DRA-1-09-RR:IT:EC 225874 GOB
Joseph P. Cravero, Esq,
Senior Tax Attorney
Deere & Company
John Deere Road
Moline, Illinois 61265-8098
RE: Unused merchandise drawback; NAFTA drawback; Painting;
Repackaging; 19 U.S.C. 1313(j)(1); 19 CFR 181.43 - 181.45
Dear Mr. Cravero:
FACTS:
This is in response to your letter dated November 23, 1994.
Your letter describes the factual situations which are
stated in the ISSUES section of this ruling.
ISSUES:
1. For drawback purposes, in determining the origin of
fungible goods or materials for all of its shipments, may an
exporter choose any one of the four inventory methods listed in
Schedule X of the Appendix to 19 CFR Part 181 (hereinafter
referred to as "Schedule X") for Customs purposes and continue
using that method for the remainder of the exporter's fiscal
year, regardless of the type of inventory method the exporter
uses for accounting purposes?
2. Are the following within the meaning of "use" or "in the
same condition" within the meaning of 19 U.S.C. 1313(j)(3) and 19
CFR 181.45(b), respectively: (a) the painting of imported parts
with John Deere identifying colors; and (b) the repackaging or
"kitting" of parts?
3. Whether the following transactions are eligible for
unused merchandise drawback under 19 U.S.C. 1313(j)(1):
a. Goods imported into the U.S. from one foreign
source (origin determined by the use of one of the four inventory
methods listed in Schedule X) and subsequently exported to one
foreign destination (e.g., CZ to MZ).
b. Goods imported into the U.S. from one foreign
source (origin determined by the use of one of the four inventory
methods listed in Schedule X) and subsequently exported to more
than one foreign destination (e.g., CZ to MX and BR).
c. Goods imported into the U.S. from more than one
foreign source (origin determined by the use of one of the four
inventory methods listed in Schedule X) and subsequently exported
to one foreign destination (e.g., JP and DE to MX).
d. Goods imported into the U.S. from more than one
foreign source (origin determined by the use of one of the four
inventory methods listed in Schedule X) and subsequently exported
to more than one foreign destination (e.g., JP and DE to MX and
BR).
e. Goods imported into the U.S. from more than one
foreign source, as well as sourced domestically (origin
determined by the use of one of the four inventory methods listed
in Schedule X) and subsequently exported to one foreign
destination (e.g., JP, DE and US to MX).
f. Goods imported into the U.S. from more than one
foreign source, as well as sourced domestically (origin
determined by the use of one of the four inventory methods listed
in Schedule X) and subsequently exported to more than one foreign
destination as well as being used for domestic sales (e.g., JP,
DE and US to MX, BR and US).
LAW AND ANALYSIS:
Pertinent statutory and regulatory provisions are as
follows.
19 U.S.C. 1313(j)(1) and (3) provide as follows:
(j) Unused merchandise drawback
(1) If imported merchandise, on which was paid any duty,
tax, or fee imposed under Federal law because of its
importation-
(A) is, before the close of the 3-year period beginning
on the date of importation-
(i) exported, or
(ii) destroyed under customs supervision; and
(B) is not used within the United States before such
exportation or destruction; then upon such
exportation or destruction 99 percent of the amount of
each duty, tax, or fee so paid shall be refunded as drawback. The exporter (or destroyer) has the right to claim
drawback under this paragraph, but may endorse such
right to the importer or any intermediate party.
* * * * *
(3) The performing of any operation or combination of
operations (including, but not limited to, testing, cleaning,
repacking, inspecting, sorting, refurbishing, freezing,
blending, repairing, reworking, cutting, slitting, adjusting,
replacing components, relabeling, disassembling, and
unpacking), not amounting to manufacture or production for
drawback purposes under the preceding provisions of this
section on-
(A) the imported merchandise itself in cases to which
paragraph (1) applies, or
(B) the commercially interchangeable merchandise in
cases to which paragraph (2) applies,
shall not be treated as a use of that merchandise for
purposes of applying paragraph (1)(B) or (2)(C).
With respect to exportations to Canada and Mexico, section
203 of the North American Free Trade Agreement (NAFTA)
Implementation Act (Public Law 103-182; 107 Stat. 2057, 2086; 19
U.S.C. 3333), provides for the treatment of goods subject to
NAFTA drawback. Section 203(a) provides in pertinent part as
follows:
(a) Definition of a Good Subject to NAFTA Drawback - For
purposes of this Act and the amendments made by subsection
(b), the term "good subject to NAFTA drawback" means any
imported good other than the following:
(1) A good entered under bond for transportation and
exportation to a NAFTA country.
