[Federal Register Volume 69, Number 211 (Tuesday, November 2, 2004)]
[Rules and Regulations]
[Pages 63445-63452]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-24326]


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DEPARTMENT OF HOMELAND SECURITY

Bureau of Customs and Border Protection

DEPARTMENT OF THE TREASURY

19 CFR Parts 10 and 178

[CBP Dec. 04-36]
RIN 1505-AB32


Prototypes Used Solely for Product Development, Testing, 
Evaluation, or Quality Control Purposes

AGENCY: Customs and Border Protection, Department of Homeland Security.

ACTION: Final rule.

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SUMMARY: This document amends the Customs and Border Protection 
Regulations in order to establish rules and procedures under the 
Product Development and Testing Act of 2000 (PDTA). The purpose of the 
PDTA is to promote product development and testing in the United States 
by allowing the duty-free entry of articles, commonly referred to as 
prototypes, that are to be used exclusively in product development, 
testing, evaluation or quality control. The final regulations set forth 
the procedures for both the identification of those prototypes properly 
entitled to duty-free entry, as well as the permissible sale of such 
prototypes, following use in the United States, as scrap, waste, or for 
recycling.

EFFECTIVE DATE: This final rule is effective on December 2, 2004.

FOR FURTHER INFORMATION CONTACT: Richard Wallio, Office of Field 
Operations, 202-344-2556.

SUPPLEMENTARY INFORMATION: 

Background

    The Product Development and Testing Act of 2000 (PDTA) was enacted 
on November 9, 2000, as part of the Tariff Suspension and Trade Act of 
2000 (Act) (Pub. L. 106-476). The provisions of the PDTA are found in 
sections 1431-1435 of the Act.
    The purpose of the PDTA, as set forth in section 1432(b) of the 
Act, is to promote product development and testing in the United States 
by allowing the importation on a duty-free basis of articles commonly 
referred to as ``prototypes'' that are to be used exclusively for 
product development, testing, evaluation or quality control.
    Until the enactment of the PDTA, prototype articles had generally 
been subject to customs duty when imported, unless the articles were 
eligible for duty-free treatment under a special trade program, such as 
the North American Free Trade Agreement (NAFTA) (19 U.S.C. 3301 et 
seq.), or unless they were entered under a temporary importation bond 
(TIB) (subheading 9813.00.30, Harmonized Tariff Schedule of the United 
States (HTSUS)). Furthermore, the value of these prototypes had to be 
included in the dutiable value of any imported production merchandise 
that resulted from the same design and development efforts to which the 
prototype articles themselves were dedicated. In effect, duty on a 
prototype good was assessed twice, once when the prototype was imported 
and a second time as part of the dutiable value of the related imported 
production merchandise.
    Consequently, to expedite and encourage the use of prototypes in 
the United States, section 1433 of the Act amended the Harmonized 
Tariff Schedule of the United States (HTSUS) by inserting a new 
subheading 9817.85.01 in subchapter XVII of chapter 98, HTSUS, to 
provide for the duty-free entry of prototype articles. Section 1433 of 
the Act also included a new U.S. Note 6 in subchapter XVII of chapter 
98, HTSUS, to define the term ``prototypes'' as used in HTSUS 
subheading 9817.85.01.

CBP Rulemaking

    By a document published in the Federal Register (67 FR 10636) on 
March 8, 2002, Customs (which has been renamed Customs and Border 
Protection (CBP) after being transferred to the Department of Homeland 
Security) proposed to amend the Customs Regulations (now the CBP 
Regulations) to add a new Sec.  10.91, in accordance with the 
requirements of the

[[Page 63446]]

PDTA, that would: (1) Establish procedures regarding the identification 
of prototypes at the time of their importation into the United States; 
and (2) establish procedures regarding the sale of prototypes as scrap, 
waste, or for recycling, after their intended use in product 
development, testing, and evaluation, provided that all applicable 
duties were tendered following the sale, at the rate of duty in effect 
for such scrap, waste, or recycled materials at the time of importation 
of the prototype articles. These latter procedures relating to the sale 
of the used prototypes also included prototypes and parts of prototypes 
that were incorporated into other products that were sold as scrap, 
waste, or recycled materials.

Discussion of Comments

    Twelve commenters responded to the notice of proposed rulemaking. A 
description of the issues that are raised by these commenters together 
with CBP's response to these issues is set forth below.

