal Register of notice of such ruling; but this provision shall not apply with respect to the imposition of anti-dumping duties or the imposition of countervailing duties under section 1303 of this title.

Protestant maintains that for the ten years prior to June, 1994, FTZ produced vehicles, such as the vehicles subject to this protest, were reentered from Canada as American Goods Returned, under subheading 9801.00.10, HTSUS, and not subject to duty. Protestant claims that since no notice of Customs' ruling of the change in treatment from granting duty-free treatment pursuant to the American goods returned provision has been published in the Federal Register, no change can take effect with respect to articles entered for consumption until after 30 days from the date of publication of such ruling. Therefore, protestant claims that the vehicles assembled in the FTZ which are the subject of this protest should be treated as American goods returned and eligible for duty-free treatment, upon reentry into the U.S.

As previously stated, entries of articles which are claimed to be duty-free pursuant to subheading 9801.00.10, HTSUS, must satisfy certain documentation requirements. 19 CFR 10.1 requires the following documents to be filed in connection with the entry: (1) a declaration by the foreign shipper in which he/she declares that the articles are products of the U.S. and that they were exported from the U.S. from the port of X country and returned without having been advanced in value or improved in condition; and (2) a declaration by the owner, importer, consignee, or agent having knowledge of the facts regarding the claim for free entry. Prior to the amendment of 19 CFR 10.1 by T.D. 94-47, 28 Cust. Bull. 1 (May 25, 1994), importers were also required to file a Customs Form 3311 with the entry to show whether drawback was claimed or paid on the merchandise covered by the certificate and, if any was paid, the amount thereof. However, T.D. 94-47, eliminated the use of Customs Form 3311 for articles which are entered under subheading 9801.00.10, HTSUS, after June 16, 1994. As the vehicles subject to this protest were entered prior to June 16, 1994, the submission of Customs Form 3311 is still required with the entry.

With regard to the applicability of American Goods Returned (subheading 9801.00.10, HTSUS), to goods that are manufactured in a foreign trade zone from both foreign and domestic-origin materials, Customs has not deviated from its long-standing position which is clearly stated in HRL 553240 dated March 5, 1985, as previously discussed in this protest decision. Customs position is that goods which are produced in a FTZ from both U.S. and foreign components are not considered "products of" the U.S., unless duty has been paid on the value of the foreign components when exported from the zone, or the good is comprised wholly of domestic components or materials. In the instant case, duty has not been paid on the value of the foreign components when exported from the zone to Canada, and the vehicles are clearly not comprised wholly of U.S.-origin components, therefore, the vehicles are not considered "products of" the U.S. within the meaning of subheading 9801.00.10, HTSUS.

Furthermore, we believe that a uniform and established practice cannot exist for entries which are claimed to be duty-free under subheading 9801.00.10, HTSUS. In order for an entry to be free of duty under this provision, certain documentation requirements must be satisfied, or the District Director must be satisfied that all of the requirements for eligibility under this provision have been satisfied so that the documentation requirements may be waived. Therefore, the fact that a Ford Taurus may enter into the U.S. at a free rate of duty under subheading 9801.00.10, HTSUS, does not necessarily mean that a similar Ford Taurus is eligible to enter into the U.S. duty-free under subheading 9801.00.10, HTSUS. We recognize that the courts have found that a section 1315(d) "established and uniform practice" can be predicated on uniform classifications and liquidations at various ports over a period of time. Heraeus-Amersil, Inc. v. United States, 617 F. Supp. 89, 9 CIT 412 (1985), (where the court found that a uniform and established practice had been established with regard to the classification of fused quartz/fused silica under items 540.11 and 540.41, TSUS). The facts at issue in this case, however, do not involve the question of whether or not a certain tariff classification applies, but rather whether the subject vehicles have satisfied all of the requirements for duty-free eligibility under a Chapter 98, HTSUS, provision. Entries under subheading 9801.00.10, HTSUS, are fact specific; each entry stands on its own particular fact situation. Hence, liquidations covering the same type of merchandise at a free rate of duty are not enough to establish a uniform and established practice under subheading 9801.00.10, HTSUS.

III. Detrimental Reliance

Protestant further maintains that Customs' publication of C.S.D. 95-3 has the effect of formally modifying Customs' long-standing treatment of vehicles in substantially identical transactions. It is further claimed that this modification is in violation of 19 CFR 177.9(e)(1), which concerns ruling letters which have the effect of modifying past Customs treatment of transactions not covered by ruling letters. According to 19 CFR 177.9(e)(1):

The Custom Service will from time to time issue a ruling letter covering a transaction or issue not previously the subject of a ruling letter and which has the effect of modifying the treatment previously accorded by the Customs Service to substantially identical transactions of either the recipient of the ruling letter or other parties covering a transaction or issue not previously the subject of a ruling letter has the effect of modifying the treatment previously accorded by Customs.

