Customs Ruling HQ H311202 - Subheadings 9801.00.10, 9801.00.20, 9802.00.50, HTSUS; Application for Further Review of Protest No. 2506-20-100243; Motorcar Parts of America, Inc.

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HQ H311202
Jan 05, 2023

Type : Classification • HTSUS :
Related: 560807; 556538; 559719; 558723; 563039; H060423; H007668; H149357; H175426; H285614

OT:RR:CTF:VS HQ H311202 UBB

Center Director, Aerospace and Automotive CEE
477 Michigan Ave.
Detroit, MI 48226

RE: Subheadings 9801.00.10, 9801.00.20, 9802.00.50, HTSUS; Application for Further Review of Protest No. 2506-20-100243; Motorcar Parts of America, Inc.

Dear Center Director: This is in reference to Protest No. 2506-20-100243 and the Application for Further Review, dated January 28, 2020, timely submitted by Gibson, Dunn & Crutcher, LLP, on behalf of Motorcar Parts of America, Inc. (“MPA,” “the importer” or “protestant”), contesting the denial of duty-free or partial duty exemption for certain entries made during 2017 and 2018.

On August 2, 2019, CBP liquidated approximately 500 entries from 2017 and 2018 for which MPA was the importer of record. These entries had been rate advanced at the conclusion of an audit conducted by CBP to determine if certain prior disclosures filed by MPA starting in 2016 were reasonably accurate and complete. The audit took place over nearly two years and examined all relevant entries from the period of April 1, 2011 to May 31, 2018 after which CBP concluded that the prior disclosures were not reasonably accurate and complete and that MPA could not support its claims for duty-free treatment under subheadings 9801.00.20 and 9801.00.10 of the Harmonized Tariff Schedule of the United States (“HTSUS”). MPA protests the rate advance and liquidation.

FACTS:

MPA is a remanufacturer, manufacturer and distributor of automotive aftermarket parts, including starters and alternators. MPA has facilities located in the United States (U.S.), Mexico, Malaysia, Singapore and China. The facility located in Tijuana, Mexico, Motorcar Parts De Mexico, S.A. De C.V. (“MPM”), is a manufacturing, remanufacturing, distribution, engineering, packaging and warehousing facility. According to MPA, in 2007, MPM expanded its operations to include warehousing and related operations or shipments from MPA of new starters and alternators. In its protest memo, MPA states that it received these new or newly refurbished starters/alternators either (1) as articles that MPA had imported from non-North American sources and shipped them to MPM immediately after it had entered them for consumption in the U.S. with U.S. customs duty paid, or (2) as articles considered U.S. products that MPA obtained and shipped to MPM. MPA further claims that since 2007, it has returned the first category of articles pursuant to subheading 9801.00.20, HTSUS, and the second category of articles pursuant to subheading 9801.00.10, HTSUS, and that MPM’s receipt of these starters/alternators in Mexico is made pursuant to a bailment agreement between the parties that stipulates that the starters/alternators remain the property of MPA. MPA states that it uses two systems to capture its inventory and track imports and exports: a QAD system that is internal to MPM that captures repairs and/or alterations done to the starters and alternators, and an Import/Export Database that is used by the compliance team to track shipments that enter and depart MPM.

In February 2016, CBP commenced an audit of MPA related to its importation of goods entered under subheading 9801.00.20, HTSUS. In its response, MPA was unable to fully support its 9801.00.20 claims through documentation. CBP closed the audit to allow the company to perform self-review and complete its disclosure. Subsequently, MPA filed a prior disclosure disclosing that certain articles were ineligible as claimed under subheading 9801.00.20, HTSUS, as they had been modified in some fashion following exportation from the U.S. Additionally, MPA disclosed that claims may have been made on new goods that were shipped directly from Malaysia to Mexico. On May 1, 2017, CBP initiated an audit to verify MPA’s prior disclosures and to review its methodology. The eventual scope of the 2017-2018 audit included imports under subheadings 9801.00.10 and 9801.00.20, HTSUS, for the period April 1, 2011 to May 31, 2018. As the audit proceeded, MPA supplemented its disclosures, noting that many of the parts and alternators underwent a labeling process while at MPM. CBP closed the audit in November 2018, concluding overall that MPA’s processes, systems, and records could not support the eligibility of conditionally duty-free claims under subheadings 9801.00.1055, 9801.00.20 and 9802.00.50, HTSUS. On February 15, 2019, CBP issued a notice of action rate advancing and liquidating entries from 2017 and 2018 (thus, only a subset of the entries that had been subject to the audit) and the liquidation took place on August 2, 2019. MPA filed a protest on January 28, 2020.

