OT:RR:CTF:VS H308234 EGJ
Ania Wierzbowska-Fuller
A.N. Deringer, Inc.
173 West Service Road
Champlain, NY 12919
RE: Tariff Classification and NAFTA-eligibility of the Start Me Stick and the Fix Me Stick; Section 301 Duties; Valuation
Dear Ms. Wierzbowska-Fuller:
This is in response to your request for a ruling on behalf of your client, FixMeStick Technologies, Inc., regarding the tariff classification under the Harmonized Tariff Schedule of the United States (“HTSUS”), eligibility for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”), the applicability of Section 301 duties, and the basis of appraisement for two different products: the Start Me Stick and the Fix Me Stick.
FACTS:
Both products are USB flash drives which are loaded with proprietary software. The Start Me Stick plugs into the user’s computer, and then runs the program from its own internal operating system. The device allows the user to browse the Internet securely and privately from any computer. Once removed, there is no trace of the Start Me Stick’s programming left on the computer.
The Fix Me Stick is a USB virus removal device that boots up from its own internal trusted operating system. The device connects to the Internet, downloads the latest malware definitions, and removes threats from the computer. The device then reboots the computer and scans for viruses again.
You indicate that the printed circuit board assemblies (“PCBAs”) for both of these products will be manufactured in Taiwan from components made in Taiwan. These components include the flash memory storage chip and the controller chip. After assembly, the PCBAs are shipped to China for further processing. In China, the PCBAs are attached to a plastic PCBA holder and are then inserted into the device’s external casing. Both the PCBA holder and the external casing are made in China. Afterwards, the external casing is etched with the product’s name and serial number. The blank USB devices are then shipped to Canada.
Your client imports the blank USB devices into Canada under subheading 8523.51, which provides for “solid-state non-volatile storage devices.” In Canada, the blank flash drives are plugged into a custom designed duplication system. Once one or more blank drives are plugged in, an operator selects a SKU from a computer screen (for example Fix Me Stick for Mac, Fix Me Stick for PC, Start Me Stick, etc.). The duplication system then writes the compiled object code onto the drive, reads all the bytes back to ensure they were written correctly, and then registers the drive serial number in a database mapping the serial number to the selected SKU. If the registration step is not done, the stick will not be authorized to run. You note that all of the source code for the relevant software was written and developed in Canada. You take the view that the flash drives loaded with software will still be classified under subheading 8523.51, HTSUS, when they are exported to the United States.
With regard to the proper basis of appraisement for the instant flash drives, you note that none of the parties involved in the transaction are related to each other. Therefore, for the purposes of this ruling, we will assume that the transaction value applies to the instant merchandise. You have requested that we examine whether the value of the merchandise should be the value of the blank flash drive, or whether the value should include the cost of the downloaded software. You have also asked us to assess whether the flash drives are eligible for preferential tariff treatment under NAFTA, which must include ascertaining the proper tariff classification of the merchandise. You have also asked us to determine the country of origin for the purpose of assessing duties under Section 301.
ISSUES:
Are the Fix Me Stick and the Start Me Stick properly classified under subheading 8523.51.00, HTSUS, as “solid-state non-volatile storage devices?”
Is the subject merchandise eligible for preferential tariff treatment under NAFTA?
What is the country of origin of the subject merchandise for the purposes of assessing the applicability of Section 301 duties?
Should the transaction value of the instant merchandise be based upon the cost of the blank USB device, or should the transaction value include the cost of the software downloaded onto the device?
LAW AND ANALYSIS:
Tariff Classification
Classification under the HTSUS is made in accordance with the General Rules of Interpretation (“GRI”). GRI 1 provides that the classification of goods shall be determined according to the terms of the headings of the tariff schedule and any relative Section or Chapter Notes. In the event that the goods cannot be classified solely on the basis of GRI 1, and if the headings and legal notes do not otherwise require, the remaining GRIs may then be applied. Under GRI 6, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading notes and, mutatis mutandis, to GRIs 1 through 5.
