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HQ 563532




July 28, 2006

CLA-02 RR:CTF:VS 563532 HEF

CATEGORY: CLASSIFICATION

Mr. Stuart P. Seidel
Baker & McKenzie LLP
815 Connecticut Avenue, NW
Washington, DC 20006-4078

RE: Applicability of subheading 9802.00.50, HTSUS, to vacuum storage bags; Requirement to declare value of 9802.00.50 repairs or alterations; Aggregate Reconciliation

Dear Mr. Seidel:

This is in response to your letter dated June 19, 2006, on behalf of ITW Space Bag, in which you request a binding ruling regarding the necessity of declaring a value for the repairs or alterations performed in Mexico to certain space bags, which subsequently are exported to the United States and re-entered under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (“HTSUS”).

FACTS:

ITW Space Bags are vacuum storage bags that are manufactured in the United States. The space bags are plastic bags that have a closeable end and, in some cases, a valve fitted to the bag. To use the product, the purchaser places clothing or other articles in the space bag and seals the bag. The air in the bag is then removed creating a vacuum that reduces the storage space needed for the contents. In the case of space bags marketed without a valve, the bag is rolled up and the ends are squeezed together to form a seal. In the case of space bags marketed with a valve, the bag may be squeezed and sealed as above, or sealed first and then the air is removed through the valve. The bags are manufactured in different sizes and are sent in bulk to Mexico for retail packaging, after which, they are returned to the United States.

In Mexico, one or more of the following scenarios may occur:

Approximately 3 percent of the valveless models and approximately 5 percent of the models with valves will have repairs performed, because they failed quality control tests. In addition, approximately 5 percent of the bags that were supposed to have valves applied in the United States will have had problems with the insertion of the valves on the U.S. assembly line and will be sent to Mexico where valves will be inserted into the valve hole. Then, these bags will be packaged together with other bags, which may have had caps and/or zip slides installed, as described below, and returned to the United States. You claim that the space bags will be entered in the United States under subheading 9802.00.50, HTSUS.

All space bags have a small, plastic “sure-zip slide,” which you state is similar in function to the slides found on kitchen storage bags. Approximately 5 percent of the “sure-zip slides” will be placed on the bags in Mexico. The other “sure-zip slides” are attached in the United States before the space bags are sent to Mexico. The “sure-zip slides” are manufactured in Mexico. Some of these bags may also be repaired in Mexico. Whether or not the space bags are repaired, the bags will then be packaged in Mexico with bags of other sizes, some of which have been repaired and/or have had caps placed on the valves, as described below, and returned to the United States. You state that the space bag is fully functional without the slide, but the slide makes it easier for the buyer to seal the bag. You claim that the space bags will be entered in the United States under subheading 9802.00.50, HTSUS.

Space bags with valves are completed in the United States and are sent to Mexico where they will have a small plastic cap placed on the valve to prevent dirt from entering the valve and air from entering or exiting the bag. The cap is manufactured in Mexico. These space bags may also be repaired in Mexico, as described in scenario 1. Then, the space bags will be packaged in Mexico with bags of other sizes, some of which have been repaired, and returned to the United States. You state that while the cap keeps the dirt out and helps to prevent air from entering/exiting the bag, the cap is not necessary for the bag and valve to function. You claim that the space bags will be entered in the United States under subheading 9802.00.50, HTSUS.

You state that although the Mexican facility keeps inventory records, the factory cannot, on individual shipments, identify which space bags had damaged or missing valves repaired or replaced, or which had “sure-zips” installed in Mexico before they are packaged with other bags. It is not known which specific items were repaired or had “sure-zips” installed and totals are not available until the end of the accounting period. Thus, you state that the importer is unable to provide a value for the repairs or “sure-zips” on a shipment-by-shipment or line-item basis. However, at the end of the accounting cycle, the Mexican factory will be able to determine the total number of units that were repaired or had “sure-zips” installed during the accounting cycle and provide a value to the importer for the repairs performed or the “sure-zips” installed during that cycle.

ISSUES:

Are the space bags eligible for tariff treatment pursuant to subheading 9802.00.50, HTSUS?

Is it necessary for the importer to declare a value for the repairs and/or alterations performed in Mexico to certain space bags upon their re-entry to the United States?