General; Duty-Free Entry

    Comment: Proposed Sec.  10.91 does not create simplified procedures 
and impose only minimal burdens, as Congress intended in enacting the 
PDTA, regarding the entry of prototype articles for use under HTSUS 
subheading 9817.85.01, and the possible recovery and sale of the used 
prototypes thereafter as scrap, waste, or for recycling.
    CBP Response: CBP disagrees. It is CBP's view that the proposed 
procedures as further developed in this final rule will efficiently and 
expeditiously promote product development and testing in the United 
States, as contemplated under the PDTA, while, at the same time, 
ensuring that the subject tariff provision is used only for the 
purposes intended, and that any duty that is due on the sale of scrap, 
waste or recycled material is correctly reported and paid, as the PDTA 
also requires.
    Comment: The heading for proposed Sec.  10.91 should add a 
reference to product evaluation and quality control as purposes for 
which prototypes may be entered duty-free under HTSUS subheading 
9817.85.01.
    CBP Response: CBP finds that this is unnecessary. Section headings 
and titles are nothing more than reference guides and cannot limit or 
restrict the plain meaning of the regulatory text itself. In accordance 
with the PDTA, Sec.  10.91(b)(1) fully addresses the purposes for which 
prototype articles may be entered duty-free under HTSUS subheading 
9817.85.01.
    Comment: It is observed that proposed Sec.  10.91 inadvertently 
omits a paragraph (d), although it does contain paragraphs (e) and (f).
    CBP Response: While this observation is correct, CBP is adding a 
paragraph (d) in the final rule. The new paragraph (d) describes the 
obligations of an importer of a prototype to CBP regarding a used 
prototype if the used prototype is not sold. Because a paragraph (d) is 
added, paragraphs (e) and (f) in proposed rule Sec.  10.91 may retain 
their respective designations. However, because the proposed rule 
incorrectly cross-referenced paragraph (d) in Sec.  10.91(b)(2)(ii) and 
Sec.  10.91(c)(3), these cross-references are corrected in the final 
rule.
    Comment: Proposed Sec.  10.91(a) should provide that goods entered 
as prototypes under HTSUS subheading 9817.85.01 may be exported or 
scrapped prior to being used for the required purposes.
    CBP Response: CBP disagrees. One of the purposes of the PDTA was to 
encourage the trade to do its testing and research in the United States 
without having to pay duty. Accordingly, CBP believes that goods that 
benefit under the PDTA must be used for testing and research. Proposed 
Sec.  10.91(d) reflects this.
    Comment: Proposed Sec.  10.91(a)(1) should include specific 
guidelines for the preparation of the CF 7501 (now CBP Form 7501) when 
an importer is entering prototypes under HTSUS subheading 9817.85.01. 
In particular, no other HTSUS subheading should be required on the CBP 
Form 7501.
    CBP Response: CBP disagrees that this regulation needs to include 
specific guidelines. The statistical note to Chapter 98, HTSUS, 
provides sufficient guidance. In addition, operational instructions 
will be issued covering all aspects of the preparation of the CBP Form 
7501 for articles sought to be entered, duty-free, as prototypes under 
HTSUS subheading 9817.85.01.

Importer Declaration; Proof of Actual Use; Liquidation of Entry

    Comment: Proposed Sec.  10.91 should include specific requirements 
regarding the certification of the prototypes, such as a statement from 
the importer indicating that the material is for testing or evaluation 
under HTSUS subheading 9817.85.01.
    CBP Response: CBP believes that Sec.  10.91(a)(2)(i) will 
adequately address this issue in the context of the importer 
declaration.
    Comment: It is pointed out that proposed Sec.  10.91(a)(2) does not 
make any provision for the liquidation of a prototype entry under HTSUS 
subheading 9817.85.01.
    CBP Response: CBP agrees that a time frame for liquidation of a 
prototype entry should be provided, especially in relation to Sec.  
10.91(a)(2)(ii), which authorizes the port director to request proof of 
actual use. In this respect, proposed Sec.  10.91(a)(2)(ii) is amended 
in this final rule to provide that liquidation of the entry will be 
extended until the requested proof of actual use is received, or until 
the three-year period from the date of entry allowed for its receipt 
has expired; and that if proof of actual use is requested and not 
timely received, the entry will be liquidated as dutiable under the 
tariff provision that would otherwise apply to the imported article.
    Comment: It is contended, under proposed Sec.  10.91(a)(2)(ii), 
that the PDTA does not envision permitting the port director to request 
proof of actual use of the articles following their entry under HTSUS 
subheading 9817.85.01, and that CBP should not impose such a 
requirement. It is declared that the life of a prototype may easily 
span many years and that this would be inconsistent with requiring 
proof of use, which must usually be submitted within three years of the 
date of entry. One company asked that it be specifically exempted from 
any requirement to submit proof of actual use of the articles following 
entry.
    CBP Response: CBP believes that it has the discretion to ask for 
proof of actual use under HTSUS subheading 9817.85.01. To be entitled 
to duty-free entry under that HTSUS subheading, the imported articles 
must qualify as prototypes that are to be used exclusively for 
development, testing, product evaluation or quality control purposes. 
In this latter vein, CBP has a responsibility and an obligation under 
the PDTA to follow up, on occasion, and require post-entry proof of 
actual use as specified in Sec.  10.91(a)(2)(ii), in order to 
effectively monitor and ensure the proper employment of this tariff 
provision for the purposes intended. To this end, the port director is 
accorded the discretion to require such proof in those cases where it 
is believed to be warranted.
    In those instances where the port director requests proof of actual 
use, while such proof of use must be given to CBP within three years of 
the date of entry, the prototype may, of course, continue to be used 
thereafter for the purposes enumerated in HTSUS subheading 9817.85.01. 
Proposed Sec.  10.91(a)(2)(ii) is modified in this final rule to make 
this clear. Also, in relation to this, proposed Sec.  
10.91(a)(2)(ii)(A) is

[[Page 63447]]

