DRA 4
OT:RR:CTF:ER
H258306 ECG
Shay O’Reilly
Anritsu US Import Analyst
Anritsu Company
490 Jarvis Drive
Morgan Hill, CA 95037
Re: Request for a Ruling as to Whether Network Test and Measurement Models Qualify as Unused Merchandise for 1313(j)(1) Drawback
Dear Mr. O’Reilly:
This is in response to your ruling request dated September 30, 2014, and correspondence dated January 8, 2015, and April 17, 2015, on behalf of Anritsu Company, regarding whether certain network test and measurement models may qualify for unused merchandise drawback.
FACTS:
You state that Anritsu Corporation is a Japanese manufacturer of network test and measurement devices for the telecommunications industry. These pieces measure and test network signal strength. Such pieces include, but are not limited to, base station simulators, long term evolution protocol conformance test systems, signal testers, and fading simulators. These products are normally used by wide area networks’ and local area networks’ operators and repair technicians to confirm signal strength and validate that network operations are within accepted parameters.
Anritsu US’ (“Anritsu”) sales personnel generate interest in the company’s products by first marketing them to potential customers. Once they generate interest, the U.S. sales personnel contact Anritsu Corporation in Japan with requests to send promotional models of the equipment to the United States to demonstrate the models to interested customers. Anritsu Corporation produces promotional models to have all options activated to enable equipment demonstration at several customer sites. When Anritsu imports promotional models, Anritsu Corporation (Japan) and Anritsu enter into a loan agreement, which lists the models imported to the United States for demonstration to potential customers and assigns a loan agreement number for each model. The loan agreements have a six-month duration with the option to extend for additional six-month increments. Anritsu indicates that it is rare for a loan agreement to extend beyond a one-year time period. However, Anritsu indicates that it is the sales personnel’s ability to generate interest in the product that is the factor in determining when to extend a loan agreement and when to export the demonstration model back to Japan.
Once an agreement is signed, promotional models are then delivered to the U.S. sales headquarters and logged into a pool of demonstration inventory. The login consists of recording model details in a database, photographing each item, and applying a sticker to the models that informs customers “do not export and do not remove or manipulate components.” These promotional models are then routed to U.S. sales personnel according to a predetermined schedule.
Next, Anritsu sales personnel move a demonstration model to a potential customer site where it is demonstrated. At the potential customer site, the model is demonstrated by either immediately showing the model through a sales representative or leaving the model with the potential customer. If the model is left with a potential customer, an onsite principal is required to sign a “traveler” document that acknowledges receipt of Anritsu equipment for demonstration purposes. The model is typically left with a potential customer for one or two weeks. A model is demonstrated in one of three ways, either when shown by Anritsu sales personnel or temporarily left with a potential customer. First, a model can be evaluated in a standalone setting. This involves a customer evaluating the network testing and measuring models without connecting the models to any external network system under test. This allows a potential customer to experience a device’s general software interface. Second, a model can be evaluated in a lab setting. This involves a demonstration in a lab that includes a duplicate of a network. This allows a customer to experience a device’s capabilities in a simulated network setting without actually testing a real network. Third, the model can be evaluated in a short-term live network setting. This involves evaluating a device’s capability on a live network, but in a non-intrusive manner, through test ports. The test ports work by copying live network traffic onto the non-intrusive test port. This allows a customer to experience the device’s capabilities on a live copied network.
If a model is left with a customer and the demonstration is finished, sales personal will retrieve the model from the customer and reconcile the physical equipment retrieved with that listed in the “traveler” document. After customer demonstration, sales personnel either move the model to another potential customer’s site or return it to Anritsu’s sales headquarters where they log the model into inventory and prepare it for exportation back to Anritsu Corporation in Japan.
Demonstration models are not sold to customers. If a customer desires to purchase equipment from Anritsu, the customer places an order and Anritsu manufactures a model to the customer’s specifications. Anritsu provides that it is possible, but unusual, for a demonstration model to be sold to a customer, but that if this occurred, it would remove that model from Anritsu’s drawback claims. Anritsu would like to claim unused merchandise drawback on duties and inquires whether it may do so.
ISSUE:
Whether the test and measurement models may qualify for unused merchandise drawback.
LAW AND ANALYSIS:
Section 313(j), of the Tariff Act of 1930, as amended (19 U.S.C. § 1313(j)) provides for a refund of duty if a duty-paid article is exported in the same condition as when imported, within three years from date of importation, and was not used in the United States. Therefore, merchandise that was used prior to exportation is ineligible for drawback under 19 U.S.C. § 1313(j)(1).
An article is considered used for drawback eligibility under 19 U.S.C. § 1313(j)(1) if it is put to the purpose for which it was built. In HQ 230037, dated November 4, 2003, U.S. Customs and Border Protection (“CBP”) held that a yacht, the Eclipse, was ineligible for drawback under 19 U.S.C. § 1313(j)(1) because it was sailed under its own power within the United States. In that case, the yacht was imported to be sold and the protestant argued that it was unused because sailing the yacht under its own power was incidental to the intended reason for importation. CBP disagreed, stating that the “sailing of the Eclipse from Ft. Lauderdale, Florida to Nantucket, Massachusetts was a prohibited use within the meaning of 1313(j)(1) . . . [where] the Eclipse, manned by the crew, was put to the exact use for which a yacht is built.” Additionally, in HQ H240038, dated June 16, 2014, CBP held that a truck with equipment driven under its own power from Canada to Massachusetts and back was ineligible for drawback under 19 U.S.C. § 1313(j)(1) because when driving the truck for transportation, it was employed for the purpose for which it was built. As such, CBP finds that an article is used when it is employed for the purpose for which it was built.
