OT:RR:CTF:VS H285614 RMC
Port Director
U.S. Customs & Border Protection
726 Exchange Street Suite 400
Buffalo, NY
Re: Application for Further Review of Protest No. 0712-17-100261; Subheading 9802.00.50, Harmonized Tariff Schedule of the United States
Dear Port Director:
This is in response to the Application for Further Review (“AFR”) of Protest No. 0712-17-100261, timely filed by counsel on behalf of Appalachian Flooring Ltd. (“Appalachian”). The AFR concerns the eligibility of “finished” engineered wood flooring for a duty exemption under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (“HTSUS”), when it is returned to the United States after having been sanded, stained, and surface coated in Canada.
FACTS:
Appalachian is a Cowansville, Quebec-based manufacturer of wood flooring products. Appalachian sells both solid wood flooring, which consists of solid planks of hardwood, and engineered flooring, which consists of a core of hardwood or plywood with a layer of hardwood veneer as the top surface. Appalachian produces two types of engineered wood flooring products: “unfinished” and “finished.” The manufacturing process for both types of engineered wood flooring begins at Appalachian’s facility in Vermont, where engineered wood flooring is produced from imported plywood and U.S- and Canadian-origin hardwoods. The product that results from this manufacturing process is known as “unfinished” engineered wood flooring because it is not surface-coated with a protective finish at the factory. Instead, the customer will have the protective coating applied on-site after the installation of the flooring. Appalachian states that this “unfinished” product represents about 25% of its sales of engineered wood flooring.
To produce the merchandise at issue here, the “unfinished” product must be sanded, stained, and surface coated to produce “finished” engineered wood flooring. Due to manufacturing constraints at the Vermont facility, Appalachian exports the “unfinished” engineered wood flooring to its Quebec facility to conduct these operations. Specifically, Appalachian describes the processes that occur in Quebec as laying down strips of ½” engineered flooring on a four-foot-wide belt, sanding these strips to remove 0.05” of the face ply, and applying a base coat of stain and, depending on the customer’s specifications, five coats of clear polyurethane or oil. In addition, each application of polyurethane or oil is followed by an ultraviolet curing process. At this point, the product is referred to as “finished” wood engineered flooring. With respect to the entries at issue in this case, the product was then imported to the United States in January 2016 with a claim for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”).
The controversy over whether the imported finished engineered wood flooring products are eligible for duty-free treatment began in July of 2016. At that time, Appalachian filed a prior disclosure with the port in which it admitted that it had misclassified the “finished” engineered wood flooring in its entries between January 11, 2012, and April 7, 2016. Appalachian concedes that the proper tariff classification of the merchandise is 4412.32.3125, HTSUS, and not 4818.90.4605, as claimed at the time of entry. As a result of this misclassification, the product was no longer eligible for preferential tariff treatment under the NAFTA. Accordingly, Appalachian tendered payment for the duties owed on each entry plus interest.
After submitting its prior disclosure and tendering payment, Appalachian contacted the port to express its opinion that although the merchandise was not eligible for preferential tariff treatment under the NAFTA, it was eligible for a duty exemption under subheading 9802.00.50, HTSUS. In response, the port issued an Informed Compliance Notice communicating its disagreement with Appalachian’s position. Appalachian filed a protest, with a request for further review, to contest the port’s position as expressed in the Informed Compliance Notice. However, at the time that the protest was filed, the entries at issue had not yet been liquidated. Accordingly, CBP had not yet made a protestable decision, and the protest was rejected as non-protestable. That rejection was upheld by this office, which also rejected Appalachian’s request under 19 U.S.C. 1515(c) to set aside the denial of further review.
On January 13, 2017, the entries at issue in this protest were rate-advanced and liquidated. The liquidation reflects the proper tariff classification of the merchandise under subheading 4412.32.3125, HTSUS, and the associated 8% ad valorem rate on duty. On protest, Appalachian argues, as it had previously argued in its untimely protest, that the merchandise is eligible for a duty exemption under subheading 9802.00.50, HTSUS. Your port believes that the merchandise is not eligible for a duty exemption under subheading 9802.00.50, HTSUS, because the operations that occur in Canada are a continuation of the manufacturing process and thus exceed the scope of an “alteration” for purposes of subheading 9802.00.50, HTSUS.
ISSUE:
Whether engineered wood flooring that is returned to the United States after being sanded and stained in Canada is eligible for a duty exemption under subheading 9802.00.50, HTSUS.