If a value must be declared for the repairs and/or alterations performed in Mexico to certain space bags upon their re-entry to the United States, are Aggregate Reconciliations or Supplemental Information Letters acceptable means of providing this information?

LAW & ANALYSIS:

1. Applicability of subheading 9802.00.50, HTSUS

Subheading 9802.00.50, HTSUS, provides a full or partial duty exemption for articles returned to the United States after having been exported to be advanced in value or improved in condition by means of repairs or alterations. Articles returned to the United States after having been repaired or altered in Mexico, whether or not pursuant to warranty, may be eligible for duty-free treatment, provided the documentary requirements of section 181.64, Customs Regulations, (19 C.F.R. § 181.64), are satisfied.

Section 181.64(a) states, in pertinent part:

‘Repairs or alterations’ means restoration, addition, renovation, redyeing, cleaning, resterilizing, or other treatment which does not destroy the essential character of, or create a new and commercially different good from, the good exported from the United States.

Repairs are operations aimed at restoring articles to their original condition, but cannot be so extensive as to destroy the identity of the exported article or to create a new or different article. See Press Wireless Inc. v. United States, C.D. 438, 6 Cust. Ct. 102 (1941). The replacement and/or addition of parts to restore products to their original condition may constitute repair operations for purposes of subheading 9802.00.50, HTSUS, if the particular article does not lose its identity and the replacements and/or additions are not so extensive as to create a new or different article. See id.

In the instant case, approximately 3 percent of the valveless models and approximately 5 percent of the models with valves will have repairs performed in Mexico, because they failed quality control tests. In addition, approximately 5 percent of the bags that were supposed to have valves applied in the United States will have had problems with the insertion of the valves on the U.S. assembly line and will be sent to Mexico where valves will be inserted into the valve hole. These repair operations will not cause the product to lose its identity or create a new and different article. See Headquarters Ruling Letter (“HRL”) 563289, dated January 20, 2006, where Customs and Border Protection (“CBP”) found that repair operations consisting of replacing defective hangers with good hangers and repackaging wardrobe door installation kits for export to the United States where the kits will be reintroduced to the U.S. market does not cause the product to lose its identity or create a new and different article); see also HRL 555819, dated October 11, 1991, where CBP found that the replacement and/or addition of parts to combination telephone/answering machines that are not so extensive as to create a new or different article constitutes acceptable repair operations for purposes of subheading 9802.00.50, HTSUS.

Classification under subheading 9802.00.50, HTSUS, is also precluded when the exported product is not complete for its intended use, and the foreign operations constitute intermediate processing operations which are performed as a matter of course in the preparation of the finished article. See Dolliff & Company, Inc., v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F.Supp. 618 (1978), aff’d, 66 C.C.P.A. 77, C.A.D. 1225, 599 F.2d 1015, 1019 (1979). Congress did not intend to permit uncompleted articles to be exported and made into finished products in the foreign country and when returned to be subject to duties only on the cost of the so-called alterations. United States v. J.D. Richardson Co., 36 C.C.P.A. 15, 17, C.A.D. 390 (1948), cert. denied, 336 U.S. 936 (1949). Therefore, the focus is upon whether the exported article is “incomplete” or “unsuitable for its intended use” prior to the foreign processing. Guardian Industries Corp. v. United States, 3 Ct. Int’l Trade 9, 12 (1982).

In the instant case, the space bags may also undergo alterations in Mexico. Plastic caps are added to the space bags with valves at the Mexican factory. You state that while the cap keeps the dirt out and helps to prevent air from entering/exiting the bag, the cap is not necessary for the bag and valve to function. In addition, approximately five percent of “sure-zip slides” will be attached to the bags in Mexico. You state that the space bag is fully functional without the slide, but the slide makes it easier for the buyer to seal the bag. You claim that the space bags are suitable for their intended use prior to the alterations made in Mexico. Thus, the addition of the plastic cap and/or “sure-zip slide” to the space bags should be a permissible alteration for the purposes of subheading 9802.00.50, HTSUS.

The above-described foreign processing operations do not have the effect of destroying the identity of the space bags. The Mexican operations do not result in any significant change to the character or use of the product nor create a new and different article. Moreover, we view the space bags to be complete for their intended use prior to the foreign processing. Therefore, based on the information provided and consistent with our previous rulings, we find that the described operations constitute acceptable repairs or alterations within the meaning of subheading 9802.00.50, HTSUS.