recast in this final rule to provide that the proof of use, if 
requested, must include a description of the use that is being and/or 
that has been made of the articles so as to enable the port director to 
confirm that the articles have been entitled to entry as claimed.
    Comment: Proposed Sec.  10.91(a)(2)(ii) should make clear what type 
of statements would be acceptable for the proof or declaration of 
actual use. Also, the statement required in proposed Sec.  
10.91(a)(2)(ii)(B) that prototype articles not be put to any other use 
than as specified in HTSUS subheading 9817.85.01 seems contradictory in 
that the articles may be sold for use as scrap, waste, or for recycling 
under the PDTA.
    CBP Response: CBP agrees in part. To further sharpen the focus of 
this provision, proposed Sec.  10.91(a)(2)(ii)(B) is revised in this 
final rule to reflect that the prototype articles may not be put to any 
other use than as specified in HTSUS subheading 9817.85.01 after their 
entry or withdrawal from warehouse for consumption and prior to the 
completion of their use under HTSUS subheading 9817.85.01. Further, a 
reference to paragraphs (c) and (d) is added to Sec.  
10.91(a)(2)(ii)(B) in this final rule, indicating the permissible 
dispositions to which the articles may be subject following the 
completion of their use as prescribed in HTSUS subheading 9817.85.01.
    As thus revised, CBP finds that Sec.  10.91(a)(2)(ii)(A)-(C) sets 
forth the information required for the proof (declaration) of actual 
use with ample clarity and detail, and, along these same lines, 
proposed Sec.  10.91(e)(1) is changed in this final rule to reference 
those records which would be necessary to support the proof of actual 
use.
    Comment: Proposed Sec.  10.91(a)(2)(ii)(C) provides that a 
declaration of actual use must include a statement that neither the 
articles nor any parts of the articles will be sold, or be incorporated 
into other products that are sold, after the articles have been entered 
or withdrawn from warehouse for consumption and prior to the completion 
of their use as provided in HTSUS subheading 9817.85.01. This paragraph 
seems unnecessary in light of proposed Sec.  10.91(a)(2)(ii)(B), which 
provides that the declaration of actual use must also include a 
statement that articles are not to be put to any other use after the 
articles have been entered or withdrawn from warehouse for consumption 
and prior to the completion of their use under HTSUS 9817.95.01.
    CBP Response: CBP disagrees. The statement required in Sec.  
10.91(a)(2)(ii)(C) represents an acknowledgment by the importer that 
the prototype articles may not be sold after importation and prior to 
their use as prototypes under HTSUS subheading 9817.85.01. A sale of 
the prototype articles does not constitute a use of those articles as 
contemplated under Sec.  10.91(a)(2)(ii)(B).

Articles Classifiable as Prototypes Under the PDTA

    Comment: Proposed Sec.  10.91(b)(1) should be revised essentially 
to state that an article may be presumed to be entitled to duty-free 
entry as a prototype under HTSUS subheading 9817.85.01, if the article 
is otherwise eligible for entry under a temporary importation bond 
(TIB) pursuant to HTSUS subheading 9813.00.30 (articles intended solely 
for testing, experimental or review purposes).
    CBP Response: CBP disagrees. Articles that may be entitled to free 
entry as prototypes under HTSUS subheading 9817.85.01 are defined in 
U.S. Note 6(a) to Subchapter XVII of Chapter 98, HTSUS. This definition 
is essentially mirrored in Sec.  10.91(b)(1). Not all articles entitled 
to entry under TIB pursuant to HTSUS subheading 9813.00.30 would 
necessarily meet the stated definition for ``prototypes,'' as required 
for duty-free entry under HTSUS subheading 9817.85.01.
    Comment: Proposed Sec.  10.91(b)(1) should expressly state that 
prototypes may encompass articles from all industries, and are not 
restricted to articles of certain industries.
    CBP Response: CBP agrees. The introductory text of proposed Sec.  
10.91(b)(1) is changed in this final rule to affirm that articles 
classifiable as prototypes under HTSUS subheading 9817.85.01 may 
encompass articles that pertain to any industry as long as such 
articles meet the requirements set forth in Sec.  10.91(b)(1)(i) and 
(b)(1)(ii).
    Comment: The definition of prototypes should be revised to show 
that certain motor vehicles and parts of motor vehicles would qualify 
as ``original'' articles under proposed Sec.  10.91(b)(1). 
Additionally, concerning proposed Sec.  10.91(b)(1)(i), it is suggested 
that a definition be added for the term ``preproduction'' to explicitly 
include research and development efforts expended on prototypes that 
may never result in commercial production; and that the phrase 
``development, testing, product evaluation or quality control'' be 
further defined to include, among other things, ``manufacturing of the 
imported [prototype] articles with any foreign or domestic materials, 
and further processing.''
    CBP Response: CBP is of the opinion that the definition of 
prototypes in U.S. Note 6(a) to subchapter XVII, chapter 98, HTSUS, as 
adopted in Sec.  10.91(b)(1)(i) and (b)(1)(ii), should not be further 
expanded within the framework of this rulemaking. In this regard, 
whether given merchandise or particular activities or operations would 
fall within the scope of the definition for prototypes under the PDTA 
would more suitably be determined on a case-by-case basis as the need 
arises, taking into account the precise facts and circumstances of each 
case, through the administrative ruling process in accordance with the 
requirements of part 177, CBP Regulations (19 CFR part 177).
    Comment: In proposed Sec.  10.91(b)(2)(i), the importation of 
prototypes is limited to noncommercial quantities based on industry 
practice. The exact limits on the numbers of prototypes that may be 
imported should be included in the regulation.
    CBP Response: CBP disagrees. It is not possible to establish rigid 
limitations on the numbers of prototypes that may be entered under 
HTSUS subheading 9817.85.01, in view of the multifarious industries 
potentially affected and the myriad purposes among those industries for 
which prototypes might be used in testing, evaluation, product 
development or quality control. In certain cases, an entry may be 
rejected if CBP should conclude that an importer seeks to enter a 
commodity under HTSUS subheading 9817.85.01 in numbers that are 
considered to be excessive in light of the purposes intended and based 
on the practice of the specific industry involved.
    Comment: Proposed Sec.  10.91(b)(2)(ii) should be revised to 
provide that the general restriction on the sale of prototypes or parts 
of prototypes after their importation into the United States does not 
apply to sales for export. It is stated that the same principle applies 
in the case of temporary importations under bond (TIBs).
    CBP Response: CBP believes that it is sufficient in the context of 
this rulemaking to generally restate the prohibition imposed in U.S. 
Note 6(b)(ii) to subchapter XVII, chapter 98, HTSUS, on the sale of 
prototypes or parts of prototypes into the commerce of the United 
States after their importation into the United States, including their 
incorporation into other products that are sold. The prohibition on the 
sale of prototypes or parts of prototypes does not apply to sales for 
export.
    Analogously, the TIB provisions and attendant regulations are to 
the same effect. Specifically, articles entitled to entry under TIB may 
not be imported for sale or for sale on approval (U.S.

