VAL RR:IT:VA W546437 LPF
Mr. Larry Mitchell
Roadmaster Corporation
P.O. Box 344
Olney, IL 62450
RE: Article 509, NAFTA advance ruling; Bicycles; Regional value content via net cost; Intermediate materials; Indirect materials; Packaging materials and containers; Packing materials and containers
Dear Mr. Mitchell:
This is in response to your letter of June 28, 1996, requesting a North American Free Trade Agreement (NAFTA) advance ruling pursuant to section 181. 93, Customs Regulations (19 CFR §181.93). Your inquiry concerns whether bicycles imported from Mexico qualify as originating goods under the NAFTA pursuant to General Note (GN) 12(b), Harmonized Tariff Schedule of the United States (HTSUS). The additional issue concerning the applicability of 9802, HTSUS, to U.S. components incorporated in the imported bicycles has been referred to the Special Classification and Marking Branch for their direct response to you under separate cover. We regret the delay in reply.
FACTS:
Roadmaster (importer) intends to manufacture bicycles (goods) in its related Mexican factory (producer) under a shelter program for importation into the U.S. You provide that the 26 inch bicycles are classifiable under subheading 8712.00.3500, HTSUS, providing for bicycles having both wheels exceeding 63.5 cm in diameter, other. In accordance with GN 12(t)/87.41, HTSUS, the applicable change in tariff classification rule, you provide that the imported bicycles satisfy the required 50 percent regional value content (RVC), under the net cost method (GN 12(c)(ii), HTSUS), to qualify as originating NAFTA goods.
Specifically, you have submitted a bill of material divided into twenty three (23) separate manufacturing processes, within which you have listed the purchased materials/parts necessary to complete each particular process. You list each material/part, designated as domestic (U.S. origin) or imported (third country or non-NAFTA) origin, utilized in each particular manufacturing process. The quantity provided represents the total amount of each material/part utilized, including waste. A figure is provided for each material/part utilized in each process, which represents your most recent purchase price quote and is updated continually whenever a new quote is received and accepted by your materials department. The quantity of each material/part utilized is multiplied by the price quote amount which, along with freight charges, forms the cost for each material/part. The freight charges comprise the costs to ship the parts to the Illinois and Texas factories which are then consolidated for shipment to the Mexican factory as well as costs to ship parts from third countries directly to the Mexican factory. The sum of these individual material/part and freight costs is then calculated to derive a subtotal material and freight cost for each of the 23 manufacturing process.
You also provide a cost summation where you apportion these material and freight cost subtotals for each manufacturing process into "NAFTA Territorial Costs" and "NAFTA Non-Originating Costs." The territorial (or originating) and non-originating material and freight cost subtotals in turn are added together to derive a total originating material and non-originating cost for the entire assembly process and, hence, the bicycles. You have not included labor and fabrication costs pertaining to each manufacturing process in the material and freight cost subtotals for each manufacturing process. However, you estimate a cumulative figure per imported bicycle, designated as "maquiladora period costs," which in turn is added to the total originating material cost figure to derive the total originating cost for the goods. To this amount the non-originating cost is added to calculate the total Ex works cost for the goods. These amounts are included, as appropriate, in calculating the RVC under the net cost method.
With regard to the 23 manufacturing processes and the respective subtotal material and freight costs for each manufacturing process we note the following.
Process I (Wheel Sub-Assembly) - Subtotal material and freight cost is designated as originating. Although a portion of the materials/parts comprising the wheel sub-assembly are imported from non-NAFTA countries you provide that the sub-assembly constitutes an intermediate material which satisfies the applicable rule of origin in accordance with GN 12(c)(viii) and (ix).
Processes 3-9 (Bicycle Frame) - Subtotal material and freight cost for each process is designated as originating. The bicycle frame is formed from pieces of steel tubing of U.S. origin. When purchased in the U.S., each steel material/part is cut to exact length as specified by each individual part number and then shipped to Mexico to be welded into various sub-assemblies ultimately welded together to become the bicycle frame. Although several of the materials/parts comprising the bicycle frame are imported from non-NAFTA countries, you provide that their value is "inconsequential." As a result, you submit that the bicycle frame, formed via processes 3-9, is an originating intermediate material in accordance with GN 12(c)(viii) and (ix). You also designate the bulk dry argon gas, carbon dioxide, and welding wire utilized in the production of the bicycle frame as originating insofar as they qualify as indirect materials in accordance with GN12(i).