MPA claims that it is not liable for additional duties as levied by the port in the rate advance and liquidation that took place in 2019. Briefly, MPA argues that MPA and MPM’s internal procedures and documentation satisfied CBP’s 9801.00.10/.20, HTSUS, entry requirements because the same type of documentation was deemed acceptable by a San Diego port for earlier entries and because the regulations do not contain a requirement that exported and re-imported merchandise be traceable from beginning to end of the transaction. MPA also argues that MPM’s labeling operations do not disqualify its imports from entry under 9801.00.10/.20, HTSUS. MPA argues that it is not liable for additional duties for the starters/alternators that were reworked or modified in Mexico because the rework/modification operations merely restored defective units to the “new” condition under which they had originally been purchased, and in any event, the units would be eligible for entry under 9802.00.50, HTSUS. Finally, MPA argues that CBP has a duty to arrive at the correct classification for the units before levying additional duties, and that pursuant to the offsetting provisions of 19 U.S.C. § 1509(b)(6), MPA owes no further duties as the duties owed on the items as declared under 9810.00.10/9810.00.20, HTSUS (i.e. zero) were equal to or more than the duties that would be owed on the items if they were classified under 9802.00.50, HTSUS (i.e. also zero).

In support of this protest MPA has provided a memo that provides a narrative explanation of its position and legal arguments, supported by various attachments. The attachments consist of a declaration provided by the Assistant Vice President and Plant Manager of Operations, Global Distribution and Logistics at MPM (Attachment I to the protest memo, hereafter “MPA Declaration” or “Declaration”), an explanation of MPM’s reworking operations and an explanation of MPM’s modification operations. The declaration and flow-charts detail MPA’s operations, with some printouts of its QAD system showing how it tracks the parts and alternators. According to the Declaration, the starters and alternators received at MPM may be treated in different ways. Upon receiving imported articles from the U.S., MPM inspects either 100% of the units (for shipments from unaffiliated suppliers) or a sample of shipments (for shipments from affiliated suppliers). These inspections take place in an area that MPM denotes as “INSPC” in its internal inventory tracking system (also known as its QAD system). If a sample of units passes inspection, the entire shipment is then released to a storage area denoted as “ASSY”. If a unit in a sample fails inspection, that shipment is quarantined, and each unit is inspected. MPM then reworks or repairs defective units, after which the reworked or repaired units are moved to the “ASSY” area and then to general inventory. According to MPA, some units may also be modified to make them saleable for a broader range of uses, such as to expand the model year of vehicles with which they can be used. Once reworked or modified, the units are moved to the “ASSY” area, from where all units are sorted into part-number based storage for general inventory. When a customer places an order, units from the part-number bins are collected to fulfill the order.

Some of the starters and alternators require labeling. According to MPA’s protest memo and supporting Declaration, some vendors ship starters and alternators to MPM with labels affixed to each unit. The label displays the MPA part number and its country of origin. In cases where no such label is included on the units received, MPM adds such a label to the part and in many cases the label remains on the part the entire time the part is at MPM. In other cases, MPA’s customer for a particular part may request that its own or another part number be included on the part that MPM will ship back to the United States. In these cases, MPM adds a new label with the customer’s part number and the country of origin. This label is added directly over the preceding label.

MPA claims that it is able to sufficiently track the parts and alternators at the MPM warehouse using the internal QAD tracking system, unit part numbers, a country-of-origin label (that conforms to U.S. country of origin labeling requirements), and a system of inventory sheets attached to individual baskets containing parts or alternators, pick tickets and pallet content sheets. MPA does not provide any information on how any information gathered via this internal tracking system is then shared with the Import/Export system or how it ensures that only those parts eligible for duty-free treatment under subheadings 9801.00.10, 9801.00.20, or 9802.00.50, HTSUS are declared as such.

ISSUES:

Whether MPA has shown that it can support its use of subheadings 9801.00.10 and 9801.00.20, HTSUS. Whether MPA may seek to reclassify eligible entries pursuant to 9802.00.50, HTSUS, by means of this protest.

