Customs Ruling HQ W546020 - Leased telephones ; transaction value inapplicable ; 19 U.S.C. § l 40 l a(f); value of rental payments; subheading 9801.00.20; subsequent re-importation duty-free; subheading 9804.00.10 not applicable·

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HQ W546020
Apr 17, 1995

Type : Valuation • HTSUS :
Related: 067920; 545112

VAL RR:IT:VA W546020 CRS

David J . Chavolla, Esq. Casner & Edwards
One Federal Street Boston, MA 02110

RE: Leased telephones ; transaction value inapplicable ; 19 U.S.C. § l 40 l a(f); value of rental payments; subheading 9801.00.20; subsequent re-importation duty-free; subheading 9804.00.10 not applicable ·

Dear Mr. Chavolla:

This is in reply to your ruling requests of April 28, 1995, and May 26, 1995, submitted on behalf of Cellhire PLC, a United Kingdom (U.K ) corporation, concerning classification, appraisement and entry issues raised in connection with the importation of wireless, battery-powered (cellular) telephones. We regret the delay in responding.

FACTS:

Cellhire rents wireless, battery-powered telephones, commercially known as cellular telephones, in the U.K. and in other countries that are part of the Global System for Mobile Communications ("GSM") mobile telephone network. The telephones are used mainly by business customers when traveling in countries that belong to the network. The United States is not part of the GSM network, however, and absent substantial rewiring, GSM-compatible telephones cannot be used in the U.S.

Cellhire has therefore entered into a non-exclusive agreement, dated January 30, 1995, with McCaw Cellular Communications, lnc. of Kirkland, Washington, an unrelated party, to supply McCaw's subscribers with telephones for use while they are traveling in GSM countries. Under the terms of the agreement, Cellhire is designated a preferred supplier of GSM telephones to McCaw's subscribers and McCaw will use its best efforts to refer its subscribers to Cellhire. Although the agreement allows McCaw to refer its subscribers to Cellhire, the agreement is non-exclusive and McCaw is under no obligation to refer a set number of subscribers.

McCaw's subscribers will be notified of the availability service and provided with a rental agreement setting forth the terms of hire. A copy of a sample rental agreement was submitted with

your ruling request. Subscribers who choose to use the service are to sign the rental agreement and send it by facsimile to a United States telephone number for redirection to the United Kingdom . Once the rental agreement is signed, Cellhire will furnish the McCaw subscriber with cellular telephones that can be used in the U.K. and some fifteen other GSM countries. The telephones will be shipped directly to the McCaw subscriber through various ports of entry in the U.S. The typical rental period is two weeks, at the end of which time, the customers return to the U.S. with the telephones (the "second entry"); subsequently, they return the telephones to Cellhire by common carrier. In this regard, Cellhire will make all reasonable efforts, including the utilization of any available confirmation procedures, to ensure that the telephones are returned and do not remain in the U.S.

The Cellhire telephones are solely for use outside the U.S., indeed, they cannot be operated in the U.S. since the U.S. is not part of the GSM network. The telephones are activated for use in a GSM country by means of a "Smartcard", which enables customers to make calls directly through the GSM network and allows the United States company to "gather information for billing purposes.'' The telephones will at all times remain the property of Cellhire and the customer may not in any way alter or dispose of or otherwise grant an interest in the telephones to any third party. Payment of the rental charges by the customer will be by cred it card to Cellhire in the U.K. In certain limited situations, Cellhire has sold telephones to McCaw for resale to McCaw's subscribers. However, these telephones are designed for data transmission, are more sophisticated and more expensive than the rental telephones.

In respect of the telephones (hereinafter, the "equipment"), you have submitted a certificate from Cellhire's accountants setting forth the current depreciation schedules for each model that will be offered to McCaw subscribers under the terms of the agreement. This statement indicates that Cellhire depreciates the equipment on the basis of generally accepted accounting principles (GAAP) in the U.K., specifically, in accordance with Statement of Standard Accounting Practice (SSAP) 12, entitled "Accounting for Depreciation," which provides that "depreciation should be allocated so as to charge a fair proportion of the cost of the asset to each accounting period expected to benefit from its use." SSAP 12 defines "depreciation" as "the measure of the wearing out, consumption or other reduction in the useful economic life of a fixed asset whether arising from use, effluxion of time or obsolescence through technological or market changes." Cellhire's directors have determined that a useful life of three years is acceptable in this instance and, therefore, i n accordance with U.K. GAAP and SSAP 12, depreciate the equipment on a straight line basis over three years, calculated on a monthly basis starting in the month of acquisition.