Processes 2 (Tires); 10 (Painting); 11 (Inspection); 12 (Head Cap Assembly); 13 (Decals); 14 (Water Bottle Screws); 15 (Derailleurs); 16 (Shifter Cable); 17 (Crank Assembly); 18 (Forks); 19 (Kickstand and Chain); and 20 (Brakes) - Material and freight costs for materials/parts of U.S. origin are designated as originating, while costs for materials/parts, imported from non-NAFTA countries, are designated as non-originating.
Processes 21 and 22 (Packing Kitbags and Packing Cartons) - Material and freight cost for packaging and cartons, imported from non-NAFT A countries, is designated as non-originating, while cost for packaging and cartons, of U.S. origin, is designated as originating in accordance with GN 120) providing for packaging materials and containers for retail sale.
Process 23 (Shipping) - Material and freight cost for the thermal ribbon and shipping labels placed on each retail carton, all of U.S. origin, is designated as originating, apparently in accordance with GN 120), while slip sheet and stretch wrap are disregarded and not treated as originating in accordance with GN 12(k) providing for packing materials and containers for shipment.
ISSUE:
Based on the information provided, whether the imported bicycles satisfy the regional value content requirement under the net cost method to qualify as originating NAFTA goods.
LAW AND ANALYSIS:
General Note 12, HTSUS, as implemented by part 181 appendix, Customs Regulations (19 CFR pt. 181 app.), the Appendix to the NAFTA Rules of Origin Regulations (ROR), provide, inter alia, that a good originates in the territory of a NAFTA country if each of the non- originating materials used in the production of the good undergoes the applicable change in tariff classification as a result of production occurring entirely in the territory of one or more of the NAFTA countries and the good satisfies the applicable RVC requirement, where the applicable rule of origin specifies both a change in tariff classification and an RVC requirement. GN 12(b)(ii); ROR, §4(2)(b ). A good also originates in the territory of a NAFTA country if produced entirely in the territory of one or more of the NAFTA countries exclusively from originating materials. GN 12(b)(iii); ROR, §4(3).
In accordance with GN 12(t)/87.41, HTSUS, the applicable rule of origin for the imported bicycles, which you state are classified in subheading 8712.00.3500, HTSUS, you request calculation of the RVC under the net cost method. See GN 12(c) and ROR, §6(1) stating, except as otherwise provided, that the exporter or producer of a good may select the method, where appropriate, by which the RVC is calculated.
The RVC of the imported good is equal to its net cost (NC) less the value of non-originating materials (VNM) used by the producer in producing the good, the difference of which is divided by the net cost, and the resulting quotient multiplied by 100. In other words, RVC = (NC - VNM) + NC x 100. GN 12(c)(ii); ROR, §6(3). Where indicated by the applicable change in tariff classification rule, as is the case here, an RVC of 50 percent is required under the net cost method in order for the good to qualify as an originating NAFTA good.
There are several options for determining the net cost of a good, all of which involve a calculation of the producer's total cost. GN 12(c)(vi); ROR, §6(11). For instance, the producer may choose to derive the net cost by calculating the total cost incurred with respect to all goods it produces, subtracting any excluded costs comprising the total cost, and then reasonable allocating, in accordance with Schedule VII, ROR, that difference to the good. GN 12(c)(vi)(A); ROR, §6(1l)(a). With regard to determining net cost, section 2(6}, ROR, provides, inter alia, that:
(a) total cost consists of all product costs, period costs and other costs that are recorded, except as otherwise provided in paragraphs (b )(i) and (ii}, on the books of the producer without regard to the location of the persons to whom payments with respect to those costs are made;
(b) in calculating total cost,
(i) the value of materials, other than intermediate materials, indirect materials and packing materials and containers, shall be the value determined in accordance with section 7(1),
(ii) the value of intermediate materials used in the production of the good or material with respect to which total cost is being calculated shall be calculated in accordance with section 7(6),
(iii) the value of indirect materials and the value of packing materials and containers shall be the costs that are recorded on the books of the producer for those materials, and
(iv) product costs, period costs and other costs, other than costs referred to in subparagraphs (i) and (ii), shall be the costs thereof that are recorded on the books of the producer for those costs ....
