CLA-2 OT: RR:CTF:TCM W967896 KSH
Ms. Shirley Coffield
Coffieldlaw
666 Eleventh Street, NW
Suite 315
Washington, D.C. 20001
RE: Modification of NY K80306; Sugar and Gelatin Blend
Dear Ms. Coffield:
This is in reference to New York Ruling Letter (NY) K80306, issued to you, on behalf of your client Streamline Foods, Inc., by Customs and Border Protection (“CBP”), on November 5, 2003. That ruling concerned the classification and duty rate under the Harmonized Tariff Schedule of the United States Annotated (HTSUSA) and country of origin of sugar and gelatin blended in a Foreign Trade Zone (“FTZ”). In NY K80306, we determined that the sugar and gelatin blended in a FTZ was entitled to a free rate of duty pursuant to the North American Free Trade Agreement (“NAFTA”). Further, NY K80306 determined that pursuant to the NAFTA country of origin marking rules, the country of origin of the sugar and gelatin blend was the United States. Therefore, the sugar and gelatin blend was exempt from country of origin marking. We have reviewed NY K80306 and determined that the sugar and gelatin blend is not entitled to preferential tariff treatment under NAFTA and that the country of origin for marking purposes should not have been determined under the NAFTA marking rules. This ruling sets forth the correct classification and country of origin marking analysis for the sugar and gelatin blend.
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. 103-182, 107 Stat. 2057), a notice was published on June 7, 2006, in Vol. 40, No. 24 of the Customs Bulletin, proposing to modify NY K80306. One comment was received in response to this notice.
FACTS:
NY K80306 concerned a sugar and gelatin blend. The goods were described as a blend of 94% sugar and 6% gelatin. The sample of the product was of a fine granulation with the sugar and gelatin particles virtually indistinguishable. NY K80306 stated that the sugar used to create the blend would be imported from Brazil, Australia or another non-NAFTA country. You now report that sugar is no longer being imported from Australia, but is being imported directly from Costa Rica, Guatemala or other countries eligible for treatment under the Generalized System of Preferences (“GSP”) or the Caribbean Basin Economic Recovery Act (“CBERA”). In NY K80306, you indicated that the gelatin used to make the blend may be a product of the United States or Brazil.
The sugar and gelatin are imported directly into a FTZ in Toledo, Ohio, where they are blended. After leaving the FTZ, the sugar and gelatin blend is used by food processors, who will add flavoring, coloring, preservatives, salt, and sodium citrate to make a gelatin dessert mix for retail sale. The sugar and gelatin blend was classified in subheading 2106.90.5870, HTSUSA, which provides for “[f]ood preparations not elsewhere specified or included: [o]ther: [o]ther: [o]f gelatin: [o]ther: [c]ontaining sugar derived from sugar cane or sugar beets.”
NY K80306 also determined that the non-originating materials used to make the sugar and gelatin blend underwent a change in tariff classification provided under HTSUSA General Note 12(t)/21.14, and were entitled to a free rate of duty. NY K80306 used Part 102, CBP Regulations, (19 CFR Part 102) to apply the NAFTA marking rules to determine that the sugar and gelatin blend was not subject to country of origin marking requirements.
ISSUES:
What are the country of origin marking requirements of the sugar and gelatin blend upon leaving a Foreign Trade Zone?
LAW AND ANALYSIS:
The country of origin marking requirements for a "good of a NAFTA country" are determined in accordance with Annex 311 of the NAFTA, as implemented by section 207 of the North American Free Trade Agreement Implementation Act (Pub. L. 103-182, 107 Stat 2057) (December 8, 1993) and the appropriate CBP Regulations. The Marking Rules used for determining whether a good is a good of a NAFTA country are contained in Part 102, CBP Regulations. The marking requirements of these goods are set forth in Part 134, CBP Regulations.
NY K80306 involved sugar which could be a product of Brazil, Australia, or another non-NAFTA country and gelatin which could be a product of the United States or Brazil. Your client is no longer importing sugar from Australia, only from Costa Rica, Guatemala or other GSP or CBERA eligible countries. The products are processed in a FTZ in Toledo, Ohio. In NY K80306, CBP used the NAFTA provisions to determine the country of origin and duty rate of the sugar and gelatin blend. However, since none of the sugar or gelatin is from Canada or Mexico, and the processing is performed in a FTZ in the United States, NAFTA is not applicable. Therefore, NY K80306 incorrectly applied a NAFTA analysis and must be modified.