[[Page 63448]]

Note 1(a) to subchapter XIII, chapter 98, HTSUS); and the implementing 
CBP Regulations for TIBs merely reiterate this requirement (Sec.  
10.31(a)(3)(iii), CBP Regulations (19 CFR 10.31(a)(3)(iii))).
    Comment: Clarification is sought as to proposed Sec.  
10.91(b)(2)(iii) (``Articles excluded from being prototypes''), which 
excludes articles from being classified as prototypes if they are 
subject to quantitative restrictions, antidumping orders or 
countervailing duties. It is asked whether this provision would exclude 
all textile and apparel products, as opposed to those that are in fact 
subject to quantitative restrictions at the time of entry.
    CBP Response: Based upon U.S. Note 6(c) to subchapter XVII of 
chapter 98, HTSUS, articles that are in fact subject at the time of 
entry to quantitative restrictions, antidumping orders or 
countervailing duty orders are precluded from being classifiable as 
prototypes entitled to free entry under HTSUS subheading 9817.85.01. 
Proposed Sec.  10.91(b)(2)(iii), entitled, ``Articles excluded from 
being prototypes,'' is revised in this final rule to make this clear, 
and, furthermore, for purposes of editorial integrity, the provision is 
redesignated in this final rule as Sec.  10.91(b)(2)(iv). Also, the 
introductory text of proposed Sec.  10.91(b)(2) is revised in this 
final rule to add a reference to U.S. Note 6(c).

Sale of Prototypes Following Use; Alternative Dispositions

    Comment: It is asserted, in connection with proposed Sec.  
10.91(c), that articles imported as prototypes under HTSUS subheading 
9817.85.01 do not have to be sold as scrap, waste or for recycling; 
that such articles may instead be exported, destroyed, donated to 
charity, otherwise given away to another party, or be retained and/or 
put to any other use by the importer. It is suggested that Sec.  10.91 
should make reference to these possible alternative dispositions of the 
articles, and state that such alternative dispositions of the used 
prototype articles need not be reported to CBP.
    CBP Response: CBP agrees. Except for sale, section 1434(b) of the 
PDTA is not concerned with any other disposition of the prototypes 
following their use pursuant to HTSUS subheading 9817.85.01. Hence, 
other than sale to the extent authorized under section 1434(b), no 
other disposition of the used prototype articles need be reported to 
CBP. A paragraph (d) is added to proposed Sec.  10.91 in this final 
rule to address this issue.
    Comment: With respect to proposed Sec.  10.91(c), the regulation 
should set out a comprehensive definition of recycling.
    CBP Response: CBP has determined, as with the definition for 
prototypes discussed previously, that the meaning of recycling for 
purposes of the PDTA would more aptly be elucidated on a case-by-case 
basis through the administrative ruling process pursuant to part 177, 
CBP Regulations (19 CFR part 177). The concept of recycling may have 
different meanings depending upon the merchandise concerned or the 
particular industry involved.
    Comment: Under proposed Sec.  10.91(c)(1), the provision that the 
used prototypes or parts may be sold as scrap, waste, or for recycling 
upon payment of applicable duty appears to erroneously imply that duty 
must be paid before the articles may be sold.
    CBP Response: To avoid this misperception, proposed Sec.  
10.91(c)(1) is revised in this final rule to make clear that duty is 
payable after the sale of the used prototypes or their parts. 
Furthermore, in Sec.  10.91(c)(1), a reference is added in this final 
rule to Sec.  10.91(c)(3), which sets forth the timing and the manner 
in which the applicable duty must be paid.
    Comment: Proposed Sec.  10.91(c)(2) should not require the 
submission of a notice of sale if the used prototype that is sold as 
scrap, waste, or for recycling is not subject to any duty.
    CBP Response: CBP disagrees. The report of sale under Sec.  
10.91(c)(2) is needed so that CBP may readily confirm that the used 
prototype material has been sold as scrap, waste, or for recycling, as 
authorized under the PDTA, and that the importer is correct in 
concluding that the scrap, waste or recycled material that is sold is 
duty-free.
    For editorial consistency, the last sentence of proposed Sec.  
10.91(c)(2) is recast in this final rule to advise that the notice of 
sale, if applicable, should not be submitted to CBP prior to the 
submission of proof of actual use, in the event that such proof should 
be requested by the port director; likewise, the reference to paragraph 
(c)(1) in the last sentence of proposed Sec.  10.91(c)(2) is changed in 
this final rule to paragraph (a)(2)(ii).
    Comment: Proposed Sec.  10.91(c)(2) and (c)(3) should be amended to 
allow the notice of sale to be filed quarterly, instead of within 10 
business days of each sale. A requirement that a separate notice of 
sale be filed for each prototype or part of a prototype that is 
scrapped or recycled and subsequently sold would impose an undue burden 
on the importer. At the same time, lengthening the reporting period 
would have no appreciable impact on customs revenue since most scrap, 
waste and recycled materials are duty-free.
    CBP Response: CBP agrees. Paragraphs (c)(2) and (c)(3) of proposed 
Sec.  10.91 are changed in this final rule to permit an importer to 
file a blanket notice of sale covering all sales of prototypes and 
parts that occur during a quarterly (3-month) calendar period. This 
blanket notice must be filed within 10 business days following the end 
of the related quarterly calendar period in which the sale(s) occurred.
    Comment: A question is posed as to whether the notice of sale in 
proposed Sec.  10.91(c)(3) constitutes a new entry, an amended entry, 
or a voluntary disclosure.
    CBP Response: The notice of sale is neither an import entry, nor is 
it a voluntary disclosure. The notice of sale is basically the required 
report that is made to CBP regarding those prototypes and parts of 
prototypes that are sold as scrap, waste, or for recycling following 
their use under HTSUS subheading 9817.85.01. The employment of an 
import entry form (a CBP Form 7501), modified as appropriate, as 
provided in Sec.  10.91(c)(3), is simply a convenient administrative 
means for making the required report of sale to CBP.
    Comment: It is asked, regarding proposed Sec.  10.91(c)(3)(I), 
whether the description requested by CBP of the condition of a 
prototype following its use for the purposes specified in HTSUS 
subheading 9817.85.01 relates to an article immediately following its 
use as a prototype or the article after it has been scrapped (i.e., 
crushed and shredded).
    CBP Response: CBP is interested in any damage, degradation or 
deterioration to the prototype articles resulting from their use for 
the specified purposes and resulting from any other cause before their 
sale as scrap, waste or for recycling. Proposed Sec.  10.91(c)(3)(i) is 
thus clarified in this final rule. Also, a corresponding change is made 
to proposed Sec.  10.91(e)(2) in this final rule pertaining to the 
valuation of the used prototypes or their parts for purposes of proper 
duty assessment.