LAW AND ANALYSIS: In simple terms, this protest is about whether the importer can support its use of subheading 9801.00.10/.20 (or, for a subset of entries, change its classification to subheading 9802.00.50, HTSUS) for certain entries made in 2017 and 2018 (hereafter, “subject entries”). The subject entries are limited to those entries that were rate advanced in the February 15, 2019 notice of action and subsequently liquidated on August 2, 2019. CBP concluded that MPA could not support its claims for preferential duty treatment under subheadings 9801.00.10 and 9801.00.20, HTSUS because the parts could not be traced through MPM’s systems to support its claim that the merchandise exported from the United States to Mexico was the same merchandise being re-imported back to the United States.

Whether MPA has shown that it can support its use of subheadings 9801.00.10 and 9801.00.20, HTSUS

Section 141.2 of the Customs Regulations (19 C.F.R. § 141.2) states that “Dutiable merchandise imported and afterwards exported even though duty thereon may have been paid on the first importation, is liable to duty on every subsequent importation into the Customs territory of the United States” unless specifically exempted therefrom under the HTSUS.

Entry under 9801.00.10, HTSUS

Section 904(b) of the Trade Facilitation and Trade Enforcement Act of 2015 (Pub. L. 114-125, February 24, 2016) amended subheading 9801.00.10, HTSUS, to include any products which are returned within 3 years after having been exported. Previously, subheading 9801.00.10, HTSUS, only applied to products of the United States. Subheading 9801.00.10, HTSUS, now provides for the duty-free treatment of:

Products of the United States when returned after having been exported, or any other products when returned within 3 years after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad.

However, operations which either advance the value or improve the condition of the exported product render it ineligible for duty free entry upon return to the United States. Border Brokerage Company, Inc. v. United States, 314 F. Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970). Section 10.1, CBP Regulations (19 C.F.R. § 10.1) sets forth the documentary requirements for entry under subheading 9801.00.10, HTSUS. We note that CBP has not yet amended the regulations to implement the change to subheading 9801.00.10, HTSUS. Nonetheless, 19 C.F.R. § 10.1(a)(1) provides that the foreign shipper declare the following information with regard to articles in a shipment valued over $2,500: the port of exportation, the date of exportation, the quantity, the description of the merchandise, the value of the merchandise, the date of the declaration, and whether the articles were returned without having been advanced in value or improved in condition by any process of manufacture or other means. Specifically, the regulations also require that the declaration must include the “marks and numbers” relating to the goods in addition to the description of the articles. These documentation requirements ensure that articles that are returned to the U.S. and entered under subheading 9801.00.10, HTSUS, may be traced back to prior exports from the U.S. containing those specific articles. See Headquarters Ruling Letter (“HQ”) 559719 (July 11, 1996) (“Customs also requires additional evidence that supports a port director’s ability to trace the exportation and subsequent importation of the article in question as well as documentation on supporting the importer’s claim that the article was not advanced in value or improved in condition abroad.”), and HQ 560807 (May 6, 1998) (“The Customs Service requires that sufficient documentation be submitted to establish that the importer articles are in fact of U.S. origin.”) These requirements are designed to prevent, to the extent possible, the substitution of new or remanufactured articles for the articles that were exported from the U.S.

Entry under 9801.00.20, HTSUS

Subheading 9801.00.20, HTSUS, provides duty-free treatment for:

[a]rticles, previously imported, with respect to which the duty was paid upon such previous importation or which were previously free of duty pursuant to the Caribbean Basin Economic Recovery Act or Title V of the Trade Act of 1974, if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States.

As is the case for 9801.00.10, HTSUS, operations which either advance the value or improve the condition of the exported product render it ineligible for duty free entry (under subheading 9801.00.20, HTSUS) upon return to the United States. See Border Brokerage Company, Inc. v. United States, 314 F. Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970).

Section 10.108, Customs Regulations (19 C.F.R. § 10.108), provides, in relevant part, that free entry shall be accorded under subheading 9801.00.20, HTSUS, whenever it is established to the satisfaction of the port director that the article for which free entry is claimed was duty paid on a previous importation, is being reimported by or for the account of the person who previously imported it into, and exported it from the United States, without the article having been advanced in value or improved in condition by any process of manufacture or other means, and was exported from the U.S. under a lease or similar use agreement. It should be noted that CBP has denied treatment under subheading 9801.00.20, HTSUS, in situations where such evidence was not provided. See, e.g., HQ 556538, dated May 27, 1992 (duty-free status under subheading 9801.00.20, HTSUS, denied because documentary requirements were not satisfied, and no evidence was provided to indicate that the subject merchandise was exported under a lease or similar use agreement).

