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HQ 560102

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June 17, 1997

CLA-2 RR:TC:SM 560102 MLR; NK

CATEGORY: MARKING CLASSIFICATION

Mr. Ronald G. Setzer
SF Imports, Inc. C.H.B.
P.O. Box 2959
Tax Department/Plaza 6
Winston-Salem, NC 27102

RE: Classification and Tariff Rate Quota For Cut-Filler Tobacco; Country of Origin Marking; Substantial Transformation; Ultimate Purchaser

Dear Mr. Setzer:

This is in reference to your letter of August 30, 1996, to U.S. Customs in New York, requesting a ruling on behalf of several unnamed dealers and manufacturers of tobacco, concerning the classification, tariff quota rates of duties, and country of origin for marking purposes for cut-filler tobacco. A flow chart of the processing was submitted. Our ruling follows.

FACTS:

Scenario A

Unmanufactured types of tobacco, classified as unmanufactured tobacco in heading 2401, Harmonized Tariff Schedule of the United States (HTSUS) are imported into Argentina and blended and processed into manufactured cut-filler tobacco, classified in heading 2403, HTSUS. The unmanufactured types of tobacco imported into Argentina are as follows.

100,000 kilograms (Kgs.) of flue-cured strip grown in Brazil,
100,000 Kgs. of flue-cured strip grown in Canada, 100,000 Kgs. of oriental type grown in Turkey, and 100,000 Kgs. of burley stems grown in the U.S.

In Argentina, the first step performed is "receiving and blending." During this process, the tobacco is received either in cases or in bales, and it undergoes an initial delamination, initial cleaning, and initial conditioning in a conditioning cylinder, pneumatic separators, and a pre-blend bulker. It is stated that the blending of the various types and grades of tobacco results in cut-filler tobacco used for a particular brand of cigarettes. Next, the tobacco undergoes a group blending, a casing application which adds flavor and moisture, and the tobacco is cut, dried, and subjected to a final blending to result in "final blended strips." Next, the tobacco undergoes another cutting process, a final delamination, final cleaning, final conditioning, and a top dressing application. Lastly, the resulting cut-filler tobacco is stored and delivered to the U.S., where the cut-filler is used to make cigarettes.

Scenario B

Unmanufactured types of foreign tobacco are exported to the United States after September 13, 1995, and are admitted into a U.S. foreign trade sub-zone (FTZ). The zone status is not indicated. In the zone, the unmanufactured types of tobacco will be blended and processed into manufactured cut-filler tobacco as in scenario A, and then entered for consumption into the Customs territory of the United States. The unmanufactured types of tobacco are as follows.

100,000 Kgs. of burley stems grown in the U.S., 100,000 Kgs. of flue-cured strip grown in Argentina, 100,000 Kgs. of flue-cured strip grown in Mexico, and 100,000 Kgs. of oriental type grown in Greece.

ISSUES:

I. What is the country of origin for marking purposes for the blended and processed manufactured cut-filler tobaccos?

II. What is the tariff classification of the tobaccos and are they subject to tariff rate quotas?

LAW AND ANALYSIS:

Scenario A

The marking statute, section 304, Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin (or its container) imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. Part 134, Customs Regulations (19 CFR Part 134) implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304.

Section 134.1(b), Customs Regulations {19 CFR 134.1(b)}, defines "country of origin" as the country of manufacture, production or growth of any article of foreign origin entering the U.S. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of the marking laws and regulations.

In Headquarters Ruling Letter (HRL) 557577 dated May 16, 1994, Customs reconsidered HRL 557192 dated July 14, 1993, where leaf tobacco was subjected to moistening, inspection, and fermentation processes, before the lamina was handstripped away from the midrib (large central stem) of the leaf. The resulting tobacco "strips" were passed over a screen and after the strips were cleaned of all contaminants, the strips were moved to a drying room. The fermentation process performed in an environmentally controlled sweat room lowered the nicotine content, and the drying process had a mellowing effect on the tobacco. Relying on Uniroyal, Inc. v. United States, 542 F. Supp. 1026 (CIT 1982), and National Juice Products Association v. United States, 628 F. Supp. 978 (CIT 1986), in HRL 557577 Customs held that the leaf tobacco which was handstripped in a beneficiary country did not undergo a substantial transformation, and, therefore, was not eligible for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA). In HRL 557192, it was also indicated that both the leaf tobacco and the handstripped tobacco were classifiable under heading 2401, HTSUS.