(2) A good exported to a NAFTA country in the same
condition as when imported into the United States. For
purposes of this paragraph-
(A) processes such as testing, cleaning,
repacking, or inspecting a good, or preserving it in
its same condition, shall not be considered to change
the condition of the good, and
* * * * *
The Customs Regulations issued under the authority of the
NAFTA Implementation Act specifically provide for the
availability of drawback on the exportation of merchandise to a
NAFTA country.
19 CFR 181.43 provides:
181.43 Eligible goods subject to drawback.
Except as otherwise provided in this subpart, drawback is
authorized for an imported good that is entered for consumption
and is:
(a) Subsequently exported to Canada or Mexico (see 19 U.S.C.
1313(j)(1));
(b) Used as a material in the production of another good
that is subsequently exported to Canada or Mexico (see 19
U.S.C. 1313(a)); or
(c) Substituted by a good of the same kind and quality as
defined in 181.44(c) of this subpart and used as a material
in the production of another good that is subsequently
exported to Canada or Mexico (see 19 U.S.C. 1313(b)).
19 CFR 181.44(a) provides:
181.44 Calculation of drawback.
(a) General. Except in the case of goods specified in
181.45 of this part, drawback of the duties previously paid
upon importation of a good into the United States may be
granted by the United States, upon presentation of a NAFTA
drawback claim under this subpart, on the lower amount of:
(1) The total duties paid or owed on the good in the
United States; or
(2) The total amount of duties paid on the exported
good upon subsequent importation into Canada or Mexico.
19 CFR 181.44(g), promulgated by Treasury Decision 95-68 and
published in the Customs Bulletin on September 20, 1995,
provides:
(g) Unused goods under 19 U.S.C. 1313(j)(1) that have
changed in condition. An imported good that is unused in the
United States under 19 U.S.C. 1313(j)(1) and that is shipped
to Canada or Mexico not in the same condition within the meaning of 181.45(b)(1) may be eligible for drawback under this
section, except when the shipment to Canada or Mexico does not
constitute an exportation under 19 U.S.C. 1313(j)(4).
19 CFR 181.45 provides in pertinent part:
181.45 Goods eligible for full drawback.
(a) Goods originating in Canada or Mexico. A Canadian or
Mexican originating good that is dutiable and is imported
into the United States is eligible for drawback without
regard to the limitation on drawback set forth in 181.44 of this
part if that originating good is:
(1) Subsequently exported to Canada or Mexico;
(2) Used as a material in the production of another good
that is subsequently exported to Canada or Mexico; or
(3) Substituted by a good of the same kind and quality and
used as a material in the production of another good that is
subsequently exported to Canada or Mexico.
...
(b) Claims under 19 U.S.C. 1313(j)(1) for goods in same
condition. A good imported into the United States and
subsequently exported to Canada or Mexico in the same
condition is eligible for drawback under 19 U.S.C. 1313(j)(1)
without regard to the limitation on drawback set forth in
181.44 of this part.
...
(1) Same condition defined. For purposes of this subpart, a
reference to a good in the "same condition" includes a good
that has been subjected to any of the following operations
provided that no such operation materially alters the characteristics of the good:
(i) Mere dilution with water or another substance;
(ii) Cleaning, including removal of rust, grease, paint
or other coatings;
(iii) Application of preservative, including
lubricants, protective encapsulation, or preservation
paint;
(iv) Trimming, filing, slitting, or cutting;
(v) Putting up in measured doses, or packing,
repacking, packaging, or repackaging; or
(vi) Testing, marking, labelling, sorting or grading.
(2) Commingling of fungible goods - (i) General.
Commingling of completely fungible goods in inventory, such
as parts, is permissible (see 191.141(e) of this chapter)
but one must identify entries for designation for same condition drawback; the origin of the goods shall be determined on the
basis of the inventory methods set forth in the Appendix
to this part.
...
Issue 1
You have not provided us with sufficient information for us
to respond to this issue. The kind of information which we would
need to respond to this issue would include a description of the
type of inventory which you use for accounting purposes and the
inventory management method in Schedule X which you would propose
to use. We would also like to see an analysis of how these
methods would differ for drawback purposes.
Issue 2
The issues herein are as follows: are the following within
the definition of "use" or "in the same condition" within the
meaning of 19 U.S.C. 1313(j)(3) and 19 CFR 181.45(b),
respectively: (a) the painting of imported parts with John Deere
identifying colors; and (b) the repackaging or "kitting" of
parts?
