CLA-02 RR:CTF:VS 563290 EAC
Mr. Munford Page Hall, II
Dorsey & Whitney LLP
Suite 400 South
1001 Pennsylvania Avenue, NW
Washington, D.C. 20004-2533
RE: Reconsideration of HRL 563119; NAFTA; manufactured tobacco.
Dear Mr. Hall:
This is in response to your letter of May 16, 2005, submitted on behalf of Grand River Enterprises (“GRE”), requesting reconsideration of Headquarters Ruling Letter (“HRL”) 563119 dated March 8, 2005, which held that manufactured tobacco from Canada did not qualify for preferential treatment under the North American Free Trade Agreement (“NAFTA”) and was not eligible for a tariff rate quota under Additional U.S. Note 5(a), Chapter 24, Harmonized Tariff Schedule of the United States (“HTSUS”). In reconsidering HRL 563119, we have additionally analyzed the arguments presented during a meeting at our offices on October 19, 2005, and in your supplemental submission of November 16, 2005.
FACTS:
GRE processes “unmanufactured” tobacco into “manufactured” tobacco in Canada. After undergoing such processing, the tobacco is ready-for-use in the production of cigarettes. The unmanufactured tobacco consists of 76 percent lamina and scrap lamina 24 percent tobacco stems. The lamina and scrap lamina are sourced from Brazil, Canada, China, Greece, Albania, Turkey, the Philippines, and the United States. The tobacco stems are obtained from tobacco frown within Canada. The tobacco which is imported into Canada consists of unmanufactured “tobacco, partly or wholly stemmed/stripped” classified in subheadings 2401.20.85 and 2401.20.87, HTSUS, and “tobacco, not stemmed/stripped, Turkish type,” classified in subheading 2401.10.44, HTSUS. After processing, the manufactured tobacco that is exported to the United States is classified in subheading 2403.10.90, HTSUS.
The lamina is conditioned, preblended, redried, and packed in cases for storage in Canada. The processed lamina is thereafter transferred, as needed, from storage to the factory where it will undergo conversion into finished blended tobacco. During this stage of production, the lamina blend is further conditioned, encased, cut, and dried to the proper moisture level. In a separate operation, the tobacco stems are conditioned, cut, expanded with steam, and dried to the proper moisture level. The lamina and stem portion, as well as small scrap lamina and tobacco shorts, are subsequently mixed together in a cylinder where a top flavor is applied. After mixing, the finished cut filler is packed into boxes and shipped to the customer.
By memorandum dated May 3, 2004, this office was advised that GRE executed a NAFTA Certificate of Origin that claimed NAFTA eligibility for the subject merchandise. GRE exported three shipments to the United States under the Certificate of Origin. The three shipments were entered on May 4, 2004, May 25, 2004, and June 28, 2004, by Sandia Tobacco Manufacturers (“Sandia”), through the Port of El Paso, Texas.
On June 17, 2004, U.S. Customs and Border Protection (“CBP”) issued a Request for Information (CF 28) to Sandia requesting information to verify the classification of the imported tobacco, the processing performed in Canada, and the use of the finished product in the United States. On August 20, 2004, a NAFTA Verification of Origin Questionnaire was issued to GRE requesting additional information.
In consideration of the foregoing facts, CBP held in HRL 563119 that the unmanufactured tobacco did not qualify for preferential treatment under the NAFTA when processed within Canada to produce manufactured tobacco. It was further stated that the manufactured tobacco was not eligible for a tariff rate quota under Additional U.S. Note 5(a), Chapter 24, HTSUS (hereinafter “Note 5(a)”)) once it has undergone processing in Canada.
ISSUE:
Whether the imported manufactured tobacco qualifies for preferential tariff treatment under the NAFTA.
LAW AND ANALYSIS:
General Note 3(a)(ii), HTSUS, establishes that the “General” rate of duty subcolumn in the tariff schedule provides the general or normal trade relation (“NTR”) duty rate that is applicable to products of countries which are not entitled to special tariff treatment. General Note 3(a)(iii), HTSUS, states that the “Special” subcolumn in the tariff schedule reflects the rates of duty under one or more special tariff treatment programs (including the NAFTA) which apply to those products which are classified under a provision for which a special rate is indicated in the “Special” subcolumn and for which all of the legal requirements for such program(s) have been met. (Emphasis added).
In order to determine whether all of the legal requirements for preferential treatment under the NAFTA have been met in this case, we must consult General Note 12, HTSUS, which incorporates Article 401 of the NAFTA into the tariff schedule. General Note 12(a)(i), HTSUS, provides:
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 parenthesis, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act.
