# Presentation: 294351

## What Vendors Should Know About Substantial Transformation October 9, 2008

- Gerry O’Brien
- Office of International Trade
- Regulations and Rulings
- U.S. Customs and Border Protection

## Buy American Act

- Restricts USG purchase of items that are not *domestic end products.*

- To be a *domestic end product *:
- (1) Article must be mined, produced or manufactured in the United States, and
- (2) If manufactured, the cost of U.S. components must exceed 50 percent of the total cost of all components.1

- 1 *See* 48 C.F.R. § 25.003 (2006), FAR 25.003.

## Trade Agreements Act of 1979

- President has authority to waive Buy American Act and other discriminatory provisions for certain countries.
- For list of designated countries, consult 48 C.F.R. § 25.400.

## Operation of the TAA

- Consult threshold amounts in 48 C.F.R. § 25.402 to see if the TAA applies.

- If the TAA applies:
- The Buy American Act is waived, and
- The procurement of products from non-designated entities is prohibited.2

- 2 *See *19 U.S.C. § 2512(a).

## Importance of the TAA

- Affects sourcing of products
- Settlements for TAA violations prosecuted by the Department of Justice in 2005:
- Office Max ($9.8 million)
- Staples ($7.4 million)
- Office Depot ($4.75 million)

## Origin Under the TAA

- An article is a product of a country only if

- 3 *See* 19 U.S.C. § 2518(4)(B); 19 C.F.R. § 177.22(a).

- it is wholly a product of that country, or
- (ii) it has been substantially transformed in that country.3

## Substantial Transformation

- A substantial transformation occurs when an article emerges from processing as a new and different article of commerce that possesses a new name, character, or use.4

- 4 *See* 19. U.S.C.  § 2518(4)(B)(ii).

## ST Categories

- Assembly
- Machining/Metalworking
- Mixing & Blending

## Assembly Operations

*United States v. Gibson-Thomsen Co., Inc.*5

- Facts: Imported wood blocks combined with bristles to form hairbrushes and toothbrushes in the United States.
- Held: The manufacturing in the United States caused the articles to lose their separate identities and become an integral part of a new article having a new name, character, or use.

- 5 27 C.C.P.A. 267 (C.A.D.98) (1940).

## Assembly Operations

- HRL 734617 (Aug. 17, 1993)
- Medical device for regulating intravenous administration of fluids
- HRL 556800 (Mar. 15, 1994)
- Anesthesia breathing circuits
- HRL 735315 (Apr. 10, 1995)
- Optical spectroscopy instruments

## Machining Operations

- Facts: Imported hand tool forgings were processed in the United States.
- Operations included: knurling of handgrips; some reshaping with power press; heat treatment; cleaning by sandblasting, tumbling or chemical vibration; electroplating; and some assembly operations.

*National Hand Tool Corp. v. United States**6*

- 6 16 Ct. Int’l Trade 308 (1992).

## Machining Operations

*National Hand Tool Corp. *(continued)

- Court held that no substantial transformation occurred in the United States, because the tool components were hot forged or cold formed into their final shape before importation.

## Machining Operations

- HRL 559847 (Jan. 2, 1997)
- HRL 561002 (May 21, 1998)
- HRL 561141* (Nov. 2, 1998)
- HRL 561189 (Nov. 5, 1998)
- HRL 561086 (Mar. 8, 1999)
- HRL 561498 (Mar. 22, 2000)
- HRL 562658 (Apr. 25, 2003)
- HRL 562896 (Jan. 28, 2004)
- HRL W968396 (Dec. 21, 2006)
- HRL H003713 (Feb. 22, 2007)

- Surgical Instruments

## Machining Operations

- Manufacture of surgical sutures in India from U.S.-origin wire and U.S.-origin suture thread results in a substantial transformation.
- U.S. finishing operations, such as curving and sterilization, do not substantially transform the Indian-origin surgical sutures.

- Surgical Sutures

*See *HRL 561167 (Dec. 14, 1998); and HRL 561785 (Jan. 22, 2002)

## Blending Operations

*National Juice Products Assoc. v. United States*7

- Facts: Imported juice concentrate blended with water, orange essences, orange oil, and U.S. juice concentrates.
- Held: No substantial transformation, because the imported juice concentrate was the “very essence” of the finished product.

- 7 628 F. Supp. 978 (Ct. Int’l Trade 1986).

## Blending Operations

- Pharmaceuticals
- No Substantial Transformation8
- Sterilization
- Filtration
- Dilution
- Distribution of bulk form into measured doses
- Substantial Transformation9
- Chemical reaction
- Significant processing

- 8 *See* HRLs 733248 (Aug. 22, 1990); 735146 (Nov. 15, 1993); 561544 (May 1, 2000); and 561975 (Apr. 3, 2002).
- 9 *See *HRLs 563207 (June 1, 2005); 731731 (Feb. 23, 1989); and 563301 (Aug. 26, 2005).

