CLA-2 RR:TC:SM W559969 MLR
Frederick L. Ikenson, Esq.
Larry Hampel, Esq.
Joseph A. Perna, V, Esq.
1621 New Hampshire Avenue, N.W.
Washington, D.C. 20009
RE: Eligibility of footwear uppers from the Dominican Republic for duty-free treatment under U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS; wet blue leather; shaving; retanning; coloring; buffing; Mexico; HRL 556242
Dear Messrs. Ikenson, Hampel and Perna:
This is in response to your letter of July 16, 1996, on behalf of Prime Tanning Co., Inc. (“Prime Tanning”), regarding the applicability of duty-free treatment for certain footwear, pursuant to Section 222 of the Customs Trade Act of 1990 (Public Law 101-382), which amended U.S. Note 2, Subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS), {hereinafter “Note 2(b)”}. A meeting was held at the Office of Regulations & Rulings on October 17, 1996, and additional information was submitted on October 18, 1996, and November 19, 1996. As discussed herein and as a result of your ruling request, pursuant to section 625, 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. 103-182, 107 Stat. 2057, 2186 (1993) (hereinafter “section 625"), notice of the proposed revocation of Headquarters Ruling Letter (HRL) 557714 dated September 9, 1994, was published January 2, 1997, in the Customs Bulletin, Volume 30/31, Number 52/1.
FACTS:
The articles at issue are finished leathers and the footwear manufactured therefrom. It is stated that wet blue leather produced in the U.S. by Prime Tanning is shipped to a tannery in Mexico for processing into finished leather. Prior to exportation to Mexico, it is stated that the processes performed in the U.S. involve salting, bating, and pickling (by chrome tanning), which converts the hide into wet blue leather. The wet blue leather is then split and exported to Mexico. It is stated that the finished leathers, exported from Mexico to the U.S., vary according to quality, type, color, and various other characteristics. However, generally, in Mexico, the first operation performed to the wet blue leather is shaving which imparts a uniform dimensional thickness, determined by the use of the finished leather. The next series of operations are retanning, coloring, and fatliquoring which together affect softness and flexibility, control solidity, provide pigmentation and resistance to fading and perspiration. The leather is then set out and dried by one of a variety of methods, either hanging, vacuum drying, or most commonly pasting. Next, the leather is conditioned, either by staking or milling, which imparts the degree of softness and flexibility that the fatliquoring prepared the leather to accept. The operation of the staking machine, used on heavier material, is also described as stretching, flexing, and striking the leather with numerous mechanical fingers. The milling machine, used for thinner and softer lots, is similar to a rotating drum where the leather is simply tumbled. The next operation, performed as needed, is stated to be buffing which may be used to minimize variations in the surface of the grain. Last, the leather is finished which may entail plating, a high pressure and temperature ironing process that makes the finished grain surface smoother or embosses varied grain textures. At a minimum, the finishing involves the application of surface treatments that provide resistance to stains and abrasions.
It is stated that the finished leather is then shipped from Mexico f.o.b. Laredo Texas, generally in lots consisting of 20 to 24 pallets. The leather is unladen from the importing carrier and then stored in a commercial warehouse facility. It is then stated that subject to Prime Tanning’s direction, each bundled group of finished sides will be physically inspected to confirm that the product shipped to and received at the U.S. facilities conforms to that character of product ordered and the quantity of product allegedly shipped. If the results of such inspection are satisfactory, an approval label or acceptance sticker will be affixed to each bundle that passes this inspection in order to signify the commercial acceptability of the product as delivered. It is also stated that the leather is sold by Prime Tanning to an unrelated footwear producer, and that a new bill of lading is drafted for the shipment from the U.S. to the Dominican Republic. Prime Tanning may also arrange for shipment of the leather from Laredo to Jacksonville, Florida, and from Jacksonville to a consignee in the Dominican Republic.
In the Dominican Republic, it is stated that the leather, together with other U.S. materials which were exported directly from the U.S., are used to produce footwear. It is then stated that the finished footwear is imported directly into the U.S.
ISSUE:
Whether the leather footwear produced in the Dominican Republic is eligible for duty-free treatment under Note 2(b).