LAW AND ANALYSIS:
Subheading 9802.00.50, HTSUS, provides a full or partial duty exemption for articles that have been returned to the United States after having been exported to be advanced in value or improved in condition by means of repairs or alterations. Articles returned to the United States after having been repaired or altered in Canada, whether or not pursuant to warranty, may be eligible for duty-free treatment if the documentary requirements of 19 C.F.R. § 181.64 are satisfied. 19 C.F.R. 181.64(a) states, in pertinent part:
For purposes of this section, “repairs or alterations” means restoration, addition, renovation, redyeing, cleaning, resterilizing, or other treatment which does not destroy the essential character of, or create a new and commercially different good from, the good exported from the United States.
The Court of International Trade has long held that classification under subheading 9802.00.50, HTSUS, is precluded where: (1) the exported articles are not complete for their intended use and the foreign processing operation is a necessary step in the preparation or manufacture of finished articles; or (2) the operations performed abroad destroy the identity of the exported articles or create new or commercially different articles through a process of manufacture. See, e.g., Guardian Indus. Corp. v. United States, 3 Ct. Int’l Trade 9 (1982), and Dolliff & Co. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff’d, 66 C.C.P.A. 77, C.A.D. 1225, 599 F.2d 1015 (1979).
In Guardian Industries v. United States, 3 CIT 9 (1982), the Court of International Trade stated that, in construing “the tariff provision for repairs and alterations performed abroad, the focus is upon whether the exported article is ‘incomplete’ or ‘unsuitable for its intended use’ prior to the foreign processing.” At issue in Guardian Industries was whether subjecting U.S.-produced annealed glass to a tempering process in Canada to create glass for sliding glass patio doors qualified as an “alteration” under item 806.20, Tariff Schedules of the United States (the precursor provision to subheading 9802.00.50, HTSUS). The court noted that glass must be tempered (i.e., strengthened) for practical safety use reasons and to conform to U.S. federal regulations before it may be marketed for use in sliding glass patio doors. In concluding that the tempering process was not an “alteration,” the court stated that “the exported articles of raw annealed glass were not ‘completed articles’ since they were entirely unsuitable for their intended use” as sliding glass patio doors and required a manufacturing process to make them complete. The court further concluded that, because the tempering of the annealed glass transformed the glass in name, use, performance characteristics and tariff classification, the operation created a new and different commercial article.
Similarly, in Dolliff & Company, Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F.Supp. 618 (1978), aff’d, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015 (1979), the issue presented was whether certain U.S.-origin Dacron polyester fabrics which were exported to Canada as griege goods for heat setting, chemical scouring, dyeing, and treating with chemicals, were eligible for the partial duty exemption available under item 806.20, TSUS, when returned to the United States. The U.S. Court of Customs and Patent Appeals found that the processing steps performed on the exported greige goods were undertaken to produce finished fabric and could not be considered as alterations. The court stated (66 CCPA at 82) that:
. . . repairs and alterations are made to completed articles and do not include intermediate processing operations, which are performed as a matter of course in the preparation or manufacture of finished articles. In the instant situation, the operations performed in Canada comprise further processing steps which are performed on unfinished goods and which lead to completed articles, i.e., the finished fabrics, and, therefore, the processing cannot be considered alterations.
In Amity Fabrics, Inc. v. United States, 43 Cust. Ct. 64, C.D. 2104 (1959), “pumpkin” colored fabrics were exported to Italy to be redyed black since the pumpkin color had gone out of fashion and black was a consistently good seller. The court held that the identity of the goods was not lost or destroyed by the dyeing process, that no new article was created since there was no change in the character, quality, texture, or use of the merchandise; it was merely changed in color. The court found that such change constituted an alteration for purposes of paragraph 1615(g) of the Tariff Act of 1930.
In Royal Bead Novelty Co. v. United States, 68 Cust. Ct. 154, C.D. 4353, 342 F. Supp. 1394 (1972), uncoated glass beads were exported so that they could be half coated with an Aurora Borealis finish which imparted a rainbow like luster to the half coated beads. The court found that the identity of the beads was not lost or destroyed in the coating process and no new article was created. Moreover, there was no change in the beads’ size, shape, or manner of use in making articles of jewelry (evidence was presented which indicated that both uncoated and half coated beads were used interchangeably). Accordingly, the court concluded that the application of the Aurora Borealis finish constituted an alteration within the meaning of item 806.20, TSUS.
Consistent with these court decisions, CBP has previously held that painting or staining an item may constitute an acceptable alteration for purposes of subheading 9802.00.50, HTSUS. For example, in Headquarters Ruling (“HQ”) 557161, dated June 28, 1993, CBP held that wooden interior shutters that had been exported to Mexico for certain operations, including the application of several coats of paint or stain, were eligible for subheading 9802.00.50, HTSUS, treatment when returned to the United States. The manufacturer also sold shutters in an “unfinished” condition; that is, without any paint or stain applied. CBP found that the shutters in their condition as exported from the U.S. (unfinished) were complete for their intended use to control light, ventilation, and to provide privacy, and that the painting or staining was not a necessary step in the production of the shutters. Therefore, CBP determined that the returned shutters were eligible for the partial duty exemption under subheading 9802.00.50, HTSUS. In making that determination, CBP also modified a past ruling, HQ 555093, dated April 26, 1989, to the extent that it disallowed subheading 9802.00.50, HTSUS, treatment for wooden furniture kits also sold in an unfinished condition and sent abroad for staining and lacquering.