## Totality of the Circumstances

- Primary Factors
- Country of origin of components
- Extent of processing occurring within country
- Whether processing renders a product with a new name, character, and use.

## Totality of the Circumstances

- Additional Factors
- Resources expended on product design and development,
- Extent and nature of post-assembly inspection and testing procedures, and
- Worker skill required during manufacturing process

## Advisory Rulings & Final Determinations

- Consult 19 C.F.R. § 177.21-31.
- Mail written requests to:
- 	U.S. Customs and Border Protection
- 	Valuation and Special Programs Branch
- 	Regulations and Rulings
- 	1300 Pennsylvania Avenue, NW
- 	Washington, DC 20229
- 	Attention: Mint Annex

## Federal Register   7/25/08 

- Uniform Rules of Origin for Imported Merchandise (73 FR 43385)
- A proposal - Notice of proposed rulemaking; comment period expired 9/23
- Establish uniform rules governing CBP determinations of country of origin of imported merchandise
- Extend the application of country of origin rules in 19 CFR Part 102 (NAFTA Marking Rules)

## Federal Register   7/25/08

- Under current regulations there are two primary methods which CBP uses to determine country of origin:
-  1. Substantial Transformation
-  2. Tariff Shift Rules, *e.g*., NAFTA marking rules/Part 102

## Federal Register  7/25/08

- CBP is now proposing to extend the application of the Part 102 rules to all country of origin determinations under the customs and related laws and the navigation laws, unless otherwise specified.

## Federal Register  7/25/08

- Exceptions – where, under the proposal, the 102 rules will not be used:
- where agreements specify another origin test for that purpose
- origin-related scope determinations for trade remedy proceedings (antidumping and countervailing duties)
- U.S.-Israel and U.S.-Jordan Free Trade Agreements for goods other than textile and apparel goods

## NAFTA Marking Rules19 CFR Part 102

## NAFTA Marking Rules

- 			 19 CFR Part 102
- 	Applicable to trade with Canada and Mexico
- 	Step-by-step application of rules
- 		- wholly obtained
- 		- domestic materials
- 		- tariff shift
- 		- essential character
- 		- sets
- 		- minor processing

## First Rule – 102.11(a)(1)

- Wholly Obtained or Produced
- Defined at 19 CFR 102.1(g) – including
- Mineral good extracted
- Vegetable or plant harvested in country
- Live animal born and raised
- Good from sea such as fish using flag of vessel
- Outer space
- Waste or scrap
- Produced from wholly obtained goods

## Second Rule: 102.11(a)(2)

- Produced Exclusively from Domestic Materials
- Defined at 19 CFR 102.1(d)
- The origin of the material used is the same country where the good is produced

## Third Rule: 102.11(a)(3)

- Each foreign material undergoes a tariff shift according to a specific rule
- Product specific rules in 102.20
- Part 102 rules are different than the preference rules in GN 12(t)
- “Foreign material” is defined in 102.1(e) as a material whose origin is not the same as the country where the good is produced

## Fourth Rule: 102.11(b)

- The single material that imparts the essential character (except sets)
- Criteria for determining essential character is in section 102.18
- Only consider materials that are determined NOT to meet the applicable tariff shift rule

## Fifth Rule: 102.11(c)

- A special rule for sets (goods put up in sets for retail sale)
- Rule: Origin is the country or countries of all materials that merit equal consideration in determining the essential character of the good.

## Sixth Rule: 102.11(d)

- 1. Minor processing such as dilution, cleaning, trimming, unloading, testing, etc. – country of origin of all materials meriting equal consideration in the essential character determination.
- 2. Simple assembly such as the fitting together of 5 or fewer parts by bolting, soldering, etc. – if the assembled parts that merit equal consideration for essential character are from the same country, that is the country of origin.
- 3. If country of origin cannot be determined under 1 or 2, it is the last country in which the good underwent production.

## NAFTA Rules Summary – 102.11

- (a)(1) – wholly obtained or produced
- (a)(2) – produced exclusively with domestic materials
- (a)(3) – each foreign material undergoes applicable tariff shift
- (b) - material which imparts the essential character to the good
- (c) - sets – all materials that impart essential character to the good
- (d) – minor processing; simple assembly; where good last underwent production

## CBP Rulings

- http://rulings.cbp.gov

## U.S. Customs and Border Protection

*Securing America’s Borders*

- CBP.gov