CLA-2 RR:TC:SM 560102 MLR; NK
Mr. Ronald G. Setzer
SF Imports, Inc. C.H.B.
P.O. Box 2959
Tax Department/Plaza 6
Winston-Salem, NC 27102
RE: Classification and Tariff Rate Quota For Cut-Filler
Tobacco; Country of Origin Marking; Substantial
Transformation; Ultimate Purchaser
Dear Mr. Setzer:
This is in reference to your letter of August 30, 1996,
to U.S. Customs in New York, requesting a ruling on behalf of
several unnamed dealers and manufacturers of tobacco,
concerning the classification, tariff quota rates of duties,
and country of origin for marking purposes for cut-filler
tobacco. A flow chart of the processing was submitted. Our
ruling follows.
FACTS:
Scenario A
Unmanufactured types of tobacco, classified as
unmanufactured tobacco in heading 2401, Harmonized Tariff
Schedule of the United States (HTSUS) are imported into
Argentina and blended and processed into manufactured cut-filler tobacco, classified in heading 2403, HTSUS. The
unmanufactured types of tobacco imported into Argentina are
as follows.
100,000 kilograms (Kgs.) of flue-cured strip grown in
Brazil,
100,000 Kgs. of flue-cured strip grown in Canada,
100,000 Kgs. of oriental type grown in Turkey, and
100,000 Kgs. of burley stems grown in the U.S.
In Argentina, the first step performed is "receiving and
blending." During this process, the tobacco is received
either in cases or in bales, and it undergoes an initial
delamination, initial cleaning, and initial conditioning in a
conditioning cylinder, pneumatic separators, and a pre-blend
bulker. It is stated that the blending of the various types
and grades of tobacco results in cut-filler tobacco used for
a particular brand of cigarettes. Next, the tobacco
undergoes a group blending, a casing application which adds
flavor and moisture, and the tobacco is cut, dried, and
subjected to a final blending to result in "final blended
strips." Next, the tobacco undergoes another cutting
process, a final delamination, final cleaning, final
conditioning, and a top dressing application. Lastly, the
resulting cut-filler tobacco is stored and delivered to the
U.S., where the cut-filler is used to make cigarettes.
Scenario B
Unmanufactured types of foreign tobacco are exported to
the United States after September 13, 1995, and are admitted
into a U.S. foreign trade sub-zone (FTZ). The zone status is
not indicated. In the zone, the unmanufactured types of
tobacco will be blended and processed into manufactured cut-filler tobacco as in scenario A, and then entered for
consumption into the Customs territory of the United States.
The unmanufactured types of tobacco are as follows.
100,000 Kgs. of burley stems grown in the U.S.,
100,000 Kgs. of flue-cured strip grown in Argentina,
100,000 Kgs. of flue-cured strip grown in Mexico, and
100,000 Kgs. of oriental type grown in Greece.
ISSUES:
I. What is the country of origin for marking purposes for
the blended and processed manufactured cut-filler
tobaccos?
II. What is the tariff classification of the tobaccos
and are they subject to tariff rate quotas?
LAW AND ANALYSIS:
Scenario A
The marking statute, section 304, Tariff Act of 1930, as
amended (19 U.S.C. 1304), provides that, unless excepted,
every article of foreign origin (or its container) imported
into the U.S. 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 U.S. the English
name of the country of origin of the article. Part 134,
Customs Regulations (19 CFR Part 134) implements the country
of origin marking requirements and exceptions of 19 U.S.C.
1304.
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 U.S. 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 the marking laws
and regulations.
In Headquarters Ruling Letter (HRL) 557577 dated May 16,
1994, Customs reconsidered HRL 557192 dated July 14, 1993,
where leaf tobacco was subjected to moistening, inspection,
and fermentation processes, before the lamina was
handstripped away from the midrib (large central stem) of the
leaf. The resulting tobacco "strips" were passed over a
screen and after the strips were cleaned of all contaminants,
the strips were moved to a drying room. The fermentation
process performed in an environmentally controlled sweat room
lowered the nicotine content, and the drying process had a
mellowing effect on the tobacco. Relying on Uniroyal, Inc.
v. United States, 542 F. Supp. 1026 (CIT 1982), and National
Juice Products Association v. United States, 628 F. Supp. 978
(CIT 1986), in HRL 557577 Customs held that the leaf tobacco
which was handstripped in a beneficiary country did not
undergo a substantial transformation, and, therefore, was not
eligible for duty-free treatment under the Caribbean Basin
Economic Recovery Act (CBERA). In HRL 557192, it was also
indicated that both the leaf tobacco and the handstripped
tobacco were classifiable under heading 2401, HTSUS.