ISSUE:

The issues presented are: (I) whether the second importation of the each separate e item of merchandise is exempt from duty under subheading 9801.00.20, Harmonized Tariff Schedule of the United States Annotated (HTSUS); (2) whet her the merchandise under consideration be imported into the United States duty-free under subheading 9804 .00. 1 0, HTSUS; (3) whether the merchandise is exempt from formal entry requirements , and (4) what constitutes the appropriate basis of appraisement for the merchandise imported pursuant to the Cellhire-McCaw agreement LAW AND AN ALYSIS:

Classification

Subheading 9801 .00.20, HTSUS, provides duty-free treatment for.

[a]rticles, previously imported, with respect to which the duty was paid upon such previous importation or which were previously free of duty pursuant to the Caribbean Basin Economic Recovery Act or Title V of the Trade Act of 1974, if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States.

Section 10.108, Customs Regulations (19 C.F.R. § 10.108), provides, in relevant part, that free entry shall be accorded under subheading 9801.00.20, HTSUS, whenever it is established to the satisfaction of the port director that the article for which free entry is claimed was duty paid on a previous importation, and is being reimported by or for the account of the person who previously imported it into, and exported it from the U.S.

It is contended that the second entry into the U. S. of each item of equipment will be eligible for duty-free treatment under subheading 9801.00 .20, HTSUS, assuming duty is paid on the equipment upon the first entry in the U.S., because: (l ) the equipment is being leased to the Cellhire customer for personal use; (2) the equipment will be exported under the leasing arrangement with the Cellhire customer for use by that party in a GSM country, and it will not be advanced in value or improved in condition; and (3) the equipment will be re-imported by or for the account of the Cellhire customer, who is the party who originally imported it into, and exported it from the U.S.

In Headquarters Ruling Letter (HRL) 553676 dated February 28, 1986, a mold was imported from Portugal by Max Klein Company of Wisconsin duty-free under the Generalized System of Preferences. The mold was subsequently exported to Bow Plastics Ltd. in Canada under an exclusive right and license agreement which made Bow Plastics responsible for the transportation of the molds back and forth and for the payment of duties and royalties to Max Klein. The mold was imported into the U.S. by Bow Plastics from Canada, and duty paid. The mold was later returned to Bow Plastics in Canada for a second production run and again reimported by Bow Plastics. Duty-free treatment under item 801.00, Tariff Schedules of the United States (TSUS) (the precursor provision to subheading 9801.00.20, HTSUS) was granted when the mold was reimported after the second production run because the mold was imported into the U.S. on both occasions from Canada by the agent (Customs broker) acting on behalf of his principal, Bow Plastics, who in tum was responsible for the transportation of the molds, back and forth, and given the license to make and sell planters produced from the mold and to pay the duty. In HRL 067920 dated August 31, 1982, a crane company placed a purchase order for a crane with an American-based company who accepted the order and in tum passed the order to an affiliated factory in Sweden. The foreign-made crane was entered into the U.S. by and for the account of the American-based company and, after sale, was forwarded to the crane company's jobsite in the U.S. The crane company subsequently exported the crane under a lease agreement to a Mexican firm. The crane was later returned to the U.S. by and for the account of the crane company. Customs held that although the crane may have been imported for the crane company because of a purchase agreement, the entry documents show that the American-based company was the importer of record and duty was paid by that firm. Generally, Customs has held that the term "importer" means "the person primarily liable for the payment of any duties on the merchandise, or an authorized agent acting on his behalf " In HRL 067920, Customs found that the American-based company was the designated importer of record and paid customs duties for which it was primarily liable. The company was a separate business entity and failed to show that it was acting as agent "by or for the account" of the exporter, and re-importer of the crane.

In Werner & Pi1eiderer Corp. v. United States, 17 CIT 916 (1993), the Court of International Trade interpreted item 801.00, TSUS, stating that the purpose of this provision is "to eliminate an assessment of duty which has the appearance of double taxation" and that "the provision concerning goods exported under lease, i n particular, is not 'the sort of exemption from duties which must be narrowly construed."'

In this case, as evidenced by the rental agreement, Cellhire will deliver the equipment to the address specified by the customer. For purposes of this ruling, we assume that the customer is located in the U.S. Although the rental agreement does not specify that the customer will be the importer, it appears that by agreeing to accept delivery of the equipment, the customer will be liable for the payment of duties and, therefore, will be the importer. The equipment will al so be exported by the customer under a lease or '·similar use agreement" since the rental agreement states that the customer may only use the equipment outside the U.S. in exchange for payment to Cellhire. The customer, also by accepting the terms of the rental agreement, will not repair or modify the equipment while abroad . Therefore, assuming the U.S. customer pays duty upon the first importation into the U.S. and the customer does not advance the value or improve the condition of the equipment while abroad, since the rental agreement constitutes a lease for use of the equipment abroad, once the customer reimports the equipment at the end of the rental period, the equipment will be eligible for duty-free treatment under subheading 9801.00.20, HTSUS.