The space bags are eligible for tariff treatment under subheading 9802.00.50, HTSUS, provided the documentary requirements of 19 C.F.R. § 181.64 are satisfied.

2. Declaration of value for items entered under subheading 9802.00.50, HTSUS

The documentary requirements to obtain treatment under subheading 9802.00.50, HTSUS, for goods re-entered after repair or alteration in Mexico are set forth in 19 C.F.R. § 181.64. Basically, what is required is: (1) the filing of a declaration by the person who performed the repairs or alterations when the goods are imported, and (2) a declaration by the owner, importer, consignee, or agent having knowledge of the pertinent facts stating that the declaration described above is true and correct; whether the goods were subject to NAFTA drawback; that the goods were exported from the United States (specifying the date and port of export); and that the goods entered in their repaired or altered condition are the same goods that were exported on the listed date and identified in the declaration made by the person who performed the repairs are alterations. The declaration that should be completed by the person who performed the repairs or alterations in Mexico asks for the value of the repairs or alterations and for the total value of the articles after the repairs or alterations have been made. You indicate that the Mexican factory cannot determine the value of the repairs or alterations made to the space bags at the time of entry.

U.S. Note 3 of Subchapter II, Chapter 98, HTSUS, states, in pertinent part, that:

The value of repairs, alterations, processing or other change in condition outside the United States shall be: The cost to the importer of such change; or If no charge is made, the value of such change, as set out in the invoice and entry papers; except that, if the appraiser concludes that the amount so set out does not represent a reasonable cost or value, then the value of the change shall be determined in accordance with section 402 of the Tariff Act of 1930, as amended. No appraisement of the imported article in its changed condition shall be required unless necessary to a determination of the rate or rates of duty applicable to such article.

Articles exported for repairs or alterations in Mexico and re-entered under subheading 9802.00.50, HTSUS, are duty-free. In the instant case, the space bags repaired and/or altered in Mexico are eligible for duty-free treatment under subheading 9802.00.50, HTSUS. Thus, consistent with U.S. Note 3(b) of Subchapter II, Chapter 98, HTSUS, an appraisement of the space bag in its changed condition is not necessary.

In HRL 557295, dated October 18, 1993, the importer was unsure of the value of the repairs and alterations made to books and periodicals sent to Canada for binding or rebinding and re-entered into the United States under subheading 9802.00.50, HTSUS. CBP determined that the value of the repairs and alterations was the cost to the library for the binding and rebinding operations. CBP further explained that as the books and periodicals may be entered duty-free, no appraisement of the books and periodicals in their changed condition was required.

The instant case differs from the situation described in HRL 557295, as you state that the value of the repairs and alterations performed to the space bags in Mexico cannot be determined at the time of entry. In HRL 557295, the value of the repairs and alterations could be determined, although no duty was collectable on the value of the binding or rebinding operations performed in Canada.

U.S. Note 3(b) of Subchapter II, Chapter 98, HTSUS, does not require the appraisement of an “imported article in its changed condition” unless necessary to a determination of the rate or rates of duty applicable to such article. This provision has no effect on the importer’s duty to declare the value of the repairs or alterations made to goods entered under subheading 9802.00.50, HTSUS.

You also cite that 19 C.F.R. § 181.64(c)(3) provides the port director with the discretion to waive the declarations required under 19 C.F.R. § 181.64, if the port director is satisfied, because of the nature of the goods or production of other evidence, that the goods are imported under circumstances meeting the requirements of 19 C.F.R. § 181.64. Under section 181.64, the port director has the discretion to waive the submission of the declarations only. Values for the repairs and/or alterations performed to the space bags will still be needed to complete the entry of merchandise in accordance with section 484 of the Tariff Act of 1930, as amended (19 U.S.C. § 1484). Section 484 requires the importer of record to complete the entry of merchandise by filing with CBP the declared value, classification and rate of duty applicable to the merchandise.

Therefore, it is necessary to declare a value for the repairs and/or alterations performed to the space bags in Mexico in order to complete the entry of the goods. The value of the repairs and/or alterations performed in Mexico should be determined in accordance with U.S. Note 3 of Subchapter II, Chapter 98, HTSUS.

