CLA-2-RR:TC:SM 559917 DEC
Ms. Lynn S. Baker
Baker & McKenzie
One Prudential Plaza
130 East Randolph Drive
Chicago, Illinois 60601
RE: Cheddar Cheese; Border Brokerage Company Inc. v. United
States; United States v. John V. Carr & Sons; HRL 555685;
HRL 555148; HRL 555072; HRL 554643; HRL 731425; HRL 558912;
HRL 559611; HRL 555174; HRL 554179; A.F. Burstrom v. United
States; Guardian Industries Corp. v. United States; Dolliff
& Company, Inc. v. United States; HRL 556685; HRL 555180;
Wilbur G. Hallauer v. United States; HRL 554654; HRL 555642;
HRL 555708; HRL 078034; HRL 555343; HRL 555766; General Note
12; Originating Good; NAFTA Article 509; 19 CFR 102.19; 19
CFR 102.11
Dear Ms. Baker:
This is in response to your letters dated June 24, 1996, and
May 9, 1997, on behalf of Kraft Foods Incorporated (Kraft),
concerning the eligibility of cheddar cheese from Canada for
duty-free entry under subheading 9801.00.10, Harmonized Tariff
Schedule of the United States (HTSUS), or alternatively, for a
partial duty exemption under subheading 9802.00.50, HTSUS. In
addition, this ruling letter will address the applicable duty
rate for the subject cheddar cheese as well as the country of
origin marking requirements pursuant to the North American Free
Trade Agreement (NAFTA) Marking Rules.
FACTS:
Kraft intends to export to Canada 640 pound blocks of
natural cheddar cheese that will be produced at one of its
cheddar supply plants in the United States. At a Kraft
plant in Ontario, Canada, each 640 pound block of cheddar cheese
will be cut by
passing it through a heated wire into sticks and wedges ranging
in weight from six ounces to three pounds. You note that the
cutting of cheese is an integral step in the retail packaging
operation and that it must be performed simultaneously with the
wrapping operation as a unified task because the exposure to
oxygen promotes mold growth.
ISSUES:
1. Will 640 pound blocks of U.S.-origin cheddar cheese
that are sent to Canada to be cut and packaged for retail sale be
eligible for duty-free treatment under subheading 9801.00.10,
HTSUS, or for partial duty relief under subheading 9802.00.50,
HTSUS, when returned to the U.S.?
2. Is the returned cheese eligible for the NAFTA
preferential rate for goods of Canada?
3. What are the country of origin marking requirements
applicable to the returned cheese?
LAW AND ANALYSIS:
I. Applicability of Chapter 98
A. Subheading 9801.00.10, HTSUS
Subheading 9801.00.10, HTSUS, provides for the free entry of
U.S. products that are exported and returned without having been
advanced in value or improved in condition by any means while
abroad, provided the documentary requirements of section 10.1,
Customs Regulations (19 CFR 10.1), are met. While some change in
the condition of the product while it is abroad is permissible,
operations which either advance the value or improve the
condition of the exported product render it ineligible for
duty-free entry upon return to the U.S. See Border Brokerage
Company Inc. v. United States, 65 Cust. Ct. 50, C.D. 4052, 314 F.
Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970).
The packaging abroad of U.S.-made products will not preclude
classification under this tariff provision when there is no
improvement in condition or advancement in value of the products
themselves, apart from their containers. In United States v.
John V. Carr & Sons, Inc., 69 Cust. Ct. 78, C.D. 4377 (1972), the
court stated that absent some alteration or change in the item
itself, the mere repackaging of the item,
even for the purpose of resale to the ultimate consumer, is not
sufficient to preclude the
merchandise from being classified under item 800.00, Tariff
Schedules of the United States (TSUS) (the precursor to
subheading 9801.00.10, HTSUS).
You state that the cutting of the cheese that you have
described is more analogous to the processing at issue in HRL
555072, dated October 17, 1988, in which Customs addressed the
issue of whether rapseed and soybean oils that were exported to
Canada via tank trucks where the oils were repackaged into 5-gallon plastic containers. Citing HRL 554643, dated July 7,
1987, which addressed the bottling of wines and HRL 731425, dated
June 28, 1988, which addressed the bottling of spring water,
Customs determined that the repackaging of the rapseed and
soybean oils did not constitute an advancement in value or an
improvement in condition. Accordingly, the oils were entitled to
duty-free entry as American goods returned. We disagree with
your analogy of these rulings to the cheese cutting operation at
issue. The Carr and Border Brokerage decisions specifically
instruct Customs to examine what is done to the article itself.