In HRL 557577, reference was made to HRL 553120 dated September 28, 1984, where Customs held that cigar leaf tobacco processed into cigar scrap tobacco in the Dominican Republic qualified for duty-free treatment under the CBERA. Some of the operations considered in HRL 553120 included: placing cigar leaf tobacco of Dominican and foreign origin in a vacudyne machine to add moisture to the tobacco leaves; blending tobacco of various grades; placing the tobacco leaves in sweat boxes to reduce the nicotine; mellowing the tobacco; cutting the tobacco leaves into particles; stemming the tobacco pieces; running the tobacco pieces through a series of threshers and separators to strip the lamina; running the tobacco pieces over vibrating screens to remove fine particles detrimental to cigar manufacture; and placing the tobacco pieces in drying chambers to reduce the moisture content to allow cigar manufacturing. In HRL 557577, Customs decided that HRL 553120 was in error as the very essence of the final product was imparted by the tobacco, and, accordingly, HRL 553120 was revoked.

In HRL 733207 dated November 21, 1990, Customs considered the blending of various foreign and U.S. raw botanical ingredients, essential oils, fragrances and fixatives to create potpourri intended to scent the air. It was held that despite the fact that the botanicals remained recognizable as parts of flowers and plants, their character and use was entirely commercially different as potpourri. In HRL 731685 dated March 15, 1990, Customs considered the marking of imported fruit drink manufactured in Mexico using ingredients sourced from various countries. Applying the rationale of National Juice, supra, HRL 731685 determined that fruit juice concentrates imported into Mexico were substantially transformed by their use in the manufacture of a fruit drink as the product contained much less juice concentrate than products sold as reconstituted fruit juice or as frozen concentrated juice.

The Explanatory Notes of Chapter 24 of the Harmonized Commodity Description and Coding System (HCDCS), state that tobacco may be cured either as whole plants (on the stalk) or as separate leaves. The various methods of curing are sun curing (in the open air), air curing (in closed sheds with free circulation of air), flue curing (in hot air flues), or fire curing (with open fires). Before packing for shipment, the dried leaves are treated to ensure their preservation and this may be done by controlled natural fermentation (Java, Sumatra, Havana, Brazil, Orient, etc.) or by artificial-drying. This treatment and the curing, is stated to affect the flavor and aroma of the tobacco which undergoes spontaneous ageing after packing. In some cases, in addition to or instead of fermentation, flavoring or moistening substances are added (casing) in order to improve the aroma or keeping qualities.

The Explanatory Notes to heading 2401, HCDCS, provide that this heading covers unmanufactured tobacco in the form of whole plants or leaves in the natural state or as cured or fermented leaves, whole or stemmed/stripped, trimmed or untrimmed, broken or cut (including pieces cut to shape, but not tobacco ready for smoking). Heading 2401 also covers tobacco leaves, blended, stemmed/stripped and "cased" ("sauced" or "liquored") with a liquid of appropriate composition mainly in order to prevent mold and drying and also to preserve the flavor. According to the Explanatory Notes, heading 2403, HCDCS, covers smoking tobacco, whether or not containing tobacco substitutes in any proportion, for example, manufactured tobacco for use in pipes or for making cigarettes.

If leaf tobacco is not bought in ready-stemmed form, the first step in turning it into a product that the consumer can smoke, chew, or take as snuff is to remove midribs (central veins). The New Encyclopedia Britannica, Volume 18 at. 466 (1975). It is also stated that for most products, manufacturers blend leaf of various types, origins, grades, and crop years to obtain the qualities they require and assure uniformity over the years. Furthermore, it is stated that cigarette manufacturers usually add sweetening preparations and flavorings. Tobaccos for pipe smoking and chewing may involve the incorporation of additives and the application of pressure and heat. Snuff is usually made by fermenting fire-cured leaf and stem and grinding it, and adding salts and flavorings. Id.