3. Aggregate Reconciliations and Supplemental Information Letters

You state that the importer, at the time of entry, is unable to provide a value for the repairs or “sure-zips” on a shipment-by-shipment or line-item basis. However, at the end of the accounting cycle, the exporter will be able to determine the total number of units that were repaired or had “sure-zips” installed during the accounting cycle and provide a value to the importer for the repairs or “sure-zips” installed during that cycle. Thus, you inquire whether it is permissible to list a “provisional value” and file a Supplemental Information Letter (“SIL”) or an Aggregate Reconciliation based on an inventory methodology.

Reconciliation is a process that allows an importer to identify undeterminable information (other than that affecting admissibility) to CBP, and provide the outstanding information at a later date. Modification and Clarification of Procedures of the National Customs Automation Program Test Regarding Reconciliation, 67 Fed. Reg. 61,200, 61,201 (Sept. 27, 2002). Issues regarding the value aspects of entries filed under heading 9802, HTSUS, are allowed Reconciliation. Id. Importers notify CBP that an entry summary is subject to Reconciliation by flagging the entry summary for Reconciliation. Id. The flagged entry summary is liquidated for all aspects of the entry except those issues that were flagged. Id. The means of providing the outstanding information at a later date relative to the flagged issues is through the filing of a Reconciliation entry. Id.

Aggregate Reconciliation entries contain a list of the underlying entry summaries covered and the aggregate revenue adjustment relative to those entry summaries. Id. at 61,203. Aggregate Reconciliations can be used to report an increase in duties, taxes, and fees owed or no change in the amounts already paid when the underlying entry summaries were filed; decreases may be reported in an Aggregate Reconciliation only when the importer includes a statement waiving any claim to a refund for those decreases. Id.

Based on the information you provided, the space bags will be returned to the United States from Mexico and re-entered under subheading 9802.00.50, HTSUS. As such, no duty will be collectable. Thus, it follows that there should be no change in the amount paid to CBP at the time the underlying entry summaries are filed and there should be no claim to a refund. Under these circumstances, the use of Aggregate Reconciliations to provide the value of the repairs and/or alterations performed to the space bags in Mexico, which could not be determined at the time of entry, is acceptable.

SILs may be used as an alternative to Reconciliation in certain instances. ACS Reconciliation Prototype: A Guide to Compliance, dated September 2004, states on page 7:

If an entry needs correction after filing, the Supplemental Information Letter (SIL) may be used. The SIL can cover amendments that result in requests for refunds or the submission of additional monies owed prior to liquidation.

The SIL typically addresses amendments on elements that could have been determined at the time of entry, as opposed to issues that are reasonably indeterminable at that time. Filers who use SILs excessively may be judged as failing to exercise reasonable care and may be penalized. CBP will monitor the volume of SILs and will take appropriate action should excessive use be observed.

In this matter, the value of the repairs and/or alterations performed to the space bags in Mexico cannot be determined at the time of entry. Consequently, use of SILs for this situation is contrary to the SIL’s intended use. In addition, the routine use of SILs in this matter might lead CBP to determine that your client is not using reasonable care and lead to penalty actions.

HOLDING:

On the basis of the information provided, it is our opinion that the Mexican operations enumerated above constitute "repairs" and “alterations” within the meaning of subheading 9802.00.50, HTSUS. Therefore, upon re-entry into the United States, the repaired and/or altered space bags are entitled to duty-free treatment under subheading 9802.00.50, HTSUS, provided the documentary requirements of 19 C.F.R. § 181.64 are satisfied.

U.S. Note 3(b) of Subchapter II, Chapter 98, HTSUS, does not affect the importer’s duty to declare the value of the repairs or alterations made to goods entered under subheading 9802.00.50, HTSUS. Thus, it is necessary to declare a value for the repairs and/or alterations performed to the space bags in Mexico. The value of the repairs and/or alterations performed in Mexico should be determined in accordance with U.S. Note 3 of Subchapter II, Chapter 98, HTSUS.

Where the value of the repairs and/or alterations performed in Mexico to space bags classified under subheading 9802.00.50, HTSUS, cannot be determined at the time of entry, the use of Aggregate Reconciliation is acceptable.

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,
Monika R. Brenner, Chief,
Valuation & Special Programs Branch


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