OT:RR:CR:ED H233345 RDC
Category: Foreign Trade Zone
Mr. R. Brian Burke
Rode & Qualey
55 West 39th Street
New York, NY 10018
RE: Temporary removal from an FTZ of disposable medical devices for sterilization.
Dear Mr. Burke:
This is in response to your request per Part 177 of 19 C.F.R. for a ruling on behalf of your client, Becton, Dickinson Infusion Therapy Systems, Inc. (BD). You requested a ruling on whether disposable medical devices could be removed temporarily from a foreign trade zone (FTZ) for sterilization. Because sterilization is a manufacture the devices may not be removed temporarily from the FTZ for sterilization.
FACTS:
BD produces disposable medical devices such as needles, syringes, catheters and cannulas and is also the operator of a Foreign Trade Zone (FTZ). BD imports materials and components to manufacture these devices and admits these goods into its FTZ. These materials and components are then shipped to BD's production facility in Mexico. BD wants to admit finished products from the Mexican production facility into the FTZ in non-privileged foreign status and store the products until shipped. If the stored products require sterilization BD wants to remove the devices temporarily from the zone without entering the devices for consumption, have the devices sterilized outside of the zone and then return the devices to the zone. CBP only permits temporary removal from zone if the processing does not constitute manufacturing or production and no value is added to the merchandise, among other conditions.
Sterilization of the finished products is accomplished with one of three methods, laser ionization, gas or cobalt radiation. Sterilization kills unwanted microbes on the finished medical devices. Laser ionization sterilization involves running the finished products in their retail packaging through an ionization machine. During gas sterilization pallets of finished products are placed in the sterilization room where they are first conditioned to the required humidity and temperature, then gas is introduced into the room to complete the sterilization. Cobalt radiation sterilization is accomplished by placing pallets of finished products in a room and exposing them to cobalt rods. None of the sterilization processes requires any physical change to the devices except for the killing of microbes. BD argues that sterilization is not a manufacture. BD also asserts that the 3% increase of standard cost attributable to the sterilization process should be considered a de minimis increase in value. Therefore, BD concludes that it can temporarily remove these devices from the zone for sterilization without filing an entry for consumption.
ISSUE:
Whether disposable medical devices may be removed temporarily from an FTZ for sterilization.
LAW AND ANALYSIS:
CBP's Foreign Trade Zone Manual (FTZM) at 9.2 permits temporary removal of goods from the zone when the processing of the goods outside the zone does not constitute a manufacture or production under the drawback law at 19 U.S.C. § 1313, and when no value is added. The sterilization processes to which the disposable medical devices, needles, syringes, catheters and cannulas are subject constitute a manufacture or production for purposes of the manufacturing drawback law at 19 U.S.C. §§ 1313(a), (b) because sterilization renders the disposable medical devices fit for the particular use for which they were not suitable prior to the sterilization. Therefore, because sterilization is a manufacture, disposable medical devices cannot be removed temporarily from an FTZ for sterilization.
The statute governing the creation and operation of FTZs 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 an 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 entered into the U.S. customs territory. When foreign merchandise is so entered from an FTZ into the U.S. customs territory it is subject to the U.S. laws and regulations affecting imported merchandise. Articles of the United States 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 an FTZ from the U.S. customs territory, placed under the supervision of the appropriate CBP officer, and, whether or not they have been combined with or made part of other articles while in the FTZ, be brought back thereto free of quotas, duty, or tax. See 19 U.S.C. § 81c(a). The Act and regulations are silent on temporary withdrawal from a zone.
CBP's Foreign Trade Zone Manual (FTZM) at 9.2 permits temporary removal of goods from the zone only when the processing of the goods outside the zone does not constitute a manufacture or production under the drawback law at 19 U.S.C. § 1313. The FTZ Manual contains the following regarding temporary removal of goods from a zone:
Upon permit by the Port Director, zone status merchandise may be temporarily removed to the Customs territory from the zone for up to 120 days for repair, restoration, or incidental operation. "Incidental operation" means inspection, analysis, testing, calibration, measurement, sampling, photography, cleaning, repacking, or similar process which would not constitute "manufacturing or production" under drawback law (19 U.S.C. §1313(a) and HQ Ltr 214189 dated August 31, 1982).
