MAR-2-05 CO:R:C:V 730155 KG

District Director of Customs
Portland, Maine 04112

RE: Internal Advice No. 92/86 concerning country of origin marking of running shoe uppers

Dear Sir:

This is in response to a request for internal advice initiated by a letter of September 18, 1986, from David R. Ostheimer, on behalf of Hyde Athletic Industries, Inc., regarding the country of origin marking of running shoe uppers imported from Taiwan. We regret the delay in responding.

FACTS:

The imported uppers go through 5 different departments in their processing in the U.S. In the first department, the counters and the sock inserts (insoles) are die-cut into proper shape and size. The counters are cut from a flat stytherm sheet stock and the sock inserts from pre-molded foam blocker.

In the second department, the counters are skived prior to being added to the upper. Skiving is the thinning of the counter edges to enable the counter to fit properly into the heel area of the upper. Also, a string is tied through the eyelets of the upper. Shoe size, production date and production tag numbers are all stamped on the inside tongue of the upper. The counter is placed into the heel between the nylon and the overlapping leather.

The third department is the lasting department. First, the heel area/counter is shaped. Then the upper is placed onto a plastic last. The next operation is where the toe is shaped followed by the shaping of the side of the upper. The outer pieces of the upper are tucked, folded and shaped in order to insure that the upper sits correctly on top of the mid/outsole unit when this unit is bonded to the bottom of the upper. A machine smooths all bumps, creases and folds on the bottom of the upper. Then the bottom of the upper is roughed in preparation for the cementing process.

In the fourth department, the bottom of the upper is primed and cement is placed on it. The wedge/outsole unit is also primed and cemented. After letting the cement dry for 1 to 1 1/2 hours, the upper and wedge/outsole unit are heat-activated at 110-130 degrees Farenheit. Then the upper and the wedge/outsole are pressurized at a rate of 275 pounds per square inch. Prior to the pressurizing of the wedge/outsole and the upper, a plastic heel stabilizer (MCD) is added. The MCD is put through a special wash and then primed, cemented and dried before being heat- activated and pressed together with the the heat-activated wedge/outsole. This new combined unit then cools to room temperature before being heat-activated again and pressurized with the upper. The toe flap of the outsole is dryed and wrapped by activating the cement and placing the shoe in the toe wrap machine. The lacing is then cut and the last is pulled out of the shoe. The heel is scoured and trimmed.

In the fifth department, the sock inserts are placed into the shoe. Excess cement is cleaned off the shoe. The suede is touched up, the midsole and outsole are cleaned and shoe laces are added to the shoe. The shoes are matched up in pairs, inspected and packed into boxes for shipment.

In addition to reviewing the written submission and examining the samples, we viewed the videotape that was submitted which showed all of the above U.S. operations.

The only information submitted regarding the operations performed in the processing of the upper in Taiwan are cost figures for the labor performed abroad and a list of machines used in the construction of the uppers. There is no description given of either the machines or what they do.

ISSUE:

Whether the imported uppers are substantially transformed by the manufacturing processes in the U.S.

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. The U.S. Court of International Trade stated in Koru North America v. United States, 701 F.Supp. 229, 12 CIT (CIT 1988), "In ascertaining what constitutes the country of origin under the marking statute, a court must look at the sense in which the term is used in the statute, giving reference to the purpose of the particular legislation involved. The purpose of the marking statute is outlined in United States v. Friedlaender & Co., 27 CCPA 297, 302, C.A.D. 104 (1940), where the court stated that: 'Congress intended that the ultimate purchaser should be able to know by an inspection of the marking on imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will."

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. The ultimate purchaser is defined in section 134.1(d), Customs Regulations (19 CFR 134.1(d)), as generally the last person in the United States who will receive the article in the form in which it was imported. If the imported article will be used in manufacture, the manufacturer may be the ultimate purchaser if he subjects the imported article to a process which results in a substantial transformation of the article, even though the process may not result in a new or different article. In such case, the article itself is excepted from marking pursuant to section 134.35, Customs Regulations (19 CFR 134.35), and only the outermost container of the imported article must be marked.

For a substantial transformation to be found, an article having a new name, character, or use must emerge from the processing. United States v. Gibson-Thomsen Co., Inc. 27 C.C.P.A. 267 (1940). In a country of origin marking case involving imported shoe uppers, Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983), the U.S. Court of International Trade considered whether the addition of an outsole in the U.S. to imported uppers lasted in Indonesia effects the substantial transformation of the uppers. The court described the imported upper, which resembled a moccasin, and the process of attaching the outsole to the upper. The factors examined included: a comparision of the time involved in attaching the outsole versus the time involved in manufacturing the upper, a comparision of the cost involved in the process of attaching the outsole versus the cost involved in the process of manufacturing the upper, a comparision of the cost of the imported upper versus the cost of outsole and a comparision of the number of highly skilled operations involved in both processes. The court concluded that a substantial transformation of the upper had not occurred since the attachment of the outsole to the upper is a minor manufacturing or combining process which leaves the identity of the upper intact. The upper was described as a substantially complete shoe and the manufacturing process taking place in the U.S. required only a small fraction of the time and cost involved in producing the upper.