MPA argues that the statute and regulations do not require the importer to “trace” the articles from the time that they are exported from the United States until the point of reimportation. In support, MPA notes that in five prior instances (in 2012) concerning duty-free entry of goods under subheading 9801.00.20, HTSUS, CBP did not request (and MPA did not provide) any information relating to the receipt of the items in Mexico or any documentation regarding MPA or MPM’s inventory control or other procedures in Mexico. Thus, MPA maintains that CBP does not have precedent or authority to require documents or procedures that “trace” the starters and alternators through MPM’s facility.

MPA is mistaken. The legal requirements for eligibility for subheadings 9801.00.10 and 9801.00.20, HTSUS, are clear: the articles being reimported must be the same articles that were previously exported from the United States, and they must not have been advanced in value or improved in condition while abroad. The statute and regulations cited above affirm that MPA needs to show, to CBP’s satisfaction, that the starters and alternators being imported into the United States are the same starters and alternators that were previously exported, and that they have not been advanced in value or improved in condition while in Mexico. It follows, that the importer must be able to show with specificity that the conditions above have been met, i.e. the importer must be able to trace the articles throughout the transaction. See, HQ 559719 and HQ 560807. The regulations pertaining to subheading 9801.00.10, HTSUS, set forth a specific procedure by which to show that the articles being reimported were the same articles previously exported, as noted in more detail above. The regulations pertaining to subheading 9801.00.20, HTSUS, do not prescribe a specific process by which the importer needs to show this, but rather, leave it up to the discretion of the port director that he or she is satisfied that the requirement was met. Regardless, the importer’s ability to show that the articles being reimported are the same articles that were previously exported underpins eligibility for entry pursuant to both subheadings 9801.00.10 and 9801.00.20, HTSUS.

As noted above, in support of this protest MPA has provided a memo that provides a narrative explanation of its position, supported by various attachments. The attachments consist of a declaration by the MPA representative for logistics and customs compliance covering the period of the audit (MPA Declaration), an explanation of MPM’s reworking operations and an explanation of MPM’s modification operations. The declaration and flow-charts detail MPA’s operations, with some printouts of its QAD system showing how it tracks the parts and alternators. According to MPA’s submissions, the parts, regardless of whether they are inspected and cleared or quarantined and subsequently reworked/repaired/modified all end up in the same storage area (“ASSY”) from where they are sorted into part-numbered bins. The fact that MPA’s systems are not adequate to separate out the parts that have not been altered (and are therefore eligible for 9801.00.10/.20, HTSUS) from the parts that have been altered (and are therefore precluded) is evidenced by MPA’s admission that it had to recalculate the costs relating to reworking and modification for the purpose of this protest. That is, MPA had to recalculate these costs to capture costs that had been missed as part of its earlier disclosures that led to the audit. While MPA provides a large number of documents in support of its position, the documents merely track self-selected parts through MPA’s system. Moreover, the single entry that MPA chooses to illustrate its inventory tracking processes is taken from the information it had already provided to CBP Audit in response to a Request for Information (“RFI”) issued by CBP during the 2016 audit. As such, it is part of the documentation already reviewed by CBP as part of its two audits concerning MPA’s entries under 9801.00.10/.20 HTSUS, during which CBP found MPA’s processes to be inadequate for the purposes of tracing the entries. Finally, the entry selected by MPA to demonstrate MPA’s processes for the purposes of the protest is not in fact one of the entries that is the subject of this protest.

MPA has not provided any documents or information explaining how it ensures that the information contained in its QAD system is transferred to its Import/Export system or how the Import/Export system ensures that entries are being classified accurately. In fact, MPA has described its inventory tracking (QAD) and Import/Export tracking systems as two distinct databases that do not interface. In the course of its audit, CBP also found that the two systems do not communicate with each other. MPA has not provided any further explanation in this protest on what systems it uses to ensure that the starters and alternators being exported to the United States are in fact eligible for the duty-free or duty-reduced treatment they seek. While MPA has provided many pages of documentation for its QAD process, none of the information it provides is new (i.e. it is the same information that CBP has already reviewed as part of the audit), and it has not provided any information regarding its Import/Export database that it uses to track shipments in and out of Mexico. Thus, MPA has provided no additional proof or new evidence as part of this protest that supports its claim that it is able to support its claims for duty free entry under subheadings 9801.00.10 or 9801.00.20, HTSUS.