Section 9.2 of the FTZ Manual is the result of Headquarters Letter (HL) 214189, August 31, 1982, which addressed for the first time temporary removal of goods from a zone and concluded that temporary removal was permissible under specified conditions. HL 214189 was issued by the predecessor agency to U.S. Customs and Border Protection (CBP), the U.S. Customs Service (Customs). The language in 9.2 comes directly from HRL 214189 which stated in part:
Specifically merchandise may be temporarily removed from a zone under the proposed procedure for repair or restoration or any incidental operation (e.g., inspection, analysis, testing, calibration, measurement, sampling photographing, cleaning, repacking, etc.) which would not constitute a "manufacture or production" under drawback law, 19 U.S.C. 1313.
C.S.D. 82-67 (December 22, 1981) articulated two definitions of "manufacture or production" for drawback purposes. First was the definition of "manufacture," laid down in Anheuser-Busch Brewing Association v. The United States, "[t]here must be transformation; a new and different article must emerge, "having a distinctive name, character or use" (207 U.S. 556, 562) based on the definition of "manufactured" stated in Ishimitsu v. United States, 11 Ct. Cust. App. 186, T. D. 38963. The second definition was: "rendering something fit for a particular use for which it was not suitable prior to the operations performed" found in United States v. International Paint Co., Inc., 35 CCPA 87 (1948). These definitions were adopted when legacy Customs added a definition of "manufacture or production" for drawback purposes to Part 191 of the Customs regulations.
On January 21, 1997, legacy Customs published a notice of a proposed rulemaking (NPRM) that proposed, among other things, to add a definition of "manufacture or production" to the Customs regulations at 19 C.F.R. § 191.2(p). 62 Fed. Reg. 3,082, (January 21, 1997). The NPRM explained that:
The definition of manufacture or production is based on court cases and administrative rulings interpreting that phrase (see Anheuser-Busch Brewing Association v. The United States, 207 U.S. 556 (1908); United States v. International Paint Co., Inc., 35 CCPA 87 (1948); et al.). In regard to the latter case, it is noted that a manufacture or production, for drawback purposes, occurs even if the processing operation does not change the general use for which the merchandise may be used (e.g., as paint) but does change the particular use for which the merchandise may be used (e.g., as anti-fouling paint designed for preventing marine growth on the bottom of ships).
62 Fed. Reg. 3083, 3084 (Jan. 21, 1997). The final rule adopted verbatim the proposed definition of "manufacture or production" at 19 C.F.R. § 191.2(q):
(q) Manufacture or production. Manufacture or production means:
(1) A process, including, but not limited to, an assembly, by which merchandise is made into a new and different article having a distinctive "name, character or use"; or
(2) A process, including, but not limited to, an assembly, by which merchandise is made fit for a particular use even though it does not meet the requirements of paragraph (q)(1) of this section.
63 Fed. Reg. 10,970, 11,008. The definition of "manufacture" and "production" contained in 19 C.F.R. § 191.2(q) was adopted in order to ensure sufficient processing was performed on imported articles for purposes of manufacturing drawback under 19 U.S.C. §§ 1313(a) and (b). The preamble for the Final Rule included the following comments and legacy Customs responses to those comments. A relevant comment and response was:
Comment: A statement was desired in the "BACKGROUND" section of the final rule that certain existing rulings concerning what constituted a manufacture or production for drawback purposes would remain in effect.
Customs Response: No change as to what constitutes a manufacture or production is intended by these regulations. . . .
Id. at 10,971. Consequently, although promulgated in conjunction with the regulations implementing the drawback provisions of the NAFTA Implementation Act, the regulation adopted to define the terms "manufacture" and "production" was based on Customs' long-standing definition of manufacture or production for purposes of determining whether imported articles underwent sufficient processing in the United States to qualify for drawback pursuant to the manufacturing drawback law.