Under the basic entry law (l9 U.S.C. 1484) and the Customs Regulations issued thereunder (see 19 CFR Part 141, and, in particular, section 141.4(a)), entry is required of every importation, whether free or dutiable, unless specifically exempted from entry Such specific exemptions from entry are listed in 19 CFR 14 l.4(b). None of these exemptions appear to be applicable to the situation described above. Formal entry is provided for in 19 U.S.C. 1484. In addition to formal entry, informal entry by regulation is also provided for certain kinds of merchandise under certain conditions (see 19 1498; 19 CFR 141.4(e); 19 CFR 143.21 through 143.28). Section 1498 authorizes the prescription of rules and regulations for informal entry by regulation in the following specific situations (only those situations which may be applicable in this case are listed):

Merchandise when the aggregate value of the shipment does not exceed an amount specified by the Secretary of the Treasury by regulations, but not more than $2,500 ( 19 U.S.C. 1498(a)(l); and

Tools of trade of a person arriving in the United States (l9 U.S.C. l 498(a)(8)).

The Customs Regulations issued under the authority of the foregoing are found in 19 CFR Part 143, Subpart C (19 CFR 143.21 through 143.28). The regulation issued under 19 U.S.C. 1498(a)( 1 ) (based on the aggregate value of the shipment) limits the amount of such shipments to $1,250 (19 CFR 143.2l (a)). The regulation issued under 19 U.S.C. 1498(a)(8) (tools of trade (the regulatory provision also covers household or personal effects entitled to free entry under Subchapter IV, Chapter 98, HTSUS)) is found in 19 CFR l43.2 l (d) and limits informal entry under this provision to such merchandise entitled to free entry under the cited Subchapter IV, Chapter 98, HTSUS. Under 19 CFR 143.22, formal entry may be required for any merchandise if deemed necessary for import admissibility enforcement purposes, revenue protection, or the efficient conduct of Customs business.

General Note 1 of the HTSUS provides that "[a]IJ goods provided for in this schedule and imported into the customs territory of the United States from outside thereof are subject to duty or exempt therefrom as prescribed in general notes 3 through 14, inclusive, and general note 16." The customs territory of the United States is defined in General Note 2, HTSUS, as including "... only the States, the District of Columbia and Puerto Rico. " Under U.S. Note 2, Chapter 98, HTSUS, "[i]n the absence of a specific provision to the contrary, the tariff status of an article is not affected by the fact that it was previously imported into the customs territory of the United States and cleared through customs whether or not duty was paid on such previous importation ."

Under 19 CFR 141.1(a):

Duties and the liability for their payment accrue upon imported merchandise on arrival of the importing vessel within a Customs port with the intent then and there to unlade, or at the time of arrival within the Customs territory of the United States if the merchandise arrives otherwise than by vessel, unless otherwise specifically provided for by law.

The above provision of the Customs Regulations is consistent with decisions of the Courts addressing the meaning of importation (see Cunard S. S. Co. v. Mellon, 262 U.S. 100, 122 (1923), "Importation ...consists in bringing an article into a country from outside"; see also The Sherwin- Williams Co. v. United States, 38 CCPA 13, C.A.D. 432 ( 1950), and United States v . Estate of Boshel l, T D 41884 (Ct. of Cust. App. 1922), and cases cited therein).

Thus, it is clear that the merchandise under consideration is imported, both when it is initially shipped to the United States and when it is brought back to the United States by the individual who rented it. As imported merchandise, it is required to be entered (either formally or informally, depending on whether the above conditions for informal entry are applicable) and it is subject to duty or exempt therefrom as prescribed in general notes 3 through 14, inclusive, and general note 16.

You contend that the merchandise under consideration is classifiable under subheading 9801 .00.20 or 9804.00.10, HTSUS. If classified under a provision in chapter 98, HTSUS, of course, "[because] (t)he provisions of [chapter 98] are not subject to the rule of relative specificity ... [a]ny article which is described in any provision in [chapter 98] is classifiable in said provision if the conditions and requirements thereof and of any applicable regulations are met" (U.S. Note 1, Chapter 98, HTSUS).

