DRA 4
OT:RR:CTF:ER
H292054 KF
Jay Charkow
International Tariff Management, Inc.
127 Scott Road
Waterbury, CT 06705
RE: Eligibility of unsold merchandise, returned by a retailer to the importer, for substitution unused merchandise drawback; 19 U.S.C. § 1313(j)(2).
Dear Mr. Charkow:
This is in response to your letter, dated November 10, 2017, requesting a ruling on behalf of your client (“the Company”), to determine whether jewelry, transferred on consignment to retailers but never sold, is eligible for substitution unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(2) if returned to the Company by a retailer. Confidential treatment has been requested for certain information submitted in connection with this ruling request. In consideration of the request and sufficient justification presented pursuant to 19 CFR § 177.2(b)(7), this office will not identify the parties having any connection to the transactions under review nor any of the financial information provided to U.S. Customs and Border Protection (“CBP”).
FACTS:
International Tariff Management, Inc. (“ITM”) is a customs brokerage that files drawback claims on behalf of its clients, including the Company. ITM seeks a prospective ruling as to whether certain jewelry, imported and exported by the Company, is eligible for substitution unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(2).
The jewelry at issue is imported by the Company for consignment to retailers. Upon importation, the jewelry is shipped to various retail locations in the United States for sale to end customers. The Company asserts that its jewelry is intended to be used by end customers after a sale is completed. Until sold, the Company retains title to the jewelry and the retailers merely hold physical custody over the jewelry in their inventory. Since retailers never hold legal title to the jewelry, they only pay the Company for pieces that are ultimately sold to end customers. End customers acquire title to the jewelry upon purchase.
While the jewelry is within a retailer’s inventory, it is displayed to prospective customers and possibly tried on. The Company claims such unsold jewelry constitutes unused merchandise because while within a retailer’s physical custody, being displayed or tried on by prospective customers, the jewelry is permissively utilized for the limited purpose of advertising: “to entice potential buyers” and enable them to decide which piece to purchase. Once any consigned jewelry is sold, retailers inform the Company of an inventory deduction due to a sale, and the Company bills them for all sold pieces. Any jewelry not sold at retail is returned to the Company, then stored in offices which are rented and insured by the Company until the jewelry can be exported.
The Company directs all inventory and maintains inventory control records which track the jewelry from importation through consignment to a retailer’s inventory and ultimate sale at retail or return. These records are described as capable of distinguishing sold jewelry pieces from any pieces remaining unsold within a retailer’s inventory, and from any unsold pieces which have been returned to the Company by the retailer. The Company intends to claim substitution unused merchandise drawback, pursuant to 19 U.S.C. § 1313(j)(2), on any unsold jewelry it exports. The Company requests a binding ruling confirming this unsold jewelry, meaning never sold to a retailer or an end customer at retail, is eligible for unused merchandise drawback. Based on this request, our analysis excludes any merchandise that may have possibly been sold at retail and returned to the Company.
ISSUES:
Is the Company’s unsold jewelry unused for drawback purposes?
Is the unsold jewelry within the Company’s possession prior to exportation?
LAW AND ANALYSIS:
Drawback “means the refund, in whole or in part, of the duties, taxes, and/or fees paid on imported merchandise.” 19 C.F.R. § 190.2. Pursuant to 19 U.S.C. § 1313(j)(2), as amended by the Trade Facilitation and Trade Enforcement Act of 2015 (“TFTEA”), Pub. L. 114-125, 130 Stat. 122 (Feb. 24, 2016), drawback may be claimed on exported merchandise which is substituted for imported and duty-paid merchandise. Among the requirements for claiming drawback under 19 U.S.C. § 1313(j)(2), termed “substitution unused merchandise drawback,” the substituted merchandise must be:
(A) [] classifiable under the same 8-digit HTS subheading number as such imported merchandise;
(B) [exported or destroyed under customs supervision] before the close of the 5-year period beginning on the date of importation of the imported merchandise and before the drawback claim is filed … ; and
(C) before such exportation or destruction—
(i) [] not [be] used within the United States, and
(ii) [be] in the possession of, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback under this paragraph, if that party—
(I) is the importer of the imported merchandise, or
(II) received the imported merchandise, other merchandise classifiable under the same 8-digit HTS subheading number as such imported merchandise, or any combination of such imported merchandise and such other merchandise, directly or indirectly from the person who imported and paid any duties, taxes, and fees imposed under Federal law upon importation or entry and due on the imported merchandise (and any such transferred merchandise, regardless of its origin, will be treated as the imported merchandise and any retained merchandise will be treated as domestic merchandise).
To determine whether the unsold jewelry at issue is eligible for unused merchandise drawback in accordance with the above statutory requirements, we must therefore consider whether the jewelry remains unused despite being displayed to and possibly tried on by customers, and whether it is within the Company’s possession prior to exportation.
Is the Company’s unsold jewelry unused for drawback purposes?
