MAR-2-05 CO:R:C:V 730155 KG
District Director of Customs
Portland, Maine 04112
RE: Internal Advice No. 92/86 concerning country of origin
marking of running shoe uppers
Dear Sir:
This is in response to a request for internal advice
initiated by a letter of September 18, 1986, from David R.
Ostheimer, on behalf of Hyde Athletic Industries, Inc., regarding
the country of origin marking of running shoe uppers imported
from Taiwan. We regret the delay in responding.
FACTS:
The imported uppers go through 5 different departments in
their processing in the U.S. In the first department, the
counters and the sock inserts (insoles) are die-cut into proper
shape and size. The counters are cut from a flat stytherm sheet
stock and the sock inserts from pre-molded foam blocker.
In the second department, the counters are skived prior to
being added to the upper. Skiving is the thinning of the counter
edges to enable the counter to fit properly into the heel area of
the upper. Also, a string is tied through the eyelets of the
upper. Shoe size, production date and production tag numbers are
all stamped on the inside tongue of the upper. The counter is
placed into the heel between the nylon and the overlapping
leather.
The third department is the lasting department. First, the
heel area/counter is shaped. Then the upper is placed onto a
plastic last. The next operation is where the toe is shaped
followed by the shaping of the side of the upper. The outer
pieces of the upper are tucked, folded and shaped in order to
insure that the upper sits correctly on top of the mid/outsole
unit when this unit is bonded to the bottom of the upper. A
machine smooths all bumps, creases and folds on the bottom of the
upper. Then the bottom of the upper is roughed in preparation
for the cementing process.
In the fourth department, the bottom of the upper is primed
and cement is placed on it. The wedge/outsole unit is also
primed and cemented. After letting the cement dry for 1 to 1 1/2
hours, the upper and wedge/outsole unit are heat-activated at
110-130 degrees Farenheit. Then the upper and the wedge/outsole
are pressurized at a rate of 275 pounds per square inch. Prior
to the pressurizing of the wedge/outsole and the upper, a plastic
heel stabilizer (MCD) is added. The MCD is put through a special
wash and then primed, cemented and dried before being heat-
activated and pressed together with the the heat-activated
wedge/outsole. This new combined unit then cools to room
temperature before being heat-activated again and pressurized
with the upper. The toe flap of the outsole is dryed and wrapped
by activating the cement and placing the shoe in the toe wrap
machine. The lacing is then cut and the last is pulled out of
the shoe. The heel is scoured and trimmed.
In the fifth department, the sock inserts are placed into
the shoe. Excess cement is cleaned off the shoe. The suede is
touched up, the midsole and outsole are cleaned and shoe laces
are added to the shoe. The shoes are matched up in pairs,
inspected and packed into boxes for shipment.
In addition to reviewing the written submission and
examining the samples, we viewed the videotape that was submitted
which showed all of the above U.S. operations.
The only information submitted regarding the operations
performed in the processing of the upper in Taiwan are cost
figures for the labor performed abroad and a list of machines
used in the construction of the uppers. There is no description
given of either the machines or what they do.
ISSUE:
Whether the imported uppers are substantially transformed by
the manufacturing processes in the U.S.
LAW AND ANALYSIS:
Section 304 of the Tariff Act of 1930, as amended (19
U.S.C. 1304), provides that, unless excepted, every article of
foreign origin imported into the U.S. shall be marked in a
conspicuous place as legibly, indelibly, and permanently as the
nature of the article (or 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. The U.S.
Court of International Trade stated in Koru North America v.
United States, 701 F.Supp. 229, 12 CIT (CIT 1988), "In
ascertaining what constitutes the country of origin under the
marking statute, a court must look at the sense in which the term
is used in the statute, giving reference to the purpose of the
particular legislation involved. The purpose of the marking
statute is outlined in United States v. Friedlaender & Co., 27
CCPA 297, 302, C.A.D. 104 (1940), where the court stated that:
'Congress intended that the ultimate purchaser should be able to
know by an inspection of the marking on imported goods the
country of which the goods is the product. The evident purpose
is to mark the goods so that at the time of purchase the ultimate
purchaser may, by knowing where the goods were produced, be able
to buy or refuse to buy them, if such marking should influence
his will."
