• HQ H290868
• Sep 11, 2019

• Type : • HTSUS :
•  Related:   224227; 222059; 223076; 222638; 225668; 226685; 222633; H289069; W230187; H263493; H251771   

DRA 2-02
OT:RR:CTF:ER
H290868 KF

U.S. Customs and Border Protection
Port of New York/New Jersey
1100 Raymond Blvd
Suite 402
Newark, NJ 07102

Re: Giorgio Armani Corporation; customer returned retail merchandise; 19 U.S.C. § 1313(j)(1); 19 U.S.C. § 1313(c).

Dear Port Director:

This is in response to the request from Giorgio Armani Corporation (“Armani”), for internal advice, forwarded by your office pursuant to 19 C.F.R. § 177.11(a). We received the request on October 2, 2017. Armani inquires: (1) whether returned retail merchandise must be defective to qualify for drawback pursuant to 19 U.S.C. § 1313(c)(1)(C)(ii), (2) whether the timeframe to claim drawback pursuant to 19 U.S.C. § 1313(c) differs if premised on direct identification instead of designation, (3) whether customer returned retail merchandise (“CRRM”) is eligible for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1), and (4) whether its inventory system constitutes a First In First Out (“FIFO”) accounting pursuant to 19 C.F.R. § 191.14.

Our response follows.

FACTS:

On January 15, 2016, Armani acquired successorship rights to the drawback program of Presidio International, Inc. (“Presidio”) in the course of the companies’ merger. Pursuant to the terms of their merger in 2015, Presidio’s excess inventory of imported wearing apparel and accessories was combined for exportation and sale abroad. The inventory was comprised of articles that remained unsold, and articles that were sold at retail but returned by a customer. In December of 2015, the inventory was exported for sale within Asia and Europe by a third entity. Exportation occurred in two shipments, with a total stated value of $5,000,000. Within the shipments, unsold articles were commingled with CRRM. Armani subsequently consulted with U.S. Customs and Border Protection (“CBP”) officials at the Port of Newark as to the proper statutory provision under which to claim drawback on the exported inventory. The Port of Newark advised Armani that it may claim drawback pursuant to 19 U.S.C. § 1313(c)(1)(C)(ii), applicable to merchandise sold at retail that is returned for any reason.

Armani sought internal advice from CBP Headquarters to verify the appropriate statutory provision for its drawback claim. Armani contests the Port of Newark’s determination as to applicability of 19 U.S.C. § 1313(c)(1)(C)(ii). Armani contends that 19 U.S.C. § 1313(c) is only applicable to defective merchandise, rendering the provision inapplicable to CRRM within its exported inventory which retail store managers decided was non-defective and visually appeared “as new.”

Armani concludes that 19 U.S.C. § 1313(j)(1) is most appropriate for its drawback claim, because the provision applies to imported merchandise that remains unused at the time of exportation. Armani argues that that any CRRM within its exported inventory is unused because it could be “resold as new” as it lacks significant deterioration. To ensure that CRRM can be “resold as new,” Armani’s returns policy limits returns to merchandise “with tags attached and in salable condition.” The returns policy further states that “worn, damaged, [or] altered merchandise” may not be returned. We note that Armani indicated its store managers may nevertheless decide to accept returns without tags, or which may have been worn, if the returns visually appear suitable for resale. If the CRRM is deemed damaged or defective, it is pulled from a store. CRRM deemed resalable is reintroduced into Armani’s inventory. Armani relies on C.S.D. 83-17 (November 30, 1982) for the proposition that an article’s use is determined by its level of deterioration, rendering its CRRM is unused because it appears “as new.” Armani also argues that CRRM tried on for purposes of demonstration or testing by a customer is not ineligible for unused merchandise drawback.

Armani further concludes that its inventory and recordkeeping system is suitable to claiming drawback under 19 U.S.C. § 1313(j)(1). During a call with our office, Armani noted that this issue became moot if we found that its exported inventory is ineligible for drawback pursuant to 19 U.S.C. § 1313(j)(1). Accordingly, we do not address this issue because we find that Armani’s exported inventory is ineligible for unused merchandise drawback.

ISSUES:

Whether returned retail merchandise must be defective to qualify for drawback pursuant to 19 U.S.C. § 1313(c)(1)(C)(ii).  What are the timeframes to claim drawback pursuant to 19 U.S.C. § 1313(c)? Whether any CRRM within Armani’s exported inventory is eligible for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1). LAW AND ANALYSIS:

Whether returned retail merchandise must be defective to qualify for drawback pursuant to 19 U.S.C. § 1313(c)(1)(C)(ii).