Your letter states as follows, in pertinent part:
Deere imports a number of parts of varying colors and
characteristics for use on its many pieces of agricultural,
industrial, and lawn and grounds care equipment and/or use as
parts. In a number of situations, Deere will import a specific
part and paint the part with identifying "John Deere" colors
for use on John Deere equipment. Thereafter, and prior to its
use in the United States, Deere may export that part for sale
or use outside the United States.
In other situations, Deere may import a number of specific
parts (i.e. parts "A", "B" and "C") for use on pieces of John
Deere equipment. Prior to their use in the United States, Deere
may have to "repackage" the parts (that is, for example, put parts A, B and C in one package and call it "D") before
exporting those parts from the United States for use or sale
abroad. Thus, Deere may use the exported parts (in the
same condition as they were imported) on pieces of John Deere
equipment or "repackage" or "kit" the parts together for
exportation and either use or sale outside the United States
prior to their being used in the United States.
Painting of Imported Parts with John Deere Identifying Colors
19 U.S.C. 1313(j)(3)
The court in International Paint Co., Inc. v. United States,
18 Cust. Ct. 105 (1947), aff'd 35 C.C.P.A. 87 (1948), repeated
the classic definition of the term "manufacture", stated by the
court in Ishimitsu v. United States, 11 Ct. Cust. Appls. 186,
T.D. 38963 (1921):
...to constitute a manufacture of a thing, or a thing
manufactured, it must appear that something has been produced so
changed or advanced in condition from what it was before being
subjected to the processing or treatment that whether of only
one material or of more than one, it has attained a distinctive
name, character or use, different from that originally
possessed by the material or materials before being subjected to
the manufacturing process.
(Emphasis supplied.)
Painting is not listed within 19 U.S.C. 1313(j)(3) as one of
the operations which "shall not be treated as a use of that
merchandise for purposes of" 19 U.S.C.(j)(1) or (j)(2). However,
19 U.S.C. 1313(j)(3) contains the language "including, but not
limited to, testing, cleaning..." It is our determination that
the painting of John Deere parts with John Deere identifying
colors is not a use for the purposes of 19 U.S.C. 1313(j)(1) and
(j)(2) because the painted part has not attained a distinctive
name, character, or use which is different from the part before
it is painted.
We emphasize, however, that this determination relates to
use, within the meaning of 19 U.S.C. 1313(j), the unused
merchandise drawback statute. This determination does not relate
to the same condition requirement of 19 CFR 181.45(b).
19 CFR 181.45(b)
The issue here is whether after the John Deere parts are
painted with John Deere identifying colors in the United States
and then exported to Canada or Mexico, the parts are in the same
condition as they were when imported.
Pertinent parts of 19 CFR 181.45(b) are excerpted supra. 19
CFR 181.45(b)(1) defines "same condition." We determine that the
parts, as described in the previous paragraph, are not in the
same condition when exported as they were when imported.
19 CFR 181.45(b)(1)(iii) provides that the "[a]pplication
of preservative, including lubricants, protective encapsulation,
or preservation paint" are operations which a good may be
subjected to and still be in the same condition provided that no
such operation materially alters the characteristics of the good.
We find it to be significant that "painting" itself is not
included in this list. We consider painting to be an operation
of greater magnitude than the operations stated in 19 CFR
181.45(b)(1)(iii). Painting is more than the application of a
preservative, including lubricants, protective encapsulation, or
preservation paint. We believe that if painting were intended to
be within the scope of 19 CFR 181.45(b)(1), it would have been
clear from the language of 19 CFR 181.45(b)(1). This is not the
case. As stated supra, we consider painting to be an operation
of greater magnitude than the operations stated in 19 CFR
181.45(b)(1).
Accordingly, because the parts are not exported in the same
condition as they were imported, they are not eligible for
drawback pursuant to 19 CFR 181.45(b).
We note, however, that these parts may be eligible for
drawback pursuant to 19 CFR 181.44(g).
Repackaging of Parts
19 U.S.C. 1313(j)(3)
Deere's repackaging is described supra. Deere also refers
to this activity as "kitting." The parenthetical phrase of 19
U.S.C. 1313(j)(3), which describes operations which, if they do
not amount to a manufacture or production for drawback purposes.
shall not be treated as a use for purposes of 19 U.S.C. 1313,
includes, but is not limited to, inter alia, "repacking" and
"unpacking."
