CLA-2 RR:TC:SM 560125 MLR

Port Director
U.S. Customs Service
477 Michigan Avenue
Detroit, MI 48226

RE: Application for Further Review of Protest No. 3801-95-106726; Denial of duty exemption under HTSUS subheading 9801.00.10 to Chevrolet Caprice sedan; General Note 3(d); uniform and established practice; NAFTA; Article 509; FTZ

Dear Sir:

This is in reference to a protest and application for further review filed by Bob Morris, Pontiac & GMC, contesting the denial of the duty exemption of subheading 9801.00.10, Harmonized Tariff Schedule of the United States (HTSUS), to a 1995 Chevrolet Caprice Classic sedan.

FACTS:

The 1995 Chevrolet Caprice Classic sedan was entered on March 6, 1995, and was liquidated on June 30, 1995. The application for further review of protest no. 3801-95-106726 was timely filed on September 26, 1995. The protestant states that cars and trucks assembled in U.S. foreign trade zones (FTZs) were shipped to Canada and were eligible for duty-free entry into Canada under section 401(b) of the North American Free Trade Agreement (NAFTA) and under the Automotive Practices Trade Act (APTA), as originating material of the U.S. It is further stated that some of the vehicles were purchased by U.S. Department of Transportation-licensed importers, such as the protestant, for reimportation into the U.S., and that upon reimportation, Customs advanced the U.S. duty rate from zero to 100 percent ad valorem. It is stated that the non-U.S. parts and components in the vehicles range from zero to about twelve percent by value. The protestant claims that there is no legal basis which requires advancing the rate of duty for these vehicles, or which disallows the payment of a lower duty rate. Therefore, in accordance with U.S. law, and in particular, the sixth proviso of the Foreign-Trade Zones Act (FTZA), the NAFTA and the NAFTA Implementation Act, it is claimed that the vehicle at issue is not a vehicle to which the 2.5 percent duty rate applies, but at a minimum should be dutiable at the same rate as like articles manufactured in Canada.

The protestant states that the Chevrolet Caprice Classic sedan was made in a U.S. FTZ, exported to Canada, and upon importation into the U.S. was classified under heading 8703, HTSUS, and assessed a duty rate of 2.5 percent ad valorem. It is claimed that the vehicle should have been allowed entry duty-free as a U.S. good under subheading 9801.00.10, HTSUS, or as a NAFTA good. Furthermore, it is claimed that a uniform and established practice was in existence on these vehicles as goods manufactured in the U.S. because for at least ten years the duty rate assessed by Customs for the reentry of such vehicles was zero, and that liquidation of the vehicles under heading 8703, HTSUS, was taken without any prior notice or discussion. Furthermore, the protestant states that other ports on the U.S.-Canadian border continue to follow the ten-year, customary practice.

ISSUES:

I. Whether the 1995 Chevrolet Caprice Classic sedan produced in a FTZ in the U.S. with U.S. and foreign components, exported directly to Canada, and imported into the U.S., is entitled to duty-free entry under subheading 9801.00.10, HTSUS, or preferential duty treatment under the NAFTA, and whether there is a uniform and established practice to provide such duty treatment.

II. Whether the 1995 Chevrolet Caprice Classic sedan qualifies for a duty on its applicable foreign value content, as provided in General Note 3(d), HTSUS.

LAW AND ANALYSIS:

I. Duty-Free Treatment

A. Subheading 9801.00.10, HTSUS

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 CFR 10.1), are satisfied. 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). Moreover, compliance with section 10.1(a) is mandatory and a condition precedent to recovery unless compliance has been waived or is impossible. Maple Leaf Petroleum, Ltd. v. United States, 25 CCPA 5, T.D. 48976 (1937). The basis for waiver of the required documentation is predicated upon the port director being satisfied by the production of other evidence as to the American origin of the merchandise and its eligibility under subheading 9801.00.10, HTSUS.

In Headquarters Ruling Letter (HRL) 553240 dated March 5, 1985, a truck was assembled in a FTZ, using both "privileged domestic" and "privileged foreign parts." The truck was withdrawn from the FTZ on a weekly formal entry covering the production of additional trucks. Duties were paid on the assembled foreign merchandise having privileged foreign zone status upon withdrawal of the truck from the FTZ for domestic consumption during 1982. The truck was subsequently exported to Germany and reimported into the U.S. Customs held in HRL 553240 that since the truck was first transferred to the Customs territory of the U.S., and duties were paid on the foreign components, prior to being exported to Germany, upon return to the U.S., the truck was eligible for duty-free treatment under the American Goods Returned provision. The foreign merchandise used in the assembly of the truck had lost its foreign character and was considered to have been substantially transformed by being merged into the assembled truck. "The merger occurred in the FTZ located in the U.S. and the substantial transformation was complete when the truck was entered for consumption in the U.S. and duties paid on the privileged foreign merchandise." This position was followed in HRL 556976 dated June 9, 1994, in which Customs concluded that engines produced as a result of a substantial transformation of foreign and domestic parts in a FTZ established in the U.S. and entered from the FTZ for consumption before being exported to Japan were considered "article[s] manufactured within the Customs territory of the U.S.," and, therefore, "products of the U.S." for purposes of subheading 9802.00.80, HTSUS, and 19 CFR 10.12(e). As there is no evidence that the vehicle in the instant case was exported, duty paid from the FTZ prior to being reimported into the U.S., the vehicle produced in the FTZ from U.S. and foreign-origin components is not considered a good of U.S.-origin for purposes of eligibility under subheading 9801.00.10, HTSUS.

