MAR-2-05 RR:CR:SM 560633 RSD
TARIFF NO. 9801.00.10
Mr. Michael McKenna
Expeditors Consulting Services, LLC
Suite 4401
999 Third Avenue
Seattle, Washington 98104
RE: Applicability of the duty exemption under HTSUS 9801.00.10
to laptop computers; American Goods Returned; substantial
transformation
Dear Mr. McKenna:
This is in reference to your letter dated August 26, 1997,
on behalf of Whalley Computer Associates, (hereinafter Whalley)
requesting a ruling regarding the applicability of subheading
9801.00.10, Harmonized Tariff Schedule of the United States
(HTSUS), to laptop computers which will be imported into the
United States. Pursuant to your letter of September 15, 1997,
only the sources of the computers and their components will be
kept confidential.
FACTS:
Whalley purchases two laptop computer models, SL5 and SL9,
from a supplier located in the United States. You state that
these computers are completely assembled in the U.S. by Whalley's
supplier from parts and components obtained through multiple
vendors from various countries. Whalley exports some of the
laptop computers to foreign customers and on occasion they are
returned to the United States for repair.
You indicate that the SL5 laptop computer contains the
following imported parts: central processing unit (CPU), memory
module, hard disk drive, and keyboard. The SL9 laptop computer
contains the following imported parts: central processing unit
(CPU), memory module, hard disk drive, keyboard, and
complementary metal-oxide semiconductor (CMOS) battery.
Additional parts may be assembled into the laptop computer
depending on the model, which may include one or more of the
following: additional floppy drives, compact disk read only
memory (CD ROM), memory boards/single in-line memory modules,
cache memory, network, controller cards, fax modems, video
display cards, and multimedia kits.
The major parts of the laptop computers are described as
follows:
1. Base Module. Includes, as one unit, the computer case,
motherboard,
contoller, and liquid crystal display.
2. Central Process Unit (CPU). The CPU is the component
of the computer system with the circuitry to
control the interpretation and execution of
instructions and includes the arithmetic-logic unit
and control unit.
3. Memory. The memory module printed circuit board
assembly is imported from Taiwan and is populated
with Japanese or Korean dram at Whalley's
supplier's facility.
4. Hard Disk Drive. The hard disk drive is a fast
auxiliary storage device that is part of the
laptop computer. The hard disk drive is of Japanese origin.
5. Keyboard.
You describe the assembly process performed by Whalley's supplier
as including the following operations:
a. The base module is disassembled and prepared for
installation of components.
b. Operators apply specified tape across the battery
blank contacts and mount
capacitors and ohm resistors with specialized tooling.
c. The battery fastener base and Li Cylindrical
Battery are installed; the battery
wires are then connected to the wiring assembly.
d. An operator establishes the proper Basic
Input/Output System (Bios)
and jumper settings, which must be established
accurately. Upon successful
completion of the testing, the completed
motherboard is sent to be used in
the manufacture of the laptop computers. For
computers furnished by the supplier to Whalley, a
specially modified basic input/output system is loaded
onto each machine.
e. The supplier installs the central processing unit
and memory modules.
Installation of the central processing unit chip
requires the employees to use
specialized tooling. The central processing unit
speed DIP switches are
manipulated and specifically set to enable the central
process unit to properly
function.
f. The operator then installs tape over all battery
contacts in the battery blank.
g. Hard disk drives are taken to the manufacturing floor
where a certified operator downloads (the
process of transferring data from one system to
another system) the hard drive with software to fit the
model to be
manufactured. Software downloaded normally includes
Microsoft
Disk Operating System, Microsoft Windows, mouse driver,
system
utilities and other software.
h. The downloading of the hard disk is accomplished by
attaching the target
and source hard disk drives to machinery dedicated for
this purpose.
As part of the downloading process, the supplier's
employees determine
and set the jumper setting that must coincide to the
settings needed for
the specific source and target hard drive being used.
i. The supplier's employees conduct, during the loading
process, a test, which
determines that the drive is not defective, and a virus
scan to ensure that no
software viruses have been introduced to the system.
j. Any hard disk drive that experiences errors during the
downloading process
is rejected.
k. The supplier's operators change the jumper settings on
the target hard drive
and place a small label printed with the date code on
the hard disk drive.
l. After the successful downloading and testing of the
hard drive, personnel
move the hard drives out to the station where the
operators complete the manufacture of the laptop
computers and reassemble the base module.
According to a statement prepared by the supplier's
president, a skilled operator works on one laptop computer at a
time and builds the laptop computer from the casing up,
installing each part. In addition, employees may install one or
more of the following components into the finished laptop
computers, depending on the model: memory boards, fax modems, and
or/other components. After the assembly of the laptop computers
is completed, the supplier performs a detailed testing of the
laptop. The quality control also includes a detailed internal
and external visual workmanship inspection.
As pointed out above, Whalley will export many of the
computers, but on occasion, they will be returned to Whalley in
the United States for repair. You inquire as to whether the
returned computers will be eligible for the duty exemption as
American goods returned under subheading 9801.00.10, HTSUS.
ISSUE:
Whether the laptop computers will qualify for the duty
exemption available under subheading 9801.00.10, HTSUS, when
returned to the U.S.