Part 134, Customs Regulations (19 CFR Part 134), implements
the country of origin marking requirements and exceptions of 19
U.S.C. 1304. The ultimate purchaser is defined in section
134.1(d), Customs Regulations (19 CFR 134.1(d)), as generally the
last person in the United States who will receive the article in
the form in which it was imported. If the imported article will
be used in manufacture, the manufacturer may be the ultimate
purchaser if he subjects the imported article to a process which
results in a substantial transformation of the article, even
though the process may not result in a new or different article.
In such case, the article itself is excepted from marking
pursuant to section 134.35, Customs Regulations (19 CFR 134.35),
and only the outermost container of the imported article must be
marked.
For a substantial transformation to be found, an article
having a new name, character, or use must emerge from the
processing. United States v. Gibson-Thomsen Co., Inc. 27
C.C.P.A. 267 (1940). In a country of origin marking case
involving imported shoe uppers, Uniroyal, Inc. v. United States,
3 CIT 220, 542 F. Supp. 1026 (1982), aff'd, 702 F.2d 1022 (Fed.
Cir. 1983), the U.S. Court of International Trade considered
whether the addition of an outsole in the U.S. to imported uppers
lasted in Indonesia effects the substantial transformation of the
uppers. The court described the imported upper, which resembled
a moccasin, and the process of attaching the outsole to the
upper. The factors examined included: a comparision of the time
involved in attaching the outsole versus the time involved in
manufacturing the upper, a comparision of the cost involved in
the process of attaching the outsole versus the cost involved in
the process of manufacturing the upper, a comparision of the cost
of the imported upper versus the cost of outsole and a
comparision of the number of highly skilled operations involved
in both processes. The court concluded that a substantial
transformation of the upper had not occurred since the attachment
of the outsole to the upper is a minor manufacturing or combining
process which leaves the identity of the upper intact. The upper
was described as a substantially complete shoe and the
manufacturing process taking place in the U.S. required only a
small fraction of the time and cost involved in producing the
upper.
In a more recent case involving the classification of an
athletic shoe upper, the U.S. Court of Appeals for the Federal
Circuit reversed the trial court's finding that the upper was
substantially complete as imported. Simod America Corp. v.
United States, 23 Cust. B. & Dec. 17 (Fed. Cir., 1989).
The upper was lasted and soled in the U.S. The court described
in great detail the process of making polyurethane shoe soles
with a machine called a Desma 513/24. The Desma is a very
expensive, massive, intricate machine requiring significant
start-up time and costs. The test for determining substantial
completeness set forth in Daisy-Heddon, Div. Victor Comptometer
Corp. v. United States, 600 F.2d 799 (CCPA, 1979), enumerates a
series of five factors to be considered. In Simod, the court
centered its discussion on the second factor of Daisy-Heddon, a
comparision of the time and effort required to complete the
article with the time and effort required to place it in its
imported condition. This involved comparing the labor-intensive
craftsmanship required in Italy with the capital-intensive
mechanized and sophisticated process completed in the U.S. The
court stated that "It would be a startling breach if two
identical entries were classified differently because, after
importation, one was destined for completion in a labor-intensive
operation, and the other in a capital-intensive
operation....labor intensivity alone cannot be made a test of
completeness where there is a great difference in the extents of
capital intensivity in the manufacturing operation before and
after importation." Simod at 23, 24.
The Daisy-Heddon factors are: (1) comparision of the number
of omitted parts with the number of included parts; (2)
comparision of the time and effort required to complete the
article with the time and effort required to place it in its
imported condition; (3) comparision of the cost of the included
parts with that of the omitted parts; (4) the significance of the
omitted parts to the overall functioning of the completed
article; and (5) trade customs, i.e., does the trade recognize
the importation as an unfinished article or as merely a part of
that article. The factors examined in Daisy-Heddon and Simod
are very similar to the factors applied in Uniroyal. However,
Uniroyal was a country of origin marking case while Simod is a
tariff classification case applying the Tariff Schedules of the
United States. Further, not only do these two cases arise under
two different statutes with different legislative purposes and
intent, but also these two cases present significant different
fact patterns. Therefore, these two cases have limited
relevance to each other.