We find that the repackaging described by Deere is within
the scope of 19 U.S.C. 1313(j)(3) such that such repackaging is
not a use for the purposes of 19 U.S.C. 1313(j)(1) and (j)(2).
The repackaging described by Deere is essentially the same as, or
is the same as, "repacking" within the meaning of 19 U.S.C.
1313(j)(3).
19 CFR 181.45(b)
19 CFR 181.45(b)(1), which defines "same condition" for the
purpose of the pertinent regulations is excerpted supra. 19 CFR
181.45(b)(1)(v) includes "packing, repacking, packaging, or
repackaging." We find that the repackaging of parts by Deere is
within the scope of 19 CFR 181.45(b)(1)(v) such that parts which
are repackaged by Deere are in the same condition provided that
the repackaging operation does not materially alter the
characteristics of the parts. No evidence has been submitted
which would indicate that the characteristics of the parts would
be materially altered by the repackaging.
Issue 3
a. The facts, supra, state that the goods were imported
into the United States from Czechoslovakia, a non-NAFTA country,
and exported to Mexico, a NAFTA country. Because the goods do
not originate in Canada or Mexico, 19 CFR 181.45(a) does not
apply. Pursuant to 19 CFR 181.45(b), if the goods are exported
to Canada or Mexico (the facts herein have the goods being
exported to Mexico) in the same condition as imported, the goods
are eligible for drawback pursuant to 19 U.S.C. 1313(j)(1)
without regard to the limitation of 19 CFR 181.44. The facts do
not provide information with respect to whether or not the goods
are in the same condition upon export as they were upon import.
Same condition is defined in 19 CFR 181.45(b)(1). See 19 CFR
181.44(g) with respect to unused goods under 19 U.S.C. 1313(j)(1)
that have changed in condition. See 19 CFR 181.45(b)(2) with
respect to the commingling of fungible goods.
b. The facts, supra, state that the goods were imported
into the United States from Czechoslovakia, a non-NAFTA country,
and exported to Mexico, a NAFTA country, and Brazil, a non-NAFTA
country. Because the goods do not originate in Canada or Mexico,
19 CFR 181.45(a) does not apply. With respect to the goods
exported to Brazil, 19 CFR 181.43, 181.44, and 181.45 do not
apply. The "normal" or non-NAFTA requirements of 19 U.S.C.
1313(j)(1) apply. For example, the goods do not have to be
exported in the same condition as imported and the goods may not
be used within the United States before exportation. With
respect to the goods exported to Mexico, pursuant to 19 CFR
181.45(b), if they are exported in the same condition as
imported, the goods are eligible for drawback pursuant to 19
U.S.C. 1313(j)(1) without regard to the limitation of 19 CFR
181.44. The facts do not provide information with respect to
whether or not the goods are in the same condition upon export as
they were upon import. Same condition is defined in 19 CFR
181.45(b)(1). See 19 CFR 181.44(g) with respect to unused goods
under 19 U.S.C. 1313(j)(1) that have changed in condition. See
19 CFR 181.45(b)(2) with respect to the commingling of fungible
goods.
c. The facts, supra, state that the goods were imported
into the United States from Japan and Denmark, both non-NAFTA
countries, and exported to Mexico, a NAFTA country. Because the
goods do not originate in Canada or Mexico, 19 CFR 181.45(a) does
not apply. With respect to the goods exported to Mexico, pursuant
to 19 CFR 181.45(b), if they are exported in the same condition
as imported, the goods are eligible for drawback pursuant to 19
U.S.C. 1313(j)(1) without regard to the limitation of 19 CFR
181.44. The facts do not provide information with respect to
whether or not the goods are in the same condition upon export as
they were upon import. Same condition is defined in 19 CFR
181.45(b)(1). See 19 CFR 181.44(g) with respect to unused goods
under 19 U.S.C. 1313(j)(1) that have changed in condition. See 19
CFR 181.45(b)(2) with respect to the commingling of fungible
goods.
d. The facts, supra, state that the goods were imported
into the United States from Japan and Denmark, both non-NAFTA
countries, and exported to Mexico, a NAFTA country and Brazil, a
non-NAFTA country. Because the goods do not originate in Canada
or Mexico, 19 CFR 181.45(a) does not apply. With respect to the
goods exported to Brazil, 19 CFR 181.43, 181.44, and 181.45 do
not apply. The "normal" or non-NAFTA requirements of 19 U.S.C.