As noted above, if the U.S. customer pays duty on the first importation into the U.S. and does not advance the value or improve the condition of the equipment while abroad, given that the rental agreement constitutes a lease for use of the equipment abroad, the equipment will be eligible for duty free treatment under subheading 9801.00.20, HTSUS, once the customer reimports the equipment at the end of the rental period.

Subheading 9804.00.10, HTSUS, provides duty-free treatment for:

Articles imported by or for the account of any person arriving in the United States from a foreign country... Professional books, implement s, instruments and tools of trade, occupation or employment , which have been taken abroad by him or for his account.

Basically, in this case, the following occurs:

The telephone is shipped directly to the renter in the United States;

The renter in the United States takes the telephone abroad ;

The renter returns to the United States with the telephone; and

The renter ships the telephone abroad.

In regard to the initial importation, (i.e., shipment of the telephone directly to the renter in the United States), neither subheading 9801.00.20, HTSUS, nor subheading 9804 .00.10, HTSUS, is applicable. That is, in the case of the former, the merchandise must have been previously imported with duty paid and, the merchandise must have been reimported... after having been exported under lease or similar use agreements, and the merchandise must have been reimported by or for the account of the person who imported it into, and exported it from, the United States. Even if the merchandise was previously imported with duty paid and even if the exportation was considered to be under lease or similar use agreement (although we note that at this point, the lease or similar use agreement would be terminating), it would not be reimported by or for the account of the person who imported it into and exported it from the United States (i.e., it would have been imported into and exported from the United States by a previous renter and it would be reimported by a new renter). In the case of subheading 9804.00.10, HTSUS, the merchandise would not be imported by or for the account of any person arriving in the United States from a foreign country (i.e., it would be imported by or for the account of a renter in the United States, not a person arriving in the United States).

Subheading 9804.00.10, HTSUS, is not applicable to the reimportation of the merchandise by the renter (after the renter's use of the merchandise abroad). This is so because, based on the information before us, the merchandise under consideration does not qualify as "[p]rofessional books, implements, instruments and tools of trade, occupation or employment ...." That phrase has been interpreted by the Courts in applying predecessors to subheading 9804.00.10, HTSUS. In Dunham v. United States, T.D. 46941 (Cust. Ct., 3d Div. 1934), the Court thoroughly reviewed the interpretation of the phrase. On the basis of that review, the Court held that certain merchandise imported by a dentist and claimed to be free of duty under a predecessor to subheading 9804.00. 10, qualified for such duty free treatment, except for certain items. In regard to these non-qualifying items, the Court stated:

In respect to the desk, basin, and sink, it was testified that there was nothing peculiar about them for dentists' use. It was not shown that they were imported for use of the plaintiff in the practice of his profession, or that they were caused to serve a purpose or were necessary to his occupation as dentist. [Vol. 65, Treasury Decisions (1934), at 411]

The telephone equipment under consideration is analogous to the above described desk, basin, and sink. That is, nothing about the telephone equipment has been established to be peculiarly suited to the profession, occupation, or employment of the person who would be reimporting it. Instead, the telephone equipment is suited for general use, as was true of the desk, basin, and sink.

Since neither of the importations qualify for classification under subheading 9804.00. J 0, HTSUS (or, based on the information in the file, any other subheading in Subchapter IV, Chapter 98, HTSUS), the merchandise does not qualify for informal entry by virtue of 19 CFR 143.21(d). There is no authority in 19 CFR Part 143, Subpart C (providing for informal entries) for the informal entry of merchandise qualifying for classification under subheading 9801 .00.20, HTSUS. Accordingly , the merchandise under consideration may only be entered informally if it qualifies under 19 CFR 143.21(a) (value not exceeding $1,250), subject to the requirements of 19 CFR Part 143, Subpart C (note in particular, section 143.22, described above).

Value

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 140l a). The primary basis of appraisement under the TAA is transaction value, defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus amounts equal to certain statutorily defined additions thereto . 19 U.S.C. § 1401a(b)( l ). In the instant case, however, the imported merchandise, i.e., the equipment, will not be sold for exportation to the U.S. but will instead be imported into the U.S. on a temporary basis pursuant to the rental agreement between Cellhire and its customers. Accordingly, the transaction value method of appraisement is inapplicable.

When imported merchandise cannot be appraised on the basis of transaction value, the TAA provides that it shall be appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. § 140l a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or the transaction value of similar merchandise; deductive value; computed value; and the "fallback" method provided for in section 402(f) of the TAA.