One of the definitions of a manufacture or production is an operation that renders a commodity or articles fit for a use for which it was otherwise unfit. Such an operation falls within the "letter and spirit" of "manufacture." United States v. International Paint Co., Inc., 35 CCPA 87, 94 (1948). In International Paint, imported paint contained impurities which rendered it unfit for use as an anti-fouling paint. Id. at 90. The impurities were removed and made the paint suitable for use as an anti-fouling paint. Id. The Court concluded that the character of the paint was changed with the removal of the impurities conferring upon it "a use, as a merchantable and usable anti-fouling paint, which it did not possess upon arrival in this country . . . [p]roof that there was a change in character was found in the fact that the exported product was fitted for a distinctive use for which the imported product was wholly unfit -- the painting of the steel bottoms of ships." Id. at 94. The sterilization of the medical devices to remove microbes is directly analogous to the removal of the impurities in International Paint. The unsterilized medical devices at issue are "wholly unfit" for their respective uses because they cannot be used for the purpose intended unless sterilized. The imported medical devices are contaminated by microbes and the removal of those microbes renders them fit for use as medical devices. Consequently, under the definition of manufacture set out in International Paint, sterilization, like the removal of the impurities from the paint, is a manufacture.
Legacy Customs discussed the "fit for a particular use" standard established by the Court of Customs and Patent Appeals in United States v. International Paint Co., Inc., 35 CCPA at 96, in Customs Service Decision (C.S.D). 82-67). The issue in that case was whether transforming plain, untrimmed, and unsanitized towels into Oshiburi refresher towels, according to specifications set by the producers and its customers, was a manufacture. Legacy Customs found in that case that processes less than sterilization was a manufacture because although the towels were not sterilized, the operations transformed them into articles fit for a particular use for which, prior to the operations, they were unsuited. C.S.D. 82-67 states:
In determining what constitutes a manufacture, we have held in our administrative rulings that if an operation involves special treatment of merchandise to obtain certain properties required for a specific use by the entity performing the operation or his customers and the operation involves significant capital and labor expenditure, then that operation is a manufacture or production.
In application of this principle we held in C.S.D. 80-183 that the sterilization and filling with antibiotics of unsterilized imported glass vials, thereby transforming them into injectables ready for use with hypodermic syringes, constitutes a manufacture or production. Likewise, in C.S.D. 79-339 we held that the sorting, cleaning, in some cases splitting, and bagging of peas, rendering them fit for consumption, was a manufacture or production. Finally, following C.S.D. 80-183, supra, in an unpublished opinion of September 23, 1981 (213530) we held that the sterilization and wrapping in paper pouches of material to produce disposable laparotomy sponges for hospital use, constitutes a manufacture or production.
The process of sterilizing the disposable medical devices is a special treatment to obtain a certain property required for the only use to which the medical devices are put. The devices cannot be put to the uses for which they are intended, insertion into a bodily cavity, surgical suturing and injecting fluids into the body before sterilization. Sterilization renders the medical devices fit for a particular use for which they were not suitable prior to sterilization. Accordingly, the sterilization processes to which the disposable medical devices, needles, syringes, catheters and cannulas are subject constitute a manufacture or production for purposes of the manufacturing drawback law at 19 U.S.C. §§ 1313(a), (b) because the sterilization process make the medical devices "fit for a particular use" per 19 C.F.R. § 191.2(q)(1). Therefore, the medical devices may not be removed temporarily from the FTZ for sterilization because it is a manufacture. Since this conclusion prohibits temporary removal we need not address the other criteria for temporary removal found in the FTZM.
HOLDING:
Sterilization of disposable medical devices is a manufacture. Consequently, disposable medical devices may not be removed temporarily from an FTZ for sterilization.
Sincerely,
Carrie L. Owens, Chief
Entry Process & Duty Refunds Branch