DRA-2-02
OT:RR:CTF:ER
H263493 KF
U.S. Customs and Border Protection
Port of New York/New Jersey
1100 Raymond Blvd
Suite 402
Newark, NJ 07102
Attn: Jennifer Tagliaferro, Protest & Control
Re: Application for further review of protest No. 4601-14-101587; Carlo Pazolini (USA) LLC; customer returned retail merchandise; used for intended purpose; 19 U.S.C. § 1313(j)(1).
Dear Port Director:
This is in response to the application for further review (“AFR”) of protest number 4601-14-101587 (“protest”), received by our office on April 6, 2015. We have considered the points raised by your office and the protestant, Carlo Pazolini (USA) LLC (“Pazolini”). Our response follows.
FACTS:
Pazolini is an importer and domestic retailer of footwear and handbags. Pazolini accepts customer returned merchandise (“CRM”) with “no questions asked.”
From May of 2013 through January of 2014, Pazolini submitted claims for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1). Pazolini alleges that the underlying entries are comprised exclusively of unsold merchandise or CRM that Pazolini determined to be unused by an employee’s visual inspection.
In December of 2013, your office informed Pazolini that its claims were defective because Pazolini failed to submit sufficient evidence to substantiate that CRM within the underlying entries was in fact unused prior to being returned by a customer. Your office advised Pazolini that it could instead claim drawback under 19 U.S.C. § 1313(c)(1)(C)(ii), which confers drawback eligibility on retail merchandise returned for any reason, regardless of whether it was used prior to being returned by a customer.
In January of 2014, your office held a conference call with Pazolini to discuss the conflict between Pazolini’s “no questions asked” returns policy and the statutory requirements of 19 U.S.C. § 1313(j)(1). Pazolini did not withdraw its drawback claims as recommended by your office.
In May of 2014, your office denied Pazolini’s drawback claims for the subject entries on the basis that CRM within the underlying entries may have been used regardless of whether it appeared unused, and, that Pazolini’s inventory and recordkeeping procedures could not distinguish the unsold merchandise within the entries from the CRM.
In December of 2014, your office met with Pazolini to discuss the present protest, filed by Pazolini in October of 2014. Your office explained that it intended to deny the protest due to the previously discussed conflict between Pazolini’s “no questions asked” returns policy and the statutory requirements of 19 U.S.C. § 1313(j)(1). Your office further reiterated that Pazolini’s inventory and recordkeeping procedures could not directly identify merchandise that was unsold at retail from CRM, rendering the procedures unsuitable for claiming drawback under 19 U.S.C. § 1313(j)(1). Pazolini conceded to the points raised by your office, but explained that it would pursue the protest because it could not satisfy the filing deadline to claim drawback pursuant to 19 U.S.C. § 1313(c)(1)(C)(ii).
Pazolini here alleges that by denying the subject drawback claims, United States Customs and Border Protection (“CBP”) issued a decision inconsistent with prior rulings regarding similar merchandise. To counter the points raised by your office, Pazolini submitted two documents describing its inventory procedures for customer returns, titled: General Returns Process Description (“GRPD”) and Carlo Pazolini Customer Returns Procedure (“CPCRP”).
The GRPD states that Pazolini tracks returned inventory based on box number, stock keeping unit (“SKU”), size, and color. The noted purpose of the GRPD is to track returned merchandise in the event that it is resold, and to physically segregate all returned merchandise from unsold merchandise within the inventory of a retail store. The GRPD explicitly states that it was instituted because Pazolini “does not have a system that tracks returned merchandise…[and] cannot differentiate unsold merchandise against returned merchandise.” The document does not indicate when the procedure was implemented.
The CPCRP describes the process by which Pazolini employees visually inspect CRM to determine whether it will be resold at retail. If an employee determines by visual inspection that the CRM shows “no evidence of wear or blemish,” the merchandise is labeled “brand new” or “saleable.” Pazolini utilizes the labels “brand new” and “saleable” interchangeably. If an employee determines the CRM shows evidence of a defect which pre-existed its sale to the customer, the merchandise is labeled “repairable.” “Saleable” and “repairable” CRM is ultimately reinstated into Pazolini’s inventory for resale at a retail store in the United States or abroad. Pazolini asserts that “saleable” merchandise is unused for purposes of claiming drawback pursuant to 19 U.S.C. § 1313(j)(1).
ISSUE:
Whether Pazolini’s customer returned retail merchandise is eligible for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1).
