ENT-6-02-CO:R:C:E GG
Robert J. Holz
Vice President and
Associate General Counsel
Continental Bank
231 South La Salle Street
Chicago, Illinois 60697
RE: Returning U.S. military personnel cannot enter leased
automobile free of duty under personal exemption; automobile
purchased under bona fide conditional sales contract may be
entered under exemption
Dear Mr. Holz:
This is in response to your letter dated January 21, 1988
concerning a proposed financing agreement on cars acquired by
U.S. servicemen stationed overseas.
Continental Bank has requested advice because it is
contemplating entering into an agreement to finance the
acquisition of foreign-made motor vehicles by servicemen
stationed in Europe. Under the terms of this agreement,
servicemen will enter into either a conditional sales agreement
or a lease agreement, both of which are governed by West German
or English law. The designated seller/lessor is a U.K.
corporation not doing business in the United States. Title
remains with the seller/lessor until all payments have been made,
at which point the servicemen may exercise an option to purchase
the vehicle. Although the servicemen take possession of the cars
while in Europe, many will transfer back to the United States
when title is still vested in the U.K. corporation. Customs has
been asked to give an opinion on the tariff consequences of such
transactions.
U.S. government personnel returning from extended service
overseas may claim a duty exemption on their personal and
household effects, provided that their tour of duty is being
terminated and lasted at least 140 days. The effects must have
been in the direct personal possession of the claimant prior to
importation, and cannot be imported for sale or for the account
of any ineligible person. Section 148.74, Customs Regulations
and subheading 9805.00.50, Harmonized Tariff Schedule of the
United States (HTS). Numerous rulings by the Customs Service
have held that automobiles are personal or household effects and
thus qualify for free entry under this provision.
Personal exemptions are privileges, not rights. E.S.
Saterlie v. United States, 39 Cust. Ct. 214, C.D. 1931 (1957).
Subheading 9805.00.50, HTS clearly identifies the persons
entitled to the exemption (returning U.S. personnel, their
families, and evacuees); nobody outside this group may claim free
entry under this provision. A concern of the Customs Service is
that allowing a serviceman to enter free of duty an automobile
not owned by him or his family, would in reality extend the free
entry privilege to ineligible persons, in this case the U.K.
sellor/lessor or Continental Bank. Under the terms of the
proposed agreements, the servicemen would not own the vehicles
outright when they claimed the exemption. The issue therefore is
whether an automobile, leased, or in the alternative, acquired
under a conditional sales contract, is a personal or household
effect within the meaning of the statute.
The legal definition of a personal effect is personal,
movable property associated with the person. It does not include
property belonging to another. Property means ownership of and
the exclusive and unrestricted right to possess, use and dispose
of the article in question. Black's Law Dictionary (5th ed.
1979) and United States v. One Diamond and Platinum Brooch, 86
F.Supp 329 (D.N.Y. 1949). For the purposes of this inquiry, it
must be determined whether the proposed agreements would grant
servicemen such exclusive rights of possession, enjoyment and
disposal of their automobiles, thus making them "personal
effects" and eligible for free entry.
A conditional sales contract is a contract where property
sold is delivered to the buyer under an agreement that title will
not pass from seller to buyer until the agreed consideration is
paid. Taylor v. Graver Tank & Manufacturing Company, 344 P.2d
1045 (Okla. 1959). The buyer has an immediate right to use the
property as his own, and has exactly the same power over it and
rights in regard to it, as if he had bought and mortgaged it back
to secure the price. Williston on Contracts, Section 966 (3d ed.
1961). In contrast, a lease is an arrangement where the lessee
pays merely for the use of the item. Under most lease
agreements, the lessor retains title when the term of the lease
expires. In the Matter of South View Country Club of Mankata,
Inc., 229 F.Supp. 105 (D. Minn. 1963).
An automobile acquired under a bona fide conditional sales
contract could probably be entered free of duty by a returning
serviceman, because once the conditions of the contract have been
fulfilled, title will pass to the buyer. The serviceman
indicated by entering into the contract that his intent was not
only to possess and use the car, but also eventually to own and
secure full title to it, i.e., to have it as his personal or
household effect. Signing a lease agreement, on the other hand,
would indicate a different intent: to pay for the temporary use
of the property of another. A serviceman who was a party to a
conditional sales contract would have a future right in the car.
A lease, while permitting temporary use, would confer no equity
in or right to dispose of the vehicle once the term had expired.
Full authority over the automobile would revert to the lessor.
Thus allowing a serviceman to enter a leased car duty free would
be tantamount to transferring the exemption to the lessor/seller
or financier, both unintended beneficiaries under subheading
9805.00.50, HTS. Many cars would wrongfully enter Customs
territory free of duty. It would also be contrary to Customs'
policy of strictly restricting the duty-free importation of
leased vehicles, which is set down in 19 CFR 148.39. This
provision allows returning residents to bring in rental
automobiles without duties being assessed, but requires that the
cars be exported within 30 days.
Absent an opportunity to examine the precise wording of the
proposed agreements, the Customs Service can offer no definitive
answer on whether servicemen would be able to apply the exemption
to their automobiles. However, it would be important that a bona
fide conditional sales agreement have most if not all of the
following features which are typically not found in a lease: the
buyer is obligated to pay the total purchase price of the subject
of the contract, the total payments exceed the cash price because
of accumulated interest, there is a transfer of title provision,
and the risk of loss falls on the buyer. In re South View
Country Club, 229 F.Supp. 105 (D.Minn. 1963). The mere existence
of a purchase option does not per se convert a lease into a
conditional sale. In the Matter of the Tax Appeal of Dobbs
Houses, Inc., 53 Haw. 195, 490 P.2d 902 (1971). As stated above,
free entry would be permitted under a conditional sales contract
but denied if the instrument were a lease.
A serviceman can act as importer of record of an automobile,
regardless of whether the vehicle was leased or purchased under a
conditional sales contract. Only an owner, purchaser or a
licensed customs broker can enter merchandise, and for this
limited purpose a person who imports under lease is considered an
owner or purchaser. The right to enter goods must be
distinguished, however, from the right to enter them free of
duty. Finally, all imported vehicles must be in conformity with
EPA and Department of Transportation requirements.
Please do not hesitate to contact us if we may be of further
assistance.
Sincerely,
John Durant
Director, Commercial
Rulings Division