The cases cited above involving liquids that are repackaged are
distinct from the cutting of the blocks of cheese. In the case
at issue, it is the actual article, cheese, that is being altered
by the cutting operation which reduces the 640 pound block into
sticks and wedges ranging from six ounces to three pounds. In
the rulings cited, the articles merely underwent a repackaging
operation and no processing operation was applied to the articles
themselves. Similarly, Customs' concluded in HRL 558912, dated
March 17, 1995, that steel tubing which was cut to ordered
lengths abroad was an improvement in condition, thereby
disqualifying it from eligibility for entry under subheading
9801.00.10, HTSUS.
In HRL 559611, dated May 7, 1996, herbs grown in the U.S.
were sent to Canada to be cleaned, trimmed to be uniform in size,
packaged, and labeled for retail and food service industry. We
found that the combination of cleaning and trimming served to
advance in value and improve the condition of the herbs that were
to be exported to Canada. Accordingly, the herbs were not
entitled to classification under subheading 9801.00.10, HTSUS.
Additionally, Customs has previously stated that cutting
exported merchandise to length generally advances its value or
improves its condition. See HRL 555174, dated April 25, 1989
(decorative banners cut to shorter lengths for retail sale were
more marketable than rolls of banners in 140-foot lengths;
consequently, this change in the banners' marketability
constituted an improvement in the merchandise's condition,
thereby precluding the duty exemption available under HTSUS
subheading 9801.00.10); and HRL 554179, dated September 10, 1986
(ribbon exported to Mexico to be cut to length, rewound onto
spools and wrapped in plastic packaging was not eligible for item
800.00, TSUS, treatment as the cutting to shorter lengths
improved the condition of the ribbon by making it ready for sale
upon return to the U.S.
B. Applicability of subheading 9802.00.50, HTSUS
Alternatively, articles returned to the United States after
having been exported to be advanced in value or improved in
condition by repairs or alterations may qualify for the partial
duty exemption under subheading 9802.00.50, HTSUS, provided the
foreign operation does not destroy the identity of the exported
articles or create new or commercially different articles through
a process of manufacture. See, A.F. Burstrom
v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'd, C.D.
1752, 36 Cust. Ct. 46 (1956); Guardian Industries Corp. v. United
States, 3 CIT 9 (1982). Accordingly, entitlement to this tariff
treatment is precluded where the exported articles are incomplete
for their intended purpose prior to the foreign processing and
the foreign processing operation is a necessary step in the
preparation or manufacture of finished articles. Dolliff &
Company, Inc. v. United States, 455 F. Supp. 618 (CIT 1978),
aff'd, 559 F.2d 1015 (Fed. Cir. 1979). Articles from Canada
entitled to this partial duty exemption are dutiable only upon
the cost or value of the foreign repairs or alterations when
returned to the United States, provided the documentary
requirements of section 181.64, Customs Regulations (19 CFR
181.64), are satisfied.
In HRL 556685, dated June 26, 1992, Customs concluded that
the removal of stems from jalapeno peppers would not preclude the
peppers from receiving the benefits of subheading 9802.00.50,
HTSUS, since stemmed peppers are not commercially different
articles from unstemmed peppers. In addition, Customs has
ruled that certain cleaning operations constitute alterations.
See HRL 555180, dated December 26, 1989 (carrots exported to
Mexico for washing, cooling, sorting by size, grading for
quality, and packaging for retail sale were entitled to the
partial duty exemption provided for under subheading 9802.00.50,
HTSUS). In addition, the Court of Customs and Patent Appeals
concluded that certain operations performed in Canada to
U.S.-origin apples, including cleaning, grading, wrapping, and
packing, were deemed to be alterations. Wilbur G. Hallauer v.
United States, 40 CCPA 197, C.A.D. 518 (1953).
