CLA-2 CO:R:C:S 557732 WAS

Marjorie M. Shostak
Stein Shostak Shostak & O'Hara
Suite 1240
3580 Wilshire Boulevard
Los Angeles, CA 90010-2597

RE: Eligibility for duty-free treatment under General Note 13(c), HTSUS, of materials prepared abroad for Warner Bros. Animation

Dear Ms. Shostak:

This is in reference to your letter dated November 5, 1993, on behalf of Warner Bros. Animation, concerning the eligibility of materials used abroad in the production of animated cartoons for duty-free treatment under General Note 13(c), Harmonized Tariff Schedule of the United States (HTSUS).

FACTS:

You state that Warner Bros. Animation is in the business of producing animated cartoons. The individual cartoon episodes are animated abroad with the use of pre-production materials supplied from the U.S. by Warner Bros. Animation. The pre-production work done in the U.S. involves the preparation of a story board, scripts, drawing, sketches, written instructions, background materials and timing data. A sound track of the dialogue is also prepared and sent along with the other pre-production materials to a selected overseas animation studio, so that the animations prepared abroad can be matched to the sound track.

At the animation studios in the foreign country, the animation work is performed pursuant to the written instructions supplied by Warner Bros. Animation; the production drawings are photocopied onto animation cels, painted, and then photographed against various background scenes painted abroad from designs received from the U.S., to produce a film of animated cartoons. The animated cartoon films are returned to Warner Bros. Animation in the U.S. for review, and such retakes, as are requested by Warner Bros. Animation, are prepared by the animation studios and supplied to Warner Bros. Animation. When the animation has been completed abroad, the animated cartoon films are imported separately. You claim that their tariff classification and appraised value are not at issue in this ruling request.

You state that this ruling request relates to materials accumulated by the animation studios, consisting of the pre-production materials for preparation of these episodes, exported from the U.S. by Warner Bros. Animation, together with the used animation cels, background scenes, rejected film takes and retakes, and any other materials created by the animation studios. These materials are packed in cartons by episode, and stored by the animation studios until ordered to be destroyed, or requested to be returned to the U.S. to Warner Bros. Animation. You state that often these materials may not be shipped back to the U.S. for a year or more after the animated film has been returned to the U.S.

You submit that these materials are returned to the U.S. not as the result of a commercial transaction, but because they are owned by Warner Bros. Animation. You state that they are either ordered destroyed abroad, or repatriated, to protect the intellectual property rights therein of Warner Bros. Animation. You claim that the primary purpose for returning these materials to the U.S. is to protect the intellectual property interests of Warner Bros. Animation in the productions, so that they cannot be reproduced by unauthorized persons, stolen, or copied.

In addition, you state that, on occasion, the returned cartons containing the materials may be examined to ascertain whether or not to retain the materials or destroy them. After examination, a few of the used animation cels might ultimately be retrieved from the stored boxes. You claim that in their condition as imported, packed with a mass of other used materials, the used animation cels are not in a saleable condition, and are worthless. To put them in a viable commercial condition, the cels which are retrieved from the stored cartons must be cleaned, reconditioned, associated with a background scene, mounted, and authenticated as coming from a particular cartoon or film. It is your position that it is only after retrieval, and after the cels have undergone significant processing operations in the U.S. that they have any value and become saleable.

ISSUE:

Whether the materials returned to Warner Bros. Animation in the U.S. are exempt from duty and entry pursuant to General Note 13(c), HTSUS, and section 141.4, Customs Regulations (19 CFR 141.4).

LAW AND ANALYSIS:

General Note 13(c), HTSUS, provides:

For the purposes of General Note 1 --

records, diagrams and other data with regard to any business, engineering or exploration operation whether on paper, cards, photographs, blueprints, tapes or other media, . . . are not goods subject to the provisions of the tariff schedule.

Section 141.4, Customs Regulations (19 CFR 141.4) states:

[e]ntry as required by section 484(a), Tariff Act of 1930, as amended (19 U.S.C. 1484(a)), shall be made of every importation, whether free or dutiable and regardless of value, except for:

(a) The exemptions listed in General Note 4 [now General Note 13(c)] to the Harmonized Tariff Schedule of the United States (HTSUS).

HRL 063240 dated October 24, 1979, involved various materials including rough layouts, working drawings of layouts for reproduction purposes, ozachrome proofs, full color proofs, film copies of the working drawings for reproduction, photographs, photostats in the form of either negative or positive prints, handmade approximations of finished printed designs, tracing sheets indicating what colors go where, ink swatches, color standard tolerance samples, and printed production samples. In HRL 063240, we held that these materials fell within the scope of item 870.10, Tariff Schedules of the United States (TSUS) [the precursor provision to General Note 13(c), HTSUS].

We are of the opinion that the materials in the instant case are very similar to those materials described in HRL 063240. The materials accumulated by the Animation Studios, consist of pre-production materials for preparation of animated cartoon films, exported from the U.S. by Warner Bros. Animation, together with the used animation cels, background scenes, rejected film takes and retakes, and other materials created by the Animations Studios in the production of animation work. The materials returned to Warner Bros. Animation are being used directly in the production of animated cartoon films and are returned to the U.S. in order to protect their proprietary value. Thus, it is our position that the returned materials consist of business records and data necessary for the production of animated films within the meaning of General Note 13(c), HTSUS.

Customs, however, also has held that in order for materials to be eligible for an exemption in duty under General Note 13(c), HTSUS, they cannot be imported primarily for commercial sale. See HRL 951044 dated February 1, 1993 (Customs held that certain magnetic discs containing transcribed information, which was intended for sale to third parties and not information related to business operations, was not eligible for the duty exemption under General Note 4(c), HTSUS). The legislative history of item 870.10, indicates that the records contemplated in item 870.10, TSUS, are not salable (S. Rep. No. 1318, 97th Cong., 1st Sess. 1640 (1962)). Similarly, records or data classifiable under this provision are not permitted any commercial value except to the business to which they pertain. See HRL 073099 dated June 5, 1984. Customs has interpreted the terms "salable" and "commercial value" to mean that the primary purpose of importation into the U.S. is for the resale to others. See HRL 220989 dated May 11, 1989.

Under the facts in this case, the material returned to the U.S., which may be stored in a warehouse and retained indefinitely, or may be destroyed, is not intended for commercial sale to a third party. You have submitted that the primary purpose of returning the materials to the U.S. is to protect the intellectual property rights of Warner Bros. Animation in the material. The materials returned to the U.S. have no commercial value and are not suitable for sale in their condition as imported. However, if it is known at the time of importation that the returned materials may at some later date be put in a viable commercial condition for sale, such materials will not meet the requirements of this statute. Therefore, if the animation cels will be reconditioned into articles which are "salable" or have "commercial value", they will not be exempt from duty and entry under General Note 13(c), HTSUS.

HOLDING:

Based on the information presented, we are of the opinion that the materials returned to the U.S. to Warner Bros. Animation consist of business records and data associated with the business of producing animated films, and are not imported primarily for commercial sale. Therefore, we are of the opinion that these materials are properly exempt from duty and entry under General Note 13(c), HTSUS. However, if it is known at the time of importation that the returned materials will at some later date be reconditioned for sale, then these materials will be precluded from duty-free treatment under General Note 13(c), HTSUS.

Sincerely,


John Durant, Director
Commercial Rulings Division