LAW AND ANALYSIS:
As an initial matter, we find that this protest meets the criteria for further review. We find that, pursuant to 19 U.S.C. § 1514(c)(3)(B), this protest was timely filed on October 6, 2014, within 180 days of the decision by your office, on May 2, 2014, to deny Pazolini’s drawback claims. Pursuant to 19 U.S.C. § 1514, a protestable issue was raised by challenging a decision of CBP. Pursuant to 19 C.F.R. § 174.24(a), this protest qualifies for further review because it alleges that CBP’s decision was inconsistent with prior rulings regarding similar merchandise.
Drawback as claimed herein may be granted on imported duty-paid merchandise that is exported, or destroyed under CBP supervision, within three years from the date of importation, so long as the merchandise remains unused prior to its exportation or destruction. See 19 U.S.C. § 1313(j)(1); 19 C.F.R. § 191.31(a)-(b). According to 19 U.S.C. § 1313(j)(3), merchandise remains unused if subjected to the performance of any operation or combination of operations not amounting to manufacture or production, such as “testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking.” In circumstances where drawback is claimed on finished articles, the term “used” has long been defined by Customs as any operation employing an article for its intended purpose. See C.S.D. 81-222 (May 27, 1981) (defining “use” by its ordinary meaning: “(to) employ [articles in the manner] for which they were manufactured and intended”) (quoting Swalley v. Addressograph Multigraph Corporation, 158 F. 2d 51, 54 (7th Cir. 1946), cert. denied 330 U.S. 945 (1947)); C.S.D. 84-65 (January 6, 1984) (“[i]f a piece of equipment or a tool, etc., is put to its intended use and is found not to perform satisfactorily for any reason, that equipment or tool has nonetheless been used”). Customs thus deems a finished article unused if it is subjected to an operation that does not result in the article being employed for the use for which it was designed and manufactured.
Pazolini attempts to establish that the subject merchandise is unused on the basis of the following arguments: that any CRM within the protested entries is unused because the merchandise displays “no evidence of use;” that the CRM was merely tested by customers prior to being returned, such that it was subjected to a non-use operation permitted by 19 U.S.C. § 1313(j)(3); and that even if the CRM was used prior to being returned, Pazolini has sufficient inventory and recordkeeping procedures in place to distinguish CRM from unsold merchandise within the underlying entries. Pazolini cites to HQ 226685 (January 31, 1997), HQ 225552 (November 1, 1994), and HQ 224227 (May 2, 1996), as rulings supporting its arguments with which CBP’s decision to deny its drawback claims is said to be inconsistent.
We note that Pazolini acknowledges that an applicant for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1) “has the burden of establishing…that none of the exported merchandise was ‘used.’” Establishing the fact of non-use is a statutory requirement for drawback eligibility pursuant to 19 U.S.C. § 1313(j)(1), and a regulatory requirement pursuant to 19 C.F.R. § 191.61(a), which requires port directors to verify drawback claims and ensure compliance with all applicable drawback laws. Indeed, the rulings cited by Pazolini affirm this requirement. See HQ 226685 (“it is incumbent on the protestant to present evidence as to [whether and] how the merchandise was used”); see e.g. HQ 230089 (May 26, 2004) (“the [protestant] here must establish that the exported article was the imported article and that that article was unused”); HQ 227944 (October 22, 2001) (“the right to recover drawback ripens only when all provisions of the statute and applicable regulations prescribed by [CBP] under its authority have been met”) (citing Guess? Incorporated v. United States, 944 F.2d 855, 857 (Fed. Cir. 2001)). To administer drawback benefits under 19 U.S.C. § 1313, Congress specifically vested CBP with the authority “to assure proper entitlement to statutory benefits.” See Graham Engineering Corp. v. United States, 510 F.3d 1385, 1389 (Fed. Cir. 2007) (finding that CBP has the authority to specify conditions for satisfying substantive drawback requirements).
In HQ 226685, the ruling cited by Pazolini as support for its argument that merchandise which appears unused should be deemed unused, Customs determined that equipment returned pursuant to a “no questions asked” policy was ineligible for drawback pursuant to 19 U.S.C. § 1313(j)(1) because the retailer lacked information regarding the equipments’ use to prove that it was unused. Customs noted that the equipment exhibited signs of use because it bore scratches and had broken parts. Pazolini contends that in contrast to the equipment in HQ 226685, any CRM within the protested entries exhibits no sign of use and is therefore unused.
