HQ 229403 - NAFTA; unused merchandise drawback; fungibility; footwear; origin; 19 U.S.C. 1313(j)(1); 19 CFR 181.45(b)(2)(i)(B); 19 CFR 191.2(o); 19 CFR 191.14(b)(1); General Note 12(t)/64.1, HTSUS, Chapter 64 - United States International Trade Commision Rulings

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HQ 229403

April 15, 2002

DRA-4-RR:CR:DR 229403 IOR

CATEGORY: DRAWBACK

Peter T. Middleton, Esq.
Middleton & Shrull
44 Mall Road, Suite 208
Burlington, MA 01803-4530

RE: NAFTA; unused merchandise drawback; fungibility; footwear; origin; 19 U.S.C. 1313(j)(1); 19 CFR 181.45(b)(2)(i)(B); 19 CFR 191.2(o); 19 CFR 191.14(b)(1); General Note 12(t)/64.1, HTSUS, Chapter 64

Dear Mr. Middleton:

We are in receipt of your ruling request dated January 8, 2002, on behalf of New Balance Athletic Shoe, Inc. (“New Balance”), in which you request a ruling that 1) the U.S. assembled footwear is non-originating for NAFTA purposes, 2) the foreign and domestically produced footwear is fungible at the style/gender/size level for purposes of section 181.45(b), and 3) New Balance may use one of the accounting methods provided for under 19 CFR 191.14 to identify entries for designation for same condition drawback claims.

FACTS:

New Balance imports finished athletic footwear manufactured in China. That merchandise is labeled with the style number, size and country of origin. New Balance also imports components of footwear for assembly in its U.S. facilities. According to your submission, in some cases, the styles assembled in the U.S. are identical to those produced in China and imported into the U.S.

According to your submission, the footwear is designated by style number, color, and gender, which form the product code. You have provided us with three sample shoes. The shoes have labels on the inside of the tongue with style, size, and place of manufacturing information. The sample U.S. assembled shoes have the code M805AT, are a size 9 ½ D in U.S. size and also have UK and EUR size numbers. The barcode number for the shoe assembled in the California plant is 9148259458, and the barcode number for the shoe assembled in the Maine plant is 4148359458. Both of the U.S. assembled shoes are marked “Made in USA of Imported Materials”. The sample shoe assembled in China has a code M805AT, a barcode number of 801001359458, and is marked “Made in China”. The shoe made in China has US, UK, EUR and CM sizing. The shoe made in China has the code “FS8754” on the label.

You have explained the significance of the different markings. The M805AT is broken down as follows:

The first character- M for men, W for women, and K for kids; The numerical characters – footwear style number, 805 in this case; and Final letter characters – color designation, in this case AT for “all terrain” which means gray and black.

For the barcode, the last five digits for all of the shoes reflect the UPC-SKU number which is the same for all shoes of the same style, size and width, 59458, in this case. On the U.S. assembled shoes, the first digit denotes the factory where the shoe was produced, the second digit is the year of production, and the third and fourth digits are for the production week, based on a calendar year. The fifth digit represents the UPC code designator. On the shoes assembled in China, the first two digits denote the factory where the shoe was produced, the third and fourth digits represent the month of production and the fifth and sixth digits represent the year of production. The seventh digit represents the UPC code designator.

The CM sizing on the shoe assembled in China denotes centimeters, which is the sizing system used in China, Japan and other Asian markets. The shoes produced in China can be sold in those markets also, whereas the footwear assembled in the U.S. is generally not sold in any of the markets using centimeter sizing, unless there is a shortage of shoes produced elsewhere. Once imported, the shoes produced in China are not sold to the Asian markets.

The code “FS8754” on the label of the shoe made in China represents the purchase order number pursuant to which the shoe was sold for importation. This particular code represents the order from the Boston New Balance location, for shoes intended for sale in North America. The purpose of the placement of the purchase order number on the label of the shoe is to verify the authorized sale of the shoes. For example, if shoes with a purchase order number indicating they were to be sold in Poland, were found for sale in Canada, New Balance would be aware that the sale was not authorized.

You assert that the imported and U.S. assembled shoes with the same product code are fungible at the style/color/gender level. You state that the price is the same no matter what the size of the shoe, and the duty is the same on all of the imported shoes, without regard to the size, likewise the price to distributors and retail customers is the same with no differentiation by size or production location.

With respect to the similarity of the U.S. assembled shoes and the imported shoes you state as follows:

The production methods for both the Chinese and United States products are similar. The Uppers used both in China and the United States are made using the identical materials, cutting patterns, and specifications by three primary Chinese factories, depending on capacity availability.