Under scenario A, unmanufactured types of tobacco from various countries are blended and processed in Argentina into cut-filler tobacco. As the Explanatory Notes indicate, heading 2403, HTSUS, includes smoking tobacco for use in pipes or in making cigarettes, whereas heading 2401, HTSUS, is tobacco which is not ready for smoking. Accordingly, it is our opinion that the blended tobacco in this case in most instances is ready for use by the final user of the tobacco which will be used to make cigarettes. Unlike HRL 553120 which was revoked by HRL 557577, we find that the blending of various types of tobacco in this case makes the tobacco ready for use, whereas in HRL 553120, only different grades of the same type of tobacco were blended together. For example, Oriental (Turkish) tobacco, used in this case, is used in blending for aroma in cigarettes {see McGraw Hill Encyclopedia of Science & Technology, Vol. 18 at 389 (1987)}, and the type of tobaccos used in making cigarettes include flue-cured, burley, Maryland, and imported Turkish {see Encyclopedia Americana, Vol. 26 at 802 (1980)}.

Additionally, in HRL 557577, the tobacco remained unmanufactured tobacco even after the lamina was stripped away from the midrib. In this case, however, the blending, casing, conditioning, cutting and other processes performed on the unmanufactured tobacco in Argentina result in a different article, namely smoking tobacco. As in HRL 733207 regarding potpourri, and HRL 731685 regarding fruit drink, in this case the processing and blending of various types of tobacco substantially transform the various types of tobacco capable of different uses, into a product with a specific use. Therefore, we find that in scenario A the country of origin of the manufactured tobacco will be Argentina. Pursuant to Additional U.S. Note 5(a), Chapter 24, HTSUS, tobacco from Argentina entered under subheadings 2403.10.60, 2403.91.45, and 2403.99.60, HTSUS, are subject to the quantitative limitations therein and if the quantitative limits have been reached, over tariff rate quotas apply.

Scenario B

Under scenario B, unmanufactured tobacco from various countries will be blended and processed in a U.S. foreign trade zone into cut-filler tobacco. The statute governing the creation and operation of foreign trade zones (FTZ's) is the Foreign Trade Zones Act of 1934, as amended (48 Stat. 998; 19 U.S.C. 81a through 81u). Under 19 U.S.C. 81c(a), foreign and domestic merchandise of every description (except prohibited merchandise) may be brought into a FTZ without being subject to the U.S. Customs laws and may there be, among other things, stored, mixed with foreign or domestic merchandise, or otherwise manipulated and be exported, destroyed, or sent into the U.S. customs territory. When foreign merchandise is so sent from a FTZ into U.S. customs territory, it is subject to the U.S. laws and regulations affecting imported merchandise. Pursuant to the second proviso of 19 U.S.C. 81c, articles of the U.S. and articles previously imported on which duty and/or tax has been paid, or which have been admitted free of duty and tax, may be taken into a FTZ from the U.S. customs territory, placed under the supervision of the appropriate Customs officer, and, whether or not they have been combined with or made part of other articles while in the FTZ, be entered from the FTZ free of quotas, duty, or tax. Pursuant to the third proviso of 19 U.S.C. 81c, if the identity of such articles (i.e., the "domestic status" articles described in the preceding sentence) has been lost, the articles are treated as foreign merchandise if they reenter the customs territory. The Customs Regulations issued under the authority of this statute are found in 19 CFR Part 146.

In this case, the merchandise brought into the FTZ would consist of domestic status merchandise (the U.S. burley stems) and foreign tobacco from Argentina, Mexico, and Greece. As determined in scenario A, the processing and blending of the unmanufactured tobacco result in a substantial transformation. Accordingly, the country of origin of the manufactured tobacco blended together in a foreign trade zone will be the U.S. As stated above, domestic status merchandise may be combined with or made part of other articles in the FTZ and be removed from the FTZ into the Customs territory without being subject to quotas, duty, or tax, provided that the identity of such articles has not been lost.

The zone status of the various foreign types of tobacco admitted in the FTZ is not stated. Part 146 of the Customs Regulations covers FTZ. Section 146.65(a)(1), concerning the classification of privileged foreign merchandise, provides as follows:

(a) Classification -- (1) Privileged foreign merchandise. Privileged foreign merchandise provided for in this section will be subject to tariff classification according to its character, condition and quantity, at the rate of duty and tax in force on the date of filing, in complete and proper form, the application for privileged status. Classification of merchandise subject to a tariff-rate import quota will be made only at the higher non-quota duty rate in effect on the date privileged foreign status was granted. Notwithstanding the grant of privileged status, Customs may correct any misclassification of any such entered merchandise when it posts the bulletin notice of liquidation under ?159.9 of this chapter.