One comment was received which believed that the NAFTA marking rules should still be applied in this instance. The commenter argues that whenever any production or processing occurs in North America the NAFTA marking rules should first be consulted to determine the country of origin of the article. Only after the analysis under NAFTA, if the article is determined not to be a good of a NAFTA country may the substantial transformation analysis be applied. We disagree. Since there are no materials from, nor any processing in, Canada or Mexico, the NAFTA marking rules of 19 CFR Part 102 do not apply. Further, pursuant to 19 U.S.C.
§ 3332(a)(2), the NAFTA tariff shift rules do not apply to a good produced in a foreign trade zone. Therefore, in this situation only the substantial transformation analysis is applicable.
The commenter is also concerned that this modification should not affect sugar and gelatin blends and other products which are made in Canada and Mexico and imported into the United States. Those facts would be significantly different from the instant facts and therefore any determination in that regard would require a separate analysis.
Section 304 of the Tariff Act of 1930 (19 U.S.C. §1304), provides that, unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. §1304 was that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods, the country of which the goods is the product. "The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlander & Co., 27 C.C.P.A. 297 at 302 (1940).
Part 134, CBP Regulations (19 CFR Part 134), implements the country of origin marking requirements and the exceptions of 19 U.S.C. §1304. Section 134.1(b), CBP Regulations (19 CFR 134.1(b)), defines "country of origin" as the country of manufacture, production or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of the marking laws and regulations. The case of United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D. 98)(1940), provides that an article used in manufacture which results in an article having a name, character, or use differing from that of the constituent article will be considered substantially transformed and, as a result, the manufacturer or processor will be considered the ultimate purchaser of the constituent materials. In such circumstances, the imported article is excepted from marking and only the outermost container is required to be marked. See, 19 CFR 134.35(a).
In the instant situation, the foreign sugar is admitted into a FTZ where it is blended with either domestic or foreign gelatin. The ratio of the blend is 94 percent sugar and 6 percent gelatin and once blended, the sugar and gelatin particles are virtually indistinguishable. The Court of International Trade recently decided that the blending of sugar and gelatin together changed the character of the initial ingredients. See Arbor Foods, Inc. v. United States, Slip Op. 06-74 (CIT May 17, 2006). Although this decision only determined the classification of the 98% sugar and 2% gelatin blend, not the country of origin, it clearly stated that characteristics of the blend were different than that of the component parts. The court stated “that the characteristics of this blend impart it with a different functionality from that of pure sugar.” Id, Slip Op. at 8. Therefore, the court determined that the blend was a different product, a food preparation. See also, HQ 559259 (December 6, 1995) and NY C81089 (December 2, 1997).
Since blending the sugar and the gelatin creates a new product, a food preparation, this satisfies the substantial transformation requirement of 19 CFR 134.35(a) of having a new “name, character or use”. Thus, since there is a substantial transformation of the component ingredients, the country of origin of the sugar and gelatin blend is the country where the blending process occurred. CBP previously issued you two rulings determining under the traditional substantial transformation analysis that the sugar and gelatin blend underwent a change in name, character or use and, therefore, was substantially transformed and the country of origin of the blend was the country where the blending process occurred. This was true even though the processing occurred in a FTZ. See NY L82489 (February 23, 2005) and NY L83843 (April 29, 2005). These rulings correctly used a “substantial transformation” analysis to determine that the classification of the sugar and gelatin blend was under subheading 2106.90.5870, HTSUSA, and the country of origin for marking purposes was the United States. Therefore, since in the instant case the sugar and gelatin are blended in the FTZ located in the United States, we find the instant sugar and gelatin are substantially transformed in the FTZ and the country of origin of the sugar and gelatin blend is the United States.
The court in Arbor Foods also addressed the issue of classification at the subheading level of heading 2106, HTSUSA. The court considered the percentage of gelatin in the blend and held that the need to add additional gelatin or other thickeners/stabilizers to make the final product determined that the essential character of the blend was as a sweetener. The court stated that “the need to add further gelatin to the majority of products demonstrates that the primary purpose of the blend is its sweetening function….Furthermore, the undisputed facts also show that gelatin is not the ingredient of chief value and does not comprise the majority of the ingredients in the blend….Accordingly, because the gelatin is not the essential ingredient, the ingredient of chief value, or the preponderant ingredient, the subject blend is not classifiable as a food preparation of gelatin.” Arbor Foods, Slip Op. at 14.