Likewise the soles used on both the Chinese and United States assembled products are made in China at one of two factories. Thus the molds, materials, and construction are the same. .
The sales and marketing information from the Company make no distinction between Chinese and US production for a particular style. .
Internally the Company treats all units of the same style as identical. The Company does not honor orders for a specific country of origin on dual sourced styles and expressly refuses such requests. If a Canadian customer requests a pair of style M805AT size 9, that customer may not request a US or Chinese produced shoe and could receive any one of the three samples enclosed herewith, i.e. whichever one the shipping department happened to pull from inventory.

You have provided a letter from New Balance’s Vice President of Sales stating that the company does not differentiate within a specific style as to the origin in sales catalogs, on any price lists, or other advertising. You have provided a New Balance catalog that identifies the shoe as “M805AT”. There is no reference to the location of production of the shoe.

The samples assembled in the U.S. do come with a card. The card discusses the ongoing efforts of New Balance to continue footwear production in the U.S., explains that it is not always possible to use all domestic materials and that often some components must be procured overseas. According to your submission, the card is an explanation of why some shoes are marked “Made in USA” and some are marked “Made in USA of Imported Materials”. The presence or absence of the card is not indicated on the exterior of the shoebox. When shoes are picked for shipment, orders are filled according to style, then color, then size, with no consideration given to the country of origin.

You have provided 1) descriptions of the production process for both Chinese and U.S. factories; 2) three sample shoes of model M805AT; and 3) a cost comparison chart for five styles, listing the total cost of the shoes for each of the three manufacturing locations. Of the three sample shoes, one was manufactured in China, one was produced in California by a contract manufacturer, and one was produced at the New Balance factory in Maine.

According to the cost comparison chart, the costs for the U.S. produced shoes vary from being smaller to greater than the costs of the imports, and the price difference is negligible (from the domestic costs being .3% to 1.26% greater than the import costs, and the import costs being .15% to .28% greater than the domestic costs). As to the production process, the descriptions of the construction of the shoes are substantially similar. The shoe samples all appear identical.

The shoe assembled in the U.S. is constructed of uppers manufactured in China that are imported into the U.S. where they are assembled with U.S. components into finished footwear. The uppers are created by means of two different manufacturing processes, both of which result in an upper that is considered unformed because the bottom of the upper is not closed. After arriving in the U.S., the upper is bonded to the unit soles to create the finished shoe.

New Balance seeks to file claims for NAFTA same condition drawback using the low-to-high method with established average inventory turn-over period for exportations to Canada and possibly Mexico.

ISSUE:

Whether the domestically assembled athletic shoe is considered originating in the U.S. under the NAFTA provisions. Whether the imported shoes are fungible with the domestically assembled shoes? Whether the drawback claimant may use one of the accounting methods provided for under 19 CFR 191.14 for purposes of unused merchandise drawback based on exports to Canada and/or Mexico.

LAW AND ANALYSIS:

Origin

Since the shoe is assembled with foreign components, it will be considered "goods originating in the territory of a NAFTA party" only if the non-originating components have undergone a change in classification as a result of the assembly process in the U.S., in accordance with General Note 12(b)(ii)(A).

The completed footwear is classifiable under heading 6403, HTSUS, or heading 6404, HTSUS, depending on the constituent material of the upper. The rule applicable to goods of heading 6403 and 6404, HTSUS, is provided for in General Note 12(t)/64.1, HTSUS, Chapter 64, which provides the following:

1. A change to headings 6401 through 6405 from any heading outside that group, except from subheading 6406.10, provided there is a regional value content of not less than 55 percent under the net cost method.

The unformed upper is classified under subheading 6406.10, HTSUS, which provides for “Parts of footwear (including uppers whether or not attached to soles other than outer soles); removable insoles, heel cushions and similar articles; gaiters, leggings and similar articles, and parts thereof: Uppers and parts thereof.” Pursuant to General Note 12(t), because the upper is classified under subheading 6406.10, HTSUS, and subheading 6406.10, HTSUS, is excepted from the applicable tariff shift rule, the footwear does not meet the requirements under NAFTA and, as a result, is not an “originating” good.