Entry Bond; Liquidated Damages for Failure To Report Sale/Pay Duty

    Comment: Under proposed Sec.  10.91(c)(4), the failure to file a 
notice of sale or to deposit appropriate duty following the sale of a 
used prototype as scrap, waste, or for recycling constitutes a breach 
of the importer's entry bond that will result in the assessment of 
liquidated damages under the bond. The question is presented as to what 
action CBP would take, for example, assuming the applicability of 19 
U.S.C. 1504(b),

[[Page 63449]]

should the import entry of a prototype article be liquidated by 
operation of law (4 years from the date of entry), with the underlying 
import bond being cancelled, before the used prototype article is sold 
as scrap, waste, or for recycling.
    CBP Response: CBP has decided to delete proposed Sec.  10.91(c)(4) 
in this final rule. The import entry bond referred to in proposed Sec.  
10.91(c)(4) covers the performance of those conditions (19 CFR 
113.62(h)) that are associated with the duty-free entry of a prototype 
as defined in the PDTA that is to be used exclusively under HTSUS 
subheading 9817.85.01. As such, the duty-free entry of the prototype 
under HTSUS subheading 9817.85.01 is not concerned with or conditioned 
upon any liability for duty that might thereafter accrue pursuant to 
section 1434(b) of the PDTA due to the subsequent sale of the prototype 
as scrap, waste, or for recycling. In sum, the payment of applicable 
duty on scrap, waste or recycled material under the PDTA is an entirely 
separate and distinct transaction that is not subsumed within the duty-
free entry of the prototype article.
    Consequently, since duty to the extent payable on scrap, waste, or 
recycled material that is sold under section 1434(b) of the PDTA would 
not be assessed or collected under the import entry for the prototype, 
liquidated damages under the associated import entry bond would not 
apply with respect to such a sale.

Recordkeeping Requirements

    Comment: In proposed Sec.  10.91(e)(1), the record retention period 
for documents supporting the notice of sale of a used prototype as 
scrap, waste or for recycling should be five years from the date of the 
entry of the prototype article under HTSUS subheading 9817.85.01.
    CBP Response: CBP disagrees. As explained above, the possible sale 
of the used prototype as scrap, waste, or recycled material is not 
related to the entry of the prototype under HTSUS subheading 
9817.85.01. Should a sale of the used prototype as scrap, waste, or for 
recycling in fact occur, Sec.  10.91(e)(1) mandates that records 
supporting the notice of sale be retained for five years from the date 
of filing the notice of sale in complete and proper form under Sec.  
10.91(c)(3). This is governed by Sec.  163.4(a), CBP Regulations (19 
CFR 163.4), which is referenced in Sec.  10.91(e)(1).
    Comment: Proposed Sec.  10.91(e)(2) should make clear that the 
market value of any prototypes sold as scrap, waste, or for recycling 
will be based upon their selling price.
    CBP Response: Section 10.91(e)(2) already makes this amply clear.

Conversion of TIB Entry to Duty-Free Prototype Entry

    Comment: Proposed Sec.  10.91(f) should be expanded to permit 
temporary importation bond (TIB) entries under HTSUS subheading 
9813.00.05 to be converted to duty-free entries under HTSUS subheading 
9817.85.01.
    CBP Response: CBP disagrees. Section 1435(2) of the PDTA expressly 
allows only TIB entries under HTSUS subheading 9813.00.30 to be 
converted to duty-free entries under HTSUS subheading 9817.85.01, if 
those TIB entries otherwise qualify for such conversion.

Conclusion

    In view of the foregoing, and following careful consideration of 
the comments received and further review of the matter, CBP has 
concluded that the proposed regulations with the modifications 
discussed above should be adopted as a final rule.