Note that the classification of merchandise subject to a tariff-rate import quota will be made at the higher non-quota duty rate in effect on the date privileged foreign status was granted. Accordingly, if privileged status is granted, the various types of tobacco admitted in the zone would be classified as follows:

The unmanufactured flue-cured strip tobaccos, if not threshed or similarly processed, are classified in subheading 2401.20.35, and, if, threshed or similarly processed, in subheading 2401.20.87, HTSUS, dutiable at 350 percent ad valorem.

Subheadings 2401.10.44, 2401.10.48, 2401.20.23, 2401.20.26, 2401.20.75, 2401.30.13, and 2401.30.16, HTSUS, covering various types of Oriental tobaccos, are free rate provisions under the general rates.

Section 146.65(a)(2), of the Customs Regulations, covering nonprivileged foreign merchandise, states as follows:

(2) Nonprivileged foreign merchandise.
Nonprivileged foreign merchandise provided for in this section will be subject to tariff classification in accordance with its character, condition and quantity as constructively transferred to Customs territory at the time the entry or entry summary is filed with Customs.

Additional Note 5(a), Chapter 24, HTSUS (1997), states as follows:

(a) The aggregate quantity of tobacco entered, or withdrawn from warehouse, for consumption under subheadings 2401.10.63, 2401.20.33, 2401.20.85, 2401.30.33, 2401.30.35, 2401.30.37, 2403.10.60, 2403.91.45 and 2403.99.60 during the period from September 13 in any year to the following September 12, inclusive, shall not exceed the quantities specified below.
Quantity
(metric tons)

Argentina 12,000
Brazil 80,200
Chile 2,750
European Community (aggregate of
Austria, Belgium, Denmark, Finland,
France, the Federal Republic of
Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands,
Portugal, Spain, Sweden, and the
United Kingdom) 10,000
Guatemala 9,250
Malawi 12,000
Philippines 3,000
Thailand 7,000
Zimbabwe 12,000
Other countries or areas
3,000

To be classified within the subheadings listed in Note 5(a), the subheadings require that the tobaccos must be "described in additional U.S. note 5 to this chapter and entered pursuant to its provisions". Accordingly, the tobaccos must come within the quantitative limits listed or they are classified in the "other" provisions which provide for higher rates of duties.

We had previously concluded that the tobacco manufactured in the zone and entering the Customs territory from the zone in nonprivileged status is a product the United States. The United States is not one of the countries specifically listed in Additional U.S. Note 5(a), Chapter 24. However, we believe that the quantitative limits of 3,000 metric tons for "other countries or areas" is broad enough to include the United States. Accordingly, the manufactured tobacco entered into the Customs territory from the zone in nonprivileged status is classified in subheading 2403.10.60, HTSUS, with duty at the general rate of 35.7 cents per kg., if it is within the quantitative limits for "other countries or areas" of Additional U.S. Note 5(a), Chapter 24, "and, if it is not within the quantitative limits, it is classified in subheading 2403.10.90, HTSUS, with duty at the general rate of 350 percent ad valorem.
HOLDING:

Based upon the information provided, it is our opinion that the unmanufactured tobacco undergoes a substantial transformation when it is processed and blended together into manufactured tobacco. Accordingly, under scenario A, the country of origin of the blended tobacco will be Argentina. Under scenario B, the country of origin of the blended tobacco will be the U.S.

In scenario A, tobacco manufactured in Argentina for use in cigarettes, if within the quantitative limits of Additional U.S. Note 5(a), Chapter 24, is classified in subheading 2403.10.60, HTSUS, with duty at the general rate of 35.7 cents per kg., and, if the quantitative limits have been reached, the tobacco is classified in subheading 2403.10.90, HTSUS, with duty at the general rate of 350 percent ad valorem.

