DRA-4/DRA-5-01-RR:IT:EC 226685 LTO
Port Director
Port of New York
c/o Chief, Residual Liquidation and Protest Branch
6 World Trade Center
Room 761
New York, New York 10048-0945
RE: Protest 1001-95-105517; unused merchandise drawback; rejected merchandise drawback; 19 U.S.C. 1313(c); 19 U.S.C. 1313(j)(1); AM/FM stereo cassette radios and compact disc players, equalizers, amplifiers, speakers; drawback entry documentation; HQs 221245, 222633, 224227, 224752, 225552
Dear Port Director:
This is in reference to Protest 1001-95-105517, which
concerns the availability of drawback pursuant to 19 U.S.C.
1313(c) and 19 U.S.C. 1313(j)(1) for certain AM/FM stereo
cassette radios and compact disc (CD) players, equalizers,
amplifiers, speakers, etc. The drawback claims were made July 25
and August 10, 1994 (entry numbers 241-XXXX254 and 241-XXXX256,
respectively), and the entries were liquidated on April 21, 1995.
This protest was timely filed on June 22, 1995.
FACTS:
The imported merchandise consists of a variety of automotive
products, including AM/FM stereo cassette radios and CD players,
equalizers, amplifiers, speakers, etc. All were intended to be
used for installation in automobiles, trucks and vans after they
left the factory (commonly referred to as "after market"). The
products were sold throughout the United States directly and
through independent sales representatives to mass merchandisers
like K-Mart, auto specialty chains, catalog showrooms, television
shopping networks and discount drug stores. - 2 -
The products were imported in bulk and subsequently
assembled into kits for retail sale. The kits were packaged in
either a display or clamshell packaging, which allowed the
customer to view the entire contents of the package. All of the
products were designed for consumer installation (the protestant
offered a toll free consumer help line for installation and
troubleshooting assistance). The installation of these units
required that the imported article be unpacked from its original
packaging, partially disassembled and its wires had to be slit or
cut to fit the article in the motor vehicle. Since units were
returned after being purchased by the consumer, it would not be
unusual to find signs of use on the returns, such as scratches,
missing or broken parts, cut wires, etc.
The protestant accepted returns from its customers, who
received returns from the retail customer (i.e., the vehicle
owner). The protestant accumulated the returned units in its
warehouses and ultimately sold them, at a drastically reduced
amount (at approximately 10 cents on the dollar), to a trading
company for exportation. As a condition of this sale, the
articles had to be exported.
ISSUE:
Whether the imported merchandise is eligible for drawback
under 19 U.S.C. 1313(j)(1), or alternatively, under 19 U.S.C.
1313(c).
LAW AND ANALYSIS:
The protestant contends that the imported merchandise is
eligible for drawback under 19 U.S.C. 1313(j)(1), or,
alternatively, under 19 U.S.C. 1313(c).
1. 19 U.S.C. 1313(j)(1)
The drawback law was substantively amended by section 632,
title VI - Customs Modernization, Public Law 103-182 the North
American Free Trade Implementation Act (107 Stat 2057) enacted
December 8, 1993. Title VI of that Act amended 19 U.S.C.
1313(j). Section 692 of the Act provides that Title VI
provisions take effect on the date of enactment.
19 U.S.C. 1313(j)(1) provides that:
If imported merchandise, on which was paid any duty,
tax, or fee imposed under Federal law because of its
importation-- - 3 -
(A) is, before the close of the 3-year period
beginning on the date of importation--
(i) exported, or
(ii) destroyed under customs supervision;
and
(B) is not used within the United States before
such exportation or destruction;
then upon such exportation or destruction 99 percent of
the amount of each duty, tax, or fee so paid shall be
refunded as drawback. The exporter (or destroyer) has
the right to claim drawback under this paragraph, but
may endorse such right to the importer or any
intermediate party.