In HRL 559611, dated May 7, 1996, Customs determined that
the trimming of the stems of herbs in order to make the herbs
more uniform in size, simplify packaging in fresh bunches, and to
remove excess soil did not disqualify the herbs from the partial
duty exemption under subheading 9802.00.50, HTSUS. However, in
that decision, Customs noted that in a case involving slicing of
fruit abroad, we determined that the slicing of peaches exceeded
the scope of the term "alteration" under item 806.20, TSUS (the
precursor to subheading 9802.00.50, HTSUS). See HRL 554654,
dated July 28, 1987. In HRL 554654, Customs determined that the
slicing of exported whole peaches, including removal of the pits
and skins, not only destroyed the identity of the exported
peaches, but resulted in new articles of commerce, more suitable
and better
adapted not only for ice cream but other industries as well. In
addition, Customs held in HRL 555462, dated September 11, 1989,
that dicing and individually quick-freezing apples abroad did not
constitute an acceptable alteration for purposes of subheading
9802.00.50, HTSUS. In that case, we stated that the dicing of
apples resulted in new and different commercial articles having
uses different from those of whole apples. Since the herbs were
not chopped, ground, or sliced, they were deemed to be eligible
for a partial duty exemption under subheading 9802.00.50, HTSUS.
The removal of stems from jalapeno peppers at issue in HRL
556685 and the trimming of herbs at issue in HRL 559611 are
vastly different operations from the cutting of 640 pound blocks
of cheese into six ounce to three pound cheese wedges and sticks.
Both the jalapeno peppers after their stems are removed and the
herbs after they are trimmed so that they may be packaged more
easily remain the same commercial product after they are
subjected to their respective operations. Neither of these
articles becomes a commercially different article. Unlike the
jalapeno peppers and the herbs, the 640 pound blocks of cheese
are unfinished manufactured products, the 640 pound blocks of
cheese are not suitable in this form for their intended sale or
use in the retail marketplace. In addition, the cutting into
retail-sized cheese sticks and wedges is a necessary step in the
preparation or manufacture of the finished article in order to
finish the imported product to make it ready for sale. The
cutting of the 640 pound blocks of cheese also substantially
alters the shape and form of the large blocks that are exported
and changes the identity of the cheese from a mass of unusable
material for a consumer to a finished product more suitable and
appropriately adapted for use by the retail consumer. You state
that the intended purpose of the cheese is to be sold as cheese
sticks and wedges ranging in weight from six ounces to three
pounds. Accordingly, the cutting of the cheese is a necessary
step in the preparation or manufacture of the finished article
(e.g. consumer-size sticks and wedges of cheese).
In situations where rolls of material-length merchandise are
exported, and finished goods are returned merely by cutting to
length, this cutting constitutes a finishing step in the
manufacture of the goods, and exceeds the meaning of the term
"alterations." See HRL 555174, dated April 25, 1989 (decorative
banners, bearing repetitive holiday greetings, cut at a right
angle, were incomplete products as they were unsuitable for their
intended use in the continuous lengths in which they were
exported); HRL 555343, dated May 30, 1989 (jumbo rolls of
multistrike coated film 34 inches in width and 20,000 feet long
slit into ribbon material for use in plastic cartridges for data
processing machines constituted an intermediate step in the
manufacture of the computer tape which is essential to render it
suitable for its intended use); and HRL 555766, dated April 2,
1991 (fabric coated with acrylic and cut into 3 « inch strips for
vertical blinds was not complete for its intended use but
required cutting for use as vertical blinds).
In your submission, you attempt to compare the cutting of
the 640 pound blocks of cheese to the cutting of the steel tubing
at issue in HRL 558912, dated March 17, 1995, the despooling,
rewinding, and cutting of thread and yarn at issue in HRL 555708,
dated September 21, 1990, and the fabric rewound into smaller
rolls of the same width after being cut into shorter lengths at
issue in HRL 078034, dated September 9, 1986. We do not agree
that these rulings are analogous to those
operations performed on the exported cheese in this case. The
cutting of the 640 pound block of cheese is distinguishable from
the cutting of the steel tubing at issue in HRL 558912 because
the steel tubing, both before and after the cutting into shorter
lengths abroad, is not a consumer-ready good. Invariably, steel
tubing will be used in the manufacture of another finished good.
In addition, unlike the cheese exported in this case, both the
yarn and thread in HRL 555708 and the fabric in HRL 078034 were
capable of being used for its intended purpose prior to being cut
to shorter lengths abroad. On the other hand, as stated earlier,
the exported 640 pound block of cheese is not ready for its
intended use (consumer-sized sticks and wedges) and must be cut
repeatedly to make the six ounce to three-pound consumer-ready
articles. These extensive cutting operations which are necessary
steps in the preparation of the consumer-ready sizes of cheese
exceed the scope of subheading 9802.00.50, HTSUS.