In conjunction with the QAD system that it uses to track its merchandise, MPA argues that its products are identified by a country of origin (COO) label that shows that it can recognize which goods are U.S. goods returned. MPA provided sample photographs of these labels. The labels indicate “country of origin”, but they do not indicate the country from where the parts were imported into Mexico. In its protest memo, MPA explains that the origin labels are those required by U.S. law. In its Declaration, MPA details the procedures used at MPM to “track” the parts while they are at the warehouse. Once the units in a shipment are sent to the “ASSY” area, they are placed in baskets to which a sheet is attached listing the part number of the units in the basket, the quantity, and the date they were released into the “ASSY” area. The sheet does not list the country of origin of the units, but this information is contained on the label attached to each unit. From here, the units are moved to part number-based baskets with a sheet that records the number of units of the part numbers included in that basket. This document is scanned, and the number of units are manually counted to allow MPM to maintain inventory records on the number of units by part number. When a customer places an order, MPM generates a ticket that lists, among other information, the part numbers and quantities ordered. MPM employees then pick the number of units needed to fill the customer’s order from the indicated part number-based bins. The picked units are then moved to a separate area where they are packaged prior to shipping. The QAD system refers to this area as “P9999”. Here, units are packaged according to the customer’s packing requirements, and they may be relabeled to show the customer’s part number and the country of origin of the part as well (the label retains the MPA part number). The packaged units are loaded onto pallets for shipment to the United States. The warehouse generates a Pallet Content Sheet showing the MPA part number and country of origin. An example of such a Pallet Content Sheet included in MPA’s submission shows that it includes the customer’s name, the number of units on the pallet by MPA part number, country of origin, and certain other information. MPA states that in this way, it is able to track the units of each part number received from MPA from the time they are received until they are shipped back to the United States. In support of its argument, MPA cites to HQ H060423 (Sept. 8, 2009) to support its claim that a part number and country of origin label is sufficient to meet the requirements of subheading 9801.00.10, HTSUS.

We find that HQ H060423 is not analogous to MPA’s case. First, HQ H060423 is a ruling request and therefore addresses a prospective transaction. In it, the ruling requestor asserted that their internal recordkeeping system was similar to one that CBP had previously considered in another case (HQ H007668, dated June 20, 2007) in which merchandise was identified by unique serial numbers and tracked by manufacturing location in an SAP system in which, information once entered could not be changed. CBP disagreed with the requestor in HQ H060423 and found that their system was not sufficiently similar to the system in HQ H007668 because information about the country of origin and tariff classification of the merchandise could be changed at any time. More importantly, CBP noted in HQ H060423, that in an earlier transaction concerning the same requestor (the transaction was no longer under consideration) the Port had reviewed the information provided by the ruling requestor, found inconsistencies and requested additional information, which the ruling noted was within the Port director’s discretion. Separately, CBP also stated that the fact that the merchandise was marked “made in the USA” did not, by itself, entitle the ruling requestor to claim preferential tariff treatment. HQ H060423, instead of supporting MPA’s position, does the opposite. MPA has not provided proof of an internal tracking system that uses unique serial numbers and a secure database to track merchandise of the type discussed in HQ H007668. Instead, MPA has two different databases that do not interface (the QAD and Import/Export databases, as discussed above), and a process by which parts are labeled with “country of origin” labels, tracked using what appears to be a mostly manual, paper-based system, and where “part numbers” refer to parts of a specific type rather than specific individual parts (i.e. multiple units are identified by the same part number and MPM tracks the quantities of each part number in the aggregate). As noted in HQ H060423, merely having merchandise marked as “made in the USA” is not by itself, sufficient proof for preferential treatment under 9801.00.10/.20, HTSUS. Finally, it is worth noting that here again, MPA has not provided new information, argument or evidence to support its claims. The information and documents that underlie MPA’s Declaration were part of MPA’s response to an RFI issued during the audits and have already been evaluated by CBP Audit.