Regulatory Flexibility Act and Executive Order 12866

    This final rule amends the CBP Regulations to implement the terms 
and requirements of the PDTA, which went into effect on November 9, 
2000. These regulations benefit the public by allowing the duty-free 
importation of prototypes that are to be used exclusively for 
development, testing, product evaluation or quality control purposes, 
thereby promoting such activities in the United States, rather than 
overseas. Accordingly, pursuant to the provisions of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.), it is certified that these 
regulations will not have a significant economic impact on a 
substantial number of small entities. Nor do these regulations meet the 
criteria for a ``significant regulatory action'' as specified in E.O. 
12866.

Paperwork Reduction Act

    The collections of information encompassed within this final rule 
document have previously been reviewed and approved by the Office of 
Management and Budget (OMB) in accordance with the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3507) and assigned OMB Control Numbers 1651-0032 
(Importers of merchandise subject to actual use provisions); and 1651-
0038 (Proof of use for duty rates dependent on actual use). These 
collections encompass a claim for duty-free entry for prototype 
articles imported for use exclusively for development, testing, product 
evaluation or quality control purposes. This final rule does not 
present any material change to the existing approved information 
collections.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by OMB.
    Part 178, CBP Regulations (19 CFR part 178), containing the list of 
approved information collections, is revised to make reference to the 
new Sec.  10.91.

Signing Authority

    This regulation is being issued in accordance with 19 CFR 
0.1(a)(1).

List of Subjects

19 CFR Part 10

    Customs duties and inspection, Imports, Preference programs, 
Reporting and recordkeeping requirements, Shipments.

19 CFR Part 178

    Administrative practice and procedure, Collections of information, 
Imports, Paperwork requirements, Reporting and recordkeeping 
requirements.

Amendments to the Regulations

0
Parts 10 and 178, CBP Regulations (19 CFR parts 10 and 178), are 
amended as set forth below.

PART 10--ARTICLES CONDITIONALLY FREE, SUBJECT TO A REDUCED RATE, 
ETC.

0
1. The general authority citation for part 10 continues to read as 
follows, and the specific sectional authority for Sec.  10.91 is added 
in appropriate numerical order to read as follows:

    Authority: 19 U.S.C. 66, 1202 (General Note 23, Harmonized 
Tariff Schedule of the United States (HTSUS)), 1321, 1481, 1484, 
1498, 1508, 1623, 1624, 3314;
* * * * *
    Section 10.91 also issued under Pub. L. 106-476 (114 Stat. 
2101), sections 1434, 1435;
* * * * *

0
2. Part 10 is amended by adding after Sec.  10.90 a new center heading 
entitled ``Prototypes'' followed by a new Sec.  10.91 to read as 
follows:

Prototypes


Sec.  10.91  Prototypes used exclusively for product development and 
testing.

    (a) Duty-free entry; declaration of use; extension of liquidation--
(1) Entry or

[[Page 63450]]