Except as otherwise provided, where the material is imported by the producer of the good into the territory of the NAFTA country where the good is produced, the value of the material used in the production of the good is its customs value as defined in section 2(1), ROR, determined consistently with Schedule VIII of the ROR. GN 12(c)(vii); ROR, §7(1) and (2). Among other things, the customs value includes costs of freight, insurance, packing and all costs incurred in transporting the material to the producer's location and waste and spoilage resulting from the use of the material in the production of the good, minus the value of any reusable scrap or by-product. GN 12(c)(vii)(C)(l) and (3); ROR, §7(1)(c) and (f). These provisions, however, do not apply to indirect materials, intermediate materials and packing materials and containers.
Initially, we note that the submitted bill of material designates certain materials/parts as domestic, or of U.S. origin. In this regard, we would assume that such materials/parts would constitute "goods originating in the territory of a NAFTA party" as provided in GN 12(b) and ROR, §4. Your submitted bill of material then provides an amount for each material/part utilized in the manufacturing processes, representing your most recent purchase price quote which, along with freight charges including costs to ship the parts to the Mexican factory (via the Illinois and Texas facilities or directly from third countries), comprise a total material and freight cost for each manufacturing process.
Insofar as the value of the materials used in the production of the bicycles is to be its value, amounts based on purchase price quotes cannot represent the value of the materials/parts at issue. The value of the materials/parts must accurately reflect a customs value, as defined in section 2(1), ROR, determined consistently with Schedule VIII, ROR. A value based on purchase price quotes is inconsistent with these provisions because it does not necessarily represent the price actually paid or payable for the material, that is, the total payment made or to be made by the producer to or for the benefit of the seller of the material. ROR, Schedule VIII, §4(1).
Moreover, because the customs value is to include, among other things, the freight and insurance costs in transporting materials to the producer's location, the value of the subject materials/parts only would include the costs to transport the parts to the Mexican factory, but not to the Illinois or Texas facilities. It is our understanding that the production occurs at the Mexican factory. In addition, insofar as we understand the submitted values for the materials/parts to include amounts for waste, we note this would be appropriate as long as the waste results from the use of the materials/parts in producing the bicycles and the amount does not include the value of any reusable waste.
With regard to the "maquiladora period costs" reflective of labor and fabrication costs estimated per imported bicycle, we agree such amounts would be included as part of the total cost for the goods as, "product costs, period costs and other costs that are recorded . . . on the books of the producer." ROR, §2(6)(a). However, the estimates provided for such costs would be inappropriate unless reflective of the amounts actually recorded on the producers books for those costs. ROR, §2(6)(b)(iv).
Furthermore, you designate the wheel sub-assembly (process 1) and bicycle frame (processes 3-9) as originating intermediate materials. Specifically, intermediate materials, except as otherwise provided, are self-produced materials used in the production of a good, designated as such by the producer of such material. GN 12(c)(viii); ROR, §7(4) and (5). However, to qualify as an originating material, such a designated intermediate material must itself qualify as an originating material under the ROR. ROR, §7(5). At the producer's choice, the value of an intermediate material is the total cost incurred with respect to all goods produced by the producer, or the aggregate of each cost that forms part of the total cost incurred with respect to that intermediate material, that reasonably can be allocated to that intermediate material in accordance with Schedule VII. GN 12(c)(ix); ROR, § 7(6). In this regard, total cost consists of the costs referred to in section 2(6), ROR, as provided above, calculated in accordance with section 2(6) and (7), ROR. ROR, §7(7).
While the wheel sub-assembly and bicycle frame can be designated as intermediate materials by the producer, these designated intermediate materials must themselves qualify as originating materials under the ROR to qualify as originating. In order to qualify, the non-originating materials used in production would need to undergo the applicable change in tariff classification in addition to satisfying the applicable RVC requirement insofar as the applicable rule provided in GN 12, HTSUS, for the tariff provision under which the good is classified specifies both such requirements. GN 12(b)(ti); ROR, §4(2)(b). You provide that the wheel subassembly qualifies as an originating material because the value of the non-originating materials constitute only 46 percent of the total material and freight cost of the sub-assembly, resulting in an RVC of 54 percent under the net cost method. Similarly, you submit that the bicycle frame qualifies because the value of the few non-originating materials/parts is "inconsequential" as compared to the value of the originating materials/parts used in the production of the frames.