MPA argues that the starters and alternators that are the subject of this protest were eligible for duty-free treatment under subheadings 9801.00.10 and 9801.00.20, HTSUS, because the labeling operations that the parts undergo at MPM do not disqualify them from entry under the duty free provisions, and that the rework or modification that certain parts undergo at MPM merely restore the units to the “new” condition under which MPM had originally purchased them and therefore do not constitute an alteration or advancement in condition. As described above, some of the starters and alternators require labeling. In HQ H149357 (May 20, 2011), CBP found that bed-in-bag sets that were exported from the U.S. to Mexico or Canada in their finished condition and that had labels attached to the outside retail packaging indicating the company name and describing the contents remained eligible for duty-free entry under subheading 9801.00.10, HTSUS, provided all regulatory requirements were met. CBP explained that this was because no operations were performed on the set itself, unlike relabeled t-shirts from an earlier case where the relabeling operation was performed on the article itself. See HQ 014657 (Nov. 8, 2007). Therefore, if the issue in this case was limited to whether labeling parts and alternators disqualifies them for duty-free treatment under 9801.00.10/.20, HTSUS, HQ H149357 would indicate that it does not. As discussed above and below, however, the labeling of parts is not the sole issue in this case.

MPA notes that, the starters and alternators received at MPM may be reworked or modified prior to being entered into the warehouse. As noted above (and detailed in the Declaration submitted by MPA), upon receiving imported articles from the U.S., MPM inspects either 100% of the units (for shipments from unaffiliated suppliers) or a sample of shipments (for shipments from affiliated suppliers). These inspections take place in an area that MPM denotes as “INSPC” in its internal records. If a sample of units passes inspection, the entire shipment is then released to a storage area denoted as “ASSY”. If a unit in a sample fails inspection, that shipment is quarantined, and each unit is inspected. MPM then reworks or repairs defective units. In addition to rework and repair, some units are also “modified” to make them saleable for a broader range of uses, such as modification to expand the model year vehicles with which they can be used. From MPA’s submissions, it appears that modified part numbers may receive a new part number, but it is not clear from MPA’s explanations whether the new part number merely matches the part number of other units of the same kind that are also in the warehouse or whether the new part number indicates that the numbered part has undergone a modification. Regardless, once reworked or modified, these units are also moved to the “ASSY” area, from where all units are sorted into part-number based storage (as detailed above). When a customer places an order, units from the part-number bins are collected to fulfill the order. MPA argues that these repair, rework or modification operations do not preclude duty-free treatment under 9801.00.10/.20, HTSUS. In support of its position, MPA cites to HQ 558723 (Dec 22, 1994), as proof that CBP has previously found that even extensive refurbishment operations to rail carriages did not advance the value or improve the condition of the carriages as they were merely being restored to their original condition. But, despite quoting the specific language of the case, protestant misconstrues it. In HQ 558723, the rail carriages were exported to Canada in new condition, where, after use, they were refurbished to their “as exported” condition and then returned to the United States. Thus, CBP found the refurbishment was not an advancement in value where the article was exported from the U.S. in new condition and returned to the U.S. in like-new condition. Neither protestant’s labeling operations nor their reworking and refurbishment operations in Mexico are analogous to the restoration operations referenced in HQ 558723. The modification/rework operations, as described by MPA, clearly constitute advancement in value or improvement in condition as the starters and alternators are repaired (from the defective condition in which they were exported from the United States to like-new condition prior to being reimported into the United States) or reworked/modified (to make them saleable to a broader range of uses when in their exported condition they were not). These operations preclude the merchandise from being eligible for 9801.00.10/.20, HTSUS, treatment.

Moreover, the fact that these reworked, repaired, or modified starters and alternators are eventually placed in the same part-number based bins in the warehouse (prior to their importation back to the United States) as the units that are not advanced in value or improved in condition means that the merchandise is in fact commingled in the warehouse. Nothing in the evidence that MPA has provided for the purpose of this protest gives CBP new information on how MPA traces the parts and alternators such that it can verify 9801.00.10/.20, HTSUS eligibility for the subject merchandise.