withdrawal for consumption. Articles defined as ``prototypes'' and 
meeting the other requirements prescribed in paragraph (b) of this 
section may be entered or withdrawn from warehouse for consumption, 
duty-free, under subheading 9817.85.01, Harmonized Tariff Schedule of 
the United States (HTSUS), on CBP Form 7501 or an electronic 
equivalent. A separate entry or withdrawal must be made for a 
qualifying prototype article each time the article is imported/
reimported to the United States.
    (2) Importer declaration. (i) Entry accepted as declaration. Entry 
or withdrawal from warehouse for consumption under HTSUS subheading 
9817.85.01 may be accepted by the port director as an effective 
declaration that the articles will be used solely for the purposes 
stated in the subheading.
    (ii) Proof (declaration) of actual use. If it is believed the 
circumstances so warrant, the port director may request the submission 
of proof of actual use, executed and dated by the importer. The title 
of the party executing the proof of actual use must be set forth. If 
proof of actual use is requested, the importer must provide it within 
three years after the date the article is entered or withdrawn from 
warehouse for consumption. Liquidation of the related entry may be 
extended until the requested proof or declaration of actual use is 
received or until the three-year period from the date of entry allowed 
for the receipt of such proof has expired. While requested proof of use 
must be given to CBP within three years of the date of entry, the 
prototype may continue to be used thereafter for the purposes 
enumerated in HTSUS subheading 9817.85.01. If requested proof of use is 
not timely received, the entry will be liquidated as dutiable under the 
tariff provision that would otherwise apply to the imported article. 
While there is no particular form for this declaration, it may either 
be submitted in writing, or electronically as authorized by CBP, and 
must include the following:
    (A) A description of the use that is being and/or that has been 
made of the articles set forth in sufficient detail so as to enable the 
port director to determine whether the articles have been entitled to 
entry as claimed;
    (B) A statement that the articles have not and are not to be put to 
any other use after the articles have been entered or withdrawn from 
warehouse for consumption and prior to the completion of their use 
under HTSUS 9817.85.01 (also see paragraphs (c) and (d) of this section 
concerning the disposition(s) to which the articles may be put 
following their use under HTSUS subheading 9817.85.01); and
    (C) A statement that the articles or any parts of the articles have 
not been and are not intended to be sold, or incorporated into other 
products that are sold, after the articles have been entered or 
withdrawn from warehouse for consumption and prior to the completion of 
their use as provided in HTSUS subheading 9817.85.01 ( see paragraph 
(b)(2)(ii) of this section).
    (b) Articles classifiable as prototypes-- (1) Prototypes defined. 
In accordance with U.S. Note 6(a) to subchapter XVII of chapter 98, 
HTSUS, applicable to subheading 9817.85.01, the term ``prototypes'' 
means originals or models of articles pertaining to any industry that:
    (i) Are either in the preproduction, production or postproduction 
stage and are to be used exclusively for development, testing, product 
evaluation, or quality control purposes (not including automobile 
racing for purse, prize or commercial competition); and
    (ii) In the case of originals or models of articles that are either 
in the production or postproduction stage, are associated with a design 
change from current production (including a refinement, advancement, 
improvement, development or quality control in either the product 
itself or the means of producing the product).
    (2) Additional requirements. In accordance with U.S. Note 6(b) and 
(c) to subchapter XVII of chapter 98, HTSUS, applicable to subheading 
9817.85.01, the following additional restrictions apply to articles 
that may be classified as prototypes:
    (i) Importations limited. Prototypes may be imported pursuant to 
this section only in limited noncommercial quantities in accordance 
with industry practice.
    (ii) Sale prohibited after entry and prior to use. Prototypes or 
parts of prototypes may not be sold, or be incorporated into other 
products that are sold into the commerce of the United States, after 
the prototypes have been entered or withdrawn from warehouse for 
consumption under HTSUS subheading 9817.85.01, except that, after 
having been used for the purposes for which they were entered or 
withdrawn from warehouse under HTSUS subheading 9817.85.01, such 
prototypes or any part(s) of the prototypes may be sold as scrap, 
waste, or for recycling, as prescribed in paragraph (c) of this 
section.
    (iii) Articles subject to laws of another agency. Articles that are 
subject to licensing requirements, or that must comply with laws, rules 
or regulations administered by an agency other than CBP before being 
imported, may be entered as prototypes pursuant to this section if they 
meet all applicable provisions of law and otherwise meet the definition 
of prototypes in paragraph (b)(1) of this section.
    (iv) Articles excluded from being prototypes. Articles that are in 
fact subject at the time of entry to quantitative restrictions, 
antidumping orders or countervailing duty orders are excluded from 
being classified as prototypes under this section.
    (c) Sale of prototype following use. (1) Sale. Prototypes or any 
part(s) of prototypes, after having been used for the purposes for 
which they were entered or withdrawn under HTSUS subheading 9817.85.01, 
may only be sold as scrap, waste, or for recycling. This includes a 
prototype or any part thereof that is incorporated into another 
product, as scrap, waste, or recycled material. If sold as scrap, 
waste, or for recycling, applicable duty must be paid on the prototypes 
or parts as provided in paragraph (c)(3) of this section, at the rate 
of duty in effect for such scrap, waste, or recycled materials at the 
time the prototypes were entered or withdrawn for consumption.
    (2) Notice of sale required. If, after a prototype has been used 
for the purposes contemplated in HTSUS subheading 9817.85.01, the 
prototype or any part(s) of the prototype (including a prototype or any 
part that is incorporated into another product) is sold as scrap, 
waste, or for recycling, the importer must provide notice of such sale 
to the port director where the entry or withdrawal of the prototype was 
made. A notice, in the manner authorized in paragraph (c)(3) of this 
section, must be submitted in connection with the sale, whether or not 
duty is payable. The notice should not be submitted prior to the 
submission of proof of actual use, should such proof of actual use be 
requested by the port director ( see paragraph (a)(2)(ii) of this 
section).
    (3) Form and content of notice; tender of duty. While no particular 
form is required for the notice of sale, a consumption entry (CBP Form 
7501), appropriately modified, or an electronic equivalent as 
authorized by CBP, may be used for this purpose. The notice may be a 
blanket notice covering all those sales described in paragraph (c)(2) 
of this section that occur over a quarterly (3-month) calendar period. 
Such notice must be filed within 10 business days of the end of the 
related quarterly period in which the sale(s) occurred. If an article 
sold is dutiable,

[[Page 63451]]

