Assistant Port Director, Trade
Area Port of Great Falls, MT
Post Office Box 789
Great Falls, MT 59403-0789
Attn: Tami Simmons, Import Specialist – Team 398
Re: Request for Internal Advice as to the Application of a Prekrete Lining to Steel Pipes Temporarily Imported Under Bond (TIB) and the Eligibility of NAFTA Duty Deferral
Dear Port Director:
This is in response to your request for internal advice dated November 5, 2013, and subsequent conversations on January 15, 2014, forwarding the Request for Internal Advice on behalf of Crane Supply of Canada (“Crane Supply”) as to whether the application of a prekrete lining to carbon steel pipes that have been temporarily imported under bond (“TIB”) qualifies as an alteration for purposes of NAFTA duty deferral pursuant to 19 C.F.R. § 181.53(b)(5). We have also received the additional correspondence dated June 16, 2014, and February 3, 2015. Our response follows.
Crane Supply states that it imports carbon steel pipes from China into Canada and imported most of the pipes under a TIB into the United States. Upon export of the pipes to Canada, the importer of record (“IOR”) made NAFTA duty deferral entries. The remainder of the pipes not imported under TIB, were imported as consumption entries. Crane Supply imports these pipes for the application of a prekrete lining, Pre-Krete G-8, at the request of its end user, Mosaic, a Canadian company in the potash industry. This lining extends the life of the pipes by inhibiting the corrosion that occurs after long-term use. After the application of the prekrete lining, the pipes were returned to Canada. Mosaic will use the prekrete lined pipes in an underground pipeline to transfer a potash solution from Mosaic’s production facility to its central refinery in Saskatchewan. Mosiac formerly used uncoated pipe to transfer potash solution to its potash mine and would like to apply this lining to extend the life of its pipes. The pipes were not intended for sale or use in the United States.
Crane Supply explains that the imported carbon steel pipes have a wall thickness of one-half inch, vary in diameter between 12 and 24 inches, and are approximately 40 feet in length. Entries of this pipe that have an outside diameter of 16 inches or less, are subject to the antidumping duty order (case number A-570-935) and the countervailing duty order (case number C-570-936) on circular welded carbon quality steel pipe from China. See Notice of Antidumping Duty Order: Circular Welded Carbon Quality Steel Pipe from the People’s Republic of China, 73 Fed. Reg. 42,547 (July 22, 2008); and Circular Welded Carbon Quality Steel Pipe from the People’s Republic of China: Notice of Amended Final Affirmative Countervailing Duty Determination and Notice of Countervailing Duty Order, 73 Fed. Reg. 42,545 (July 22, 2008).
The prekrete lining is a cement-like substance, which is applied to inhibit corrosion. The lining is approximately one-half inch thick and applied to the inside of the pipe. To apply the lining, the pipe is spun while the prekrete is poured inside. The prekrete lining acts as a protective barrier between the carbon steel pipe and the corrosive brine solution of the potash, increasing the quality of the pipe on a technical basis for its intended purpose and extending the life of the pipe as a whole. On a physical basis, both lined and unlined pipes can equally transport the potash solution. After time, the lined pipes continue to perform, whereas, the unlined pipes may need replacing or repairing due to structural failure or blockage from corrosion. No industry standards or regulations endorse or require the use of prekrete lined versus unlined pipes. The lining of the pipes are a technical and cost/benefit choice for manufacturing facilities that wish to minimize repairs and not contaminate processed potash with iron impurities. Unlined pipes used to transport potash from a mine site that has a limited operational lifespan would be technically acceptable for the purpose of transporting potash. The Port inquires whether the application of a prekrete lining to pipes that have been imported under TIB qualifies as an alteration for purposes of NAFTA duty deferral pursuant to 19 C.F.R. § 181.53(b)(5).
Whether the application of a prekrete lining to carbon steel pipes temporarily imported under bond qualifies as an alteration for purposes of NAFTA duty deferral.