Finally, MPA makes a passing reference to the requirements for duty-free entry of fungible goods under the 9801.00.10/.20, HTSUS, provisions. Without explaining or providing proof that the starters and alternators meet the definition of fungible goods, MPA cites to HQ H175426 (Dec. 23, 2011) as evidence that, in the case of fungible goods, CBP has previously accepted reimported tools identified simply by model number (“particular models”). MPA misstates the case. The ruling (an AFR) considered, among other issues, whether an invoice from the actual manufacturer of two cutter tools (that specified the particular model of the tools and stated they were Made in the U.S.A.), as well as an exporter’s declaration (also specifying the particular models), could be an acceptable substitute for the manufacturer’s affidavit required under 19 C.F.R § 10.1. The invoice was for specific models of articles manufactured by the U.S. exporter, stated the origin of the articles exported, the date the goods were sold for exportation, and the party to whom the goods were exported. The goods were sent to the company in Canada that was exporting them back to the U.S. and the company could identify the particular model being exported. On that basis, CBP ruled that the invoices notated with “Made in the U.S.A.” may be “an acceptable substitute for a manufacturer’s affidavit in this particular instance, provided the Port Director is reasonably satisfied that the invoice substantiates the importer’s claim that the goods are a product of the United States.” The cited case did not discuss the issue of fungible articles and instead focused on whether the goods in question were in fact U.S. goods. At the time that the entries were made, the provisions of subheading 9801.00.10, HTSUS, provided for duty free entry only for products of the United States; thus, the focus of the AFR with respect to the requirements of 19 C.F.R. § 10.1 was on whether the documents could show the products were in fact products of the United States. Protestant’s reference aims to show that even for fungible goods, subheading 9801.00.10, HTSUS, does not pose any inventory requirements as long as the importer can show that the goods are U.S. goods; however, the provisions of subheadings 9801.00.10 and 9801.00.20, HTSUS, clearly require that the importer show that the goods are the same goods that were previously exported from the United States. As subheading 9801.00.10, HTSUS, is no longer limited just to goods made in the United States, the fact that a good is a product of the United States is insufficient, by itself, to satisfy the requirements of the provision. The plain language of section 10.1 states that the Center may request any such documents or evidence as may be necessary to substantiate the claim for duty-free entry and provides only an illustrative (but not exhaustive) list of the types of documents that may be requested for this purpose. Moreover, as discussed in detail above, the question of whether protestant’s specific goods were goods returned is not the only concern here; it is apparent from the information provided by MPA that MPM commingled parts and alternators in its warehouse such that goods that were reworked or refurbished were stored alongside goods that were not. This is further supported by CBP Audit’s findings in 2018. This commingling and the fact that MPA was unable to demonstrate through its systems that it could track the various categories of parts and alternators that were entered into and stored in its warehouses from the time they entered the warehouse through to their shipment to the United States led to CBP Audit’s conclusion. The evidence presented by MPA in support of this protest does not show that it is adequately able to trace the shipments of the subject merchandise. Moreover, nothing in the evidence presented in support of this protest offers new information that CBP auditors had not previously considered or provides any further insight into how MPA and MPM tracked the starters and alternators in the warehouse prior to reimportation into the United States.

For the reasons detailed above, we find that MPA is unable to show that it can support its use of subheadings 9801.00.10/9801.00.20, HTSUS, for the entries made in 2017-2018 that are the subject of this protest.

Whether MPA may seek to reclassify eligible entries pursuant to 9802.00.50, HTSUS, by means of this protest.

Subheading 9802.00.50, HTSUS, provides a full or partial duty exemption for articles returned to the United States after having been exported to be advanced in value or improved in condition by means of repairs or alterations. Articles returned to the United States after having been repaired or altered in Mexico, whether or not pursuant to warranty, may be eligible for duty-free treatment, provided the documentary requirements of section 181.64, CBP Regulations, (19 C.F.R. § 181.64), are satisfied. Section 181.64(a) states, in pertinent part: “‘Repairs or alterations’ means restoration, addition, renovation, redyeing, cleaning, resterilizing, or other treatment which does not destroy the essential character of, or create a new and commercially different good from, the good exported from the United States.”

Eligibility under subheading 9802.00.50, HTSUS, is precluded where: (1) the exported articles are not complete for their intended use and the foreign processing operation is a necessary step in the preparation or manufacture of finished articles; or (2) the operations performed abroad destroy the identity of the exported articles or create new or commercially different articles through a process of manufacture. See Guardian Indus. Corp. v. United States, 3 Ct. Int'l Trade 9 (1982), and Dolliff & Co., Inc., v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff’d, 66 C.C.P.A. 77, C.A.D. 1225, 599 F.2d 1015 (1979).

The Trade Facilitation and Trade Enforcement Act of 2015 (Pub. L. 114-125) amended Chapter 98 of the HTSUS to allow commingling and inventory management methods for fungible articles exported from the United States for purposes of subheading 9802.00.50, HTSUS. Note 3(f) Subchapter II, Chapter 98, provides:

(i) For purposes of subheadings 9802.00.40 and 9802.00.50, fungible articles exported from the United States for the purposes described in such subheadings—

(A) may be commingled; and

(B) the origin, value, and classification of such articles may be accounted for using an inventory management method.