Note 5(a) to Chapter 85, HTSUS, provides as follows:
For the purposes of heading 8523:
(a) "Solid-state non-volatile storage devices" (for example, "flash memory cards" or "flash electronic storage cards") are storage devices with a connecting socket, comprising in the same housing one or more flash memories (for example, "FLASH E²PROM") in the form of integrated circuits mounted on a printed circuit board. They may include a controller in the form of an integrated circuit and discrete passive components, such as capacitors and resistors;
Subheading 8523.51.00, HTSUS, provides as follows:
8523 Discs, tapes, solid-state non-volatile storage devices, "smart cards" and other media for the recording of sound or of other phenomena, whether or not recorded, including matrices and masters for the production of discs, but excluding products of Chapter 37:
Semiconductor media:
8523.51.00 Solid-state non-volatile storage devices
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In understanding the language of the HTSUS, the Explanatory Notes (“ENs”) of the Harmonized Commodity Description and Coding System may be utilized. The ENs, although not dispositive or legally binding, provide a commentary on the scope of each heading, and are generally indicative of the proper interpretation of the Harmonized System at the international level. See T.D. 89-80, 54 Fed. Reg. 35127 (August 23, 1989).
EN 85.23 provides, in pertinent part, as follows:
(C) Semiconductor Media
Products of this group contain one or more electronic integrated circuits. Thus, this group includes:
(1) Solid-state, non-volatile data storage devices for recording data from an external source (See Note 5 (a) to this Chapter). These devices (also known as “flash memory cards” or “flash electronic storage cards”) are used for recording data from an external source, or providing data to, devices such as navigation and global positioning systems, data collection terminals, portable scanners, medical monitoring appliances, audio recording apparatus, personal communicators, mobile phones, digital cameras and automatic data processing machines. Generally, the data are stored onto, and read from, the device once it has been connected to that particular appliance, but can also be uploaded onto or downloaded from an automatic data processing machine.
The media use only power supplied from the appliances to which they are connected, and require no battery.
These non-volatile data storage devices are comprised of, in the same housing, one or more flash memories (“FLASH E2PROM/EEPROM”) in the form of integrated circuits mounted on a printed circuit board, and incorporate a connecting socket to a host appliance. They may include capacitors, resistors and a microcontroller in the form of an integrated circuit. Example of solid state non-volatile storage devices are USB flash drives (emphasis added).
* * * * *
We note that the instant merchandise meets the definition of a solid-state non-volatile storage device set forth in Note 5(a) to Chapter 85 because it is a storage device with a connecting socket, and because it contains a flash memory chip and a controller IC chip. Moreover, it is a USB flash drive, which is a specific example set forth in the relevant EN provision. We note that we have consistently classified USB flash drives under subheading 8523.51.00, HTSUS. See, e.g. Headquarters Ruling Letter (“HQ”) H296912, dated August 29, 2018, New York Ruling Letter (“NY”) N264694, dated May 29, 2015, and HQ H168206, dated March 12, 2014. For all of these reasons, we agree that the Fix Me Stick and the Start Me Stick are properly classified under subheading 8523.51.00, HTSUS.
Eligibility for Preferential Tariff Treatment under NAFTA
The NAFTA is implemented in General Note (“GN”) 12 of the Harmonized Tariff Schedule of the United States (“HTSUS”). GN 12(a)(i) states that goods are eligible for the NAFTA rate of duty if they originate in the territory of a NAFTA party and qualify to be marked as goods of Canada. GN 12(b) sets forth the various methods for determining whether a good originates in the territory of a NAFTA party. Specifically, these provisions provide, in relevant part, as follows:
Goods originating in the territory of a party to the North American Free Trade Agreement (NAFTA) are subject to duty as provided herein. For the purposes of this note—
Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Canada under the terms of the marking rules set forth in regulations issued by the Secretary of the Treasury (without regard to whether the goods are marked), and goods enumerated in subdivision (u) of this note, when such goods are imported into the customs territory of the United States and are entered under a subheading for which a rate of duty appears in the “Special” subcolumn followed by the symbol "CA" in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act.