In the instant case, Streamline’s gelatin is at a significantly higher concentration, 6% compared to 2%, and there is no need to add additional gelatin to make the product a gelatin dessert. Therefore, we find that in the instant case, pursuant to the analysis of Arbor Foods, the gelatin is the essential ingredient and the sugar and gelatin blend is classifiable in subheading 2106.90.5870, HTSUSA, as a food preparation of gelatin.
The statute governing the creation and operation of FTZ's is the Foreign Trade Zones Act of 1934, as amended (48 Stat. 998; 19 U.S.C. 81a through 81u). Under 19 U.S.C. 81c(a), foreign and domestic merchandise of every description (except prohibited merchandise) may be brought into a FTZ without being subject to the United States customs laws and may there be, among other things, stored, mixed with foreign or domestic merchandise, or otherwise manipulated and be exported, destroyed, or sent into the United States customs territory. When foreign merchandise is so sent from a FTZ into United States customs territory, it is subject to the United States laws and regulations affecting imported merchandise. Articles of the United States and articles previously imported on which duty and/or tax has been paid, or which have been admitted free of duty and tax, may be taken into a FTZ from the United States customs territory, placed under the supervision of the appropriate CBP officer, and, whether or not they have been combined with or made part of other articles while in the FTZ, be brought back thereto free of quotas, duty, or tax. If the identity of such articles (i.e., the "domestic status" articles described in the preceding sentence) has been lost, articles not entitled to free entry by reason of noncompliance with the requirements under the authority of this provision are treated as foreign merchandise if they reenter the customs territory. The CBP Regulations issued under the authority of this statute are found in 19 CFR Part 146.
Section 146.65(a)(2) of the CBP Regulations covering nonprivileged foreign merchandise states:
Nonprivileged foreign merchandise provided for in this section will be subject to tariff classification in accordance with its character, condition and quantity as constructively transferred to Customs territory at the time the entry or entry summary is filed with Customs.
This allows an enterprise operating within the FTZ to take advantage of favorable differentials in the tariff schedules between the rates of duty for foreign materials used in the manufacturing process in the FTZ and the duty rates for the finished articles. See HQ 556976 (June 9, 1994) (citing Armco Steel Corp. v. Stans, 431 F.2d 779 (2nd Cir. 1970)). CBP has held that when a nonprivileged good is substantially transformed in an FTZ, it becomes a product of the United States. See HQ 735399 (December 22, 1993) and C.S.D. 81-44 (August 4, 1980). Further, that product upon withdrawal from the FTZ for consumption in the United States is subject to the rate of duty of the finished product. See HQ 560102 (June 17, 1997), and HQ 967222 (September 3, 2004).
In the instant case, as discussed above, the sugar and gelatin are substantially transformed by the processing in the FTZ. Therefore, the country of origin of the sugar/gelatin blend is the United States. Upon withdrawal from the FTZ, the sugar/gelatin blend is subject to the duty and quota provisions applicable to a sugar/gelatin blend which is a product of the United States. Therefore, the sugar and gelatin blend is classified in subheading 2106.90.5870, as “[f]ood preparations not elsewhere specified or included: [o]ther: [o]ther: [o]f gelatin: [o]ther: [c]ontaining sugar derived from sugar cane or sugar beets.” The sugar and gelatin blend will be a good of the United States for duty, quota and country of origin marking purposes. As such the sugar/gelatin blend is exempt from country of origin marking.
HOLDING:
In accordance with the above discussion, the sugar and gelatin entered into a FTZ in nonprivileged status and then blended, upon withdrawal from the FTZ is classified under subheading 2106.90.5870, as “[f]ood preparations not elsewhere specified or included: [o]ther: [o]ther: [o]f gelatin: [o]ther: [c]ontaining sugar derived from sugar cane or sugar beets.” The sugar and gelatin blend will be a good of the United States and is exempt from country of origin marking. The 2006 column one general rate of duty is 4.8% ad valorum.
Duty rates are provided for your convenience and are subject to change. The text of the most recent HTSUSA and the accompanying duty rates are provided on the World Wide Web at www.usitc.gov/tata/hts.
EFFECT ON OTHER RULINGS:
NY K80306, dated November 5, 2003, is modified. In accordance with 19 U.S.C. §1625(c), this ruling will become effective sixty (60) days after publication in the Customs Bulletin.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division