II. NAFTA Duty Preference
General Note 12, HTSUS provides in pertinent part that:
(b) For the purposes of this note, goods
imported into the customs territory of the
United States are eligible for the tariff
treatment and quantitative limitations set
forth in the tariff schedule as "goods
originating in the territory of a NAFTA
party" only if--
(i) they are goods wholly obtained or
produced entirely in the territory of
Canada, Mexico and/or the United States;
or
(ii) they have been transformed in the
territory of Canada, Mexico and/or the
United States so that--
(A) except as provided in
subdivision (f) of this note, each
of the non-originating materials
used in the production of such
goods undergoes a change in tariff
classification described in
subdivisions (r), (s) and (t) of
this note or the rules set forth
therein, or
(B) the goods otherwise satisfy
the applicable requirements of
subdivisions (r), (s) and (t) where
no change in tariff classification
is required, and the goods satisfy
all other requirements of this
note; or
(iii) they are goods produced
entirely in the territory of
Canada, Mexico and/or the United
States exclusively from originating
materials....
Goods are entitled to the NAFTA preferential rate of duty if they
are NAFTA "originating" and they qualify as goods of Canada or
Mexico under the terms of the marking rules set forth in the
regulations. You state in your submission that the cheese blocks
are recognized as merchandise of the U.S. For purposes of this
ruling, we are assuming that all of the ingredients of the cheese
are of NAFTA origin or otherwise qualify as "originating
materials" pursuant to General Note 12, HTSUS. Therefore, the
consumer size sticks and wedges of cheese to be imported will
qualify as originating goods.
III. Country of Origin and Marking
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C.
1304), provides that, unless excepted, every article of foreign
origin imported into the United States shall be marked in a
conspicuous place as legibly, indelibly, and permanently as the
nature of the article (or its container) will permit, in such a
manner as to indicate to the ultimate purchaser in the United
States the English name of the country of origin of the article.
By enacting 19 U.S.C. 1304, Congress intended to ensure that the
ultimate purchaser would be able to know by inspecting the
marking on the imported goods the country of which the goods are
the product. The evident purpose is to mark the goods so that at
the time of purchase the ultimate purchaser may, by knowing where
the goods were produced, be able to buy or refuse to buy them, if
such marking should influence his will. United States v.
Friedlaender & Co., 27 C.C.P.A. 297, 302 C.A.D. 104 (1940).
Section 134.1(b), Customs Regulations (19 CFR 134.1(b)),
defines "country of origin" as:
The country of manufacture, production, or
growth of any article of foreign origin
entering the United States. Further work or
material added to an article in another
country must effect a substantial
transformation in order to render such other
country the "country of origin" within the
meaning of this part; however for a good of a
NAFTA country, the NAFTA Marking Rules will
determine the country of origin.
Section 134.1(j), Customs Regulations (19 CFR 134.1(j),
provides that the "NAFTA Marking Rules" are the rules promulgated
for purposes of determining whether a good is a good of a NAFTA
country. Section 134.1(g), Customs Regulations (19 CFR
134.1(g)), defines a "good of a NAFTA country" as an article for
which the country of origin is Canada, Mexico or the United
States as determined under the NAFTA Marking Rules, set forth at
19 CFR Part 102. Section 134.45(a)(2) of the Customs Regulations
(19 CFR 134.45(a)(2)), provides that a "good of a NAFTA country"
may be marked with the name of the country of origin in English,
French or Spanish.
Section 102.11, Customs Regulations (19 CFR 102.11), sets
forth the required hierarchy for determining whether a good is a
good of a NAFTA country for marking purposes. Section 102.11(a)
states that "[t]he country of origin of a good is the country in
which:
(1) The good is wholly obtained or produced;
(2) The good is produced exclusively from
domestic materials; or
(3) Each foreign material incorporated
in that good undergoes an
applicable change in tariff
classification set out in section
102.20 and satisfies any other
applicable requirements of that
section, and all other requirements
of these rules are satisfied."
"Foreign Material" is defined in section 102.1(e) as "a material
whose country of origin as determined under these rules is not
the same country as the country in which the good is produced."
In this case, U.S.-produced cheese will be imported into
Canada to be cut and repackaged for subsequent exportation to the
U.S. for retail sale. Thus, in order to determine the
appropriate country of origin marking requirements for the
retail-packaged cheese we must apply the NAFTA Marking Rules.
Since the retail-packaged cut cheese is produced in Canada from
U.S. cheese (foreign as defined in 19 CFR 102.1(e)), the cut
cheese is neither wholly obtained/produced nor is it produced
exclusively from domestic materials and therefore paragraphs
(a)(1) and (a)(2) of section 102.11 cannot be used to determine
the country of origin of the finished article. Thus, section
102.11(a)(3) is the next applicable rule that must be applied to
determine the origin of the finished article.