However, some incidental use of an article may be permissible pursuant to 19 U.S.C. § 1313(j)(1), if the use is for demonstration purposes connected with the article’s sale. In HQ 223076, dated May 27, 1991, Legacy Customs held that a short duration demonstration cruise contained within the Honolulu Harbor for a prospective buyer and a subsequent short duration cruise in the Honolulu Harbor during which a short documentary was filmed in connection to the sale of a yacht was not a use because the activities constituted advertising for that yacht’s sale. Similarly, in C.S.D. 83-17, dated November 30, 1982, Legacy Customs determined that a captain living onboard a yacht while it was offered for sale did not render the yacht ineligible for unused merchandise drawback. Legacy Customs noted that even though the captain used the living quarters on the yacht, it was a necessary incidence to his efforts to sell the yacht and did not significantly deteriorate it. As such, the use was permissible in connection with the offer for sale. However, in each of these cases the actual yacht was being sold and the yacht was not a sample used to sell other yachts. Further, CBP has found permissible use of an article when it is demonstrated for the main purpose of selling the article without rendering it significantly deteriorated. See, e.g., C.S.D. 83-17 (November 30, 1982) (noting that if the article’s demonstration results in significant deterioration, then the article is ineligible for unused merchandise drawback).
In HQ H251771, dated December 16, 2014, CBP found that wearing haute couture garments to high-profile events constituted use of the garments that were imported by Christian Dior Couture. Although Christian Dior Couture argued that the garments qualified for unused merchandise drawback because wearing them to high-profile events was demonstration in connection with a sale, CBP found that the garments were used because their proposed use would employ them in the manner for which they were designed. Christian Dior Couture argued that these were worn simply as advertising of the company’s products. However, the haute couture garments were not used with the main purpose of advertising the individual garments to potential buyers. Rather, the haute couture garments were put to the use in the manner they were intended to be used and ineligible for unused merchandise drawback.
Here, the promotional network testing and measurement models are used because they are employed for the purpose for which they were built when they are demonstrated to potential customers to promote Anritsu’s products. The use of promotional models does not constitute a permissible use in connection with demonstrating a product offered for sale because Anritsu’s promotional models are not the devices offered for sale. Anritsu’s case is analogous to HQ H251771 where CBP found that wearing garments to high-profile events was not done for the purpose of selling the individual garments being worn. Instead, they were employed in the manner that they were intended to be used. Similarly, Anritsu’s promotional models are demonstrated to customers, not for the purpose of selling the actual equipment, but to generate sales of Anritsu’s products and are demonstrated in the manner the promotional demonstration equipment was designed to be used. Moreover, although Anritsu indicates that the models will have six month loan agreements, they may remain in the United States for an indefinite period of time if the loan agreements are renewed due to continued customer interest.
Anritsu cites HQ 223076 in support of its argument, stating the demonstration of the yacht to show its performance to potential buyers was an incidental operation for the purposes of sales and marketing. In HQ 223076, Legacy Customs found that a short duration demonstration cruise and documentary filmed in connection with the sale of the yacht was not a “use” because those activities were incidental activities to the sale of that yacht. Although Anritsu’s promotional models are demonstrated to potential customers, their demonstration is unlike the yacht’s permissible demonstration because the yacht was sailed and filmed in connection with the sale of that yacht. Conversely, if a potential customer desires to buy Anritsu’s products, new models will be ordered and shipped from Japan. The demonstration models themselves are not for sale, but are intended to be returned to Japan at the end of the demonstration loan agreement. Although Anritsu provides that it is technically possible to purchase the pieces of demonstration equipment, such a purchase would remove the article from its drawback claims because there would be no exportation. This does not negate the fact that the models upon which drawback is sought are all samples used for taking orders and might be used by prospective customers for a year or more.
Additionally, Anritsu cites to HQ 224752, dated October 29, 1993, to illustrate another situation in which CBP found that evaluation of computers by prospective buyers qualified as an incidental operation for unused merchandise drawback. In that case, Legacy Customs found that notebook computers subject to incidental testing and evaluation by customers was incidental operations and the computers qualified as unused merchandise for drawback purposes. The computers were purchased and imported to those customers who were then given an evaluation period in which they could test the computers’ compatibility with software, hard drive performance, and battery depletion rates. If the computers did not perform to the customers’ satisfaction, then the computers would be exported and returned, otherwise the customers retained the tested computers. That scenario differs from the instant case because Anritsu’s potential customers evaluate promotional models, not the actual devices for sale, unlike the computers in HQ 224752, which had been purchased and tested by the customers. As the promotional models’ use is not in connection with the sale of those models, it is unnecessary to determine if the use causes significant deterioration to models as was necessary in C.S.D. 83-17.
Thus, demonstrating network test and measurement models to potential customers as described in standalone, lab, and live network settings is a “use” prior to exportation under 19 U.S.C. § 1313(j)(1). As such, the promotional models may not qualify for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1).
HOLDING:
Based on the above, the demonstration of network test and measurement models to potential customers is a “use” of the merchandise and the models may not qualify for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1).
Please note that 19 C.F.R. § 177.9(b) 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. The application of a ruling letter by a Customs Service filed office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
Sincerely,
Carrie L. Owens, Chief
Entry Process and Duty Refunds Branch