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HQ 562255




February 22, 2002

CLA-2 RR:CR:sm 562255 Tjm

Category: CLASSIFICATION

Gerald G. Wallace
Capital Assets Manager
Conso Products Company
P.O. Box 326
513 North Duncan By-Pass
Union SC 29379

RE: NAFTA; inventory management methods; FIFO; fungible material; Conso Products Company; 19 CFR 181 App. Schedule X; 19 CFR 102.12(b); tassels, fringes.

Dear Mr. Wallace:

This is in reply to your letter dated September 18, 2001, requesting on behalf of your company, an advance ruling on the use of inventory management methods for claiming the North American Free Trade Agreement (NAFTA) preference. Please find our response below.

FACTS:

Your company, Conso Products Company, makes drapery tassels, fringes, and other similar goods. Your company acquires both U.S. and non-U.S. yarn and processes them into the finished product (e.g., drapery tassels) in the U.S. and Mexico. You state that the yarn is classified in subheading 5205.31, HTS, and the finished articles are classified in 5808.90.0010, HTSUS.

You state that your company currently uses approximately 875,000 pounds of 8/2 ring spun cotton yarn per year. Of that, about 195,000 pounds of the yarn, which are NAFTA-originating, are sent to Mexico for processing. The other yarn is procured from Pakistan. The Pakistani-origin yarn will be imported into the U.S. and commingled with the NAFTA-originating yarn. Then, the yarn will be dyed in the U.S.

You state that in preparing for dyeing, the Pakistani and NAFTA originating yarns are commingled and can no longer be distinguished from each other when they are delivered to the dye houses. The dyed yarn is stored in your S. Carolina dyed yarn warehouse for distribution to any department that requires a particular color. You state that you have approximately 190 active colors. Your operation in Mexico is part of your various departments.

You request that you be allowed to use Articles 406 and 415 of the NAFTA to establish which of the NAFTA and non-NAFTA yarns qualify as originating materials. You state that the Mexican plant would use these commingled yarns in their plant to produce the finished goods which would be sent to the U.S. for entry in El Paso, Texas. You state that the Mexican plant would like to use the FIFO inventory management method to identify which yarns are NAFTA and non-NAFTA before producing the finished goods. The finished goods would then be sent to the U.S. for entry with the appropriate NAFTA Certificate of Origin for those that qualify for the NAFTA preference.

You also inquire as to the type of inventory management methods that would be permitted in this case and the appropriate time periods in order to use this provision.

ISSUE:

Whether inventory management methods are acceptable in the instant case for NAFTA preference purposes.

LAW AND ANALYSIS:

Inventory Management Method

A. NAFTA Preference Eligibility

The NAFTA Rules of Origin Regulations (ROR) for purposes of determining NAFTA preference eligibility provides for the use of inventory management methods to distinguish originating and non-originating materials. 19 C.F.R. Part 181 app. § 7(16)(a) provides that:

For purposes of determining whether a good is an originating good, (a) where originating materials and non-originating materials that are fungible materials are used in the production of the good, the determination of whether the materials are originating materials may, at the choice of the producer of the good or the person from whom the producer acquired the materials, be made on the basis of any of the applicable inventory management methods set out in Schedule X. . .

The various inventory management methods set out in Schedule X are set forth in 19 C.F.R. Part 181 app. Schedule X, § 2, which states:

The inventory management methods for determining whether fungible materials referred to in section 7(16)(a) of this appendix are originating materials are the following: specific identification method;
FIFO method;
LIFO method; and average method

The term “fungible goods” is defined by the NAFTA, as implemented in the Harmonized Tariff Schedule of the United States (HTSUS), General Note (GN) 12(g) (19 U.S.C. § 1202) as:

Fungible goods and materials. For purposes of determining whether a good is an originating good— where originating and non-originating fungible materials are used in the production of a good, the determination of whether the materials are originating need not be made through the identification of any specific fungible material, but may be determined on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury; and where originating and non-originating fungible goods are commingled and exported in the same form, the determination may be made on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury. The term “fungible” means that the particular materials or goods are interchangeable for commercial purposes and have essentially identical properties.

B. Rule of Origin for Marking Purposes

We also note that Part 102, Customs Regulations (19 CFR § 102.0 et seq.), sets forth the rules of origin for purposes of marking and duty. This provision provides for the use of inventory management methods for marking purposes. Specifically, section 102.1(f) defines fungible goods or fungible materials as “goods or material that are interchangeable for commercial purposes and whose properties are essentially identical.” Section 102.12, Customs Regulations (19 CFR § 102.12), states that when fungible goods of different countries of origin are commingled, the country of origin of the goods:

Is the countries of origin of the commingled goods; or If the good is fungible, has been commingled, and direct physical identification of the origin of the commingled good is not practical, the country or countries of origin may be determined on the basis of any inventory management method provided under the appendix to part 181 of the Customs Regulations. (Emphasis added)

As the regulation noted above (19 CFR § 102.12(b)) states, an inventory management method is allowed to determine country of origin for marking purposes if the good is “fungible, has been commingled, and direct physical identification of the origin of the commingled good is not practical. . . .”

C. Prior Rulings

Customs has previously ruled with respect to the use of inventory management methods under similar circumstances. See HRL 559026, dated June 8, 1995, and HRL 546569, dated June 19, 1997. In those cases, the goods at issue were parts subsumed into the final product manufactured in Mexico. In HRL 546569, Customs approved the FIFO method for the production of color television sets. The issue in that case dealt with determining NAFTA eligibility for the product manufactured in Mexico using originating and non-originating fungible materials – color picture tubes (“CPT”). Also, in HRL 559026, dated June 8, 1995, the product at issue was toothbrushes with bristles bonded with toothpaste. In that case, the individual toothbrushes were not marked with their origin as Mexican or Korean and that such marking was not practical. See HRL 559026, at 4.

D. Analysis

In the instant case, it is our opinion that for NAFTA preference purposes, once the Pakistani and NAFTA originating yarn are commingled before they are dyed, the yarn is fungible material within the meaning of the provision in GN 12(g)(ii). The fact that the yarn is commingled and used indiscriminately in the dyeing process is dispositive that the yarn is interchangeable for commercial purposes and has essentially identical properties. Therefore, for determining whether the exported dyed yarn is NAFTA originating or non-originating, an inventory management method (e.g., FIFO as you propose) may be used. We also note that for country of origin marking purposes, the facts indicate that an inventory management method would be acceptable because direct physical identification of the yarn is not practical.

II. Time Scope for Inventory Management Method

The duration of time for the use of a FIFO or LIFO inventory management method is set forth in Customs Regulations. The NAFTA ROR (19 CFR pt. 181, app. Schedule X, § 3) states that:

Where a producer of a good or a person from whom the producer acquired the materials that are used in the production for the good chooses an inventory management method referred to in section 2, that method, including the averaging period chosen in the case of the average method, shall be used from the time the choice is made until the end of the fiscal year of the producer or person. (Emphasis added)

Section 2, which the above provision refers to, includes the specific identification method, FIFO method, LIFO method, and the average method. Therefore, if you were to use the FIFO method, you would be required to use the method from the starting point until the end of your fiscal year.

HOLDING:

Based on the information provided, the use of an inventory management method appears appropriate in this case for NAFTA preference eligibility. If you were to use the FIFO method as proposed, the duration of its use would be from the time of choice until the end of your fiscal year.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents are 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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