The language of 19 U.S.C. § 1313(c)(1)(C) confers drawback eligibility, assuming all applicable statutory and regulatory requirements are satisfied, on merchandise which is:

not conforming to sample or specification, shipped without the consent of the consignee, or determined to be defective as of the time of importation, or ultimately sold at retail by the importer, or the person who received the merchandise from the importer, and for any reason returned to and accepted by the importer, or the person who received the merchandise from the importer.

(emphasis added). The language of the statute 19 U.S.C. § 1313(c)(1)(C)(ii) thereby extends drawback eligibility to retail merchandise which is returned for any reason, regardless of whether the merchandise is defective.

Prior to 2004, the drawback provision of 19 U.S.C. § 1313(c)(1)(C) only conferred drawback eligibility on merchandise not conforming to sample/specification or which was defective. The statute was amended in 2004 to include a provision for returned retail merchandise that removed the requirement of proving non-conformity or a defect. Armani relies on a piece of legislative history from the 2004 amendment for its proposition that non-defective CRRM is outside the scope of the provision.

The legislative history of the amendment explains that it:

[P] provides for the recovery of duties on imported merchandise that is subject to ultimate sale at the retail level; [it] therefore clarifies that drawback is allowed on products…that are ultimately sold in the U.S. at retail and are returned to the foreign exporter/supplier for any reason, whether due to a manufacturing or other defect in the merchandise, regardless of whether the defect occurred prior to or after the Importation… [- rendering] claiming drawback in such situations…more in line with commercial realities.

See Miscellaneous Trade and Technical Corrections Act of 2003, S. Rep. 108-28, 240 (Mar. 20, 2003). Accordingly, we find that the purpose of the amendment was to specifically include retail merchandise returned for any reason, and thereby expand the statute’s applicability to the commercial reality that retail merchandise is routinely returned for reasons other than those enumerated in 19 U.S.C. § 1313(c)(1)(C)(i).

Armani contends that this legislative history instead demonstrates the amendment’s purpose was to eliminate the requirement of proving the time that a defect arose, and identifying the nature of the defect. Armani provides no support for its contention.

When conducting statutory interpretation, it is imperative to examine the language of the statute itself. See Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450 (2002). If the language is “plain and unambiguous meaning with regard to the particular” circumstances, and the statutory scheme implicated is coherent and consistent, the inquiry into the statute’s meaning is complete without consideration of its legislative history. Id; United Air Lines, Inc. v. McMann, 434 U.S. 192, 199 (1977) (“legislative history, [] by traditional canons of interpretation is irrelevant to an unambiguous statute”).

In examining the plain language of 19 U.S.C. § 1313(c)(1)(C), drawback eligibility is conferred on two types of merchandise that are separated by the word “or.” The first type is non-conforming or defective merchandise. The second type is retail merchandise returned “for any reason.” The meaning of the term “for any reason” is unambiguous: any basis or cause without limitation, as distinct from a specific reason. See Evans v. Michigan, 568 U.S. 313, 325 (2013) (equating the phrase “for any reason” with a lack of limitations); Merriam-Webster.com (accessed Feb. 21, 2018) (defining “any” as “one or some indiscriminately of whatever kind”).

We therefore find that the language of 19 U.S.C. § 1313(c)(1)(C)(ii) is plain and unambiguous, referring to merchandise returned for any basis or cause without limitation. We further find that the use of the word “or” to separate 19 U.S.C. § 1313(c)(1)(C)(i) and 19 U.S.C. § 1313(c)(1)(C)(ii) creates a coherent and consistent drawback scheme, addressing distinct types of merchandise which may be eligible for drawback. See Timken Co. v. United States, 10 C.I.T. 86, 96 (Feb. 20, 1986) (finding that a statute which sets forth categories of merchandise, and describes dissimilar merchandise, created distinct applicable categories). Consequently, we disagree with Armani’s contention that 19 U.S.C. § 1313(c)(1)(C)(ii) shares 19 U.S.C. § 1313(c)(1)(C)(i)’s limited application to merchandise that is defective. See also HQ H289069 (September 14, 2017) (noting that defective merchandise is a type of rejected merchandise under 19 U.S.C. § 1313(c)(1)(C)). Consequently, we find that 19 U.S.C. § 1313(c)(1)(C)(ii) applies to retail merchandise returned for any reason, without the limiting condition of non-conformity or defect found within 19 U.S.C. § 1313(c)(1)(C)(i).  What are the timeframes to claim drawback pursuant to 19 U.S.C. § 1313(c)?

Armani seeks clarification as to whether 19 U.S.C. § 1313(c) establishes two possible timeframes to file a drawback claim on returned retail merchandise, depending on whether the merchandise was directly identified as exported/destroyed, or designated as exported/destroyed.

