# Presentation: 294353

## What Vendors Should Know About Substantial Transformation October 9, 2007

- Holly E. Files
- 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

## CBP Rulings

- http://rulings.cbp.gov

## U.S. Customs and Border Protection

*Securing America’s Borders*

- CBP.gov