LAW AND ANALYSIS:
Pursuant to General Note 1, Harmonized Tariff Schedule of the United States (“HTSUS”), all merchandise imported into the United States is subject to duty unless specifically exempted. Under subheading 9813.00.05, HTSUS, articles to be repaired, altered or processed (including processes that result in articles manufactured or produced in the United States), may be entered temporarily free of duty, under a TIB for exportation within one year from the date of importation. This period may be extended for additional periods, which when added to the initial period do not exceed three years. See U.S. Note 1(a) of Subchapter XIII, Chapter 98, HTSUS. To satisfy the requirements for the TIB, the imported article must be timely exported. Id. Additionally, to qualify under this provision, the merchandise imported may not be imported for the purpose of sale or sale on approval. Id.
Because these pipes will be exported to Canada, we must also consider the North American Free Trade Agreement. Section 203 of the North American Free Trade Agreement (“NAFTA”) Implementation Act, Pub. L. 103-182; 107 Stat. 2057, 2086; 19 U.S.C. § 3333, provides that all goods imported into the United States that are exported to Canada or Mexico are subject to the NAFTA drawback restrictions, i.e., the lesser of duty rule, unless a specific exception applies. The lesser of duty rule, in the specific context of subheading 9813.00.05, is contained in U.S. Note 1(c), Chapter 98, Subchapter XIII, HTSUS (as amended by Presidential Proclamation 6780, 60 FR 15,845, 15,843 (Mar. 27, 1995)). If this rule were applicable, a consumption entry would be filed and duty would be collected.
However, Article 307(2) of NAFTA provides that “[n]otwithstanding Article 303, no Party may apply a customs duty to a good, regardless of its origin, imported temporarily from the territory of another Party for repair or alteration.” Section 181.53(b)(5), U.S. Customs and Border Protection (“CBP”) Regulations 19 C.F.R. § 181.53(b)(5) provides:
Except in the case of a good imported from Canada or Mexico for repair or alteration, where a good, regardless of its origin, was imported temporarily free of duty for repair, alteration or processing (subheading 9813.00.05, Harmonized Tariff Schedule of the United States) and is subsequently exported to Canada or Mexico, duty shall be assessed on the good on the basis of its condition at the time of its importation into the United States.
Therefore, because the carbon steel pipes are imported from Canada, if the application of a prekrete lining to the carbon steel pipes qualifies as an alteration, the pipes fall under the exemption from the lesser of duty rule provided for in 19 C.F.R. § 181.53(b)(5).
An alteration is change to a finished product that does not amount to an additional or vital step in its manufacturing. In E. Dillingham, Inc. v. United States, 29 Cust. Ct. 16 (1952), four metal discs were imported into the United States to be processed by having the edges bent to form flanges and to be pressed and spun to dish-like shapes. The plaintiff claimed that the processes were alterations or changes in condition that did not result in articles manufactured or produced in the United States within the meaning of the TIB law. The Customs Court held that the metal discs were not entitled to free entry, under bond, because the processing of the discs was not in the nature of repairs or alterations of finished products but an additional and vital step in their manufacture. Additionally, in HQ 230140, dated January 8, 2004, CBP found that the application of a physical vapor deposition (“PVD”) to hardware imported from Mexico was not an alteration within the meaning of 19 C.F.R. § 181.53(b)(5). CBP found that the application of the PVD coating was a step that completed the hardware’s manufacture because the hardware was unlikely to be sold without any coating, whether decorative or protective, and it made the hardware suitable for its intended use. Accordingly, the coating’s application was not an alteration because it would be applied to any hardware sold and constituted an additional and vital step in the manufacturing process. Thus, if a change to a product is an additional and vital step in the manufacturing process, it is not an alteration within the meaning of HTSUS subheading 9813.00.05.