In HRL 557577, reference was made to HRL 553120 dated
September 28, 1984, where Customs held that cigar leaf
tobacco processed into cigar scrap tobacco in the Dominican
Republic qualified for duty-free treatment under the CBERA.
Some of the operations considered in HRL 553120 included:
placing cigar leaf tobacco of Dominican and foreign origin in
a vacudyne machine to add moisture to the tobacco leaves;
blending tobacco of various grades; placing the tobacco
leaves in sweat boxes to reduce the nicotine; mellowing the
tobacco; cutting the tobacco leaves into particles; stemming
the tobacco pieces; running the tobacco pieces through a
series of threshers and separators to strip the lamina;
running the tobacco pieces over vibrating screens to remove
fine particles detrimental to cigar manufacture; and placing
the tobacco pieces in drying chambers to reduce the moisture
content to allow cigar manufacturing. In HRL 557577, Customs
decided that HRL 553120 was in error as the very essence of
the final product was imparted by the tobacco, and,
accordingly, HRL 553120 was revoked.
In HRL 733207 dated November 21, 1990, Customs considered
the blending of various foreign and U.S. raw botanical
ingredients, essential oils, fragrances and fixatives to
create potpourri intended to scent the air. It was held that
despite the fact that the botanicals remained recognizable as
parts of flowers and plants, their character and use was
entirely commercially different as potpourri. In HRL 731685
dated March 15, 1990, Customs considered the marking of
imported fruit drink manufactured in Mexico using ingredients
sourced from various countries. Applying the rationale of
National Juice, supra, HRL 731685 determined that fruit juice
concentrates imported into Mexico were substantially
transformed by their use in the manufacture of a fruit drink
as the product contained much less juice concentrate than
products sold as reconstituted fruit juice or as frozen
concentrated juice.
The Explanatory Notes of Chapter 24 of the Harmonized
Commodity Description and Coding System (HCDCS), state that
tobacco may be cured either as whole plants (on the stalk) or
as separate leaves. The various methods of curing are sun
curing (in the open air), air curing (in closed sheds with
free circulation of air), flue curing (in hot air flues), or
fire curing (with open fires). Before packing for shipment,
the dried leaves are treated to ensure their preservation and
this may be done by controlled natural fermentation (Java,
Sumatra, Havana, Brazil, Orient, etc.) or by artificial-drying. This treatment and the curing, is stated to affect
the flavor and aroma of the tobacco which undergoes
spontaneous ageing after packing. In some cases, in addition
to or instead of fermentation, flavoring or moistening
substances are added (casing) in order to improve the aroma
or keeping qualities.
The Explanatory Notes to heading 2401, HCDCS, provide
that this heading covers unmanufactured tobacco in the form
of whole plants or leaves in the natural state or as cured or
fermented leaves, whole or stemmed/stripped, trimmed or
untrimmed, broken or cut (including pieces cut to shape, but
not tobacco ready for smoking). Heading 2401 also covers
tobacco leaves, blended, stemmed/stripped and "cased"
("sauced" or "liquored") with a liquid of appropriate
composition mainly in order to prevent mold and drying and
also to preserve the flavor. According to the Explanatory
Notes, heading 2403, HCDCS, covers smoking tobacco, whether
or not containing tobacco substitutes in any proportion, for
example, manufactured tobacco for use in pipes or for making
cigarettes.
If leaf tobacco is not bought in ready-stemmed form, the
first step in turning it into a product that the consumer can
smoke, chew, or take as snuff is to remove midribs (central
veins). The New Encyclopedia Britannica, Volume 18 at. 466
(1975). It is also stated that for most products,
manufacturers blend leaf of various types, origins, grades,
and crop years to obtain the qualities they require and
assure uniformity over the years. Furthermore, it is stated
that cigarette manufacturers usually add sweetening
preparations and flavorings. Tobaccos for pipe smoking and
chewing may involve the incorporation of additives and the
application of pressure and heat. Snuff is usually made by
fermenting fire-cured leaf and stem and grinding it, and
adding salts and flavorings. Id.
Under scenario A, unmanufactured types of tobacco from
various countries are blended and processed in Argentina into
cut-filler tobacco. As the Explanatory Notes indicate,
heading 2403, HTSUS, includes smoking tobacco for use in
pipes or in making cigarettes, whereas heading 2401, HTSUS,
is tobacco which is not ready for smoking. Accordingly, it
is our opinion that the blended tobacco in this case in most
instances is ready for use by the final user of the tobacco
which will be used to make cigarettes. Unlike HRL 553120
which was revoked by HRL 557577, we find that the blending of
various types of tobacco in this case makes the tobacco ready
for use, whereas in HRL 553120, only different grades of the
same type of tobacco were blended together. For example,
Oriental (Turkish) tobacco, used in this case, is used in
blending for aroma in cigarettes {see McGraw Hill
Encyclopedia of Science & Technology, Vol. 18 at 389 (1987)},
and the type of tobaccos used in making cigarettes include
flue-cured, burley, Maryland, and imported Turkish {see
Encyclopedia Americana, Vol. 26 at 802 (1980)}.
