HQ 546838 - Article 509; NAFTA; net cost; total cost; packing; excluded costs - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 2004 HQ Rulings > HQ 546690 - HQ 548196 > HQ 546838

Previous Ruling Next Ruling
HQ 546838

April 9, 1999

VAL RR:IT:VA 546838 CRS

CATEGORY: VALUATION

Rudy A. Piña
R.A. Piña & Associates
P.O. Box 2496
Nogales, AZ 85628

RE: Article 509; NAFTA; net cost; total cost; packing; excluded costs

Dear Mr. Piña:

This is in reply to your letter dated August 15, 1997, submitted on behalf of your client, Miniature Precision Components, Inc. (MPC) of Walworth, Wisconsin, in which you requested an advance ruling under part 181, Customs Regulations (19 C.F.R. pt. 181), as to whether certain packing costs are included in determining the regional value content of a good under the North American Free Trade Agreement (NAFTA). We regret the delay in responding.

FACTS:

MPC’s Mexican affiliate, Autopartes de Precision SA de CV (APS), of Santa Anna, Sonora, assembles goods which are imported into the United States through the port of Nogales. You state that the imported goods qualify as originating under the NAFTA on the basis that they satisfy the applicable rule of origin, specifically, that they have a regional value content that is not less than fifty percent under the net cost method.

The finished goods produced by APS in Mexico are packed in cartons of U.S. origin which serve to protect the goods. The cost of the cartons and packing materials used to pack the goods are recorded on APS’s books. The goods are shipped directly from APS’s plant in Santa Anna, Sonora, to the U.S.

ISSUE:

The issue presented is whether for purposes of calculating the regional value content of a good under the NAFTA: (1) the net cost of the good includes the value of U.S. packing materials on the books of the producer; and (2) the value of the packing materials is included in the value of non-originating materials.

LAW AND ANALYSIS:

Section 6 of the Appendix to part 181, Customs Regulations, (19 C.F.R. pt. 181 app. § 6; NAFTA Rules of Origin Regulations (the "ROR")), sets forth the rules for determining the regional value content of a good. Under the net cost method, which you state is used in the instant case, the regional value content of a good is determined in accordance with section 6(11) of the ROR which provides generally that the net cost of a good is its total cost less any excluded costs. For purposes of determining regional value content the term "total cost" is defined as "all product costs, period costs and other costs that are recorded, except as otherwise provided in [the case of materials and intermediate materials] on the books of the producer without regard to the location of the persons to whom payments with respect to those costs are made." 19 C.F.R. pt. 181, § 2(6). To the extent that packing costs are on the producer’s books they would therefore be included in total cost.

However, as noted above, net cost is defined as total cost less any excluded costs, i.e., “sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs. (emphasis added)” 19 C.F.R. pt. 181, app. § 2(1). “Shipping and packing costs” are defined as the “costs incurred in packing a good for shipment and shipping the good from the point of direct shipment to the buyer, excluding the costs of preparing and packaging the good for retail sale.” 19 C.F.R. pt. 181, app. § 2(1).

In the instant case, the cost of packing cartons of U.S. origin are recorded on the books of the producer, APS. Based on the information presented, the cartons are used to protect the imported goods during shipment and, therefore, they constitute “packing materials and containers” as defined by the ROR. 19 C.F.R. pt. 181, app. § 2(1). Thus, the cost of the U.S. origin packing cartons and any other packing costs that are recorded on APS’s books and are incurred in packing the goods for shipment from Santa Anna, the point of direct shipment, are included in the total cost of the good. However, since excludable costs, including shipping and packing costs, are deducted from total cost in determining net cost, the cost of packing would be deducted from total cost in determining net cost. Thus, costs incurred by APS in packing the imported goods for shipment to the U.S. and shipping them from the Santa Anna plant should be deducted from total cost in determinng net cost.

You have also asked whether the packing materials would be included in the value of non-originating materials. You state that it is your understanding that if the packing materials were non-originating and their cost was recorded on the producer’s books, the cost of the materials would be included in total cost but that their value would not be included in the value of non-originating materials.

In regard to the value of non-originating materials used in the production of the good, section 7 of the ROR

With certain exceptions, including light-duty and heavy-duty automotive goods, the value of non-originating materials is to be determined in accordance with section 7. provides:

(15) For purposes of determining whether a good is an originating good, packing materials and containers in which the good is packed

(a) shall be disregarded for purposes of determining whether

(i) the nonoriginating materials used in the production of the good undergo an applicable change in tariff classification, and

(ii) the good satisfies a regional valuecontent requirement; and

(b) if the good is subject to a regional valuecontent requirement, the value of the packing materials and containers shall be the costs thereof that are recorded on the books of the producer of the good.

19 C.F.R. pt. 181, app., section 7(15); see also, NAFTA, Article 410. In the instant case, based on the information presented the packing costs are originating and therefore would not be included in the value of non-originating materials. If the packing materials were non-originating, however, then in accordance with section 7(15) of the ROR the value of the packing materials as recorded on the books of APS would be disregarded for purposes of determining regional value content.

HOLDING:

Packing costs recorded on the books of APS are included in total cost but excluded from net cost. The value of non-originating packing materials should be disregarded in determining the value of non-originating materials under section 7 of the ROR.

Sincerely,

Previous Ruling Next Ruling