Drawback

Under 19 U.S.C. §1313(j)(1), drawback is authorized if imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation is, within three years of the date of importation, exported or destroyed under Customs supervision and was not used in the United States before such exportation or destruction. Under 19 CFR 181.45(b), an imported good subsequently exported to Canada or Mexico, in the same condition is eligible for drawback under 19 U.S.C. §1313(j)(1), and is not subject to NAFTA drawback, that is, without regard to the limitation on drawback set forth in 19 CFR 181.44. If all of the goods in a particular inventory are non-originating, identification of entries for designation for same condition drawback shall be on the basis of one of the accounting methods in 19 CFR 191.14. 19 CFR 181.45(b)(2)(i)(B).

Identification of merchandise by accounting method is provided for in 19 CFR 191.14. One of the conditions and criteria for identification by accounting method under 19 CFR 191.14, is that the lots of merchandise be fungible. Fungible merchandise is defined, for drawback purposes, as "merchandise or articles which for commercial purposes are identical and interchangeable in all situations" (19 C.F.R. §191.2(o); see also Guess? Inc. v. United States, 14 CIT 770, 752 F. Supp. 463 (1990), vacated and remanded, 944 F. 2d 855 (Fed. Cir. 1991), each of which approved Customs definition of fungibility (14 CIT at 773, 944 F. 2d at 858)).

With respect to the card placed with the U.S. assembled shoes, and the marking identifying the place of manufacture, Customs has taken the position that if merchandise is used interchangeably, regardless of where produced, customers do not discriminate on the basis of the origin of the merchandise, and the supplier does not differentiate between domestic and imported merchandise when filling orders, fungibility is not precluded. See HQ 221377, dated December 19, 1990; HQ 224659, dated October 19, 1993. This is consistent with the decision in Guess? Inc., supra, where the CIT stated, with respect to a “Made in U.S.” label:

It would be unreasonable to say that labels are too insignificant to effect the tariff fate of merchandise when they have a demonstrated effect on the customers’ choice. Of course the converse of such a rule, namely, a presumption that labeling always destroys fungibility would also be unreasonable. The focus of attention here is a label for which a commercial preference has been demonstrated.

Id, 14 CIT at 773.

In this case, according to the submission from New Balance, there is no demonstrated preference for the merchandise according to origin or labeling, and no discrimination between different origins of merchandise in sales, marketing, or filling customer orders. The differences in the labels due to the different assembly locations, do not preclude fungibility. The inclusion of the purchase order numbers and the CM sizing on the shoes assembled in China also appears to reflect the assembly location, in this case, and does not preclude fungibility. We understand from you that the shoes made in China, and imported into the U.S., are not subsequently sold or shipped to the Asian market, and those assembled in the U.S., are not generally sold or shipped to the Asian market. Therefore the sizing information does not preclude fungibility.

For clothing, in prior decisions, Customs has found fungibility for purposes of 19 U.S.C. §1313(j)(2), prior to its amendment under the Customs Modernization Act, where the imported and substituted merchandise “perfectly conform with respect to type of garment, style no., color and size.” HQ 224287, dated April 16, 1993; HQ 224346, dated November 5, 1993. Customs has interpreted fungibility as not requiring that merchandise be precisely identical, but that identical for purposes of commercial interchangeability allows some slight differences. See e.g. HQ 224287, supra; HQ 224702, dated December 17, 1993.

With respect to size, New Balance argues that there is no price difference between one size shoe and another size shoe, and therefore seeks fungibility on the basis of style/gender/color. However, in the submission, New Balance does state that shoes are shipped to fill orders on the basis of style (which includes the gender), color and size. Therefore, New Balance does discriminate on the basis of size when filling orders, as well as color and gender.

Enclosed you will find HQ 224287, HQ 224346 and HQ 224702 for your reference. On the basis of those decisions we find that the imported and domestically assembled shoes are fungible on a style, gender, color and size level. Imported merchandise that is non-originating and is fungible in accordance with the foregoing, may be designated by identification under one of the accounting methods provided for in 19 CFR 191.14. The proposed accounting method, low-to-high with established average inventory turn-over period, is provided for in 19 CFR 191.14(c)(3)(iii).

HOLDING:

Pursuant to General Note 12(t), because the upper is classified under subheading 6406.10, HTSUS, and subheading 6406.10, HTSUS, is excepted from the applicable tariff shift rule, the footwear does not meet the requirements under NAFTA and, as a result, is not an “originating” good. The imported shoes are fungible with the domestically assembled shoes, on a style, gender, color and size level. The drawback claimant may use one of the accounting methods provided for under 19 CFR 191.14 for purposes of unused merchunder 19 CFR 191.14 for purposes of unused merchandise drawback based on exports to Canada and/or Mexico.

Sincerely,

John Durant

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