OT:RR:CTF:VS H305371 JMV
Lisa Murrin
Expeditors Tradewin, LLC
3 Technology Drive
Peabody, MA 01960
RE: Modification of NY N303338, dated March 20, 2019; Section 301 Measures
Dear Ms. Murrin:
This is in reference to New York Ruling Letter ("NY") N303338, issued to Expeditors Tradewin, LLC on March 20, 2019. The request asked for a determination of the country of origin and applicability of Section 301 trade remedies of a computer server cabinet. In NY N303338, U.S. Customs and Border Protection ("CBP") found that the country of origin of the computer server cabinet is Mexico and that the cabinet is not subject to Section 301 trade remedies as provided for under 9903.88.03, Harmonized Tariff Schedule of the United States ("HTSUS").
Upon additional review, we have found NY N303338 to be incorrect with respect to the application of trade remedies under Section 301 as the decision erroneously used the NAFTA Marking Rules in 19 CFR Part 102, and the North American Free Trade Agreement preferential tariff treatment rules of origin in General Note 12, HTSUS, in its analysis. For the reasons set forth below, with respect to the applicability of Section 301 duties to subheading 9403.10.00, HTSUS, we hereby modify NY N303338. The tariff classification of the computer server cabinet under subheading 9403.10.00, HTSUS, as determined in NY N303338, is unaffected.
Pursuant to section 625(c)(1), Tariff Act of 1930 (19 U.S.C. 1625(c)(1)), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. No. 103-182, 107 Stat. 2057, 2186 (1993), notice of the proposed action was published on March 4, 2020, in Volume 54, Number 8, of the Customs Bulletin. No comments were received in response to this notice.
FACTS:
NY N303338 concerned the Foxconn "Computer Server Cabinet," which is a floor-standing moveable steel storage cabinet on four swivel castors designed to secure a computer server and hardware. The cabinet measures approximately 44" in length, 24" in width, and 80" in height. NY N303338 found that the applicable subheading for the cabinet is 9403.10.00, HTSUS, which provides for "Other furniture and parts thereof: Metal furniture of a kind used in offices: Other."
NY N303338 also considered the country of origin of the cabinet under two manufacturing scenarios:
Scenario One:
The assembly of the server cabinet includes approximately 85-90 parts. In Mexico, the six posts, base and top subassembly of Chinese origin are welded together to form the main frame. The welds are then polished, and the frame is cleaned, painted and inspected. The side panels of Mexican origin, the castors, 0.5U blank, patch panel, Mylar, power shelf support plate, clips, busbar, and brackets are then assembled to the frame. This process, including welding, painting and assembly, takes 90 minutes to complete. The welding and painting processes require a degree of skill, and are performed by skilled technicians. The finished server cabinet is then packaged. You provided a Bill of Materials for scenario that shows 33% of the value of the materials is of Mexican origin one. When labor is included, the parts and labor in Mexico make up 60% of the finished cabinet.
Under this first scenario, the parts that are of Mexican origin are the side panels, screws, nuts, washers, and a leveler foot.
Scenario Two:
The assembly of the server cabinet includes approximately 85-90 parts. The assembly process for scenario two begins with the production of the six metal posts used to construct the main frame. The manufacturing process for the front and rear posts includes blanking/punching, riveting nut, spot welding and bending. The two middle posts are formed by blanking/punching and bending. The six posts, base and top subassembly are then welded together to form the main frame. The welds are then polished, and the frame is cleaned, painted and inspected. The side panels, castors, 0.5U blank, patch panel, Mylar, power shelf support plate, clips, busbar, and brackets are then installed to finish the server cabinet. The assembly process of the server cabinet (including producing six posts, welding, painting, and assembly) takes 140 minutes to complete. Fifty-three percent of the value of the materials is of Mexican origin. The parts, welding, painting, and labor in Mexico make up 70% of the overall value of the finished good.
Under this second scenario, the parts of Mexican origin are the left and right front posts, left and right center posts, left and right rear posts, screws and side panels.
Since Mexico is involved in the processing of the cabinet, NY N303338 considered the origin of the cabinet under the North American Free Trade Agreement ("NAFTA") rules of origin. However, NY N303338 stated, "the cabinet is not subject to the Section 301 trade remedies as provided for under 9903.88.03, HTSUS" without considering whether the parts from China underwent a substantial transformation to become a product of Mexico.
ISSUE:
Whether the computer server cabinet is subject to Section 301 duties under 9903.88.03, HTSUS.
LAW AND ANALYSIS:
When determining the country of origin for purposes of applying current trade remedies under Section 301, the substantial transformation analysis is applicable. The test for determining whether a substantial transformation will occur is whether an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 C.C.P.A. 151 (1982). This determination is based on the totality of the evidence. See National Hand Tool Corp. v. United States, 16 C.I.T. 308 (1992), aff'd, 989 F.2d 1201 (Fed. Cir. 1993).