(ii) If a person chooses to use an inventory management method under this paragraph with respect to fungible articles, the person shall use the same inventory management method for any other articles with respect to which the person claims fungibility under this paragraph.

(iii) For the purpose of this paragraph—

(A) the term 'fungible articles' means merchandise or articles that, for commercial purposes, are identical or interchangeable in all situations; and

(B) the term 'inventory management method' means any method for managing inventory that is based on generally accepted accounting principles.

For goods entered prior to the TFTEA amendment in 2015 (noted above), information needed to be provided that articles were kept as a matched set. In HQ 563039 (August 24, 2004), there was no indication that the components comprising the essential identity of the exported motors/pumps were maintained as a matched set throughout the reconditioning and reassembly operations. Thus, they were ineligible for subheading 9802.00.50, HTSUS, treatment. For goods entered after TFTEA amended Chapter 98, HTSUS, essential components disassembled from the article for repair may be used to repair other articles provided they are fungible. However, Note 3(f) Subchapter II, Chapter 98 does not contemplate commingling of articles exported for repair to be commingled with other articles that were not first exported from the United States, that is, the statutory requirement of subheading 9802.00.50, HTSUS, still pertains to articles returned to the United States.

MPA did not enter the subject merchandise under subheading 9802.00.50, HTSUS. MPA may seek to reclassify eligible entries under subheading 9802.00.50, HTSUS, by means of a protest, however, MPA still has to meet the other requirements for eligibility under subheading 9802.00.50, HTSUS. See HQ H285614 (June 8, 2017). In its memo, MPA argues that its starters and alternators that were modified or reworked qualify for duty free entry under subheading 9802.00.50, HTSUS. In addition, MPA claims that the starters and alternators that undergo relabeling would also qualify for subheading 9802.00.50, HTSUS, even though they also qualify for 9801.00.10/.20, HTSUS. However, the modifications that some starters and alternators undergo in order to make saleable for a broader range of uses, such as to expand the model year of vehicles with which they can be used, goes beyond the definition of repair found in 19 C.F.R. 181.64, and would preclude classification under subheading 9802.00.50, HTSUS, as the modifications create a commercially different article through a process of manufacture. See Guardian Indus. Corp. v. United States, 3 Ct. Int'l Trade 9 (1982), and Dolliff & Co., Inc., v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff’d, 66 C.C.P.A. 77, C.A.D. 1225, 599 F.2d 1015 (1979). To the extent that the reworked or repaired units, as well as the relabeled units, qualify for subheading 9802.00.50, HTSUS, MPA still needs to show that these are the same starters and alternators that were previously exported from the United States. For the reasons discussed above, MPA is unable to do so. MPA does not provide adequate proof to confirm that the reimported starters and alternators are the same starters and alternators that were previously exported from the United States. According to MPAs explanations of its modification and rework operations and the MPA Declaration, all starters and alternators, regardless of their treatment while at the MPM facility, end up in the MPM warehouse “ASSY” location and then in general inventory where they are commingled. This includes starters and alternators that were untouched, those that were reworked or repaired, those that were modified, and those that were potentially sourced from countries other than the United States. That is, potentially 9802.00.50, HTSUS, eligible units are commingled with units that are not eligible. As discussed above (in the sections concerning 9801.00.10/.20, HTSUS, eligibility), MPA makes a passing reference to the eligibility of fungible goods for entry under 9801.00.10/.20, HTSUS, however MPA does not describe how its starters and alternators meet the criteria for fungible goods and MPA does not describe or explain how its inventory management method is based on generally accepted accounting principles. In short, MPA does not offer any argument or explain any facts that would explain how its starters and alternators meet the requirements of Note 3(f) Subchapter II, Chapter 98 regarding commingled fungible goods. Thus, we find that MPA has not met the eligibility requirements for duty free entry under subheading 9802.00.50, HTSUS.

HOLDING:

The protest should be DENIED. MPA has not provided sufficient proof to show that the subject merchandise is eligible for entry under subheadings 9801.00.10, 9801.00.20, or 9802.00.50, HTSUS. You are instructed to notify the protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the publish on the Customs Ruling Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.

Sincerely,

Yuliya A. Gulis, Director
Commercial Trade and Facilitation