* * *
(b) For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as “goods originating in the territory of a NAFTA party” only if—
(i) they are goods wholly obtained or produced entirely in the territory Canada, Mexico and/or the United States; or
(ii) they have been transformed in the territory of Canada, Mexico and/or the United States so that—
(A) except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivision (r), (s) and (t) of this note or the rules set forth therein, or
(B) the goods otherwise satisfy the applicable requirements of subdivision (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or
(iii) they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials; ….
As described above, blank USB flash drives are imported into Canada where they are loaded with proprietary software. As such, the processing in Canada must cause the merchandise to meet the requisite tariff shift rule set forth in GN 12(t). The blank USB flash drives are classified in subheading 8523.51.00, HTSUS. Under GN 12(t), the applicable tariff shift rule is:
76C. (A) A change to prepared unrecorded semiconductor media of subheading 8523.51 from any other good of subheading 8523.51 or
any other subheading; or
(B) A change to recorded semiconductor media of subheading 8523.51 from any other good of subheading 8523.51 or any other subheading.
Per GN 12(t) Rule 76C(B) , the tariff shift rule for the Fix Me Stick and the Start Me Stick USB flash drives is “a change to recorded semiconductor media of subheading 8523.51 from any other good of subheading 8523.51 or any other subheading.” We note that software is downloaded onto the blank USB flash drives, which results in a change from unrecorded to recorded media. Therefore, we find that the Fix Me Stick and the Start Me Stick meet the applicable tariff shift rule under GN 12(t).
As both USB flash drives undergo the requisite tariff shift, they will qualify for preferential tariff treatment under the NAFTA if they also qualify to be marked as goods of Canada in accordance with GN 12(a)(i). The NAFTA Marking Rules are contained in 19 CFR Part 102 of the Federal Regulations. Section 102.11 sets forth the General Rules for determining the country of origin of imported merchandise, with the exception of textile goods which are subject to the provisions of § 102.21. Section 102.11(a)(3) provides that the country of origin of a good is the country in which:
Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in § 102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied.
“Foreign material” is defined in § 102.1(e) as “a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.” The applicable tariff shift requirement in § 102.20 for the USB flash drives of heading 8523, HTSUS, at issue is:
A change to records, tapes and other recorded media for sound or other similarly recorded phenomenon, excluding products of chapter 37, from prepared unrecorded media for sound recording or similar recoding or other phenomena, other than products of chapter 37.
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The foreign materials which originate outside of the NAFTA parties are the blank USB flash drives. The rule states that the tariff shift rule is accepted if there is a “change to … other recorded media for sound or other similarly recorded phenomenon … from prepared unrecorded media.” As the Fix Me Stick and the Start Me Stick are both recorded media which are prepared from unrecorded media, we find that they meet the NAFTA marking rule and may be marked as products of Canada. Therefore, we find that because the Fix Me Stick and the Start Me Stick meet the applicable tariff shift rule under GN 12(t) and may be marked as products of Canada that they are eligible for preferential tariff treatment under the NAFTA.
Country of Origin for the Purpose of Assessing Section 301 Duties
The Fix Me Stick and the Start Me Stick are classified under subheading 8523.51.00, HTSUS, which provides, in relevant part, for “solid-state non-volatile storage devices.” The United States Trade Representative (“USTR”) has determined that an additional ad valorem duty of 7.5% will be imposed on certain Chinese imports pursuant to its authority under Section 301(b) of the Trade Act of 1974 (“Section 301 measures”). The Section 301 measures apply to products of China enumerated in Section XXII, Chapter 99, Subchapter III, U.S. Note 20(s), HTSUS. Among the subheadings listed in U.S. Note 20(b) of Subchapter III, Chapter 99, HTSUS, is 8523.51.00, HTSUS.