Senate Report 103-189, (1993) at p. 82, provides, regarding
unused merchandise drawback, as follows:
Section 632 renames the same condition drawback provision
'Unused Merchandise Drawback,' and amends the provision in
several ways. The provision will allow exporters to claim
drawback on imported merchandise, or other domestic or
imported merchandise that is substituted for the imported
merchandise, that is not used within the United States
before exportation or destruction, while removing the
requirement that the merchandise be in the same condition.
This allows for the possibility that drawback may be claimed
on exported or destroyed unused merchandise that has
physically deteriorated.
19 U.S.C. 1313(j)(1) provides that the merchandise on which
drawback is claimed may not be used. A definition of the term
"unused merchandise" was not provided in the language of the new
act, although 19 U.S.C. 1313(j)(3) states that the performance of
certain operations (such as testing, cleaning, and inspecting) on
the imported item, not amounting to a manufacture or production,
is not treated as a use of the merchandise. In Customs Service
Decisions (C.S.D.) 81-222 and 82-135, however, we determined that
an article is used when it is employed for the purpose for which
it was manufactured and intended.
In making a claim under 19 U.S.C. 1313(j)(1), it is
incumbent on the protestant to present evidence as to how the
merchandise was used (i.e., why was the merchandise returned by
the consumer?). The protestant admits that it "cannot - 4 -
specifically identify the exact use to which each returned
article was put," but argues that "[b]y virtue of their return,
it is logical to assume that all of the returned units did not
meet the expectations of the ultimate purchaser and further, that
such units were not used by such purchasers for their intended
purpose." Although the merchandise was to be exported by a
trading company that purchased the returned units at a
drastically reduced amount, no evidence was presented to support
these assertions.
The protestant states that it accepted returns from its
customers (retailers), who received returns from the retail
consumer (the vehicle owner), who returned the units "after
attempted installation or installation and subsequent removal."
The retailers, who were not required to provide an explanation as
to why they accepted the return, received "a full credit [from
the protestant] applied for each authorized return." The "Return
Authorization" provided by the protestant simply lists the
following condition: "[o]nly defective product will be
accepted." However, there is no indication that any products
shipped by the retailers to the protestant were not accepted
(i.e., those that were not defective).
The protestant states that many of the units were installed
in the vehicles only to be returned at a later date--"it would
not be unusual to find signs of use on the returns, such as
scratches, missing or broken parts, cut wires, etc." Without
explanation, this statement does not support the protestant's
claim, and is, in fact, evidence of "use." Further, Customs
examination of three containers on August 4 and August 5, 1994,
revealed that while some of the exported merchandise had
"defective tags" on them, many others did not. Those that had
tags listed a variety of defects, including "tape doesn't work,"
"tuning knob broken loose from stem," "will not play at all,"
knob "won't turn anymore," "eats tapes," etc. Besides the tags,
no other records are maintained showing the reason for any
return. All returned merchandise is commingled, making no
distinction, except for the tags, between good, used, unused,
broken, damaged or defective products. More importantly,
however, is the fact that the tags list 1990 return dates (i.e.,
February 26 and July 7, 1990). These returns, therefore, bear no
relationship to entry numbers 241-XXXX254 and 241-XXXX256, as
that merchandise was entered in 1991 and 1992.
In HQ 224227, dated May 2, 1996, we recently held that
imported telephones, telephone answering machines and karaoke
music machines that have been returned by the retailer to the - 5 -
importer of record to be shipped back to the manufacturers were
not eligible for drawback under 19 U.S.C. 1313(j)(1). The
importer of record had a "no-questions-asked" return policy, in
which it did not inquire as to the reason for the return of the
merchandise. Because no records were maintained showing the
reason for the returns, we found that "the requirement that the
merchandise not be used under 19 U.S.C. 1313(j) has not been
met." Similarly, the merchandise in question, returned by the
retailer to the protestant apparently based on a "no-questions-asked" return policy, is not eligible for drawback under 19
U.S.C. 1313(j)(1).
