CLA-2 RR:CR:SM 563119 DCC
Port Director
U.S. Customs and Border Protection
3600 East Paisano El Paso, Texas 79905
RE: Request for Internal Advice; North American Free Trade Agreement; Manufactured Tobacco
Dear Port Director:
This is in reference to a request for internal advice dated January 6, 2005, concerning the tariff treatment of processed tobacco (manufactured tobacco) under the North American Free Trade Agreement (“NAFTA”). Your request was initiated by a request for an advance ruling dated September 2, 2004, submitted by Dorsey & Whitney LLP, on behalf of Grand River Enterprises (“GRE”).
FACTS:
In Canada, GRE processes unmanufactured tobacco into manufactured tobacco ready for use in the production of cigarettes. The unmanufactured tobacco consists of 76% lamina and scrap lamina, and 24% tobacco stems. The lamina and scrap lamina are sourced from the following countries: Brazil, Canada, China, Greece, Albania, Turkey, the Philippines, and the United States. The tobacco stems are sourced from tobacco grown in Canada. According to counsel’s submission, the tobacco imported into Canada consists of unmanufactured “tobacco, partly or wholly stemmed/stripped” classified in subheadings 2401.20.85 and 2401.20.87, Harmonized Tariff Schedule of the United States (“HTSUS”), and “tobacco, not stemmed/stripped, Turkish type,” classified in subheading 2401.10.44, HTSUS. After processing, the “manufactured tobacco,” which is exported to the United States, is classified in 2403.10.90, HTSUS.
In Canada, the lamina is conditioned, preblended and redried, and packed in cases for storage. As needed for final processing, the processed lamina is transferred from storage to the factory for conversion into the finished blended tobacco. At this stage, the lamina blend is further conditioned, encased, and cut and dried to the proper moisture level. In a separate operation, the tobacco stems are conditioned, cut, and expanded with steam, and finally dried to the proper moisture level. The lamina and stem portion, together with small scrap lamina and tobacco shorts, are mixed together in a cylinder where a top flavor is applied. After mixing, the finished cut filler is packed in boxes and shipped to the customer.
In your memorandum to this office, you state that on May 3, 2004, GRE executed a NAFTA Certificate of Origin that claimed NAFTA eligibility for the subject merchandise. GRE exported three shipments to the United States under that Certificate which were entered on May 4, 25, and June 28, 2004, by Sandia Tobacco Manufacturers (“Sandia”), through the Port of El Paso, Texas.
On June 17, 2004, El Paso Customs and Border Protection (“CBP”) issued a Request for Information (CF 28) to Sandia requesting information to verify the classification of the imported tobacco, a description of the processing performed in Canada, and information about use of the finished product in the United States. On August 20, 2004, your office issued a NAFTA Verification of Origin Questionnaire requesting additional information to GRE.
In your request for internal advice you indicate that the processing of unmanufactured tobacco from outside North America does not result in a tariff shift as required under General Note 12(t), HTSUS.
ISSUE:
Whether the imported manufactured tobacco qualifies for preferential tariff treatment under NAFTA.
LAW AND ANALYSIS:
General Note 12(a)(i) of the Harmonized Tariff Schedule of the United States provides in relevant part:
Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Canada under the terms of the marking rules set forth in regulations issued by the Secretary of Treasury (without regard to whether the goods are marked), when such goods are imported into the customs territory of the United States and are entered under a subheading for which a rate of duty appears in the “Special” subcolumn followed by the symbol “CA” in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act.
As noted above, the manufactured tobacco imported into the United States is classified in subheading 2403.10, HTSUS. The NAFTA tariff shift rule for manufactured tobacco classified under this subheading requires: “A change to headings 2401 through 2403 from tariff subheadings 2401.10.21, 2401.20.14 or 2403.91.20 or any other chapter.” General Note 12(t), HTSUS. Pursuant to the applicable tariff shift rule, the unmanufactured tobacco imported into Canada must be classified in one of the specified tariff subheadings (i.e., 2401.10.21, 2401.20.14 or 2403.91.20, HTSUS), or in a tariff heading other than 2401 through 2403, HTSUS. Because the unmanufactured tobacco is not classified in one of these headings or subheadings, the processing in Canada does not result in the specified tariff shift and therefore the manufactured tobacco imported into the United States does not qualify for preferential tariff treatment under NAFTA.
Counsel argues that denial of NAFTA eligibility for the manufactured tobacco is contrary to international obligations under the Uruguay Round Agreement, negotiated under the auspices of the General Agreement on Tariffs and Trade, and the Canada-United States Free Trade Agreement (“CUSFTA”). Counsel notes that before the Uruguay Round, the United States maintained import quotas on various agricultural products pursuant to the Agricultural Adjustment Act of 1933. During the Uruguay Round, the United States and other members of the World Trade Organization agreed to convert these quotas to tariff-rate quotas in order to comply with the general prohibition against quantitative restrictions contained in Article XI:1 of the GATT. Counsel notes that tariff shift rule under NAFTA is more restrictive than the previous rule under the CUSFTA which required, “A change to headings 2402 – 2403 (except to subheading 2403.91) from any other heading outside that group.” Because the Uruguay Round was negotiated in the context of more inclusive rules of origin existing under the CUSFTA, counsel argues the application of tariff rate quotas is inappropriate.