The subject merchandise is comprised of footwear manufactured for the purpose of being worn, and handbags manufactured for the purpose of holding items or being carried as an accessory, by customers after being purchased. See Deckers Outdoor Corp. v. United States, 844 F. Supp. 2d 1324, 1328 (Ct. Int'l Trade 2012) (including a definition of footwear as “‘wearing apparel (as shoes or boots) for the feet’”); HQ H251771 (December 16, 2014) (finding that haute couture garments were “intended to be worn by individuals,” and became used when worn by individuals); HQ H004184 (July 2, 2007) (finding that a handbag may serve as an “[a]ccessory… [designed to hold] such items as money, credit cards, and cosmetics”). Accordingly, we find that at the moment that footwear is worn, and a handbag is used to hold items or carried, by a customer after retail purchase, it is used for the purpose for which it was manufactured and intended.
Due to Pazolini’s “no questions asked” policy for customer returns, it lacks information, and does not even inquire, as to whether the merchandise being returned was used. Akin to the retailer in HQ 226685, Pazoloni thus cannot provide CBP with the information necessary to verify its drawback claim. Significantly, even if Pazolini inquired as to whether the CRM was used, Pazolini is unable to verify its customers’ representations because it completely lacks control over the merchandise once it is removed by a customer from a retail store. See C.S.D. 84-100 (February 28, 1984) (finding that cutlery sold at retail to end users, and returned because the blades broke, could not be proven unused because even if the cutlery was defective it may have been used for its intended purpose prior to the discovery of the defect; Customs noted that to determine whether the CRM was used “would be factual hair-splitting, at best, and impossible at worst”); HQ 224227.
Pazolini’s contention that the appearance of its CRM is sufficient to prove non-use glosses over the key finding in HQ 226685 that the appearance of use is not dispositive in establishing use. Although Customs noted that the equipment in HQ 226685 appeared scratched or broken, thereby evidencing use, Customs held that it could not determine whether the equipment had been used or not. The absence of signs of use is similarly insufficient evidence to prove non-use. Carefully used and returned footwear or handbags may appear unused for purposes of resale by a retailer, but are nevertheless ineligible for unused merchandise drawback. We thus find that your office properly denied Pazolini’s drawback claims because it is incapable of conclusively establishing whether any customer returned footwear or handbags within the underlying entries were used.
Further, Pazolini’s argument that any CRM within the underlying entries was merely tested, instead of being used, is likewise contrary to prior Customs decisions. As stated previously, Customs holds that merchandise employed for its intended purpose has been used even if it was deemed unsatisfactory. See C.S.D. 84-65. Here Pazolini alleges, akin to the protestant in HQ 226685, “that it ‘cannot specifically identify the exact use to which each returned article was put,’ but argue[s] that ‘[b]y virtue of their return, it is logical to assume that all of the returned units did not meet the expectations of the ultimate purchaser and further, that such units were not used by such purchasers for their intended purpose… [but] no evidence was presented to support these assertions.” Just as in HQ 226685, we find that if the merchandise had been “employed for the purpose for which [it] was manufactured,” then it was employed for the sake of being used, not for the sake of being tested. Id. (citing HQ 222633 (December 10, 1990) (finding that when the ultimate consumer took merchandise home to be used for its intended purpose, it becomes used even if it was subsequently deemed defective). Therefore, purchased footwear and handbags found unsuitable by a customer after being worn, or carried or used to hold items, has similarly been employed for the purpose for which it was manufactured, and has not been employed for the sake of testing. A shoe found to not fit may or may not have been worn for prior to being returned, or indeed may not have been capable of being worn such that it remains unused, but there is no possible way to determine whether it was used by a customer once the shoe is completely out of the retailer’s control. Id. (“there are no records in the instant case showing the reasons for the returns … i.e., did the consumer use the product but simply did not like it?”). Consequently, even if the merchandise was returned because it was deemed unsuitable, it may have been used and is therefore ineligible for drawback under 19 U.S.C. § 1313(j)(1).
In HQ 225552, another ruling cited by Pazolini in support of its argument that the subject merchandise was tested instead of used, Customs determined that machines designed to manufacture a high volume of furniture cushions were eligible for drawback under 19 U.S.C. § 1313(j)(1) despite being run for ten hours “to [en]sure that they functioned.” Customs noted that the machines were never used to produce cushions, and were never even attempted to be used for such production due to lack of sales. Customs found that because the machines “remained idle from the time of installation,” they had never been used for their intended purpose of manufacturing cushions, and had only been subjected to the non-use operation of testing. Id. (quoting 19 U.S.C. § 1313(j); citing C.S.D. 81-222; C.S.D. 82-135 (June 4, 1982)).
Pazolini equates CRM within the protested entries with the machines in HQ 225552. Implied in Pazolini’s comparison is an assumption that due to the temporary nature of the customers’ use of the merchandise, the merchandise was used for the sake of testing. The temporary use of an article is an indication of the extent to which it was used, but is not dispositive in determining whether the article was used purpose for which it was manufactured and intended. We find that the brevity of use does not negate the fact that merchandise is used as intended. As Pazolini has not presented any information regarding the use of its CRM, we find that the merchandise may have been used and is ineligible for drawback under 19 U.S.C. § 1313(j)(1).