1313(j)(1) apply. For example, the goods do not have to be
exported in the same condition as imported. The goods may not be
used within the United States before exportation. With respect
to the goods exported to Mexico, pursuant to 19 CFR 181.45(b), if
they are exported in the same condition as imported, the goods
are eligible for drawback pursuant to 19 U.S.C. 1313(j)(1)
without regard to the limitation of 19 CFR 181.44. The facts do
not provide information with respect to whether or not the goods
are in the same condition upon export as they were upon import.
Same condition is defined in 19 CFR 181.45(b)(1). See 19 CFR
181.44(g) with respect to unused goods under 19 U.S.C. 1313(j)(1)
that have changed in condition. See 19 CFR 181.45(b)(2) with
respect to the commingling of fungible goods.
e. The facts, supra, state that the goods were imported
into the United States from Japan and Denmark, both non-NAFTA
countries, as well as sourced domestically, and subsequently
exported to Mexico, a NAFTA country. Because the goods do not
originate in Canada or Mexico, 19 CFR 181.45(a) does not apply.
With respect to the goods imported from Japan and Denmark which
were exported to Mexico, pursuant to 19 CFR 181.45(b), if the
goods are exported in the same condition as imported, the goods
are eligible for drawback pursuant to 19 U.S.C. 1313(j)(1)
without regard to the limitation of 19 CFR 181.44. The facts do
not provide information with respect to whether or not the goods
are in the same condition upon export as they were upon import.
Same condition is defined in 19 CFR 181.45(b)(1). See 19 CFR
181.44(g) with respect to unused goods under 19 U.S.C. 1313(j)(1)
that have changed in condition.
The facts state that the origin of the goods is
"determined by use of one of the four inventory methods listed in
Schedule X." 19 CFR 181.45(b)(2) is pertinent. Commingling of
completely fungible goods in inventory is permissible, but one
must identify entries for designation for same condition drawback
and the origin of the goods shall be determined on the basis of
the inventory methods set forth in Schedule X to the Appendix, 19
CFR Part 181.
f. The facts, supra, state that the goods were imported
into the United States from Japan and Denmark, both non-NAFTA
countries, as well as sourced domestically, and subsequently
exported to Mexico, a NAFTA country, Brazil, a non-NAFTA country,
as well as being used for sales within the United States. With
respect to the goods exported to Brazil, 19 CFR 181.43, 181.44,
and 181.45 do not apply. The "normal" or non-NAFTA requirements
of 19 U.S.C. 1313(j)(1) apply. For example, the goods do not
have to be exported in the same condition as imported. The goods
may not be used within the United States before exportation.
Because the goods do not originate in Canada or Mexico, 19 CFR
181.45(a) does not apply. With respect to the goods imported
from Japan and Denmark which were exported to Mexico, if the
goods are exported in the same condition as imported, the goods
are eligible for drawback pursuant to 19 U.S.C. 1313(j)(1)
without regard to the limitation of 19 CFR 181.44. The facts do
not provide information with respect to whether or not the goods
are in the same condition upon export as they were upon import.
Same condition is defined in 19 CFR 181.45(b)(1). See 19 CFR
181.44(g) with respect to unused goods under 19 U.S.C. 1313(j)(1)
that have changed in condition.
The facts state that the origin of the goods is
"determined by use of one of the four inventory methods listed in
Schedule X." 19 CFR 181.45(b)(2) is pertinent. Commingling of
completely fungible goods in inventory is permissible, but one
must identify entries for designation for same condition drawback
and the origin of the goods shall be determined on the basis of
the inventory methods set forth in Schedule X to the Appendix, 19
CFR Part 181.
HOLDINGS:
Issue 1
We do not have sufficient information to respond to this
issue.
Issue 2
The painting of John Deere parts with John Deere identifying
colors is not a use for purposes of 19 U.S.C. 1313(j)(1) and
(j)(2).
Parts which are painted with John Deere identifying colors
after importation into the United States and before exportation
from the United States are not in the same condition within the
meaning of 19 CFR 181.45(b) when exported as they were when
imported.
The repackaging described by Deere is within the scope of 19
U.S.C. 1313(j)(3) such that such repackaging is not a use for the
purposes of 19 U.S.C. 1313(j)(1) and (j)(2).
The repackaging of parts by Deere is within the scope of 19
CFR 181.45(b)(1)(v) such that parts which are repackaged by Deere
are in the same condition when exported as they were when
imported provided that the repackaging operation does not
materially alter the characteristics of the parts.
Issue 3
See a. through f. under Issue 3 in the LAW AND ANALYSIS
section.
All determinations herein are limited to the specific facts
presented.
Sincerely,
Director,
International Trade Compliance
Division