In a more recent case involving the classification of an athletic shoe upper, the U.S. Court of Appeals for the Federal Circuit reversed the trial court's finding that the upper was substantially complete as imported. Simod America Corp. v. United States, 23 Cust. B. & Dec. 17 (Fed. Cir., 1989). The upper was lasted and soled in the U.S. The court described in great detail the process of making polyurethane shoe soles with a machine called a Desma 513/24. The Desma is a very expensive, massive, intricate machine requiring significant start-up time and costs. The test for determining substantial completeness set forth in Daisy-Heddon, Div. Victor Comptometer Corp. v. United States, 600 F.2d 799 (CCPA, 1979), enumerates a series of five factors to be considered. In Simod, the court centered its discussion on the second factor of Daisy-Heddon, a comparision of the time and effort required to complete the article with the time and effort required to place it in its imported condition. This involved comparing the labor-intensive craftsmanship required in Italy with the capital-intensive mechanized and sophisticated process completed in the U.S. The court stated that "It would be a startling breach if two identical entries were classified differently because, after importation, one was destined for completion in a labor-intensive operation, and the other in a capital-intensive operation....labor intensivity alone cannot be made a test of completeness where there is a great difference in the extents of capital intensivity in the manufacturing operation before and after importation." Simod at 23, 24.

The Daisy-Heddon factors are: (1) comparision of the number of omitted parts with the number of included parts; (2) comparision of the time and effort required to complete the article with the time and effort required to place it in its imported condition; (3) comparision of the cost of the included parts with that of the omitted parts; (4) the significance of the omitted parts to the overall functioning of the completed article; and (5) trade customs, i.e., does the trade recognize the importation as an unfinished article or as merely a part of that article. The factors examined in Daisy-Heddon and Simod are very similar to the factors applied in Uniroyal. However, Uniroyal was a country of origin marking case while Simod is a tariff classification case applying the Tariff Schedules of the United States. Further, not only do these two cases arise under two different statutes with different legislative purposes and intent, but also these two cases present significant different fact patterns. Therefore, these two cases have limited relevance to each other.

An examination of the factors enumerated in Uniroyal is relevant to determine whether or not the imported running shoe uppers involved in this case are substantially transformed. The first factor discussed in Uniroyal is a comparision of the time involved in the domestic processing versus the time involved in manufacturing the upper overseas. This information was not submitted by the importer and therefore, cannot be considered.

The second factor discussed in Uniroyal is a comparision of the cost involved in the domestic process versus the cost of manufacturing the upper. The information submitted by the importer is a comparision of the cost of labor done in the U.S. with the cost of labor done abroad. The cost of labor is not a complete representation of the cost of the processing. It is impossible to glean from the information submitted the cost of processing done either overseas or in the U.S. Therefore, this factor cannot be considered.

The third factor discussed in Uniroyal is a comparision of the cost of the domestic pieces attached to the upper versus the cost of the imported upper. The importer enumerated component parts added in the U.S., giving a cost figure of $5.474. However, at least one of these parts is marked "Made in Taiwan" on the sample submitted. The origin of the other parts in not given. The cost of the imported upper is $4.160 for one model of athletic shoe produced and $3.960 for the other model produced. The point of this comparision is to compare the cost of U.S.-made parts incorporated into the completed product with the cost of Taiwan-made parts incorported into the completed product. It is illological to include the cost of component parts made in Taiwan and added in the U.S. as part of the cost figure finding in favor of determining that the imported article was substantially transformed in the U.S. Only the cost of the U.S. labor necessary to attach the imported component part would be relevant to the determination of substantial transformation. Because it is not possible to determine which parts were made in the U.S., little weight can be given to this factor.

The final factor discussed in Uniroyal is a comparision of the number of highly skilled operations involved in both the domestic and foreign processes. The importer went into great detail about the processes performed in the U.S. However, the importer merely submitted a list of the machines used in Taiwan to produce the upper. It is impossible to compare a detailed explanation of the domestic process with a mere list of machines used in the operation abroad. Therefore, it is impossible to compare the operation involved in manufacturing the upper overseas with the domestic process.

To determine whether a substantial transformation of an article has occurred for the purpose of ascertaining who is the 'ultimate purchaser', each case must be decided on its own particular facts. Uniroyal at 224. In Uniroyal the court examined the facts presented and determined that the completed upper was the very essence of the completed shoe. The concept of the "very essence" of a product was applied in National Juice Products v. United States, 628 F. Supp. 978, 10 CIT (CIT 1986), where the U.S. Court of International Trade determined that frozen concentrated orange juice and reconstituted orange juice that contains imported manufacturing concentrate was not substantially transformed in the U.S. The court agreed with Customs that the manufacturing concentrate "imparts the essential character to the juice and makes it orange juice ....thus, as in Uniroyal, the imported product is the very essence of the retail product. The retail product in this case is essentially the juice concentrate derived in substantial part from foreign grown, harvested, and processed oranges. The addition of water, orange essences, and oils to the concentrate, while making it suitable for retail sale, does not change the fundamental character of the product".

In this case, the upper is lasted and soled in the U.S. Unlike Simod, much of the processing done is labor-intensive. However, it was clear from the videotape that the upper goes through a great deal of processing in the U.S. In particular, the upper did not really take the form of a shoe until it was lasted. Once the upper was heel and toe lasted, it had the basic form of a shoe and it could be said was the very essence of a shoe. For these reasons, the upper is substantially transformed in the U.S. and only the outermost container in which the uppers are imported must be marked with the country of origin.

HOLDING:

The running shoe upper is substantially transformed in the U.S. by the processing described above. Pursuant to 19 CFR 134.35 only the outermost container in which the upppers are imported must be marked with the country of origin.

Sincerely,

John Durant
Director,
Commercial Rulings Division