An examination of the factors enumerated in Uniroyal is
relevant to determine whether or not the imported running shoe
uppers involved in this case are substantially transformed. The
first factor discussed in Uniroyal is a comparision of the time
involved in the domestic processing versus the time involved in
manufacturing the upper overseas. This information was not
submitted by the importer and therefore, cannot be considered.
The second factor discussed in Uniroyal is a comparision of
the cost involved in the domestic process versus the cost of
manufacturing the upper. The information submitted by the
importer is a comparision of the cost of labor done in the U.S.
with the cost of labor done abroad. The cost of labor is not a
complete representation of the cost of the processing. It is
impossible to glean from the information submitted the cost of
processing done either overseas or in the U.S. Therefore, this
factor cannot be considered.
The third factor discussed in Uniroyal is a comparision of
the cost of the domestic pieces attached to the upper versus the
cost of the imported upper. The importer enumerated component
parts added in the U.S., giving a cost figure of $5.474.
However, at least one of these parts is marked "Made in Taiwan"
on the sample submitted. The origin of the other parts in not
given. The cost of the imported upper is $4.160 for one model of
athletic shoe produced and $3.960 for the other model produced.
The point of this comparision is to compare the cost of U.S.-made
parts incorporated into the completed product with the cost of
Taiwan-made parts incorported into the completed product. It is
illological to include the cost of component parts made in Taiwan
and added in the U.S. as part of the cost figure finding in favor
of determining that the imported article was substantially
transformed in the U.S. Only the cost of the U.S. labor
necessary to attach the imported component part would be relevant
to the determination of substantial transformation. Because it
is not possible to determine which parts were made in the U.S.,
little weight can be given to this factor.
The final factor discussed in Uniroyal is a comparision of
the number of highly skilled operations involved in both the
domestic and foreign processes. The importer went into great
detail about the processes performed in the U.S. However, the
importer merely submitted a list of the machines used in Taiwan
to produce the upper. It is impossible to compare a detailed
explanation of the domestic process with a mere list of machines
used in the operation abroad. Therefore, it is impossible to
compare the operation involved in manufacturing the upper
overseas with the domestic process.
To determine whether a substantial transformation of an
article has occurred for the purpose of ascertaining who is the
'ultimate purchaser', each case must be decided on its own
particular facts. Uniroyal at 224. In Uniroyal the court
examined the facts presented and determined that the completed
upper was the very essence of the completed shoe. The concept of
the "very essence" of a product was applied in National Juice
Products v. United States, 628 F. Supp. 978, 10 CIT (CIT
1986), where the U.S. Court of International Trade determined
that frozen concentrated orange juice and reconstituted orange
juice that contains imported manufacturing concentrate was not
substantially transformed in the U.S. The court agreed with
Customs that the manufacturing concentrate "imparts the essential
character to the juice and makes it orange juice ....thus, as in
Uniroyal, the imported product is the very essence of the retail
product. The retail product in this case is essentially the
juice concentrate derived in substantial part from foreign grown,
harvested, and processed oranges. The addition of water, orange
essences, and oils to the concentrate, while making it suitable
for retail sale, does not change the fundamental character of the
product".
In this case, the upper is lasted and soled in the U.S.
Unlike Simod, much of the processing done is labor-intensive.
However, it was clear from the videotape that the upper goes
through a great deal of processing in the U.S. In particular,
the upper did not really take the form of a shoe until it was
lasted. Once the upper was heel and toe lasted, it had the basic
form of a shoe and it could be said was the very essence of a
shoe. For these reasons, the upper is substantially transformed
in the U.S. and only the outermost container in which the uppers
are imported must be marked with the country of origin.
HOLDING:
The running shoe upper is substantially transformed in the
U.S. by the processing described above. Pursuant to 19 CFR
134.35 only the outermost container in which the upppers are
imported must be marked with the country of origin.
Sincerely,
John Durant
Director,
Commercial Rulings Division