Merchandise is unused for drawback purposes if “either no operations have been performed [upon it] or … any operation or combination of operations has been performed (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking) … which do[] not amount to a manufacture or production.” 19 C.F.R. § 190.2. By contrast, merchandise is deemed used if it has been employed for its intended purpose, meaning the purpose for which it was manufactured and designed. See C.S.D. 81-222 (May 27, 1981) (internal citations omitted). Consequently, merchandise remains unused if subjected to any operation(s) not amounting to a manufacture or production, and if utilized in a manner other than the purpose for which it was intended.
The intended use, or purpose for which merchandise is manufactured and designed, is a fact-specific determination hinging on the nature of the merchandise under consideration. The merchandise at issue in this ruling is jewelry, which the Company states is intended to be worn by end customers upon purchase. Jewelry is commonly defined as “ornamental pieces (such as rings, necklaces, earrings, and bracelets) … worn for personal adornment.” Merriam-Webster.com, Dictionary (last accessed Aug. 23, 2022). This common language definition accords with how jewelry is defined for classification purposes in the Harmonized Tariff Schedule of the United States (“HTSUS”): “small objects of personal adornment (for example, rings, bracelets, necklaces, brooches, earrings, …).” Note 9, Chapter 71. Prior CBP rulings have additionally held that manufactured jewelry is “complete for its intended use” when the finished pieces are ready for marketing and sale to customers. HQ 555787 (Oct. 2, 1991). We thus agree with the Company’s determination that jewelry is intended to be worn for personal adornment by end customers upon purchase.
The jewelry on which the Company seeks to claim drawback has never been sold to an end customer. The jewelry has therefore not been worn for personal adornment by an end customer upon purchase. However, the jewelry has been displayed at a retail store and may have been tried on by prospective customers. The Company posits that utilizing jewelry for display, or to be briefly worn by a prospective customer prior to purchase, constitutes a use for the limited purpose of advertising – but does not utilize the jewelry for its intended purpose. The Company contends that use for advertising is incidental to, yet distinct from, the jewelry’s primary intended purpose. In support of its contention, the Company cites two prior customs rulings: HQ 223076 (May 27, 1991) and HQ 251771 (Dec. 16, 2014). We address each in turn.
First, in HQ 233076, CBP considered whether an imported yacht was used for drawback purposes. The yacht had generally been confined to its birth since importation, save for necessary maintenance, a demonstration sail with prospective customers on board, and to be filmed as part of a television program advertising the yacht for sale. CBP concluded that “incidental operations” such as maintenance, testing, or inspection are explicitly permitted by statute so long as the operations do not amount to a manufacture or production. (Citing 19 U.S.C. § 1313(j)(3)). CBP further concluded that merely offering merchandise for sale, whether by demonstration or filming for advertising, does not render the merchandise used. Cf. HQ H258306 (May 28, 2015) (explaining that advertising which occurs incidentally to the primary purpose for which an object was manufactured is distinct from advertising which occurs to fulfill an object’s primary purpose, such as being used as a display model).
Akin to the yacht in HQ 233076, the unsold jewelry on which the Company seeks to claim drawback has been displayed to prospective customers at a retail store in order to offer the jewelry for sale. Given that the intended purpose of this jewelry is to be worn for personal adornment by an end customer upon purchase, we find that displaying the jewelry prior to sale constitutes an incidental use or operation which does not render the jewelry used for drawback purposes.
Second, in HQ 251771, CBP considered whether a celebrity wearing a haute couture garment to at high-profile event utilized the garment for its intended purpose. The garments were imported by Christian Dior Couture (“Dior”) and altered or modified within the United States to fit a particular celebrity for a particular event. Dior retained ownership of the garments at all times, and after being worn at an event, each garment would be returned by the celebrity to Dior for exportation. Dior argued that garments so worn were used for advertising or exhibition, allowing potential buyers to see Dior’s latest showcase and thereby solicit future purchases. CBP disagreed because the garments were never offered for sale - each garment was specifically manufactured, designed, and fitted to a particular celebrity, and intended to be worn at a particular event without ever becoming subject to sale. CBP therefore concluded that upon being worn to the event by the designated celebrity, the garment became used for its intended purpose. CBP noted that had the garments instead been worn by celebrities or models as a means of displaying the garments for sale to potential buyers, the garments would have instead been permissibly used for advertising.