LAW AND ANALYSIS:
Section 222 of the Customs and Trade Act of 1990 (Public Law 101-382) amended U.S. Note 2, Subchapter II, Chapter 98, HTSUS, to provide for the duty-free treatment of articles (other than textile and apparel articles, and petroleum and petroleum products) which are assembled or processed in a Caribbean Basin Economic Recovery Act (CBERA) beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin.
Note 2(b) provides as follows:
(b) No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum, provided for in heading 2709 or 2710) may be treated as a foreign article, or as subject to duty, if--
(i) the article is--
(A) assembled or processed in whole of fabricated components that are a product of the United States, or
(B) processed in whole of ingredients (other than water) that are a product of the United States, in a beneficiary country; and
(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country.
To qualify for Note 2(b) duty free treatment, an eligible article must be assembled or processed in a BC entirely of components or ingredients that are a “product of” the U.S. As used in this paragraph, the term “beneficiary country” means a country listed in General note 7(a), HTSUS, which includes the Dominican Republic. We have also previously held that footwear and parts of footwear are not textile and apparel articles for purposes of Note 2(b), regardless of whether they are subject to textile agreements. See T.D. 91 88, 25 Cust. Bull. 45 (1991).
The first question which must be resolved is whether the leather shipped from Mexico to the U.S. is still considered a “product of” the U.S. As support that the leather returned to the U.S. is still considered a product of the U.S., you cite the Rules for Determining the Country of origin of a Good for Purposes of Annex 311 of the North American Free Trade Agreement, 61 FR 28932 (June 6, 1996). However, as indicated in 19 CFR 102.0, the rules set forth in Part 102 are only used for certain purposes, and these purposes do not include whether a good is a “product of” the U.S. for purposes of Note 2(b) duty-free treatment. The final rule published on June 6, 1996, specifically did not include the changes in 59 FR 141 (January 3, 1994), and 60 FR 22312 (May 5, 1995), which proposed the use of 19 CFR Part 102 “for purposes of the Customs and related laws and the navigation laws of the United States.” See 60 FR 22312.
Accordingly, in order to determine whether the leather shipped from Mexico to the U.S. is still considered a “product of” the U.S., we must apply the substantial transformation test. A substantial transformation occurs when a new and different article of commerce emerges from a process with a new name, character or use different from that possessed by the article prior to processing. Texas Instruments, Inc. v. United States, 69 C.C.P.A. 152, 681 F.2d 778 (1982).
In HRL 556242 dated October 2, 1991, Customs considered, for purposes of Note 2(b), “non-perishable crust leather” which was imported into the U.S. from several South American countries. The operations performed in the U.S. included among the following operations:
1. retanning the crust for more consistent texture;
2. coloring the crust based on the desired finished color;
3. fat liquoring or oiling to change the texture of the leather;
4. drying;
5. dampening if vacuum drying was used;
6. dry milling by tumble drying for a softer feel;
7. toggling to stretch the hides back to yield size after shrinkage;
8. mechanical softening to further soften the leather;
9. embossing the leather with the desired print patter;
10. painting to desired color; and
11. sealing and trimming.
It was held that the material imported into the U.S. did not undergo a substantial transformation by the operations performed in the U.S. as the operations were cosmetic in nature and the crust leather and the finished leather were the same product at different stages of production.
However, in HRL 557714 dated September 9, 1994, Customs considered “wet blue leather” shipped by Prime Tanning to Mexico, where it was:
1. shaved to level the thickness of the wet blue split to the exact specifications needed by leather goods makers for the production of a given end product;
2. retanned to impart softness and solidity;
3. colored to provide pigmentation and resistance to fading;
4. fatliquored to soften and impart flexibility;
5. set out and dried;
6. conditioned, also known as “staking”, to stretch the leather; and
7. buffed.
It was held that, consistent with HRL 556242, the combination of the processes performed in Mexico on the wet blue split sides constituted a substantial transformation of the wet blue split leather into a new and different article having a new name, character and use. It was stated that the shaving, retanning, fat liquoring, coloring, conditioning and staking process, converted the split wet blue from a product which was suitable for many uses into a product which was suitable for specific uses. Therefore, for purposes of the Generalized System of Preferences, the imported tanned leather was considered to be a “product of” Mexico. However, it was also stated that the shaving and retanning operations did not by themselves result in a new and different article of commerce, but were merely intermediate steps in the process advancing toward the finished staked leather.