In scenario B, the unmanufactured flue-cured strip tobaccos admitted in the zone and granted privileged status, if not threshed or similarly processed, are classified in subheading 2401.20.35, and, if threshed or similarly processed, in subheading 2401.20.87, HTSUS, dutiable at 350 percent ad valorem. Subheadings 2401.10.44, 2401.10.48, 2401.20.23, 2401.20.26, 2401.20.75, 2401.30.13, and 2401.30.16, HTSUS, covering various types of Oriental tobaccos, are free rate provisions under the general rates.

In scenario B, tobacco manufactured in the zone for use in cigarettes and entered for consumption into the Customs territory from the zone in nonprivileged status, is classified in subheading 2403.10.60, HTSUS, with duty at the general rate of 35.7 cents per kg., if it is within the quantitative limits for "other countries or areas" of Additional U.S. Note 5(a), Chapter 24, and, if it is not within the quantitative limits for "other countries or areas" it is classified in subheading 2403.10.90, HTSUS, with duty at the general rate of 350 percent ad valorem.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

John Durant, Director

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See also:

• Tariff No.: 2401.10.44 - Tobacco, not stemmed or stripped, not or not over 35% wrapper tobacco, oriental or turkish type, cigarette leaf
• Tariff No.: 2401.10.48 - Tobacco, not stemmed or stripped, not or not over 35% wrapper tobacco, oriental or turkish type, other than cigarette leaf
• Tariff No.: 2401.10.63 - Tobacco, not stemmed or stripped, not or not over 35% wrapper tobacco, flue-cured burley, etc., described in addl US note 5 to chap 24
• Tariff No.: 2401.20.23 - Tobacco, partly or wholly stemmed/stripped, n/threshed or similarly processed, not or n/over 35% wrapper, oriental or turkish, cigarette lea
• Tariff No.: 2401.20.26 - Tobacco, partly or wholly stemmed/stripped, n/threshed or similarly processed, not or n/over 35% wrapper, not cigarette leaf
• Tariff No.: 2401.20.33 - Tobacco, partly or wholly stemmed/stripped, n/threshed or similarly proc., not or n/over 35% wrapper, des. in addl US note 5 to ch. 24
• Tariff No.: 2401.20.35 - Tobacco, partly or wholly stemmed/stripped, n/threshed or similarly proc., not or n/over 35% wrapper, flue-cured burley etc, other nesi
• Tariff No.: 2401.20.75 - Tobacco, partly or wholly stemmed/stripped, threshed or similarly processed, not from cigar leaf , oriental or turkish
• Tariff No.: 2401.20.85 - Tobacco, partly or wholly stemmed/stripped, threshed or similarly processed, not from cigar leaf , described in addl US note 5 to chap 24
• Tariff No.: 2401.20.87 - Tobacco, partly or wholly stemmed/stripped, threshed or similarly processed, not from cigar leaf , not oriental or turkish, other nesi
• Tariff No.: 2401.30.13 - Tobacco refuse, from oriental or turkish type, tobacco stems, not cut, ground or pulverized
• Tariff No.: 2401.30.16 - Tobacco refuse, from oriental or turkish type, tobacco stems, cut, ground or pulverized
• Tariff No.: 2401.30.33 - Tobacco refuse, from other tobacco, for cigarettes, described in addl US note 5 to chap 24, tobacco stems, not cut, ground or pulverized
• Tariff No.: 2401.30.35 - Tobacco refuse, from other tobacco, for cigarettes, described in addl US note 5 to chap 24, tobacco stems, cut, ground or pulverized
• Tariff No.: 2401.30.37 - Tobacco refuse, from other tobacco, for cigarettes, described in addl US note 5 to chap 24, not tobacco stems
• Tariff No.: 2403.10.60 - Smoking tobacco, whether or not containing tobacco substitutes, other, to be used in cigarettes, described in addl US note 5 to chap 24
• Tariff No.: 2403.10.90 - Smoking tobacco, whether or not containing tobacco substitutes, other, to be used in cigarettes, other nesi
• Tariff No.: 2403.91.45 - "Homogenized" or "reconstituted" tobacco, not suitable for use as wrapper tobacco, to be used in cigarettes, des. in addl US note 5 to chap
• Tariff No.: 2403.99.60 - Other manufactured tobacco, tobacco substitutes, tobacco extracts or essences, to be used in cigarettes, described in addl US note 5 to chap