B. NAFTA Eligibility

In C.S.D. 95-3, 29 Cust. Bull. 11 (February 8, 1995), Customs addressed the issue concerning the dutiable status of automobiles made in part with foreign components in a FTZ that were imported after having been exported from the FTZ. The automobile parts were admitted into the FTZ in either privileged foreign status or non-privileged foreign status. After manufacture, the automobiles were exported to Canada without any duty having been paid on those parts. After that exportation, the automobiles were imported into the U.S. The issue in C.S.D. 95-3 was whether the sixth proviso to section 3 of the FTZA (19 U.S.C. 81c(a)) requires duty to be assessed on the full value of an automobile made in a FTZ exported and then returned to the U.S. In short, in C.S.D. 95-3 Customs held that the automobile is dutiable on its full value at the appropriate most-favored nation rate of duty on its importation back into the U.S. Customs further stated that such an automobile does not qualify for duty-free treatment under the NAFTA. C.S.D. 95-3 is herein incorporated by reference. See also HRL 558983 dated June 29, 1995, which is also herein incorporated by reference, finding that no established and uniform practice under subheading 9801.00.10, HTSUS, was created pursuant to 19 U.S.C. 1315(d).

II. General Note 3, HTSUS

As determined above, automobiles produced in FTZs that are exported directly to Canada or Mexico and not formally entered for consumption in the U.S., generally are subject to duty on the full value (i.e., both foreign and domestic content) of the automobile when they re-enter the U.S. General Note 3(d), HTSUS, which was added by section 19 of the Miscellaneous Trade and Technical Corrections Act of 1996, Pub. L. 104-295, 110 Stat. 3514 (October 11, 1996), however, provides, in part, as follows with respect to the calculation of duties on the foregoing vehicles when appropriate information is presented:

[n]otwithstanding any other provision of law, the duty imposed on a qualified article shall be the amount determined by multiplying the applicable foreign value content of such article by the applicable rate of duty for such article.

General Note 3(d)(ii), HTSUS, defines a "qualified article" as an article that is:

(A) classifiable under any of subheadings 8702.10 through 8704.90 of the [HTSUS],

(B) produced or manufactured in a foreign trade zone before January 1, 1996,

(C) exported therefrom to a NAFTA country (as defined in section 2(4) of the [NAFTA] Implementation Act (19 U.S.C. 3301(4)), and

(D) subsequently imported from that NAFTA country into the customs territory of the United States--

(I) on or after the effective date of this subdivision, or

(II) on or after January 1, 1994, and before such effective date, if the entry of such article is unliquidated, under protest, or in litigation, or liquidation is otherwise not final on such effective date.

In this case, the article is a 1995 Chevrolet Caprice Classic sedan classified under heading 8703, HTSUS. The entry documentation indicates that the vehicle was entered into the U.S. from Canada on March 6, 1995. It is also alleged that the automobile was produced in a U.S. FTZ. Therefore, provided protestant presents (within a specified period of time) sufficient information to establish the "applicable foreign value content" as well as "the FTZ percentage" required under General Note 3(d), duty is only payable on the foreign content contained in the vehicle. See Fact Sheet 7346071 dated December 11, 1996. To the extent that the Chevrolet Caprice Classic sedan at issue qualifies for the reduced duties under General Note 3(d), this protest should be granted.

HOLDING:

Based on the information provided, the subject vehicle produced in a FTZ from U.S. and foreign components which is, exported directly from the FTZ into Canada and then imported into the U.S., is not entitled to duty-free treatment under either the NAFTA or subheading 9801.00.10, HTSUS. However, if sufficient information is presented to establish that the vehicle qualifies for reduced duties under General Note 3(d), as added by Pub. L. 104-295, 110 Stat. 3514 (October 11, 1996), duty is only payable on the applicable foreign content contained in the vehicle, and this protest should be granted.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, this decision should be attached to Customs Form 19, Notice of Action, and be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Tariff Classification Appeals
Division