In HRL 557714, the exported material was chrome-tanned wet blue leather which is created as a result of a tanning process. “Tanning” is the process used to convert hides into a stable, non-putrescible material, and is foremostly performed using a method called chrome tanning which imparts a blue-green color to the hides. See Leather Facts 15 (New England Tanners Club 2d ed. 1983). Tanning is also stated to the be the final process in turning hides and skins into finished leather. See Compton’s Encyclopedia (1992-1995). The first two steps stated to be performed in HRL 557714 were “shaving” and then “retanning”, whereas in HRL 556242, the initial material considered was “non-perishable crust leather” and the first step performed was “retanning”. We note that since the material in HRL 556242 was stated to be non-perishable, pursuant to the definition above, the material had already undergone a tanning procedure, imparting the blue-green color, prior to importation into the U.S. Consequently, the starting material in HRL 556242, described as “non-perishable crust leather” is the same as the starting material described in HRL 557714 as “wet blue leather”.
Other operations performed before “retanning” are “wringing and sorting” and “splitting and shaving”. See Leather Facts, supra, at 17. “Splitting involves feeding the material through a machine with the grain side up to cut off the bottom flesh layer, called a “split”. “Shaving” is used to level the overall hide thickness to exact specifications. Id. at 18-19. After splitting and shaving, the material may then be retanned, colored, and fatliquored. Id. In HRL 557714, it is clear that the splitting occurred prior to exportation to Mexico, and the shaving occurred in Mexico. While it is not apparent from HRL 556242, the ruling request in that case indicates that prior to retanning, the material was subjected to “buffing the flesh side before retan”, which appears to be similar to splitting.
Next, the processes described in both HRL 557714 and 556242 involve retanning, coloring, fatliquoring, and drying. HRL 556242 then refers to dampening, dry milling, toggling, and mechanical softening, whereas HRL 557714 refers to conditioning and staking. “Conditioning” involves introducing small amount of moisture to increase the material’s workability, but the material may also be used as is for some applications. Id. at 21. Therefore, “conditioning” appears to be similar to the “dampening” process described in HRL 556242. “Staking” involves mechanically softening the leather to make it pliable by pounding the leather with pins, and “dry milling” is one type of mechanical softening process. Id. at 22. Therefore, it appears that the “dry milling, toggling, and mechanical softening” processes described in HRL 556242 are akin to the “staking” operation performed in HRL 557714.
In consideration of the foregoing, it is our opinion that despite the differences in nomenclature used in these rulings, the materials involved and operations performed both in HRL 556242 and HRL 557714 were actually so similar that any conclusion regarding a substantial transformation of the materials involved should also be the same. The primary difference appears to be whether a splitting and/or shaving process occurred in HRL 556242. However, as it was stated in HRL 557714, shaving alone is merely an intermediate process, and alone is not considered a substantial transformation, and in HRL 556242 there were additional finishing operations not performed in HRL 557714. Furthermore, the initial tanning process, as opposed to “retanning” is actually the final process to convert hide or skin into finished leather. It is, therefore, our opinion that the processes performed in Mexico in HRL 557714 actually did not result in a substantial transformation, as the exported article, wet blue, is actually leather, and the additional operations performed to make conditioned crust leather are only finishing operations similar to those involved in HRL 556242. Accordingly, our decision in HRL 557714 is hereby revoked.
Therefore, pursuant to HRL 556242, we find that the operations performed in this case in Mexico similarly do not result in a substantial transformation of the wet blue leather exported from the U.S. Accordingly, we find that the leather imported into the U.S. may be considered a “product of” the U.S. for purposes of Note 2(b).
The second question which must be resolved is whether the direct shipment requirements are satisfied, especially whether the leather is exported directly from the U.S. to the Dominican Republic. It is stated that the leather processed in Mexico is shipped to the U.S., unladen from the importing carrier, placed in a commercial warehouse facility, and each bundled group of finished sides will be physically inspected subject to Prime Tanning’s direction to confirm that the product shipped to and received at the U.S. facilities conforms to that character of product ordered and the quantity of product allegedly shipped. If the results of such inspection are satisfactory, that an approval label or acceptance sticker will be affixed to each bundle that passes this inspection, in order to signify the commercial acceptability of the product as delivered. It is also stated that the leather is sold by Prime Tanning to a footwear producer, and that the leather is shipped from Mexico f.o.b. Laredo, Texas, and a new bill of lading is drafted for the shipment from the U.S. to the Dominican Republic.