Similarly, an alteration is a change to an article that does not result in a new or different article of commerce. In Guardian Industries Corp. v. United States, 3 C.I.T. 9 (1982), glass sheets were produced in annealed form in the United States and then sent to Canada for a heat treatment known as tempering. The glass was then re-imported into the United States as articles returned to the United States after having been exported for repairs or alterations. The plaintiff contended that the tempering operation was an alteration. The court stated that for tariff purposes “the focus is upon whether the [beginning] article is ‘incomplete’ or ‘unsuitable for its intended use’” before the procedures. Id. at 14. The court concluded that the tempering process transformed the glass in name, use, performance characteristics, and tariff classification and, thus, it was not an alteration because it created a new and different article. Conversely, CBP determined in HQ 229962, dated August 1, 2003, that the blending of wheat was an alteration within the meaning of HTSUS subheading 9813.00.05. Finding that although the wheat was blended with other types of wheat to adjust the grade, protein level, or moisture content to meet customer specifications, the blending did not create a new article. Accordingly, CBP determined that it was an alteration because the wheat remained wheat and the change did not result in a new article of commerce that differed from the parts of the blend. Therefore, if an operation results in a new article of commerce, CBP will not find that the change constitutes an alteration.
Additionally, CBP does not necessarily find that an operation exceeds an alteration merely because the quality of a finished product is enhanced. In HQ H070864, dated October 9, 2009, CBP found that the application of a scratch resistant coating to finished lenses was an alteration within the meaning of 9802.00.50 because the lens was ready for use in eyeglasses and the coating was a choice that the consumer may wish to add. Similarly, in HQ 559648, dated May 20, 1996, the application of a coating to a baking pan was an alteration within the meaning of 9802.00.05. There, Legacy Customs noted that a change in the quality of the article did not necessarily preclude the application of the coating from qualifying as an alteration. Finding that the coating gave the pans the ability to function more effectively and that the pans were completely manufactured articles prior to the coating’s application, Legacy Customs determined that the application was an alteration. Thus, an alteration may impart enhanced performance characteristics to a finished product.
Furthermore, the application of a coating may be an alteration if the uncoated and coated article have the same uses, unless the coating imparts significantly new performance characteristics that complete an article’s manufacture. In Headquarters Ruling Letter (“HRL”) 554192, dated September 5, 1986, Legacy Customs determined that the treatment of a flame retardant to red cedar shakes and shingles constituted an alteration because the untreated shingles were preferred over the treated product, regularly used in the untreated condition, and applied to completed articles ready for their intended use in the untreated condition. Legacy Customs found that the treatment’s application was an alteration because it was added to an already completed article and did not change the shakes’ and shingles’ identity. Additionally, in HRL 555384, dated November 24, 1989, however, the galvanization of steel was not an alteration within 9802.00.50 because the galvanization process imparted enhanced characteristics that made the steel articles ready for their intended use as corrosion resistant materials. Legacy Customs noted that the steel pipes were intended for use in salt water applications, and therefore, the galvanization operation caused a significant change in characteristic and created a different product by making the pipe corrosion resistant and suitable for its intended use in salt water. Applying these rulings, HQ 556530, dated June 12, 1992, determined that the cladding of the interior of a carbon steel pipe was not an alteration within the meaning of 9802.00.50 because the cladding was necessary for the pipe’s intended use. The cladded steel pipe and the regular steel pipe were suited for different uses. The pipe without cladding was unsuitable for its intended use in refineries and therefore incomplete without the cladding for corrosion resistance needed in the oil and gas industry. Legacy Customs found that the cladding gave the pipes a different use that was needed for its particular industry, and thus, this operation exceeded an alteration.
Here, Crane Supply would apply a prekrete lining to the inside of carbon steel pipes, which is not an additional and vital step in the manufacturing process. Unlike HQ 230140 where the application of a PVD coating to hardware was an additional and vital step in the manufacturing process because the hardware was unlikely to be sold without a coating, the carbon steel pipes at issue are used with or without the application of a prekrete lining. On a physical basis, both the lined and unlined pipes can equally transport potash. Accordingly, the lining does not amount to an additional or vital step in the manufacturing process because the pipes are completely manufactured without the lining. Additionally, the application of the lining does not create a new article of commerce like in Guardian Industries. Rather, the application of the prekrete lining is like the wheat blending found to be an alteration under 19 C.F.R. § 181.53(b)(5) in HQ 229962. Similar to the blending process that enhanced the quality of the wheat without creating a new article of commerce, the application of the prekrete lining enhances the technical quality of the carbon steel pipe by extending the pipe’s lifespan without creating a new product. Thus, the application of the prekrete lining does not create a new article of commerce or act as an additional and vital step in the carbon steel pipes’ manufacturing process.