In regard to identical or similar merchandise you have advised that while Cellhire sells a small number of telephones in the U.S., these telephones are substantially different from the equipment that is the subject of the rental agreement. In addition, you state that insofar as Cellhire is aware, no identical or similar merchandise is imported into the U.S. Consequently, the equipment cannot be appraised under section 402(c) of the TAA. Similarly, the deductive value method, which is based on U.S. resales of the imported merchandise, is inapplicable because the equipment is not resold.

Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind , and the value of any assists and packing costs. 19 U.S. C. § 1401a(e)(1). However, we understand that computed value information is unavailable in this instance. 19 C.F.R. § 152.106(f). Accordingly, the computed value method cannot be used to appraise the imported equipment.

When merchandise cannot be appraised under the methods set forth in sections 402(b)-(e) of the TAA, its value is to be determined in accordance with the "fallback" method set forth in section 402(f). The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)( l). Under section 402(f), imported merchandise may be appraised based on one of the methods set forth i n sections 402(b)-(e) of the TAA, reasonably adjusted to the extent necessary to arrive at a value. The imported equipment is subject to multiple leases and may be imported into the U.S. on numerous occasions, generally in a used condition. Nevertheless , pursuant to section 402(f), it is our position that the transaction value method can be reasonably adjusted to permit the rental value of the equipment over its full economic life to be used as the basis of appraised value. You have submitted a certificate from Cellhire's accountants setting forth the current depreciation schedules for each model of telephone that will be offered to McCaw subscribers under the terms of the agreement. This statement indicates that the equipment is depreciated on the basis of GAAP in the U.K., specifically, in accordance with SSAP 12. In regard to the equipment, Cellhire 's directors consider that a useful life of three years is acceptable and, therefore, in accordance w1th U.K. GAAP and SSAP 12, depreciate the equipment on a straight line basis over three years, calculated on a monthly basis starting in the month of acquisition.

In HRL 545112, dated June 7, 1993, imported merchandise was appraised pursuant to section 402(£) of the TAA Under the particular circumstances of that case it was determined that the total rental value of the merchandise over its economic life represented a reasonable adjustment of the transaction value method . The information submitted in this instance also supports the use of a modified transaction value under section 402(f) of the TAA.

Here, information has been submitted that, in accordance with SSAP 12, the useful economic life of the equipment is three years. Assuming this is indeed the case, the total amount of the rental payments by each individual contract subscriber over this period should be determined . However, in this unique case, since the usual rental period will generally be less than the economic life of the equipment, the modified transaction value under section 402(f) will be determined only with respect to the payments made or to be made under each individual rental agreement. Nevertheless, certain adjustments to this amount may be necessary to establish the appraised value of the equipment. Thus, in determining a modified transaction value under section 402(f), it may still be necessary to make certain of the adjustments to the price actually paid or payable required by section 402(b)( 1) of the TAA, e.g., an adjustment for packing costs incurred by the buyer. Please note that it is the responsibility of the appraising officer at the time of entry to fix final appraisement of the equipment. HOLDING: Based on the information presented, the equipment imported pursuant to the terms of the rental agreement may be appraised on the basis of a modified transaction value in accordance with section 402(t) of the TAA. Under section 402(t), the transaction value method can be reasonably adjusted to base the appraised value of the equipment on the total amount of the rental payments made by each individual contract subscriber over the useful economic life of the equipment. Since the time period covered by the individual rental agreements is generally shorter than the useful economic life of the equipment, the modified transaction value under section 402(t) is to be determined only with respect to the payments made or to be made under each individual rental agreement. Once again, please note that it is the responsibility of the appraising officer at the time of entry to fix final appraisement of the equipment. -10-

Based upon the information provided, assuming that the customer pays duty upon the first importation into the U.S. and that t he customer by signing the rental agreement only to use the equipment abroad in exchange for payment to Cellhire does not advance the value or improve t he condition of the equipment, the equipment will be eligible for duty-free treatment under subheading 980 1.00.20, HTSUS, upon reimportation into the U.S. by the customer.

Based on the information presented : (I) the initial importation of the merchandise under consideration (the shipment to t he renter) does not qualify for classification under subheading 980 1.00.20 or 9804.00. 10, HTSUS; (2) the subsequent reimportation of the merchandise under consideration (upon return of the renter to the United States) does not qualify for classification under subheading 9804.00.10, HTSUS; (3) the initial importation and the subsequent reimportation of the merchandise may qualify for informal entry only under 19 U.S.C. l 498(a)( l ) and 19 CFR 143.21(a) (aggregate value of the shipment may not exceed $1,250), subject to the regulations pertaining to informal entries (19 CFR Part 143, Subpart C).

Sincerely,

Acting Director
International Trade Compliance Division