the payment of any duty due must be forwarded together with the notice 
(see paragraph (c)(1) of this section). If the notice is filed 
electronically, payment of any duty owed will be handled through the 
Automated Clearinghouse ( see Sec.  24.25 of this chapter). The notice 
of sale must be executed by the importer, or other person having 
knowledge of the facts surrounding the sale, and must include the 
following:
    (i) The identity of the prototype; the consumption entry number 
under which it was imported; a copy of the declaration of actual use, 
if proof of actual use was requested under paragraph (a)(2)(ii) of this 
section; and a detailed description of the condition of the prototype 
following use for the intended permissible purposes, including any 
damage, degradation or deterioration to the article resulting from such 
use and/or otherwise resulting to the article from any other cause 
prior to its sale for scrap, waste, or recycling;
    (ii) The name and address of the party to whom the article was 
sold, and (if known) the use to which the party intends to put the 
article;
    (iii) The HTSUS subheading number for scrap, waste, or recycled 
material, as applicable, claimed in connection with the sale of the 
prototype, together with the corresponding rate of duty in effect at 
the time the prototype was originally imported for consumption;
    (iv) The value of the prototype article (if dutiable and the duty 
owed is based upon value) ( see paragraph (e)(2) of this section); and
    (v) The title of the party executing the declaration and the date 
of execution.
    (d) Prototypes not sold following use. As to those prototypes or 
parts of prototypes that, after having been used as prescribed under 
HTSUS subheading 9817.85.01, are disposed of otherwise than by sale ( 
see paragraph (c)(1) of this section), there is no requirement that the 
importer notify CBP of any such alternative disposition. Nor are there 
any dutiable consequences that ensue from any disposition of the 
merchandise after the merchandise's use under HTSUS subheading 
9817.85.01 other than sale to the extent authorized under paragraph 
(c)(1) of this section.
    (e) Recordkeeping; retention and production--(1) Recordkeeping. The 
importer must be prepared to submit to the CBP officer, if requested, 
any information, including any supporting documents, reports and 
records, as was necessary for the preparation of the declaration of 
use, if the declaration of use was requested under paragraph (a)(2)(ii) 
of this section, and the notice of sale, if applicable under paragraph 
(c)(3) of this section. The notices, together with any related 
supporting evidence, may be subject to such verification as the port 
director reasonably deems necessary. Supporting documentary evidence 
must be made available to the CBP officer, upon request, for a period 
of five years (see Sec.  163.4(a) of this chapter) from the date of 
filing in complete and proper form, the declaration of use, if 
requested, and, if applicable, the notice of sale. The supporting 
records must be made available to the CBP officer upon request in 
accordance with Sec.  163.6 of this chapter.
    (i) Documents supporting the proof (declaration) of actual use 
must:
    (A) Establish that the identity and description of the prototype 
article is the same article that the consumption entry was made for 
under subheading 9817.85.01, HTSUS; and
    (B) Describe the circumstances of the use of the article; the 
operations, testing, review, manipulation, experimentation, and/or 
other exercises that are being and/or that have been conducted in 
connection with the prototype; and the location, such as the plant or 
production facility, where these activities occurred, sufficient to 
demonstrate that the purposes enumerated in HTSUS subheading 9817.85.01 
are taking and/or have actually taken place.
    (ii) Documents supporting the notice of sale must establish that:
    (A) The identity of the prototype sold is the same article for 
which a consumption entry was made under subheading 9817.85.01 HTSUS 
when it was imported, and that the article was in the condition 
described in the notice of sale;
    (B) The article was sold to the party identified in the notice of 
sale;
    (C) The HTSUS subheading number for scrap, waste, or recycled 
material, as applicable, claimed in connection with the sale of the 
prototype is accurate;
    (D) The date that the prototype was originally imported for 
consumption, and the corresponding rate of duty in effect at the time 
for the applicable HTSUS subheading; and
    (E) The value of the prototype article (if dutiable and the duty 
owed is based upon value) ( see paragraph (e)(2) of this section) as 
claimed in the notice of sale is accurate.
    (2) Relevant value for used prototype or parts sold. For purposes 
of this section, with respect to any duty owed on prototypes or parts 
of prototypes that are sold as scrap, or waste, or for recycling, where 
the duty owed is based upon value, the relevant value is the market 
value of the prototypes or parts, based upon their character and 
condition following use for the purposes prescribed in HTSUS subheading 
9817.85.01. The relevant value should take into consideration any 
damage, degradation or deterioration to the prototypes or parts 
resulting from their use as a prototype and/or otherwise resulting to 
the articles from any other cause prior to their sale as scrap, waste, 
or for recycling. The market value will generally be measured by the 
selling price. Should a prototype or part of a prototype become a 
component of another product that is sold as scrap, waste, or recycled 
material, the relevant market value would be that portion of the 
selling price attributable to the component (prototype or part) as 
provided in this paragraph.
    (f) Articles admitted under TIB--(1) Duty-free entry available. 
Under the procedure presented in paragraph (f)(2) of this section, an 
entry of an article made under a temporary importation bond (TIB) 
solely for testing, experimental or review purposes under HTSUS 
subheading 9813.00.30 may be converted into a duty-free entry under 
HTSUS subheading 9817.85.01, if the following conditions exist:
    (i) The article meets the definition for ``prototypes'' in 
paragraph (b) of this section (U.S. Note 6(a) to subchapter XVII, 
chapter 98, HTSUS); and
    (ii) The TIB entry for the article was in effect and had not been 
closed, and the TIB period for the article had not expired, as of 
November 9, 2000.
    (2) Procedure for converting TIB entry to duty-free entry--(i) 
Importer request. The importer must submit a written request, or an 
electronic equivalent as authorized by CBP, that a TIB entry made under 
HTSUS subheading 9813.00.30, which was in effect and had not been 
closed, and for which the TIB period had not expired, as of November 9, 
2000, be converted instead into a duty-free consumption entry under 
HTSUS subheading 9817.85.01.
    (ii) Action by CBP. CBP will convert the TIB entry under HTSUS 
subheading 9813.00.30 to a duty-free entry under HTSUS subheading 
9817.85.01, provided that the port director is satisfied that the 
conditions set forth in paragraphs (f)(1)(i) and (f)(1)(ii) of this 
section have been met. When the TIB entry is converted, the bond will 
be cancelled and the entry closed. Once the conversion is complete, the 
port director will provide a courtesy acknowledgment to this effect to 
the importer in writing or electronically.

[[Page 63452]]

PART 178--APPROVAL OF INFORMATION COLLECTION REQUIREMENTS

0
1. The authority citation for part 178 continues to read as follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 1624; 44 U.S.C. 3501 et seq.


0
2. Section 178.2 is amended by adding the following in appropriate 
numerical sequence according to the section number under the columns 
indicated:


Sec.  178.2  Listing of OMB control numbers.

----------------------------------------------------------------------------------------------------------------
            19 CFR section                       Description                        OMB Control No.
----------------------------------------------------------------------------------------------------------------
                                                  * * * * * * *
Sec.   10.91..........................  Importers of merchandise       1651-0032 and 1651-0038
                                         subject to actual use
                                         provisions; proof of use for
                                         duty rates dependent on
                                         actual use.
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------


Robert C. Bonner,
Commissioner, Customs and Border Protection.

    Approved: October 27, 2004.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 04-24326 Filed 11-1-04; 8:45 am]
BILLING CODE 4820-02-P