In this case, the lined and unlined carbon steel pipes have the same uses. Like the shakes and shingles in HRL 554192 that could be used both with and without the treatment of a flame retardant that constituted an alteration, the pipes can be similarly used with and without the prekrete lining. The pipes have the same physical ability to transport potash with or without the lining and the lining is applied to the finished pipes. Unlike the cladding in HQ 556530 that exceeded the definition of alteration because it was necessary for corrosion resistance in the oil and gas industry, the application of a prekrete lining to carbon steel pipes is not necessary for use in the potash industry. No industry standard requires or endorses the use of prekrete lined pipes. Although the prekrete lining confers a technical advantage and likely cost savings, it is not necessary for the carbon steel pipes’ use in the potash industry. As determined in HQ H070864 and HQ 559648, operations that enhance the quality of a product do not necessarily preclude those operations from the meaning of alteration. The scratch resistant coating in HQ H070864 was an enhancement that consumers may have wished to add to the finished lenses, much like the prekrete lining that consumers may wish to add to the finished pipes. Similarly, the coating applied to the baking pans allowed the pans to function more effectively like the prekrete lining that helps the pipes function more effectively over a longer period of time. Therefore, the application of a prekrete lining to carbon steel pipes confers an advantage that does not exceed the meaning of alteration in 19 C.F.R. § 181.53(b)(5).
In the instant case, the coating process does not create a new and different article having a distinctive name, character and use. See HQ 557828 (Aug. 2, 1994) (finding that the refining of selenium exceeded the scope of an alteration for purposes of subheadings 980.00.10 and 9802.00.50, HTSUS, because the refining gave the product new chemical and physical properties). The application of the prekrete lining merely extends the lifespan of the pipes by inhibiting corrosion. It does so without giving the pipes a new name or distinctive character and use because both the treated and untreated pipes are classified the same and used similarly in the potash mining industry. Assuming that all other requirements for TIB are met, the facts of the application of a prekrete lining to carbon steel pipes satisfied the requirements for entry under a TIB under subheading 9813.00.05, HTSUS, as an alteration. As discussed above, because the application of the lining to the carbon steel pipes constitutes an alteration for TIB purposes and the pipes will be imported from Canada, the imported pipes also qualify for the exemption from the lesser of duty rule provided for in 19 C.F.R. § 181.53(b)(5).
We note that the pipes that were entered for consumption and not under a TIB at issue are subject to antidumping and countervailing duties (“AD/CVD”). Merchandise entered for regular consumption may not be converted to a TIB to avoid the application of AD/CVD duties. See, e.g., HQ H048944 (Sep. 19, 2011) (finding that regular consumption entries could not be converted to TIB entries under 19 C.F.R. § 10.31(g) without showing that mistake of fact, clerical error, or inadvertence of fact caused the importer’s failure to enter the merchandise under consumption entries). Accordingly, those pipes that were entered for consumption may not be converted now to a TIB entry and are subject to the AD/CVD cases A-570-935 and C-570-936.
Based on the above, the application of a prekrete lining to the carbon steel pipes constitutes an alteration for the purposes of 19 C.F.R. § 181.53(b)(5). The pipes would qualify under the exemption from the lesser of rule provided for in 19 C.F.R. § 181.53(b)(5) and be eligible for TIB treatment.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect.”
You are to mail this decision to the Internal Advice requester no later than 60 days from the date of the decision. At that time, the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel and to the public on CBP’s website, located at www.cbp.gov by means of the Freedom of Information Act and other methods of public distribution.
Myles B. Harmon, DirectorCommercial and Trade Facilitation Division