LAW AND ANALYSIS:
Subheading 9801.00.10, HTSUS, provides for the free entry of
products of the U.S. that have been exported and returned without
having been advanced in value or improved in condition by any
process of manufacture or other means while abroad, provided the
documentary requirements of section 10.1, Customs Regulations (19
C.F.R. 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., Border Brokerage Company, Inc. v. United States, 314 F.
Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970).
The pertinent documents required by 19 C.F.R. 10.1 are a
declaration from the foreign shipper that the articles were
exported from the U.S. and that they are returned without having
been advanced in value or improved in condition, and a
declaration from the owner, importer, consignee, or agent that
the articles were manufactured in the U.S. and that the articles
were exported from the U.S. without benefit of drawback.
For an article to be eligible for duty-free entry under
subheading 9801.00.10, HTSUS, it must first be a "product of" the
U.S. Accordingly, in this instance, it must be established that
the laptop computers, which will be returned to the U.S., are
products of the U.S. Because the laptop computers contain
components which were not made in the U.S., it must be shown that
these foreign components were substantially transformed in the
U.S. into a new and different article, or have been merged into a
new and different article such that the finished laptop computers
will be considered to be products of the U.S.
A substantial transformation occurs when, as a result of a
manufacturing process, a new and different article emerges,
having a distinct name, character or use, which is different from
that originally possessed by the article or material before being
subjected to the manufacturing process. See Texas Instruments,
Inc. v. United States, 69 C.C.P.A. 142, 681 F.2d 778 (1982).
In several rulings, Customs has analyzed whether the
assembly of computers from various components substantially
transformed those components. For example, in Headquarters
Ruling Letter (HRL) 735541 (September 15, 1994), one of the two
types of assembly operations described in the ruling involved
inserting a floppy disk drive, VGA docking station board,
keyboard, DC/DC converter, as well as a CPU, RAM, and a hard disk
drive into an imported unfinished computer. In addition, a LCD
display assembly and a plastic battery cover were attached into
the computer. We noted that the assembly process involved
several components and also included the assembly of the CPU,
which allowed the computer to function. Consequently, we
concluded that in combining these components in the production of
a notebook computer, a new article of commerce was created that
was separate and distinct from the individual components of which
it was composed.
In HQ 735608 (April 21, 1995), Customs held that foreign
components consisting of case assemblies, partially completed
motherboards, hard disk drives and slot boards which were
processed and assembled with other components to make desktop
computers in the U.S. and the Netherlands were substantially
transformed in either of the two countries. Customs stated that
the foreign case assemblies, partially completed motherboards,
hard disk drives and slot boards when combined together with
other components to make the desktop computers lose their
separate identity, acquire new attributes, and become part of a
new article of commerce--the desktop computer. Customs also
stated that the character and use of the components imported into
the U.S. or the Netherlands are changed as a result of the
processing and assembly operations performed, in that the
finished article, a desktop computer, is visibly different from
any of the individual imported components, acquiring a new use,
which is processing and displaying information. See also HRL
559336 (March 13, 1996) in which Customs also determined that
foreign components, such as clamshell base, LCD video display,
hard disk drive, floppy disk drive, AC power adapter were
substantially transformed by the processing and assembly
operations performed in the United States.
Based on the facts in this case and consistent with prior
Customs rulings such as those cited above, we find that the
foreign components that are used in the assembly of the subject
laptop computers in the U.S. in the manner described above are
substantially transformed as a result of the operations performed
in the U.S. The name, character, and use of the foreign
components change as a result of the processing and assembly
operations performed in the U.S. to make the subject laptop
computers. Like the case assemblies, partially completed
motherboards, hard disk drives and slot boards in HQ 735608, the
instant foreign components lose their separate identity and
become an integral part of a laptop computer as a result of the
assembly operations. The character and use of the foreign
components are changed as a result of the processing and assembly
operations performed, in that the finished article, a laptop
computer, is visibly different from any of the individual foreign
components, acquiring a new use--processing and displaying
information. Accordingly, we find that the foreign components
are substantially transformed by the processing done in the U.S.,
and the finished laptop computers are products of the United
States.
It is stated that the laptop computers may be exported and
subsequently returned to the U.S. for repair. We note that
Whalley has presented a declaration from its vice president for
operations indicating that the laptops being returned for repair
have not been advanced in value or improved in condition by any
process of manufacture or other means outside of the U.S.
Assuming that this declaration is accurate, the computers have
not been advanced in value or improved in condition abroad, and
the documentary requirements of 19 CFR 10.1 are satisfied, they
will be eligible for duty-free entry under subheading 9801.00.10,
HTSUS, upon their return to the United States.
HOLDING:
On the basis of the information submitted, we conclude that
the various foreign components imported into the U.S. are
substantially transformed when they are used in making a laptop
computer. Therefore the laptop computer are "products of" the
U.S. Assuming that the laptop computers are not advanced in
value or improved the condition abroad, they will be eligible for
duty-free entry under subheading 9801.00.10, HTSUS, upon return
to the U.S., provided the documentary requirements of 19 C.F.R.
10.1 are satisfied.
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,
John Durant, Director
Commercial Rulings Division