HQ 230196 - AFTA; unused merchandise drawback; direct identification; fungibility; commingling; origin; footwear; 19 U.S.C. § 1313(j)(1); 19 CFR § 181.45 (b) (2) (i) (A) ; 19 CFR 191.14 (b) (5) ; HQ 229403 - United States International Trade Commision Rulings

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HQ 230196

February 27, 2004

DRA4RR:CR:DR 230196 EAB

CATEGORY: DRAWBACK

Peter T. Middleton, Esq.
Middleton & Shrull
44 Mall Road, Suite 208
Burlington, Massachusetts 018034530

RE:NAFTA; unused merchandise drawback; direct identification; fungibility; commingling; origin; footwear; 19 U.S.C. § 1313(j)(1); 19 CFR § 181.45 (b) (2) (i) (A) ; 19 CFR 191.14 (b) (5) ; HQ 229403

Dear Mr. Middleton:

We are in receipt of your ruling request dated November 18, 2003, on behalf of New Balance Athletic Shoe, Inc. ("New Balance"), in which you request a ruling permitting New Balance to use direct identification finished footwear as an inventory management method for certain athletic footwear styles while continuing to use an approved accounting method (lowtohigh) for separate and distinct footwear styles.

FACTS:

On April 15, 2002, this Office issued to you on behalf of New Balance a ruling (HQ 229403) which, in part, authorized New Balance to use one of the accounting methods set forth in 19 CFR § 191.14 for purposes of unused merchandise drawback based on exports to Canada and/or Mexico. That decision remains in effect for the fact pattern presented therein. Presently, you advise us that certain facts and manufacturing practices have been or are desired to be changed by New Balance ,as new styles of their footwear come to market. More specifically, you state that, pursuant to HQ 229403, New Balance manages its inventory by using the lowtohigh accounting method with established average inventory turnover period set forth in 19 CFR 191.14(C)(3)(iii). We find from both your prior submission (incorporated herein by this reference) for HQ 229403 and the pending request, that New Balance uses a barcode as an element of its inventory management system. New Balance is planning to supplement the data on the barcode by adding code to indicate the specific purchase order number for foreign production and the work order number for domestic production for new styles of footwear. The barcode now in use by New Balance, i.e., the barcode for current styles of footwear in inventory, does not contain such data and it is the contention of New Balance that scanning, digitizing and linking the more detailed barcode will make it possible to determine precisely which consumption entry a particular imported shoe was entered on because the purchase order would relate to only one such entry. That same barcode would be read as part of the exportation process down the line, enabling New Balance to use direct identification of merchandise designated for drawback.

You advise us that

. . . During the time required for the complete changeover to the new label, the Company would use both identification methods in its drawback claims. A particular style would fall under only one method as new styles will start production with the new label, while old styles will maintain the current label. The labels will not be amended for currently manufactured styles and no relabelling of existing inventory will be undertaken.

Middleton, November 18, 2003, pp. 1 2. Consequently, the depleting units of styles currently in inventory and accounted for by the lowtohigh method will be readily distinguishable from the arriving new styles that will be directly identified by the new barcode. In both theory and practice, there will be two inventories, one being the current or "old" styles of footwear tracked by the existing and approved accounting method and the other being the new styles of footwear directly identified by the new barcode until the inevitable sunset of the old styles. Until such time, neither inventory will be commingled with the other.

LAW AND ANALYSIS:

Pursuant to General Note 12(t), Harmonized Tariff Schedule of the United States, we have already determined that the New Balance brand footwear assembled in the US from foreign, dutypaid goods is nonoriginating for purposes of NAFTA. HQ 229403, dated April 15, 2002.

As provided for in Customs Regulations, "Any accounting method which is used by a person for drawback purposes under this section [19 CFR § 191.14] must be used without variation with other methods for a period of at least one year, unless approval is given by Customs for a shorter period." 19 CFR § 191.14 (b) (5). You do not specify how soon after April 15, 2002 New Balance commenced the lowto-high inventory accounting method that Customs approved, nor do you positively state that that approved accounting method has been used without variation without variation with other methods for a period of at least one year. Given the nature of your current request, we understand that New Balance has satisfied the operational time span required by the foregoing regulation. Furthermore, while no definite enddate has been declared, New Balance will continue the lowtohigh accounting method for so long as there remains inventory containing the old styles of footwear.

Drawback is allowed upon the exportation of imported merchandise upon which was paid any duty, tax, or fee imposed under Federal law because of its importation, if the merchandise has not been used within the United States before such exportation and said exportation occurs within three (3) years of the date of importation of the designated merchandise. See 19 CFR § 191.31(a) & (b). For the new styles of footwear to be imported, this direct identification of merchandise can be achieved by creating and using the proposed enhanced barcode.

HOLDING:

The drawback claimant may use direct identification of merchandise for new styles of footwear labelled with a bar code encoded with the specific purchase order number and which bar code will be identified on export documents in support of unused merchandise drawback claims.

The drawback claimant must continue to use the existing lowtohigh accounting method for current/old styles of footwear to support claims for unused merchandise drawback claims until such time as the final pair of those shoes has been exported or destroyed under Customs supervision.

Sincerely,

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