Finally, Pazolini’s argument that its inventory and recordkeeping procedures are sufficient to distinguish CRM within the protested entries from unsold merchandise is contravened by its admission to the contrary during its December of 2014 meeting with your office. Pazolini’s argument is crafted to address Customs decisions denying unused merchandise drawback on claims arising from inventories of indistinguishably commingled used and unused merchandise. See HQ 226685; 224227; HQ 228219 (November 27, 2001) (“the records must prove that the merchandise imported was not used nor subject to any subsequent manufacture or production”). As explained in the Drawback Manual promulgated by CBP, inventory and recordkeeping procedures must “provide an audit trail from importation to inventory and from inventory to exportation or destruction, and to support that the exported or destroyed merchandise was, in fact, imported, and was not used in the U.S.” See CBP.gov, Drawback Manual, December 2004.
In HQ 224227, the ruling cited by Pazolini in support of the sufficiency of its procedures, Customs determined that when used and unused CRM was commingled within an inventory, and could not be distinguished by recordkeeping procedures, it was ineligible for drawback pursuant to 19 U.S.C. § 1313(j)(1). Customs found that “much of the merchandise ha[d] been used” and could not be distinguished from unused merchandise.
Pazolini seeks to distinguish its inventory and recordkeeping procedures from those addressed in HQ 224227 on the basis of its GRPD and CPCRP. Pazolini’s GRPD explicitly states that it was instituted to physically segregate CRM from unsold merchandise within its inventory because Pazolini “d[id] not have a system that tracks returned merchandise…[and could not] differentiate unsold merchandise against returned merchandise.” Akin to the retailer in HQ 224227, Pazolini therefore did not maintain records showing the reason for returns and comingled its returned merchandise, “making no distinction” between used and unused returns. As Pazolini submitted no evidence establishing when the GRPD was implemented, the GRPD fails to support Pazolini’s claim that its inventory procedures could distinguish potentially used CRM from unsold merchandise within the underlying entries. The CPCRP also fails to substantiate Pazolini’s unused merchandise drawback claim. The CPCRP solely describes the process by which Pazolini employees visually inspect customer returns to determine whether it lacks signs of wear and may be resold under the label “brand new” or “saleable.” Consequently, CPCRP is irrelevant to CBP’s determination of whether Pazolini has developed an inventory and recordkeeping procedure capable of distinguishing CRM from unsold merchandise within its retail stores. We thus find that Pazolini has not submitted sufficient information to distinguish potentially used CRM from unsold merchandise within the underlying entries, rendering the entries ineligible for drawback under 19 U.S.C. § 1313(j)(1).
Upon review of the Customs rulings regarding similar merchandise, we find that your office’s decision to deny Pazolini’s drawback claims is correct. The protest should be denied because Pazolini is unable to establish that the merchandise within the protested entries does not contain used CRM.
We note that Pazolini raised an additional argument that Congress did not intend to exclude retail merchandise from drawback eligibility under 19 U.S.C. § 1313(j)(1) by revising 19 U.S.C. § 1313(c) to specifically include retail merchandise returned for any reason as a subset of eligible merchandise. We do not address this argument because all merchandise capable of satisfying the statutory requirements of 19 U.S.C. § 1313(j)(1) is eligible for drawback regardless of whether it is sold at retail. See Miscellaneous Tariff and Customs Matters, H.R. 5047, Senate Rep. 96-999, 96th Congress, 2nd Session (September 26, 1980) (explaining that the function of drawback “is the refund of 99 percent of the duties paid on imported goods,” without any qualification of the type or kind of goods, if the goods were “…never used in the United States”). The relevant distinction between 19 U.S.C. § 1313(j)(1) and § 1313(c)(1)(C)(ii) is the imposition or absence of the requirement of non-use. “Without exception, the Customs Service has not granted…drawback [under 19 U.S.C. § 1313(j)(1)] where the imported article was used for its intended purpose and then exported.” See Trade and Tariff Act of 1984, P.L. 98-573, 98-Stat., October 30, 1984. In conformity with decades of Customs rulings, we make no exception to the statutory requirements of 19 U.S.C. § 1313(j)(1) for Pazolini’s footwear and handbags that may have been used for their intended purpose.
HOLDING:
Pazolini’s drawback claims were properly denied and protest number 4601-14-101587 should be DENIED in full.
In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. 60 days from the date of the decision, the Office Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP 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 & Trade Facilitation Division