To overcome the less favorable treatment for imported manufactured tobacco under NAFTA, counsel recommends treating the manufactured tobacco processed by GRE as products of Canada for purposes of GN 12(b). Counsel states that by application of the NAFTA marking rules under 19 C.F.R. 102.20, and Note 5(b), Chapter 24, HTSUS, the manufactured tobacco should be classified under subheading 2403.10.90, HTSUS, and be duty free under the “Special” subcolumn as a product of Canada.
Alternatively, counsel suggests that the processed tobacco exported to the United States by GRE should be treated as a product of the countries in which the unmanufactured tobacco was grown. In this way, counsel maintains, the processed tobacco would be classified in subheading 2403.10.60, HTSUS, if the Note 5(a) quantitative limits for each of the countries of origin of the unmanufactured tobacco components had not been exceeded, and if those quantitative limits had been exceeded for any portion of the tobacco, that portion only would be classified in subheading 2403.10.90, HTSUS. Under Chapter Note 5(b), the Canadian grown tobacco cannot be classified under the tariff rate quotas listed in Chapter 24 Note 5(a). Specifically, the Canadian tobacco cannot be classified 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, HTSUS. Consequently, counsel claims, the Canadian tobacco should be classified in subheading 2403.10.90, HTSUS, and entered duty free under the “Special” column rate.
Finally, counsel proposes that CBP should treat GRE’s processed tobacco as unmanufactured tobacco. According to this proposal, the tobacco stems would be classified under subheading 2401.30.70, HTSUS, and entered duty free under the “Special” column rate. The lamina portion from outside Canada would be classified in subheadings 2401.20.85 or 2401.20.87, HTSUS, depending on whether the quantitative limits had been exceeded for each country in which the product was grown. The lamina from Canada would be classified under subheading 2401.20.87, HTSUS, and entered duty free under the “Special” column rate.
In Headquarters Ruling Letter (“HRL”) 560102, dated June 17, 1997, CBP considered whether tobacco processed in Argentina or a U.S. foreign trade sub-zone could qualify for the tariff rate quotas in Note 5(a). In the first scenario, unmanufactured tobacco was sourced from Argentina, Brazil, Canada, Turkey, and the United States. In that scenario, we determined that the processing of the unmanufactured tobacco resulted in a different article. We therefore found that the manufactured tobacco was a product of Argentina and therefore eligible for the Note 5(a) tariff rate quotas, provided the quantitative limits were not filled.
In the second scenario, we found that the processing on unmanufactured tobacco that was performed in a U.S. foreign trade sub-zone resulted in manufactured tobacco that was a product of the United States. Although not specifically listed in Note 5(a), we concluded that the quantitative limit for “other countries and areas” was broad enough to include the United States, and if not within the quantitative limits, it was classified in subheading 2403.10.90, with a duty rate of 350 percent ad valorem.
The analysis in the instant case is similar to the one presented in HRL 560102. The processing by GRE transforms the unmanufactured tobacco from a product which may have many uses (under subheading 2401, HTSUS) into a product which is for use in the manufacture of cigarettes (under subheading 2403, HTSUS). The manufactured tobacco is therefore a product of Canada for purposes of Note 5, Chapter 24, HTSUS. As such, however, the manufactured tobacco is precluded from classification under a tariff rate quota by Note 5(b).
Furthermore, we find that the manufactured tobacco may not be classified under the “Special” subcolumn for items classified under subheading 2403.10.90, HTSUS, as a product of Canada. Pursuant to GN 12(b), a good may qualify as originating for purposed of NAFTA only if it is wholly obtained or produced entirely, it is produced entirely in a NAFTA country from originating materials, or the good meets the applicable requirements of GN 12(t). As described above, the processed tobacco includes unmanufactured tobacco from NAFTA and non-NAFTA countries. Therefore, the only way for the tobacco processed by GRE to qualify is to meet the product specific rule in GN 12(t). In this case, however, the GRE processing performed on Canada does not result in one of the requisite tariff shifts as specified in GN 12(t). The fact that the manufactured tobacco may qualify to be marked as made in Canada does not change this result since the rules of origin for country of origin marking and tariff preference are different.
We also disagree with counsel’s proposal to treat the manufactured tobacco according to the source of the unprocessed tobacco. Although the unmanufactured tobacco from Brazil, Greece, the Philippines, and other countries may qualify for a tariff rate quota, once the unmanufactured tobacco is processed it is classified under subheading 2403.10.90, HTSUS. Tobacco entered under this subheading is not entitled to the preferential tariff rates for the items listed under Chapter Note 5(a) upon entry into the United States. Because the processing in Canada results in a new product with a new tariff classification it would be inappropriate to classify the manufactured tobacco on the basis of the classification of the tobacco in an unprocessed condition.
Similarly, we find counsel’s suggestion to treat the Canadian grown lamina as a distinct component of the finished product unacceptable. Once the lamina, from Canada or elsewhere, is blended and conditioned and then mixed with the stem portion, the Canadian lamina is no longer distinguishable from the unprocessed tobacco from other countries. It would therefore be inappropriate to treat the lamina from Canada as if it were a distinct component of the manufactured tobacco.
HOLDING:
Based on the information provided, we find that the unmanufactured tobacco does not qualify for preferential tariff treatment under NAFTA when it is processed in Canada to produce manufactured tobacco. Furthermore, the manufactured tobacco is not eligible for a tariff rate quota under Chapter 24 Note 5(a) once it has undergone processing in Canada.
This decision should be mailed by your office to the party requesting internal advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division