However, the initial concerns discussed above are equally applicable in this context, to wit, that the value of the materials/parts based on purchase price quotes does not reflect a customs value as defined in section 2( 1 ), ROR, determined consistently with Schedule VIII, ROR, and the value of the subject materials/parts only should include the costs to transport them to the Mexican factory, but not to the Illinois or Texas facilities under section 7(l)(c), ROR. This would be the case regardless as to how "inconsequential" such non-originating materials/parts may appear. Furthermore, information concerning the applicable tariff classification change of the materials has not been provided.
In addition, you designate as originating the bulk dry argon gas, carbon dioxide, and welding wire utilized in the production of the bicycle frame insofar as you believe they qualify as indirect materials. Indirect materials are goods used in the production, testing or inspection of a good but not physically incorporated into the good, or a good used in the maintenance of buildings or the operation of equipment associated with the production of a good. GN 12(i); ROR, §2(1). Indirect materials are considered originating materials without regard to where they are produced and their value, when calculating net cost, is the cost of that material recorded on the books of the producer of the good. ROR §7(11).
While we agree that the argon gas and carbon dioxide would fit the definition of indirect materials, we cannot state whether this is the case with the welding wire. Among other things, GN 12(i) and section 2(1), ROR, include as examples of indirect materials, fuel and energy; tools, dies, and molds; lubricants, greases and compounding materials; and other goods not incorporated into the good but used in the production of the good. From the information provided, we are unable to determine whether the welding wire would not, in fact, be incorporated into the good and would be analogous to these examples. However, even though the argon gas and carbon dioxide, as indirect materials, will be considered originating materials regardless as to where they are produced, we note that the values provided only would be appropriate insofar as they reflect the cost of the materials as recorded on the books of the producer.
Finally, we agree that the "packing" materials and containers, comprised of the slip sheet and stretch wrap in which the bicycles are packed for shipment would be disregarded in determining the RVC of the goods. Specifically, GN 12(k) and section 7(15)(a), ROR, provide that "packing" materials and containers in which the good is packed for shipment are to be disregarded in determining whether the good satisfies an RVC requirement. If the good is subject to an RVC requirement, the value of the packing materials and containers are their costs as recorded on the books of the producer of the good. ROR, §7(15)(b). Hence, insofar as these costs are recorded in books other than the producer's, their value would not appear to be reflected in the total cost of the good and no adjustment to the total cost calculation would be necessary. On the contrary, if the value of the packing materials and containers were recorded on the producer's books, they would be disregarded in determining the RVC of the bicycles and an appropriate adjustment would be necessary.
Nevertheless, assuming they are classified with the bicycles under the HTSUS, the "packaging" materials and containers, comprised of the plastic bag, carton, and other materials in which the bicycles are packaged for retail sale, may be taken into account as originating materials for purposes of the RVC calculation of the bicycles. GN 12 (j) and section 7(13), ROR, provide that "packaging" materials and containers in which a good is packaged for retail sale, if classified under the HTSUS with a good subject to an RVC, is to be taken into account as originating or non-originating materials, as the case may be, when calculating the RVC of the good. In allowing the packaging materials and containers to be taken into account as originating, this would assume that they in fact "originate" as provided in section 4, ROR. We do note, however, that insofar as the thermal ribbon, bar code ribbon and bar code shipping label appear to constitute packing materials for shipment as opposed to packaging materials for retail packaging, they likewise would be disregarded in determining the RVC in accordance with section 7(15), ROR, as discussed above.
HOLDING:
Based on the information provided, we cannot conclude that the imported bicycles satisfy the regional value content requirement under the net cost method to qualify as originating NAFTA goods.
This holding applies only to the specific factual situation and merchandise identified in the ruling request. This position clearly is set forth in section 181.100(a)(2), Customs Regulations, which states that a NAFT A ruling letter is issued on the assumption that all the information furnished in connection with the ruling request and incorporated therein, directly, by reference, or by implication, is accurate and complete in every respect. Should it subsequently be determined that the information furnished is not complete and/or does not comply with 19 CFR § 181.100(a)(2), this ruling will be subject to modification or revocation. In addition, any change in the facts furnished in connection with this ruling may affect the outcome of the regional value content determination. In such a case, it is recommended that a new ruling request be submitted in accordance with 19 CFR § 181.93.
Sincerely,
Thomas L. Lobred
Acting Director
International Trade Compliance Division