The protestant cites HQ 224752, dated October 29, 1993, and
HQ 225552, dated November 1, 1994, for the proposition that any
operation of the automotive products following their installation
constitutes a "testing," which should not be treated as a "use"
pursuant to 19 U.S.C. 1313(j)(3). In HQ 224752, notebook
computers were evaluated by distributors for compatibility with
software applications, hard disk drive performance, battery
depletion rate and reliability, over a period of days, while in
HQ 225552, machinery was installed and subjected to limited trial
runs. We determined that the computers and machinery were
eligible for drawback under 19 U.S.C. 1313(j) because the
operations performed were "testing" operations (HQ 224752 cited
19 U.S.C. 1313(j)(4), the predecessor to 19 U.S.C. 1313(j)(3)).
Once again, there are no records in the instant case showing
the reasons for the returns (i.e., did the consumer use the
product but simply did not like it?), nor is there evidence that
the AM/FM stereo cassette radios and CD players, equalizers,
amplifiers and speakers were "tested" by the retail consumer in
the manner described above. Moreover, the merchandise was not
operated by the consumer for the sake of "testing," but was
employed for the purpose for which the merchandise was
manufactured. See HQ 222633, dated December 10, 1990 (wherein we
found that where the ultimate consumer took household glassware
home and discovered that it was defective, then the merchandise
was considered to be used and 19 U.S.C. 1313(j) was not
applicable). HQ 224752 and HQ 225552 are therefore
distinguishable from the case at hand.
Finally, in addition to our above-mentioned concerns
regarding the "use" of the merchandise, we note that there are
also deficiencies in the drawback entry documentation provided by
the protestant. Regarding drawback entry number 241-XXXX254, for
example, there are discrepancies between the Customs Form (CF)
7539, entry summary and commercial invoices supporting the
drawback entry. Several are listed below. - 6 -
An attachment to the CF 7539 provides that 16,000 car
stereos and nylon bags, model RS1000NB (P.O. 19274R), were
imported in entry 241-XXXX067-9. The entry summary describes the
importation of 10,000 "RAD/CASS TAPE PLAYERS, STERE," which were
classified under subheading 8527.21.10, Harmonized Tariff
Schedule of the United States (HTSUS) (reception apparatus for
radiobroadcasting, whether or not combined, in the same housing,
with sound recording or reproducing apparatus or a clock), and
6,000 "OTHER TRAVEL BAGS, MN-MD, OUT." However, the commercial
invoice for this entry indicates that only 9,000 "RS1000N-B" (and
1,000 "RS1800") car stereos were imported. Moreover, there are
no export documents indicating that the 8,800 car stereos
exported were all model RS1000N-B, as claimed.
An attachment to the CF 7539 provides that 15,600 car
radios, model RS1000NB (P.O. 19358,59,66), were imported in entry
241-XXXX450-8. Two entry summaries were provided, and they
describe the importation of 3,780 and 11,820 "RAD/CASS TAPE
PLAYERS, STERE," which were also classified under subheading
8527.21.10, HTSUS. However, a single commercial invoice (only
one is in our file, apparently that relating to the importation
of 11,820 car radios) for this entry indicates that 9,320
"RS1000N-B" and 2,500 "RS2050-B" car radios were imported.
Again, there are no export documents indicating that the 9,320
car radios exported were all model RS1000N-B, as claimed.
An attachment to the CF 7539 provides that 11,000 "stereos,
radios w/ flashlights," model RS1000NB (P.O. 19273B) were
imported in entry 241-XXXX239-5. However, two entry summaries
describe the importation of 6,000 "RADIO BROAD REC, AM/FM OR F"
and 5,000 "RAD/CASS TAPE PLAYERS, STERE" under subheadings
8527.19.00 and 8527.21.10, HTSUS, respectively. There are no
export documents indicating that the 5,000 car stereos exported
were all model RS-1000N-B, as claimed.
Accordingly, based on the lack of evidence regarding the
"use" of this merchandise, and the deficiencies in the drawback
entry documentation, the merchandise is not eligible for drawback
under 19 U.S.C. 1313(j)(1).