Accordingly, the manufactured tobacco will be eligible for the “Special” “CA” rate of duty provided (1) it is NAFTA originating under General Note 12(b), HTSUS, and (2) qualifies to be marked as a product of Canada under the NAFTA Marking Rules. We note that manufactured tobacco from Canada that satisfies these requirements is eligible for duty-free entry, whereas certain limitations and duties are currently placed upon similarly classified manufactured tobacco from other countries set forth in the “Special” subcolumn. For example, under the U.S.-Singapore Free Trade Agreement, identical manufactured tobacco considered to be a good of Singapore, entered under the terms of General Note 25, HTSUS, and described in subheadings 9910.02.05 through 9910.24.10, is subject to certain limitations and duty rates.
In order to determine whether the tobacco in this case is NAFTA originating, we must consult General Note 12(b), HTSUS, which provides, in pertinent part:
For purposes of this note, goods imported into the Customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as ‘goods originating in the territory of a NAFTA party’ only if –
they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or
they have been transformed in the territory of Canada, Mexico, and/or the United States so that –
except as provided in subdivision (f) of this note, each of the non-originating material used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s) and (t) of this note or the rules set forth therein, or
the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or
they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials.
Because the manufactured tobacco is compromised, in part, of non-originating materials, General Note 12(b)(i), HTSUS, does not apply. Therefore, we must determine whether the non-originating materials undergo the tariff shift (or other applicable requirement) prescribed under General Note 12(b)(ii), HTSUS.
Additional U.S. Note 5(a), Chapter 24, HTSUS (hereinafter “Note 5(b)”), sets forth an aggregate limit for tobacco classified under subheading 2401.10.60, HTSUS, but provides that subheading 2403.10.60, HTSUS, does not include “products of Canada”. Accordingly, the tobacco is classified under subheading 2403.10.90. The applicable rule for Chapter 24 in General Note 12(t), HTSUS, provides for: “A change to headings 2401 through 2403 from tariff items 2401.10.21, 2401.20.14 or 2403.91.20 or any other chapter.” Because the non-originating tobacco is not classified in one of these subheadings or in any other chapter, the processing in Canada does not result in the requisite tariff shift. Therefore, as the manufactured tobacco is not considered originating under General Note 12(b), it remains our opinion that the manufactured tobacco imported into the United States is not eligible for preferential treatment under the NAFTA. As such, the imported tobacco is subject to the column one subheading 2403.10.90, HTSUS, general rate of duty of 350 percent ad valorem.
Notwithstanding the foregoing, you assert that the imported tobacco cannot be precluded from receiving preferential treatment under the NAFTA and simultaneously be treated as a product of Canada for duty purposes, specifically with respect to application of Note 5(b). In this regard, you contend that the intent of the authors of Note 5(b) was that the tobacco imported from Canada would never be subject to the quotas of Note 5(a) because such tobacco would always be duty free under the “Special” subcolumn for subheading 2403.10.90, HTSUS. We disagree.
As noted, supra, General Note 3(a)(ii), HTSUS, clearly states that the “Special” rate of duty may be applied to products classified under a provision for which a special rate is indicated and for which all legal requirements for such programs have been met. The legal requirements for obtaining preferential treatment under the NAFTA have not been met in this case because the manufactured tobacco does not originate in the territory of a NAFTA part as required by General Note 12(b), HTSUS. No legal support or evidence of legislative intent that would show that tobacco from Canada should nonetheless be entered duty free under the NAFTA, or is otherwise exempt from the quotas of Note 5(a), has been offered.
Alternatively, you argue that, “if a non-North American good is processed in Canada, but the processing fails to satisfy the NAFTA rule for preferential treatment, the good is treated, for classification, duty, and quota purposes, as a product of the country in which it originated.” In support of this position, you cite HRL 964594 dated January 30, 2002, and New York Ruling Letter (“NY”) 800126 dated October 4, 1994. Moreover, it is stated that when goods from multiple countries are processed but not substantially transformed in another country, such goods retain the origin of the multiple countries, not the country of processing. In support, we are offered HRL 088799 dated November 20, 1991, HRL 734479 dated January 29, 1993, and the court case of Coastal State Marketing v. United States, 646 F. Supp. 255 (CIT 1986), aff’d, 818 F.2d 860 (Fed. Cir. 1987). Based upon the foregoing authority, it is suggested that the Note 5(a) quantitative limits should be applied according to the country of origin of each component of the manufactured tobacco blend.