Additionally, in HRL 557577, the tobacco remained
unmanufactured tobacco even after the lamina was stripped
away from the midrib. In this case, however, the blending,
casing, conditioning, cutting and other processes performed
on the unmanufactured tobacco in Argentina result in a
different article, namely smoking tobacco. As in HRL 733207
regarding potpourri, and HRL 731685 regarding fruit drink, in
this case the processing and blending of various types of
tobacco substantially transform the various types of tobacco
capable of different uses, into a product with a specific
use. Therefore, we find that in scenario A the country of
origin of the manufactured tobacco will be Argentina.
Pursuant to Additional U.S. Note 5(a), Chapter 24, HTSUS,
tobacco from Argentina entered under subheadings 2403.10.60,
2403.91.45, and 2403.99.60, HTSUS, are subject to the
quantitative limitations therein and if the quantitative
limits have been reached, over tariff rate quotas apply.
Scenario B
Under scenario B, unmanufactured tobacco from various
countries will be blended and processed in a U.S. foreign
trade zone into cut-filler tobacco. The statute governing
the creation and operation of foreign trade zones (FTZ's) is
the Foreign Trade Zones Act of 1934, as amended (48 Stat.
998; 19 U.S.C. 81a through 81u). Under 19 U.S.C. 81c(a),
foreign and domestic merchandise of every description (except
prohibited merchandise) may be brought into a FTZ without
being subject to the U.S. Customs laws and may there be,
among other things, stored, mixed with foreign or domestic
merchandise, or otherwise manipulated and be exported,
destroyed, or sent into the U.S. customs territory. When
foreign merchandise is so sent from a FTZ into U.S. customs
territory, it is subject to the U.S. laws and regulations
affecting imported merchandise. Pursuant to the second
proviso of 19 U.S.C. 81c, articles of the U.S. and articles
previously imported on which duty and/or tax has been paid,
or which have been admitted free of duty and tax, may be
taken into a FTZ from the U.S. customs territory, placed
under the supervision of the appropriate Customs officer,
and, whether or not they have been combined with or made part
of other articles while in the FTZ, be entered from the FTZ
free of quotas, duty, or tax. Pursuant to the third proviso
of 19 U.S.C. 81c, if the identity of such articles (i.e., the
"domestic status" articles described in the preceding
sentence) has been lost, the articles are treated as foreign
merchandise if they reenter the customs territory. The
Customs Regulations issued under the authority of this
statute are found in 19 CFR Part 146.
In this case, the merchandise brought into the FTZ would
consist of domestic status merchandise (the U.S. burley
stems) and foreign tobacco from Argentina, Mexico, and
Greece. As determined in scenario A, the processing and
blending of the unmanufactured tobacco result in a
substantial transformation. Accordingly, the country of
origin of the manufactured tobacco blended together in a
foreign trade zone will be the U.S. As stated above,
domestic status merchandise may be combined with or made part
of other articles in the FTZ and be removed from the FTZ into
the Customs territory without being subject to quotas, duty,
or tax, provided that the identity of such articles has not
been lost.
The zone status of the various foreign types of tobacco
admitted in the FTZ is not stated. Part 146 of the Customs
Regulations covers FTZ. Section 146.65(a)(1), concerning the
classification of privileged foreign merchandise, provides as
follows:
(a) Classification -- (1) Privileged foreign
merchandise. Privileged foreign merchandise provided for
in this section will be subject to tariff classification
according to its character, condition and quantity, at
the rate of duty and tax in force on the date of filing,
in complete and proper form, the application for
privileged status. Classification of merchandise subject
to a tariff-rate import quota will be made only at the
higher non-quota duty rate in effect on the date
privileged foreign status was granted. Notwithstanding
the grant of privileged status, Customs may correct any
misclassification of any such entered merchandise when it
posts the bulletin notice of liquidation under 159.9 of
this chapter.
Note that the classification of merchandise subject to a
tariff-rate import quota will be made at the higher non-quota
duty rate in effect on the date privileged foreign status was
granted. Accordingly, if privileged status is granted, the
various types of tobacco admitted in the zone would be
classified as follows:
The unmanufactured flue-cured strip tobaccos, if not
threshed or similarly processed, are classified in
subheading 2401.20.35, and, if, threshed or similarly
processed, in subheading 2401.20.87, HTSUS, dutiable at
350 percent ad valorem.