The block cheese is classified under heading 0406, HTSUS.
The cut and repackaged cheese is classified in the same heading.
The applicable change in tariff
classification set out in section 102.20(a), Section I, Chapters
1 through 5, of the regulations provides:
0406.......A change to heading 0406 from any
other heading.
In this case, we find that the U.S. cheese does not undergo
the applicable change in tariff classification set out in section
102.20(a), and, as a result, section 102.11(b) of the hierarchial
rules must be applied next to determine the country of origin of
the cut cheese.
Section 102.11(b) of the regulations provides in pertinent
part that:
Except for a good that is specifically
described in the Harmonized System as a set,
or is classified as a set pursuant to General
Rule of Interpretation 3, where the country
of origin cannot be determined under
paragraph (a), the country of origin of the
good:
(1) Is the country or countries of origin of
the single material that imparts the
essential character of the good, or
. . ..
Section 102.18(b) of the regulations states that:
(b) (1) For purposes of identifying the
material that imparts the essential character
to a good under 102.11, the only materials
that shall be taken into consideration are
those domestic or foreign materials that are
classified in a tariff provision from which a
change in tariff classification is not
allowed under the 102.20 specific rule or
other requirements applicable to the good.
For purposes of this paragraph (b)(1):
. . .
(iii) If there is only one material
that is classified in a tariff
provision from which a change in
tariff classification is not
allowed under the 102.20 specific
rule or other requirements
applicable to the good, then that
material will represent the single
material that imparts the essential
character to the good under
102.11.
Applying section 102.18(b)(1)(iii) to the facts of this
case, we find that the single material that imparts the essential
character of the cut cheese is the U.S. cheese. Therefore,
pursuant to section 102.11(b)(1), the country of origin of the
cut cheese for marking purposes is the U.S. The marking statute
only requires articles of foreign origin to be marked with their
country of origin (19 U.S.C. 1304). Since the country of origin
for marking purposes of the cut and packaged cheese imported into
the U.S. will be the U.S., it will be excepted from country of
origin marking requirements.
However, pursuant to 19 CFR 102.19 of the NAFTA Marking
Rules, the returned cut cheese will be treated as a product of
Canada for duty purposes. Section 102.19 states that:
If, under any other provision of this part,
the country of origin of a good which is
originating within the meaning of 181(q) of
this chapter is determined to be the United
States and that good has been exported from,
and returned to, the United States after
having been advanced in value or improved in
condition in another NAFTA country, the
country of origin of such good for Customs
duty purposes is the last NAFTA country in
which that good was advanced in value or
improved in condition before its return to
the United States.
While the cut and packaged cheese will be a product of the U.S.
for country of origin marking purposes upon its return to the
U.S. (see country of origin discussion above), it will be subject
to the Canadian preferential duty rate since it was last advanced
in value or improved in condition in Canada before its return to
the U.S. Section 102.19(b) "is intended to facilitate the
application of the appropriate NAFTA preferential duty rate under
General Note 12(a), HTSUS, in the case of originating goods the
origin of which is determined to be the United States under the
Part 102 provisions." 60 Fed. Reg. 22312, 22318 (May 5, 1995)
(Notice of Proposed Rulemaking, Final Rule published 61 Fed. Reg.
28932 (June 6, 1996)). Accordingly, the cheese will be eligible
for the NAFTA Canadian preferential duty rate.
Whether the cut and packaged cheese will be exempt from
quota requirements is a question that should be addressed to the
U.S. Department of Agriculture.
HOLDING:
On the basis of the information submitted, we find that 640
pound blocks of cheese that will be subject to the cutting
operations described above are precluded from classification
under subheading 9801.00.10, HTSUS, and are not entitled to a
partial duty exemption within the meaning of subheading
9802.00.50, HTSUS. Upon importation into the U.S., the cut and
packaged cheese will qualify for the NAFTA Canadian ("CA")
preferential duty rate pursuant to General Note 12(a), HTSUS.
For purposes of country of origin marking, the imported consumer-sized sticks and blocks of cheese will not be considered a
foreign article, and therefore, will not be subject to the
country of origin marking requirements of 19 U.S.C. 1304.
A copy of this ruling letter should be attached to the entry
documents filed at the time this merchandise is 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,
John Durant, Director
Tariff Classification Appeals
Division