CLA-2 CO:R:C:S 557732 WAS
Marjorie M. Shostak
Stein Shostak Shostak & O'Hara
Suite 1240
3580 Wilshire Boulevard
Los Angeles, CA 90010-2597
RE: Eligibility for duty-free treatment under General Note
13(c), HTSUS, of materials prepared abroad for Warner Bros.
Animation
Dear Ms. Shostak:
This is in reference to your letter dated November 5, 1993,
on behalf of Warner Bros. Animation, concerning the eligibility
of materials used abroad in the production of animated cartoons
for duty-free treatment under General Note 13(c), Harmonized
Tariff Schedule of the United States (HTSUS).
FACTS:
You state that Warner Bros. Animation is in the business of
producing animated cartoons. The individual cartoon episodes are
animated abroad with the use of pre-production materials supplied
from the U.S. by Warner Bros. Animation. The pre-production work
done in the U.S. involves the preparation of a story board,
scripts, drawing, sketches, written instructions, background
materials and timing data. A sound track of the dialogue is also
prepared and sent along with the other pre-production materials
to a selected overseas animation studio, so that the animations
prepared abroad can be matched to the sound track.
At the animation studios in the foreign country, the
animation work is performed pursuant to the written instructions
supplied by Warner Bros. Animation; the production drawings are
photocopied onto animation cels, painted, and then photographed
against various background scenes painted abroad from designs
received from the U.S., to produce a film of animated cartoons.
The animated cartoon films are returned to Warner Bros. Animation
in the U.S. for review, and such retakes, as are requested by
Warner Bros. Animation, are prepared by the animation studios and
supplied to Warner Bros. Animation. When the animation has been
completed abroad, the animated cartoon films are imported
separately. You claim that their tariff classification and
appraised value are not at issue in this ruling request.
You state that this ruling request relates to materials
accumulated by the animation studios, consisting of the pre-production materials for preparation of these episodes, exported
from the U.S. by Warner Bros. Animation, together with the used
animation cels, background scenes, rejected film takes and
retakes, and any other materials created by the animation
studios. These materials are packed in cartons by episode, and
stored by the animation studios until ordered to be destroyed, or
requested to be returned to the U.S. to Warner Bros. Animation.
You state that often these materials may not be shipped back to
the U.S. for a year or more after the animated film has been
returned to the U.S.
You submit that these materials are returned to the U.S. not
as the result of a commercial transaction, but because they are
owned by Warner Bros. Animation. You state that they are either
ordered destroyed abroad, or repatriated, to protect the
intellectual property rights therein of Warner Bros. Animation.
You claim that the primary purpose for returning these materials
to the U.S. is to protect the intellectual property interests of
Warner Bros. Animation in the productions, so that they cannot be
reproduced by unauthorized persons, stolen, or copied.
In addition, you state that, on occasion, the returned
cartons containing the materials may be examined to ascertain
whether or not to retain the materials or destroy them. After
examination, a few of the used animation cels might ultimately be
retrieved from the stored boxes. You claim that in their
condition as imported, packed with a mass of other used
materials, the used animation cels are not in a saleable
condition, and are worthless. To put them in a viable commercial
condition, the cels which are retrieved from the stored cartons
must be cleaned, reconditioned, associated with a background
scene, mounted, and authenticated as coming from a particular
cartoon or film. It is your position that it is only after
retrieval, and after the cels have undergone significant
processing operations in the U.S. that they have any value and
become saleable.
ISSUE:
Whether the materials returned to Warner Bros. Animation in
the U.S. are exempt from duty and entry pursuant to General Note
13(c), HTSUS, and section 141.4, Customs Regulations (19 CFR
141.4).
LAW AND ANALYSIS:
General Note 13(c), HTSUS, provides:
For the purposes of General Note 1 --
records, diagrams and other data with regard to any
business, engineering or exploration operation whether on
paper, cards, photographs, blueprints, tapes or other media,
. . . are not goods subject to the provisions of the tariff
schedule.