2. 19 U.S.C. 1313(c)
19 U.S.C. 1313(c), which concerns drawback for merchandise
not conforming to sample or specifications, provides that:
- 7 -
Upon the exportation, or destruction under the
supervision of the Customs Service, of merchandise--
(1) not conforming to sample or specifications, shipped
without the consent of the consignee, or determined
to be defective as of the time of importation;
(2) upon which the duties have been paid;
(3) which has been entered or withdrawn for
consumption; and
(4) which, within 3 years after release from the
custody of the Customs Service, has been returned
to the custody of the Customs Service for
exportation or destruction under the supervision
of the Customs Service;
the full amount of the duties paid upon such
merchandise, less 1 percent, shall be refunded as
drawback.
Regarding the issue of rejected merchandise, House Report
103-361, 103d Cong., 1st Sess., 129, states the following:
Section 632 amends the rejected merchandise drawback
provisions . . . to allow the importer and foreign
supplier to agree that the imported merchandise was
defective without reference to purchase specifications
or samples. If the importer and foreign supplier could
not agree that the merchandise was defective, Customs
would be required to make that determination. Under
Section 632, imported merchandise could be used for up
to 3 years and the importer could get a duty refund if
it was shown that the merchandise did not conform to
specifications or sample or was defective at the time
of importation.
Therefore, to qualify for rejected merchandise drawback, the
claimant must provide evidence that the importer and foreign
supplier agreed that the imported merchandise was defective at
the time of importation, or that the imported merchandise did not
conform to sample or specification. The protestant has not
provided such evidence.
The facts indicate that there was no agreement between the
protestant (the importer) and foreign supplier that the imported
- 8 -
merchandise was defective at the time of importation. According
to the protestant, it accumulated the returned units in its
warehouses and ultimately sold them, at a drastically reduced
amount (at approximately 10 cents on the dollar), to a trading
company for exportation. There is no mention of the foreign
supplier in this transaction or in any other involving returned
merchandise.
Because there is no agreement or insufficient evidence of an
agreement, Customs is required to make the determination as to
whether the imported merchandise was defective at the time of
importation. The type of documentation necessary to support such
a determination was described in HQ 221245, dated October 19,
1990. In HQ 221245, we stated there were two ways in which a
claimant can demonstrate to Customs satisfaction that merchandise
did not conform to sample or specifications: "(1) by presenting
specifications and showing that the defect was caused by a
failure to meet those specifications; or (2) by proving that the
imported merchandise failed to meet a warranty guaranty as to
length of service, and the credit allowed for it amounted to 90%
or more of the purchase price." See also HQ 224227, dated May 2,
1996. The protestant has not provided specifications for the
products or evidence that they were indeed defective. While the
protestant gave its customer full credit for all units returned
to it, there is insufficient evidence relating to the failure of
the units to meet any warranty guarantee. Moreover, as stated
above regarding the claim under 19 U.S.C. 1313(j)(1), there are
also deficiencies in the drawback entry documentation.
Accordingly, the units are not eligible for drawback under 19
U.S.C. 1313(c).
HOLDING:
The protest should be denied because there is a complete
lack of evidence to show that the AM/FM stereo cassette radios
and compact disc (CD) players, equalizers, amplifiers, speakers,
etc., meet the statutory requirements set in 19 U.S.C. 1313(c) or
19 U.S.C. 1313(j)(1).
In accordance with section 3A(11)(b) of Customs Directive
099 3550-065, dated August 4, 1993, Subject: Revised Protest
Directive, this decision, together with the Customs Form 19,
should be mailed by your office to the protestant no later than
60 days from the date of this letter. Any reliquidation of the
entry in accordance with the decision must be accomplished prior
to the mailing of the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to - 9 -
make the decision available to Customs personnel via the Customs
Rulings.
Sincerely,
Director, International Trade
Compliance Division