Pursuant to 19 U.S.C. § 1313(c)(1), drawback may be claimed on CRRM that is duty-paid, and entered or withdrawn from warehouse for consumption, which is exported or destroyed under CBP supervision within five years after the date of importation or withdrawal. When the merchandise on which drawback is claimed is the precise merchandise that was imported and subsequently exported or destroyed, the claim is generally termed direct identification drawback. Compare with 19 C.F.R. § 191.31. The timeframe to export or destroy merchandise in order to file a direct identification drawback claim for CRRM under 19 U.S.C. § 1313(c)(1) is therefore five years after the date of its importation or withdrawal.

In HQ W230187 (Nov. 27, 2007), CBP ruled that although 19 U.S.C. § 1313(c)(2) uses the term “designation,” conceptually, the standard permits substitution, i.e., the imported goods designated for drawback do not have to be the goods exported or destroyed. Pursuant to 19 U.S.C. § 1313(c)(2), drawback may be claimed on designated entries of merchandise that are imported within a year prior to the exportation or destruction date of returned retail merchandise that was duty paid and entered or withdrawn for consumption. The timeframe to designate an entry in order to file a substitution drawback claim is therefore one year prior to the date that substituted merchandise was exported or destroyed.

The above timeframes for 19 U.S.C. § 1313(c) set deadlines for the exportation or destruction of merchandise, and for the designation of merchandise. To file either a direct identification or substitution drawback claim under this provision, the deadline is “not later than 5 years after the date on which” the subject merchandise is imported. See 19 U.S.C. § 1313(r)(1).

Whether any CRRM within Armani’s exported inventory is eligible for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1).

Imported and duty-paid merchandise is eligible for drawback pursuant to 19 U.S.C. § 1313(j)(1) if the merchandise is exported or destroyed under CBP supervision within five years from the date of importation, and remains unused prior to its exportation or destruction. See 19 U.S.C. § 1313(j)(1); 19 C.F.R. § 191.31(a)-(b). 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.” See 19 U.S.C. § 1313(j)(3).

In circumstances where drawback is claimed on finished articles, CBP has long defined the term “used” 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 (Jan. 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”). Accordingly, a finished article remains unused if subjected to an operation that does not result in the article being employed for the purpose for which it was intended and manufactured.

In HQ H263493 (July 25, 2017), CBP determined that merchandise such as footwear and handbags that were manufactured for the purpose of being worn or carried, and were intended for retail sale, became used when worn by a customer after purchase. The exported inventory on which Armani seeks to claim drawback consists of wearing apparel and accessories that were likewise manufactured for the purpose of being worn, and intended for retail sale. See HQ H251771 (Dec. 16, 2014) (finding that garments were “intended to be worn by individuals”). We therefore find that any of Armani’s wearing apparel and accessories that were purchased and returned after being worn by a customer became used, because they were employed for the exact purpose for which they were intended.

Since such used merchandise is indistinguishably commingled with unsold merchandise within Armani’s exported inventory, the inventory is only eligible for drawback under 19 U.S.C. § 1313(j)(1) if Armani can prove the CRRM remained unused prior to exportation. See HQ 224227 (May 2, 1996). Armani seeks to establish non-use on the basis that it’s CRRM: (i) was not sufficiently deteriorated to be used, (ii) was permissibly tried on by customers for purposes of testing, and (iii) was permissibly used “for demonstration purposes connected with the article’s sale.” We address each argument in turn.

Deterioration is not the standard for determining whether articles are used.

Armani’s contention that CRRM is unused if it lacks significant deterioration refers to a prior iteration of 19 U.S.C. § 1313(j)(1), termed “same condition drawback.” See C.S.D. 83-17; HQ 222059 (Dec. 17, 1990). Whether or not merchandise deteriorated after importation into the United States was critical to the determination of whether it was exported or destroyed “in the same physical condition as when imported and not having been used in the United States.” Id.; see e.g. HQ 223076 (May 27, 1991); HQ 222638 (Jan. 7, 1991). However, 19 U.S.C. § 1313(j)(1) was amended in 1993 by the Customs Modernization Act (“Mod Act”). See Title VI of the Customs Modernization Act, Public Law 103-182, North American Free Trade Implementation Act (107 Stat. 2057) (Dec. 8, 1993). The Mod Act eliminated the same condition requirement, leaving in place the singular requirement of non-use. Id.; see e.g. HQ 225668 (June 12, 1995). An article is therefore unused if it was not employed for the purpose for which it was intended and manufactured prior to its exportation or destruction.