For purposes of Note 2(b), there are no regulations defining the direct shipment requirements. However, Customs has interpreted the direct shipment requirements similarly for purposes of the United States-Israel Free Trade Implementation Act of 1985 (Israel FTA), Generalized System of Preferences (GSP), and Caribbean Basin Economic Recovery Act (CBERA). See Annex 3, paragraph 8 of the Israel FTA; 19 CFR 10.175; and 10.193. It is your contention that the leather is shipped directly from the U.S. to the Dominican Republic as it is subjected to inspection and is sold in the U.S. to an unrelated party who ships the leather to the Dominican Republic. You have cited HRL 071575 dated November 20, 1984, where Customs stated that it has taken the position that, for purposes of the GSP, merchandise is deemed to have entered the commerce of an intermediate country if manipulated (other than loading or unloading), offered for sale (whether or not a sale actually takes place), or subjected to a title change in the country. However, HRL 071575 only held that toys produced in Macau and shipped to Hong Kong, where they were placed in a warehouse for approximately six months and not sold, repackaged or handled in any other way, did not enter into the commerce of Hong Kong. Furthermore, in HRL 555398 dated December 12, 1989, Customs determined that pepper from a beneficiary developing country (BDC) shipped to a non-BDC for processing into oleoresin and returned to the BDC, but not removed from the vessel once laden in the non-BDC until the vessel reached the U.S., was not imported directly for purposes of the GSP. In HRL 555398, it was mentioned that the direct shipment requirement may act to reduce the possibility that materials or articles of non-GSP countries will be commingled or mixed with GSP eligible articles.
However, in HRL 557149 dated November 22, 1993, Customs held that Israeli origin garments assembled in China and shipped back to Israel for sampling and inspection were considered to be “imported directly” from Israel into the U.S. provided a statement was included on each invoice that the merchandise covered by the invoice was inspected pursuant to Military Standard 105 D, a commercially recognized statistical sampling procedure. See also HRL 557647 dated July 14, 1994.
In this case, the leather will be inspected to ensure that the leather ordered is what is received at the U.S. facilities, and similar to HRL 557149 where a statement was provided on the invoice, the leather will be labeled to verify that it was inspected. We find that such an inspection, along with the sale to an unrelated footwear producer and new bill of lading, will satisfy the direct shipment requirements that the leather be directly shipped from the U.S. to the Dominican Republic.
While you have not provided extensive details regarding the operations performed in the Dominican Republic, although Note 2(b)(i)(A) and (B) are separated by the word “or”, Customs has stated that it believed Congress did not intend to preclude free treatment under this provision to an article which is created in a BC both by assembling and processing U.S. fabricated components and by processing U.S. ingredients. Therefore, in this case, provided all of the other materials are of U.S.-origin, all materials are shipped directly from the U.S. to the Dominican Republic, and the completed footwear is shipped directly to the U.S. without entering into the commerce of any foreign country other than a BC, the footwear will be entitled to duty free treatment under Note 2(b), assuming all documentation requirements of Headquarters telex 9264071 dated September 28, 1990, are satisfied.
HOLDING:
Based upon the information provided, the leather returned from Mexico to the U.S. may be considered a “product of” the U.S. for purposes of Note 2(b). Furthermore, provided the leather is used with other materials entirely of U.S. origin to make footwear in the Dominican Republic, the footwear may enter the U.S. duty free pursuant to Note 2(b), provided the direct shipment requirements and the documentation requirements set forth in Headquarters telex 9264071 dated September 28, 1990, are satisfied.
HRL 557714 is hereby revoked. In accordance with section 625, this ruling will become effective 60 days after its publication in the Customs Bulletin. Publication of rulings or decisions pursuant to section 625 does not constitute a change in practice or position in accordance with section 177.10(c)(1), Customs Regulations (19 CFR 177.10(c)(1)).
Sincerely,
John Durant, Director
Tariff Classification Appeals Division