Our analysis of the above-referenced cases begins with HRL 964594, in which black currant oil from Holland was encapsulated in Canada. The processing in Canada did not result in the requisite tariff shift under General Note 12(t). As such, CBP found that the encapsulated black currant oil from Canada was not eligible for preferential tariff treatment under the NAFTA. It was further noted that the country of origin of the encapsulated black currant oil under the NAFTA Marking Rules was Holland. Please be advised that we do not find HRL 964594 supportive of GRE’s position because the manufactured tobacco in this case would be considered a product of Canada under the NAFTA Marking Rules and would not retain the origin of the multiple countries as claimed.
With respect to blended products, you have identified HRL 088799, HRL 734479, and the Coastal State Marketing court case as supportive. In Coastal State Marketing, the Court of International Trade held that blending gas oil from the Soviet Union with Italian fuel oil in Italy did not substantially transform the Soviet oil into a product of Italy. Although the grade of the mixed oil had changed, the court reasoned that the essential character of the Soviet oil remained unchanged. The court also noted that the lack of a tariff shift, although not determinative, was indicative that the blended oil was not a new and different product. As such, assessing duty on the oil loaded in the Soviet Union was appropriate.
In HRL 088799, sweetened cocoa was blended in Canada from cocoa powder and sugar. The cocoa powder used in the blend was obtained from the United States and the sugar used was obtained from various countries abroad. Upon considering whether the sweetened cocoa was a product of Canada for tariff classification and quota purposes, CBP determined that the blending operations performed in Canada did not result in a new and different product. Because this processing did not substantially transform the cocoa and sugar, the ingredients remained the product of the countries where they originated.
In HRL 734479, instant coffee was prepared in Europe by blending and agglomerating coffees that were delivered in spray-dried condition from Central and South America. In considering this processing, CBP stated that blending and agglomerating spray dried coffee, while requiring sophisticated machinery and expertise, did not change the fundamental character or use of the spray dried coffee. Although the product was improved in a commercial and marketing sense, it remained instant coffee. Therefore, as the spray dried coffee from Central and South America was not substantially transformed in the European Community, the finished coffee did not qualify for the temporary duty modification set forth in subheading 9903.23.20, HTSUS.
The blending cases discussed above involve situations where constituent ingredients were not substantially transformed in the country of final production. In order to determine whether the unmanufactured tobacco from various countries is substantially transformed in this case, however, we must consider HRL 560102 dated June 17, 1997. In HRL 560102, CBP considered whether tobacco processed in Argentina or a U.S. foreign trade zone qualified for the tariff rate quotas in Note 5(a). In the first scenario, unmanufactured types of tobacco (classified under heading 2401, HTSUS) from various countries were imported into Argentina and blended and processed into manufactured cut-filler tobacco (classified under heading 2403, HTSUS). CBP stated that the processing and blending substantially transformed the various types of tobacco capable of different uses into a product with a specific use. Therefore, as a product of Argentina, the manufactured tobacco was eligible for the tariff rate quotas in Note 5(a) provided the quantitative limits were not filled.
In the second scenario, unmanufactured tobacco from various countries were blended and processed in a U.S. foreign trade zone into cut-filler tobacco. CBP held that such processing resulted in a substantial transformation and that the country of origin of the resultant tobacco was the United States. Although not specifically listed in Note 5(a), CBP 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.
It remains our opinion that the analysis performed in HRL 560102 is applicable to the facts of this case and that the tobacco is considered a product of Canada under the NAFTA Marking Rules. The processing performed by GRE in Canada changes the unmanufactured tobacco (classified under heading 2401, HTSUS) into a product (classified under heading 2403, HTSUS) that is ready to be used in the manufacture of cigarettes. Therefore, the manufactured tobacco is a product of Canada for purposes of Additional U.S. Note 5, Chapter 24, HTSUS, and is precluded from classification under a tariff rate quota by Note 5(b). It is further noted that applying the Note 5(a) quantitative limits according to the country of origin of each component of the manufactured tobacco blend would be inappropriate under these circumstances.
Please be advised that, per your request, we have additionally considered HRL 562118 dated September 17, 2002, and HRL 562176 dated September 11, 2002, which both address tariff rate quota treatment for tobacco blends. However, HRL 562118 and HRL 562176 may be distinguished from the instant case because the processing operations performed in those cases did not result in a substantial transformation of the constituent tobacco. The analysis undertaken in both cases is, therefore, inapplicable to the facts before us.
HOLDING:
Based on the information provided, we find that the unmanufactured tobacco does not qualify for preferential treatment under the NAFTA when processed into manufactured tobacco in Canada. Moreover, the manufactured tobacco is not eligible for a tariff rate quota under Additional U.S. Note 5(a), Chapter 24, HTSUS.
HRL 563119 is affirmed in full.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division