Subheadings 2401.10.44, 2401.10.48, 2401.20.23,
2401.20.26, 2401.20.75, 2401.30.13, and 2401.30.16,
HTSUS, covering various types of Oriental tobaccos, are
free rate provisions under the general rates.
Section 146.65(a)(2), of the Customs Regulations,
covering nonprivileged foreign merchandise, states as
follows:
(2) Nonprivileged foreign merchandise.
Nonprivileged foreign merchandise provided for in this
section will be subject to tariff classification in
accordance with its character, condition and quantity as
constructively transferred to Customs territory at the
time the entry or entry summary is filed with Customs.
Additional Note 5(a), Chapter 24, HTSUS (1997), states as
follows:
(a) The aggregate quantity of tobacco entered, or
withdrawn from warehouse, for consumption under
subheadings 2401.10.63, 2401.20.33, 2401.20.85,
2401.30.33, 2401.30.35, 2401.30.37, 2403.10.60,
2403.91.45 and 2403.99.60 during the period from
September 13 in any year to the following September 12,
inclusive, shall not exceed the quantities specified
below.
Quantity
(metric tons)
Argentina 12,000
Brazil 80,200
Chile 2,750
European Community (aggregate of
Austria, Belgium, Denmark, Finland,
France, the Federal Republic of
Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands,
Portugal, Spain, Sweden, and the
United Kingdom) 10,000
Guatemala 9,250
Malawi 12,000
Philippines 3,000
Thailand 7,000
Zimbabwe 12,000
Other countries or areas
3,000
To be classified within the subheadings listed in Note
5(a), the subheadings require that the tobaccos must be
"described in additional U.S. note 5 to this chapter and
entered pursuant to its provisions". Accordingly, the
tobaccos must come within the quantitative limits listed or
they are classified in the "other" provisions which provide
for higher rates of duties.
We had previously concluded that the tobacco manufactured
in the zone and entering the Customs territory from the zone
in nonprivileged status is a product the United States. The
United States is not one of the countries specifically listed
in Additional U.S. Note 5(a), Chapter 24. However, we
believe that the quantitative limits of 3,000 metric tons for
"other countries or areas" is broad enough to include the
United States. Accordingly, the manufactured tobacco entered
into the Customs territory from the zone in nonprivileged
status is classified in subheading 2403.10.60, HTSUS, with
duty at the general rate of 35.7 cents per kg., if it is
within the quantitative limits for "other countries or areas"
of Additional U.S. Note 5(a), Chapter 24, "and, if it is not
within the quantitative limits, it is classified in
subheading 2403.10.90, HTSUS, with duty at the general rate
of 350 percent ad valorem.
HOLDING:
Based upon the information provided, it is our opinion
that the unmanufactured tobacco undergoes a substantial
transformation when it is processed and blended together into
manufactured tobacco. Accordingly, under scenario A, the
country of origin of the blended tobacco will be Argentina.
Under scenario B, the country of origin of the blended
tobacco will be the U.S.
In scenario A, tobacco manufactured in Argentina for use
in cigarettes, if within the quantitative limits of
Additional U.S. Note 5(a), Chapter 24, is classified in
subheading 2403.10.60, HTSUS, with duty at the general rate
of 35.7 cents per kg., and, if the quantitative limits have
been reached, the tobacco is classified in subheading
2403.10.90, HTSUS, with duty at the general rate of 350
percent ad valorem.
In scenario B, the unmanufactured flue-cured strip
tobaccos admitted in the zone and granted privileged status,
if not threshed or similarly processed, are classified in
subheading 2401.20.35, and, if threshed or similarly
processed, in subheading 2401.20.87, HTSUS, dutiable at 350
percent ad valorem. Subheadings 2401.10.44, 2401.10.48,
2401.20.23, 2401.20.26, 2401.20.75, 2401.30.13, and
2401.30.16, HTSUS, covering various types of Oriental
tobaccos, are free rate provisions under the general rates.
In scenario B, tobacco manufactured in the zone for use
in cigarettes and entered for consumption into the Customs
territory from the zone in nonprivileged status, is
classified in subheading 2403.10.60, HTSUS, with duty at the
general rate of 35.7 cents per kg., if it is within the
quantitative limits for "other countries or areas" of
Additional U.S. Note 5(a), Chapter 24, and, if it is not
within the quantitative limits for "other countries or
areas" it is classified in subheading 2403.10.90, HTSUS, with
duty at the general rate of 350 percent ad valorem.
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
Tariff Classification Appeals
Division