In such circumstances, pursuant to 19 CFR 177.9(e)(1), the Customs Service may delay the effective date of the ruling letter, and continue the treatment previously accorded the substantially identical transaction, for a period of up to 90 days from the date the ruling letter is issued. However, in situations where a party has relied, not on a previously issued ruling letter, but on past Customs treatment, Customs requires that the affected party submit an application requesting a delay in the effective date of a ruling letter. In these situations, 19 CFR 177.9(e)(2), sets forth specific requirements for such applications. According to this provision, the applicant must demonstrate to the satisfaction of the Customs Service that the treatment previously accorded relates to substantially identical transactions, and was sufficiently consistent and continuous that the party reasonably relied on the past treatment in the arrangement of future transactions.

Specifically, section 177.9(e)(2) requires that the applicant must submit evidence of past treatment by the Customs Service covering the 2-year period immediately prior to the date of the ruling letter, listing all substantially identical transactions by entry number. In addition, the applicant must provide the quantity and value of merchandise covered by each such transaction, the ports of entry, and the dates of final action by the Customs Service. Section 177.9(e)(2) further notes that, "The evidence of reliance shall include contracts, purchase orders, or other materials tending to establish that the future transactions were arranged based on the treatment previously accorded by the Customs Service." Finally, in order to grant a delay pursuant to 177.9(e)(1), the Regulations require that Customs examine all relevant factors regarding the issue of reliance. Section 177.9(e)(3) requires that Customs carefully review the past transactions on which reliance is claimed to determine whether there was an examination of merchandise by Customs. Furthermore, in making the determination to delay, the weight accorded to the documented history of consistent and continuous Customs treatment, will be diminished in the following instances: transactions involving small quantities or values, informal entries, and situations where Customs, in the interest of commercial facilitation and accommodation, processes expeditiously and without examination and/or import specialist review. See 19 CFR 177.9(e)(3).

Protestant submits that it was mislead by Customs and that it reasonably relied to its detriment (for 10 to 15 years protestant built a business predicated on the cost of the cars which were duty-free) and that Customs knew that the protestant was relying on Customs' actions, and thus, protestant has satisfied its claim for detrimental reliance. Protestant states that Customs was apprised in writing that each car at issue was manufactured in a U.S. foreign trade zone, because the serial number for each car contained the identity code for the manufacturing plant, as indicated by the eleventh digit. Protestant further submits that this code was constructed by the government for the purpose of providing exactly this type of information.

It is clear that under the facts in this case, protestant has not established a claim for detrimental reliance. Protestant has failed to demonstrate to the satisfaction of the Customs Service that the entries which were previously liquidated free of duty are substantially identical transactions to the entries involved in this protest. Mere evidence of liquidation of a vehicle at a free rate under subheading 9801.00.10, HTSUS, is not sufficient to establish that the transaction was substantially identical to the subject entries. In order to be eligible for duty-free treatment under this provision, each entry must satisfy the documentation requirements or the district director must be satisfied that all of the requirements for eligibility are satisfied so that the documentary evidence may be waived. In the instant case, there is also no indication that the district director waived production of the documentary requirements. Therefore, even if protestant could produce evidence that vehicles manufactured in a foreign-trade zone were exported directly from the FTZ to Canada and subsequently imported into the U.S. free of duty under subheading 9801.00.10, HTSUS, this would not mean that future entries of vehicles will be entitled to enter into the U.S. free of duty. As previously indicated, the requirements for eligibility under subheading 9801.00.10, HTSUS, must be satisfied for each article at the time of its importation, and cannot be based upon prior importations of similar articles. In any case, however, Customs does not know and protestant has not established whether the prior entries which were accorded duty-free treatment involved the exact same circumstances as the entries which are the subject of this protest.

IV. Summary

Accordingly, as the vehicles are not eligible for duty-free treatment under subheading 9801.00.10, HTSUS, or NAFTA (General Note 12), they are subject to duty upon the full dutiable value of the vehicle at the MFN (Column 1) rate for foreign merchandise. Inasmuch as these entries were not made directly from the FTZ to the U.S. for consumption, Customs does not have the authority to apply a duty rate on only the value of the foreign materials incorporated therein.

HOLDING:

Based on the information provided, the subject vehicles made from U.S. and foreign components which are produced in a FTZ, exported directly from the FTZ into Canada and then imported into the U.S. are not entitled to duty-free treatment under either the NAFTA or subheading 9801.00.10, HTSUS. Furthermore, we do not find that protestant has demonstrated that either an established and uniform practice was created pursuant to 19 U.S.C. 1315(d), or a claim for detrimental reliance is warranted within the meaning of 19 CFR 177.9(e). Accordingly, we conclude that the subject vehicles are fully dutiable at the MFN (Column 1) rate for foreign merchandise, and the protest should be denied in full.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the 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.

Sincerely,

John Durant, Director

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