In contrast to the haute couture garments in HQ 251771, the unsold jewelry on which the Company seeks to claim drawback has been worn as part of an offer for sale. The jewelry has not been altered or modified to fit any particular customer, and, if worn, has only been worn briefly within the premises of a retail store for the purpose of being tried on by a prospective customer. Although the Company characterizes such trying on as a form of advertising, by trying on a piece of jewelry, a prospective customer is not acting as a model or to solicit sales. By trying on merchandise offered for retail sale, a prospective customer is generally testing fit and assessing other criteria relevant to their decision to purchase. Accordingly, at the moment of trying on a piece of jewelry prior to purchase, a prospective customer has not yet decided to utilize that piece for its intended purpose as an article of personal adornment. When a potential customer “trie[s] on merchandise to determine whether it fits or meets other expectations prior to purchase, such merchandise [i]s employed for purposes of testing. However, once merchandise is purchased, if subsequently tried on[/worn] it becomes worn precisely in the manner for which it was manufactured and intended.” HQ H290868 (Sept. 11, 2019). We thus find that jewelry tried on by a customer at a retail store prior to a potential sale is permissively utilized for testing and is not rendered used for drawback purposes.
The intended purpose of the unsold jewelry on which the Company seeks to claim unused merchandise drawback is to be worn for personal adornment by an end customer upon purchase. We find that this purpose has not been fulfilled by displaying the jewelry as a form of advertising at a retail store, nor by prospective customers trying on the jewelry prior to purchase for testing fit and evaluation for other criteria. Consequently, we find that the Company’s unsold jewelry remains unused for drawback purposes.
Is the unsold jewelry within the Company’s possession prior to exportation?
Pursuant to 19 U.S.C. § 1313(j)(2)(C)(ii), prior to its exportation or destruction, the merchandise on which drawback is claimed must be “in the possession of, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback.” The term “possession” is defined in 19 C.F.R. § 190.2 as the “physical or operational control of the merchandise.” CBP has interpreted the statutory requirement of possession to require more than just legal ownership or physical custody, the party claiming drawback must exercise “complete control over the articles or merchandise on premises or locations where the possessor can put the articles or merchandise to any use chosen.” HQ 228504 (Aug. 1, 2002) (citing C.S.D. 85-52 (Aug. 16, 1985)). “Complete control” over the merchandise is thus the “key element in establishing possession for purposes of drawback under 19 U.S.C. § 1313(j)(2).” HQ H236882 (July 7, 2016).
CBP may consider various criteria unique to a party’s circumstances in deciding whether that party exercises complete control over the merchandise on which drawback is claimed. In C.S.D. 87-18 (June 15, 1987), CBP determined that complete control over merchandise was evidenced by a party being able to “destroy, resell, or export the [merchandise] at will” at any moment from importation through exportation. The party additionally retained physical custody of the merchandise at all times, storing it until sale or exportation in facilities the party either leased, owned, or rented. In HQ H236882, CBP determined that a party lacked complete control over the jewelry it distributed to retail stores because it merely served as a warehousing entity for other parties who held legal title and operational control over the jewelry. The party had physical custody of the jewelry but could not “determine[] which goods were to be held at the warehouse, which were to be exported, which … were to be stocked, and which manufacturers were to supply specific products.” Since the party’s physical custody of the jewelry was directed by other entities, CBP determined the party failed to exercise complete control over the jewelry. Evidence of a party having independent control over the disposition of the merchandise on which drawback is claimed, along with physical custody and legal ownership, is thus critical to deciding whether the party is capable of exercising complete control over the merchandise and thereby establish possession for drawback purposes. See also HQ H302869 (Nov. 30, 2021).
In the present circumstances being considered, the Company imports jewelry for consignment to retailers. The Company maintains uninterrupted legal title to the jewelry from importation through sale to an end customer, while retailers only acquire temporary physical custody. Retailers have no right to dispose of the jewelry except to offer it for sale to an end customer, and any unsold jewelry is returned to the Company. The Company has sole control over inventory, deciding what jewelry is distributed to which retailer. All unsold jewelry returned to the Company by a retailer is stored in the Company’s offices prior to exportation. The Company rents and insures these offices, where it maintains exclusive physical custody over the jewelry until exportation.
The Company’s uninterrupted legal title to all unsold jewelry gives it the right to “destroy, resell, or export the [jewelry] at will.” C.S.D. 87-18. The Company’s sole control over inventory and distribution evidences that in addition to having legal control over the jewelry, the Company also maintains operational control over the jewelry. HQ H236882. When a retailer’s physical custody of the jewelry is terminated upon returning unsold pieces to the Company, the company acquires and maintains exclusive physical possession over the jewelry prior to exportation. The Company has therefore demonstrated that it has both physical and operational control over the merchandise on which it seeks to claim drawback, as required by 19 C.F.R. § 190.2. The Company’s independent control over the merchandise, which is both physical and operational, establishes that it has possession of the unsold jewelry for drawback purposes.
HOLDING:
Based on the above, we find for purposes of claiming drawback pursuant to 19 U.S.C. § 1313(j)(2), we find that the Company’s unsold jewelry is both unused and within the Company’s possession prior to exportation.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruing letter, either directly, by reference, or by implication, is accurate and complete in every material respect.” If any fact in the transaction varies from the facts stipulated to herein, this decision shall not be binding on CBP, as provided for in 19 C.F.R. § 177.9(b).
Sincerely,
Gail Kan Branch Chief
Entry Process & Duty Refunds