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). In order to determine whether a substantial transformation has occurred, CBP considers the totality of the circumstances and makes such determinations on a case-by-case basis. CBP has stated that a new and different article of commerce is an article that has undergone a change in commercial designation or identity, fundamental character, or commercial use. A determinative issue is the extent of the operations performed and whether the materials lose their identity and become an integral part of the new article. 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 Data General v. United States, 4 Ct. Int’l Trade 182 (1982), the court determined that for purposes of determining eligibility under item 807.00, Tariff Schedules of the United States (predecessor to subheading 9802.00.80, Harmonized Tariff Schedule of the United States), the programming of a foreign PROM (Programmable Read-Only Memory chip) in the United States substantially transformed the PROM into a U.S. article. The court noted that the programs were designed by a U.S. project engineer with many years of experience in “designing and building hardware.” In addition, the court noted that while replicating the program pattern from a “master” PROM may be a quick one-step process, the development of the pattern and the production of the “master” PROM required much time and expertise. The court noted that it was undisputed that programming altered the character of a PROM.
Accordingly, we have generally found that programming a device in the same country where the software was developed constitutes a substantial transformation. In HQ 558868, dated February 23, 1995, we determined that blank cards embedded with microchips were substantially transformed when they were imported into the United States and programmed into Secure ID cards using software developed in the United States. We took the view that the programming changed the blank card from a card with many potential applications into a card that could only be used to enable the user to log into a secured computer. See also HQ 735027, dated September 7, 1993 (programming imported blank media (EEPROM) with U.S. software in the United States substantially transformed it into media which prevented the piracy of software).
The instant blank flash drives are loaded with proprietary software developed in Canada and in a Canadian facility. The software is the most important component of the device, and it changes the use of the device from having many uses to having a single use as either the Fix Me Stick or the Start Me Stick. For all of these reasons, we find that the blank USB flash drives are substantially transformed when Canadian-origin software is downloaded onto them in Canada. The country of origin of the instant merchandise for the purposes applying Section 301 duties is Canada.
Transaction Value
Merchandise imported into the United States is appraised for customs purposes in accordance with U.S. value law under section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). You have stated that none of the parties involved in manufacturing, selling, or exporting of the instant merchandise are related. Therefore, for the purposes of this specific fact scenario we are going to assume that transaction value is the correct basis of appraisement.
You note that the valuation of software was addressed in T.D. 85-124, published in the Customs Bulletin, Vol. 19, No. 32 (August 7, 1985). T.D. 85-124 was the U.S. implementation of a 1984 decision by the Committee on Customs Valuation of the General Agreement on Tariffs and Trade (“GATT Committee Decision”). In T.D. 85-124 Customs stated that consistent with the GATT Committee Decision, it would continue to value imported carrier medium bearing data or instructions for use in data processing equipment exclusive of a value element for the data, instructions, or information component contained on such software. Therefore, “software” is to be valued only on the basis of the value of the carrier medium.
We agree with the conclusion reached in T.D. 85-124 for the valuation of certain types of carrier media for software. However, the text of T.D. 85-124 specifically provides as follows for semiconductor devices, which would include the instant flash drives:
In this regard, for valuation purposes carrier media bearing data or instructions (i.e., software) does not include data or instructions recorded or encoded by means of integrated circuits, semiconductors and similar devices, or articles incorporating such circuits or devices.
The transaction value is the price actually paid or payable for the merchandise when sold for exportation to the United States. As noted previously, the instant merchandise is classified as a semiconductor device which is loaded with software in subheading 8523.51.00, HTSUS, and thus it does not fall within the special valuation rule for carrier media in T.D. 85-124. Therefore, the merchandise should be valued according to the cost of both the device and the software when sold for exportation to the United States.
HOLDING:
By application of GRS 1 and 6, the Fix Me Stick and the Start Me Stick are classified under subheading 8523.51.00, HTSUS, which provides, in pertinent part for “Solid-state non-volatile storage devices.” The 2020 column one, general rate of duty for merchandise classified in this subheading is free.
The Fix Me Stick and the Start Me Stick qualify for preferential tariff treatment under the NAFTA.
The country of origin of the Fix Me Stick and the Start Me Stick is Canada. Therefore, Section 301 duties will not apply.
The transaction value of the instant merchandise must include the cost of both the flash drive and the proprietary software.
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy of this ruling, it should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch