OT:RR:CTF:VSP H329195 JMV
John M. Peterson
Neville Peterson LLP
One Exchange Plaza at 55 Broadway
New York, NY 10006
RE: U.S. - Morocco Free Trade Agreement; Cigarettes; Double Substantial Transformation
Dear Mr. Peterson:
This is in response to your request, dated December 27, 2022, on behalf of your client Japan Tobacco International ("JTI"). In your letter, you request a binding ruling regarding whether cigarettes produced in Morocco qualify for preferential tariff treatment under the U.S. - Morocco Free Trade Agreement ("UMFTA").
FACTS:
JTI intends to produce cigarettes in Morocco using non-originating "raw" tobacco. Various other originating and non-originating materials will also be used to manufacture the filter and the finished cigarette sticks.
Tobacco Production
Leaf tobacco single grades and final blended strips (unmanufactured tobacco) and reconstituted tobacco (manufactured tobacco) will be imported into a facility in Morocco to be conditioned by increasing the moisture levels and breaking up the mass by adding steam and water. This material will then be stored in bulking silos. When removed from the silos, the materials will be placed in casing cylinders, where glycerin and water are sprayed upon the tobacco. The glycerin protects the tobacco from drying out and helps to facilitate the tobacco cutting process.
After the glycerin treatment, the product is once again stored in bulking silos, and is cut and dried yielding an intermediate material known as "cut rag." Thereafter, non-originating cut rolled expanded stem ("CRES"), which is stated to be an intermediate tobacco product and provides the cigarette designer with various options to improve quality, lower deliveries and reduce blend costs, and expanded tobacco lamina ("ETS") are added to the cut rag. This blend is put into a rotating cylinder, where specific flavors are mixed in, resulting in "cut-filler" tobacco.
JTI asserts that cut-filler tobacco, suitable for use directly in the manufacture of cigarettes with no further or intermediate processing, is often sold to cigarette production plants which do not have their own tobacco processing machinery. However, in this case, the cut-filler tobacco will go into the "make pack process" to create finished cigarettes.
Filter Production
The cigarette filters for the imported cigarettes will also be produced in Morocco through a complex, highly automated process. Filters are made from cellulose acetate tow, which is derived from wood pulp and converted into the form of cellulose fibers.
Cigarette filters are usually made from cellulose acetate tow, which is a fiber derived from wood pulp. Each cigarette filter contains between 10,000-15,000 cellulose fibers. To create the filters, the tow is lifted off a bale in a continuous strip and fed into the filter maker. The precise weight of the tow gathered per centimeter determines the draught resistance and efficiency of the filter. The tow is stretched by machine rollers, gathered and crimped by nozzles, then fixed with a plasticizer (a hardening agent).
The tow is fed into a channel to form an endless filter rod, which is wrapped in filter "plug wrap paper." Modern filter machines can make two rods simultaneously, which are produced in continuous rods. The rod is sliced into segments according to the specified filter length of the cigarette and are then transported to the plant or plant area where the final "make pack" process is performed. JTI asserts that the filter is a "self-produced" component.
Final Production
The cut-filler tobacco is sent from the final blending silo and is gravity-fed into the cigarette rod-forming channel, or garniture. Cigarette paper is fed into the garniture and wrapped around the tobacco. The paper is glued to form an endless cigarette rod. Filter rods are fed in parallel and attached by the mouthpiece paper or "tipping" to the cut tobacco rods to form double cigarettes. Laser devices burn precise holes through the tipping paper into the filter to ensure the correct level of ventilation or smoke dilution for the cigarette. The double cigarettes are cut into singles and the finished cigarettes are fed into a reservoir system, which is usually linked directly with the packing machine. Cigarettes are sometimes stored in trays for greater packing flexibility.
Cigarettes are channeled in the correct arrangement, or "collation," to form a block ready to be wrapped. For their protection, cigarettes are wrapped in an inner liner, which is usually aluminum or aluminum-coated paper. The inner liner is glued at points to the inside of the pack to ensure stability of the cigarette block. Stacks of unfolded and ready cut cigarette packs, or "blanks," are fed to the packer. Glue is applied to the appropriate surfaces of the blanks before folding and pack-forming begins. Folding takes place along the pre-impressed crease lines. The glued surfaces stick together, and closure or tax stamps are applied if necessary. The pack is then sealed in polypropylene film which keeps the product fresh by providing a moisture barrier.
Usually, 10 packs are bundled together and, depending on the brand or the market, are either packed into printed cartons or overwrapped in polypropylene or printed paper. Cartons or bundles are sent to the distribution chain customers. The shipping case is often the final transport and storage unit of the distribution chain customers - both wholesale and retail. Quality checks are conducted throughout production to ensure the final products meet all internal and external regulatory standards.
ISSUE:
Whether the cut-filler tobacco and cigarette filters processed as described above are subject to a double substantial transformation in Morocco so that the value of each may be considered in calculating the Moroccan value content for purposes of meeting the 35 percent value content requirement of the UMFTA.
LAW AND ANALYSIS:
On June 15, 2004, the United States and the Government of the Kingdom of Morrocco signed the UMFTA. The provisions of the UMFTA were adopted by the United States with the enactment of the United States - Morrocco Free Trade Agreement Implementation Act (the "Act"), Public Law 108-302, 118 Stat. 1103 (19 U.S.C. 3805 note), on August 17, 2004. On December 22, 2005, the President signed Proclamation 7971 (published in the Federal Register on December 27, 2005 (70 Fed. Reg. 76649) which modified the HTSUS as set forth in Annexes I and II of Publication 3721 of the U.S. International Trade Commission to implement the Act. The modifications to the HTSUS included the addition of General Note ("GN") 27, incorporating the relevant UMFTA rules of origin as set forth in the Act, and the insertion throughout the HTSUS of the preferential duty rates applicable to individual products under the UMFTA where the special program indicator "MA" appears in parenthesis in the "Special" rate of duty sub-column.
In order to qualify for preferential tariff treatment under the UMFTA, goods must meet certain requirements set forth in GN 27, HTSUS. GN 27(b) provides, in pertinent part:
For the purposes of this note, subject to the provisions of subdivisions (c), (d), (e), (g) and (h) thereof, a good imported into the United States is eligible for treatment as an originating good of a UMFTA country under the terms of this note only if -
i) the good is a good wholly the growth, product or manufacture of Morocco, the United States, or both;
ii) the good is a new or different article of commerce that has been grown, produced or manufactured in the territory of Morocco or of the United States, or both, and that falls in a heading or subheading of the tariff schedule that is not covered by the product-specific rules of subdivision (h) of this note; and the sum of-
A. the value of each material produced in the territory of Morocco or of the United States, or both, and
B. the direct costs of processing operations performed in the territory of Morocco or the United States, or both,
is not less than 35 percent of the appraised value of the good at the time the good is entered into the territory of the United States; or
iii) the good falls in a heading or subheading covered by a product-specific rule in subdivision (h) of this note and-
A. (1) each of the nonoriginating materials used in the production of the good undergoes an applicable change in tariff classification specified in subdivision (h) of this note; or
(2) the good otherwise satisfies the requirements specified in subdivision (h) of this note; and
B. the good meets any other requirements specified in this note;
and is imported directly into the territory of the United States from the territory of Morocco. For purposes of this note, the term "good" means any merchandise, product, article or material.
Here, the cigarettes contain non-originating content and there is no product specific rule of origin for cigarettes. Therefore, to qualify for duty free treatment under the UMFTA, the cigarettes must (1) be a "new or different article of commerce that has been grown, produced or manufactured in Morocco," (i.e., have undergone a substantial transformation in Morocco such that it is a "product of" Morocco); (2) be imported directly from Morocco into the customs territory of the United States; and (3) meet the 35% value-content requirement. See GN 27(b)(ii). We assume the "imported directly" from Morocco into the customs territory of the United States requirement is met for purposes of this decision.
JTI argues that the cigarettes are eligible for duty free treatment under the UMFTA because the cigarettes are a new and different article of commerce from the non-originating materials and that 35 percent of the appraised value comes derives from direct processing in the United States or Morocco. To meet the 35 percent value requirement, the value of the cut-filler tobacco and the filters would need to be included in the calculation. However, the value of the cut-filler tobacco and the filters may be included in the required value calculation only if they undergo a double substantial transformation in Morocco. See 19 C.F.R. 10.769(h). To meet the double substantial transformation requirement, the intermediate article itself must be an article of commerce that is "commercially recognizable as a different article, i.e., it must be a 'new and different article' readily susceptible of trade and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Torrington Co. v. United States, 764 F.2d 1563, 1570 (Fed. Cir. 1985). Meaning, the "raw" tobacco and cellulose acetate imported into Morocco must be substantially transformed into a new and different article of commerce (i.e., the dry resin material), which is then substantially transformed into a new or different article of commerce, the cigarettes.
Under the UMFTA a "new or different article of commerce" exists when a good "has been substantially transformed from a good or material that is not wholly the growth, product, or manufacture of one of Morocco, the United States, or both; and has a new name, character, or use distinct from the good or material from which it was transformed." See GN 27(d)(iv)(D); Article 5.2 of the UMFTA. U.S. courts have similarly found that a substantial transformation occurs when an article emerges from a manufacturing process with a name, character or use which differs from those of the original material subjected to the process. United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (1940); Nat'l Juice Prods Assoc. v. United States, 10 CIT 48, 61 (1986).
When determining the origin of tobacco, CBP has found raw tobacco was substantially transformed when manufactured into cut-filler tobacco. In HQ 560102, dated June 17, 1997, unmanufactured tobacco from various countries were imported into Argentina and processed into manufactured cut-filler tobacco. All the processing, including the final delamination, cleaning, conditioning, and top dressing, were conducted in Argentina. The resulting cut-filler tobacco was imported into the United States, ready to be used by the final user to produce cigarettes. Customs held that the tobacco was substantially transformed in Argentina from unmanufactured tobacco into a product that could be used in cigarettes.
Conversely, CBP found HQ 562176, dated August 21, 2002, to be distinguishable from the facts in HQ 560102. In HQ 562176, CBP considered the origin of "ABC Blend" tobacco which was a blend of various types and grades of unmanufactured, stemmed, threshed burley and flue-cured tobacco, and unmanufactured, unstemmed, unthreshed oriental tobacco. The unmanufactured tobacco of various origin was imported into Italy, where the primary operations were cutting, blending and controlling the humidity of the tobacco. In finding that there was no substantial transformation of the tobacco in Italy, CBP noted that, unlike the tobacco in HQ 560102, the imported tobacco in HQ 562176 was not ready for use upon exportation to the United States. It required further processing in the United States, including preconditioning to a specific moisture level, casing, cutting, drying, cooling, flavoring, and packaging for sale as a Roll-Your-Own tobacco. Therefore, the imported tobacco did not undergo a substantial transformation in Italy and thereby did not qualify as a product of Italy. See also HQ 562118, dated September 17, 2002, (finding tobacco that required additional processing before it obtained its final specific use was not substantial transformed).
We find that the processing in Morocco is similar to the processing in HQ 560102 in that the tobacco is manufactured into cut-filler tobacco in Morocco that is ready to be assembled into a cigarette. Therefore, we find that the raw tobacco is substantially transformed by the processing in Morrocco before it undergoes final assembly.
We also find that the cellulose acetate tow is substantially transformed when produced into a cigarette filter as there is a change in name, character, and use. Cellulose acetate tow is cellulose fibers derived from wood pulp. Prior to production in Morocco, it has a soft, clothlike quality that may be used to create fabrics for the apparel industry.[1] The finished filter is a cylindrical object suitable for filtering smoke produced by a cigarette. JTI also notes that cigarette filters are considered "articles of commerce" as cigarette filters are also sold to cigarette producers who only have "make pack" facilities. Accordingly, we find that the cellulose acetate tow is substantially transformed by the processing in Morrocco before it undergoes final assembly.
Moreover, we find that the tobacco and filter as manufactured in Morocco is substantially transformed again when assembled into a cigarette. In HQ H011662, dated June 14, 2007, CBP considered the origin of cigarettes for marking purposes that were assembled in the Dominican Republic of entirely U.S. components. CBP reasoned that the U.S. origin materials, including the tobacco blend and filters, emerged from the manufacturing process in the Dominican Republic with a new name, character, and use, i.e., the loose tobacco was now in a cigarette, a separately recognizable commercial product. Therefore, CBP found that the U.S. origin materials were substantially transformed in the Dominican Republic and the origin of the cigarettes was the Dominican Republic. We similarly find that the loose tobacco, filter and other components are separately recognizable commercial products from a cigarette and that the filters and tobacco undergo a second substantial transformation in Morocco. Therefore, the cigarettes qualify as originating goods under the UMFTA.
HOLDING:
Under the facts presented, the cut-filler tobacco and cigarette filters processed as described above are subject to a double substantial transformation in Morocco so that the value of each may be included in calculating the Moroccan value content for purposes of meeting the 35 percent value content requirement of the UMFTA.
Please note that 19 C.F.R. 177.9(b)(1) provides that "[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based."
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch
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[1] See Cellulose Acetate, Britannica, (March 5, 2024, 1:31 PM), https://www.britannica.com/science/cellulose-acetate; Cellulose Acetate (Cellulose Acetate Tow and Cellulose Acetate Filament) Market Size And Forecast, Verified Market Research, (March 5, 2024, 1:27 PM), https://www.verifiedmarketresearch.com/product/cellulose-acetate-cellulose-acetate-tow-and-cellulose-acetate-filament-market/; Acetate: This Luxurious and Versatile Material has been a Staple in Creating High-end Clothing, The Clothing Manufacturers, (March 5, 2024, 1:29 PM), https://theclothingmanufacturers.com/acetate/.