Although CBP issued a notice in the September 6, 1995, Customs Bulletin (Volume 29, Number 36) proposing to modify HQ 557161 to reflect that the painting or staining abroad of unfinished interior shutters, and the staining and lacquering abroad of furniture kits under HRL 555093, would not be considered alterations under subheading 9802.00.50, HTSUS, this proposed action was withdrawn in a notice published on December 17, 1997, in the Customs Bulletin, Volume 31, Number 51. Thus, it remains CBP’s position that the painting or staining of the shutters in HRL 557161 and the staining and lacquering of the wooden furniture kits in HRL 555093 constitute permissible alterations under subheading 9802.00.50, HTSUS.
In HQ H004448, dated May 21, 2007, CBP held that plastic handrail components that were returned to the United States from Malaysia, where a colored film was applied to their surfaces, were eligible for a partial duty exemption under subheading 9802.00.50, HTSUS, when returned to the United States. We noted that the plastic handrail components were suitable for use as handrail components when they were exported to Malaysia. The application of the colored film in Malaysia, which gave the components the appearance of being made of wood, merely changed the color of the otherwise finished components and did not destroy their identity as handrail components. Accordingly, we held that the application of the colored film constituted an acceptable alteration within the meaning of subheading 9802.00.50, HTSUS.
With respect to the requirement that the exported articles be complete for their intended use in order to benefit from a duty exemption under subheading 9802.00.50, HTSUS, the product as exported in this case was “unfinished” engineered wood flooring. Similar to the wooden shutters in HQ 557161 and wooden furniture parts in HQ 555093, the engineered wood flooring at issue in this case is also offered for sale in both “unfinished” and “finished” condition. However, as in HQ 557161 and HQ 555093, the fact that the products are referred to as “finished” and “unfinished” does not necessarily mean that the exported articles are incomplete for their intended use when exported.
As noted above, the “unfinished” engineered wood flooring is not surface-coated with a protective finished at the factory in Vermont but is ready for installation as flooring in its “unfinished” condition. Appalachian notes that sales of “unfinished” product represent about 25% of its total sales of engineered wood flooring. Thus, even if the flooring is never exported to Canada to produce “finished” engineered wood flooring by sanding, staining, and surface coating, it is nonetheless complete for its intended use as engineered wood flooring and actually marketed and sold for those purposes. In this respect, we find that the product at issue in this case is analogous to the “finished” wooden items in HQ 557161 and HQ 555093, which were also available for sale as “unfinished” goods. Accordingly, as in those cases, the finishing operations that occur abroad are not a necessary step in the production of the final product.
As for the requirement that the operations performed abroad not destroy the identity of the exported articles or create new or commercially different articles of commerce through a process of manufacture, CBP stated in HQ 557161 that, with respect to painting or staining wooden shutters:
As in Royal Bead, the processing abroad results only in a change in appearance of the shutters, but not in function, character or identity. What is sent abroad are wood interior window shutters, marketable in the condition as exported, and what is returned are the same articles, available to the same class of consumers, albeit enhanced in appearance, and priced accordingly. It is noted that, both in Amity and in Royal Bead, the court relied upon the fact, as is the case here, that the exported article was also sold in its condition as exported.
The processing that occurs abroad in this case also does not change the function, character, or identity of the exported unfinished engineered wood flooring. Instead, like the wooden items in HQ 557161 and HQ 555093, the application of paint or stain merely changes the appearance of the engineered wood flooring. Moreover, as noted above and was relied upon by the court in Amity and Royal Bead, the exported article is sold in its condition as exported (i.e., as “unfinished” engineered wood flooring). In short, what is sent abroad is engineered wood flooring, marketable in the condition as exported, and what is returned is engineered wood flooring, albeit enhanced in appearance and priced accordingly. Under these circumstances, we hold that the “finished” engineered wood flooring is eligible for a duty exemption under subheading 9802.00.50, HTSUS, provided that the documentary requirements in 19 C.F.R. § 181.64 are met.
HOLDING:
The protest should be granted. If the documentary requirements in 19 C.F.R. § 181.64 are met, the “finished” engineered wood flooring that was returned to the United States after being sanded and stained in Canada is eligible for a duty exemption under subheading 9802.00.50, HTSUS.
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. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP website at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division