In order to determine whether a substantial transformation occurs when components of various origins are assembled into completed products, the determinative issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article. See Belcrest Linens v. United States, 6 CIT 204 (1983), aff'd, 741 F.2d 1368 (Fed. Cir. 1984). The country of origin of the item's components, extent of the processing that occurs within a country, and whether such processing renders a product with a new name, character, and use are primary considerations in such cases. Additionally, factors such as the resources expended on product design and development, extent and nature of post-assembly inspection and testing procedures, and the degree of skill required during the actual manufacturing process may be relevant when determining whether a substantial transformation has occurred. No one factor is determinative.
In Carlson Furniture Industries v. United States, 65 Cust. Ct. 474 (1970), the U.S. Customs Court ruled that U.S. operations on imported chair parts constituted a substantial transformation, resulting in the creation of a new article of commerce. The court determined that because the importer had to perform additional work on the imported chair parts and add materials to create a functional article of commerce, the imported parts were not chairs in an unassembled or knocked-down condition. Id. at 478. After importation, the importer assembled, fitted, and glued the wooden parts together, inserted steel pins into the key joints, cut the legs to length and leveled them, and in some instances, upholstered the chairs and fitted the legs with glides and casters. Consequently, the court found that the operations were substantial in nature, and that the processing performed in the United States constituted more than the mere assembly of finished parts. Id.
CBP applied the standard established in Carlson Furniture in Headquarters Ruling Letter ("HQ") W563456, dated July 31, 2006. In that case, CBP found that certain office chairs assembled in the United States were products of the United States for purposes of U.S. government procurement. The office chairs were assembled from seventy domestic and foreign components. The imported components alone were insufficient to create the finished chairs and substantial additional work and materials were added to the imported components in the United States to produce the finished chairs. In finding that the imported parts were substantially transformed in the United States, CBP stated that the components lost their individual identities when they became part of the chair as a result of the U.S. assembly operations and combination with U.S. components.
Similarly, in HQ 561258, dated April 15, 1999, CBP determined that the assembly of numerous imported workstation components, such as leg brackets, drawer units, and panels, with a U.S.-origin work surface constituted a substantial transformation of the parts into a finished workstation. CBP held that the imported components lost their identity when they were assembled together to form a workstation and classified the finished piece of furniture as U.S.-origin merchandise.
Here, the assembly in scenario one is simple assembly and is not enough to effect a substantial transformation. All the parts that are imported into Mexico are in a prefabricated form with a predetermined use. Additionally, unlike HQ W563456, the components of Chinese origin make up the entire frame of the cabinet and a large portion of the final product. Only the side panels, screws, nuts, washers, and leveler feet, which are all minor parts, are of Mexican origin. Therefore, the computer server cabinet remains a product of China and is subject to Section 301 duties.
However, the processing in scenario two is much more significant because a number of the fundamental components, such as the six metal posts, are created in Mexico. Fabrication of the metal posts is more than mere assembly as it consists of blanking and punching, riveting, spot welding and bending. It is also noteworthy that the Mexican originating components make up most of the value of the materials, at 53 %, and when Mexican labor is included, the value increases to 70%. Therefore, the processing in Mexico under scenario two constitutes a substantial transformation, and the country of origin of the computer server cabinet in scenario two is Mexico.
Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 9403.10.00, HTSUS, unless specifically excluded, are subject to an additional 25 percent ad valorem rate of duty. At the time of importation, you must report the Chapter 99 subheading, i.e., 9903.88.03, in addition to subheading 9403.10.00, HTSUS, listed above.
The HTSUS is subject to periodic amendment so you should exercise reasonable care in monitoring the status of goods covered by the Note cited above and the applicable Chapter 99 subheading. For background information regarding the trade remedy initiated pursuant to Section 301 of the Trade Act of 1974, you may refer to the relevant parts of the USTR and CBP websites, which are available at https://ustr.gov/issue-areas/enforcement/section-301-investigations/tariff-actions and https://www.cbp.gov/trade/remedies/301-certain-products-china respectively.
HOLDING:
Based on the information presented, under scenario one, the origin of the computer server cabinet described in NY N303338 is China and therefore, it is subject to Section 301 duties. Under scenario two, the origin of the computer server cabinet is Mexico and therefore, it is not subject to Section 301 duties. The analysis applying the NAFTA Marking Rules in 19 CFR Part 102 is not applicable to the question of whether the computer server cabinet is subject to Section 301 duties under 9903.88.03, HTSUS, and NY N303338 is hereby MODIFIED in accordance with the above analysis.
In accordance with 19 U.S.C. 1625(c), this ruling will become effective 60 days after its publication in the Customs Bulletin.
Sincerely,
Yuliya A. Gulis, Director
Commercial and Trade Facilitation Division