In HQ H263493, Carlo Pazolini (USA) LLC (“Pazolini”), attempted to claim unused merchandise drawback on CRRM that may have been tried on or worn prior to being returned. Akin to Armani, Pazolini visually inspected returned merchandise for salability, and labeled it “brand new” if it lacked signs of wear or blemish as determined by store employees. Pazolini argued that CRRM which visually appeared unused should be deemed unused. CBP found that a lack of apparent wear was of itself insufficient to satisfy a drawback claimant’s evidentiary burden of proving non-use. CBP ruled that because the merchandise was manufactured and intended for the purpose of being worn by a customer after purchase, if so worn the CRRM was used precisely as intended. CBP concluded that because Pazolini lacked information regarding how customers used the merchandise after purchase, and could not verify claims of non-use, its CRRM was ineligible for unused merchandise drawback.

Armani’s circumstances are almost indistinguishable from those of Pazolini. Armani likewise has no means of verifying whether its CRRM has been used once removed from a retail store after purchase, although its Returns Policy excludes worn merchandise. Armani’s employees likewise determine whether to accept a return simply by conducting a visual inspection, labeling merchandise “as new” if it lacks marks of significant deterioration. As in HQ H263493, we find that carefully used and returned merchandise “may appear unused for purposes of resale by a retailer, but [is] nevertheless ineligible for unused merchandise drawback.” We therefore conclude that Armani has failed to satisfy its evidentiary burden of proving that any CRRM within the exported inventory is unused.

Apparel and accessories worn by a customer after purchase are not used for the sake of testing.

Armani argues that its CRRM may have been tried on for the limited purpose of testing for fit or other criteria, a permissible operation under 19 U.S.C. § 1313(j)(3). However, CBP has long held that “merchandise employed for its intended purpose has been used even if it was deemed unsatisfactory.” Id. (citing C.S.D. 84-65). To illustrate, in C.S.D. 84-100 (Feb. 28, 1984), CBP stated that cutlery used by a customer to determine whether it could perform to expectation would be unlikely to render it ineligible for drawback. CBP distinguished such “attempted use for intended purpose” from actual use. CBP revisited this distinction in HQ 226685 (Jan. 31, 1997), when it compared audio equipment operated for the sake of testing to audio equipment used after purchase and installation in a vehicle. CBP cited to HQ 222633 (Dec. 10, 1990) for the proposition that once merchandise was taken home by a customer and found to be defective, it becomes used. As applied to Armani’s apparel and accessories, we find that if a customer tried on merchandise to determine whether it fits or meets other expectations prior to purchase, such merchandise was employed for purposes of testing. However, once merchandise is purchased, if subsequently tried on it becomes worn precisely in the manner for which it was manufactured and intended. See also HQ H263493. Since Armani lacks information as to whether or not its CRRM has been so worn and used, we find that its exported inventory cannot be definitively proven unused. Apparel and accessories worn by a customer after purchase are used for purposes of a sales-related demonstration.

Armani relies on HQ 223076 (May 27, 1991), for the proposition that offering merchandise for sale, and employing it for the purpose of demonstration to a prospective buyer, does not render it used. In HQ 223076, the owner of a yacht sailed it to Hawaii in order to offer it for sale. The yacht remained berthed during the process of securing a buyer, except for “a demonstration sail in Honolulu harbor with prospective buyers aboard” and a sail in the harbor to record a video advertisement. CBP found that the yacht had been employed exclusively for the purpose of advertising, for which the yacht’s owner received no compensation. CBP ruled that an article used for the limited purpose of demonstration as part of an offer for sale is not used for its intended purpose.

Armani’s circumstances are not comparable to the facts of HQ 223076 because the CRRM within the exported inventory may have been worn after purchase. If Armani were instead claiming drawback on apparel displayed to prospective customers at a retail store, it could rely on HQ 223076 for the proposition that such articles were used for the limited purpose of demonstration. However, Armani is instead seeking drawback on CRRM that may have been used for the precise purpose that it was manufactured and intended, rendering it ineligible for unused merchandise drawback.

We stress that “[e]stablishing 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.” HQ H263493 (citing HQ 226685 (“it is incumbent on the protestant to present evidence as to [whether and] how the merchandise was used”). Because Armani cannot prove that the CRRM within its exported inventory is unused, we cannot find that Armani has complied with the requirements to claim unused merchandise drawback. Since Armani cannot distinguish its CRRM from unsold merchandise within the exported inventory, we also cannot find that the exported inventory qualifies for unused merchandise drawback. HOLDING:

Based on the above, we find that: (1) 19 U.S.C. § 1313(c)(1)(C)(ii) applies to retail merchandise returned for any reason, regardless of whether the merchandise is defective; (2) 19 U.S.C. § 1313(c) establishes different timeframes for a direct identification drawback claim, and for a substitution drawback claim; and (3) the CRRM within Armani’s exported inventory is ineligible for drawback pursuant to 19 U.S.C. § 1313(j)(1).

You are to mail this decision to the Internal Advice requester no later than 60 days from the date of the decision. At that time, the Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.

Sincerely,

Myles Harmon, DirectorCommercial & Trade Facilitation Division