Section 141.4, Customs Regulations (19 CFR 141.4) states:
[e]ntry as required by section 484(a), Tariff Act of 1930,
as amended (19 U.S.C. 1484(a)), shall be made of every
importation, whether free or dutiable and regardless of
value, except for:
(a) The exemptions listed in General Note 4 [now General
Note 13(c)] to the Harmonized Tariff Schedule of the United
States (HTSUS).
HRL 063240 dated October 24, 1979, involved various
materials including rough layouts, working drawings of layouts
for reproduction purposes, ozachrome proofs, full color proofs,
film copies of the working drawings for reproduction,
photographs, photostats in the form of either negative or
positive prints, handmade approximations of finished printed
designs, tracing sheets indicating what colors go where, ink
swatches, color standard tolerance samples, and printed
production samples. In HRL 063240, we held that these materials
fell within the scope of item 870.10, Tariff Schedules of the
United States (TSUS) [the precursor provision to General Note
13(c), HTSUS].
We are of the opinion that the materials in the instant case
are very similar to those materials described in HRL 063240. The
materials accumulated by the Animation Studios, consist of pre-production materials for preparation of animated cartoon films,
exported from the U.S. by Warner Bros. Animation, together with
the used animation cels, background scenes, rejected film takes
and retakes, and other materials created by the Animations
Studios in the production of animation work. The materials
returned to Warner Bros. Animation are being used directly in the
production of animated cartoon films and are returned to the U.S.
in order to protect their proprietary value. Thus, it is our
position that the returned materials consist of business records
and data necessary for the production of animated films within
the meaning of General Note 13(c), HTSUS.
Customs, however, also has held that in order for materials
to be eligible for an exemption in duty under General Note 13(c),
HTSUS, they cannot be imported primarily for commercial sale.
See HRL 951044 dated February 1, 1993 (Customs held that certain
magnetic discs containing transcribed information, which was
intended for sale to third parties and not information related to
business operations, was not eligible for the duty exemption
under General Note 4(c), HTSUS). The legislative history of item
870.10, indicates that the records contemplated in item 870.10,
TSUS, are not salable (S. Rep. No. 1318, 97th Cong., 1st Sess.
1640 (1962)). Similarly, records or data classifiable under this
provision are not permitted any commercial value except to the
business to which they pertain. See HRL 073099 dated June 5,
1984. Customs has interpreted the terms "salable" and
"commercial value" to mean that the primary purpose of
importation into the U.S. is for the resale to others. See HRL
220989 dated May 11, 1989.
Under the facts in this case, the material returned to the
U.S., which may be stored in a warehouse and retained
indefinitely, or may be destroyed, is not intended for commercial
sale to a third party. You have submitted that the primary
purpose of returning the materials to the U.S. is to protect the
intellectual property rights of Warner Bros. Animation in the
material. The materials returned to the U.S. have no commercial
value and are not suitable for sale in their condition as
imported. However, if it is known at the time of importation
that the returned materials may at some later date be put in a
viable commercial condition for sale, such materials will not
meet the requirements of this statute. Therefore, if the
animation cels will be reconditioned into articles which are
"salable" or have "commercial value", they will not be exempt
from duty and entry under General Note 13(c), HTSUS.
HOLDING:
Based on the information presented, we are of the opinion
that the materials returned to the U.S. to Warner Bros. Animation
consist of business records and data associated with the business
of producing animated films, and are not imported primarily for
commercial sale. Therefore, we are of the opinion that these
materials are properly exempt from duty and entry under General
Note 13(c), HTSUS. However, if it is known at the time of
importation that the returned materials will at some later date
be reconditioned for sale, then these materials will be precluded
from duty-free treatment under General Note 13(c), HTSUS.
Sincerely,
John Durant, Director
Commercial Rulings Division