Saturday, December 03, 2016

Ruling of the Week 2016.22: Framing Substantrial Transformation

I like bikes. Lately, that is more in theory than in actual usage, but that is my fault. In reality, bikes are a transformative technology. They give kids their first sense of independence. They give everyone a means of transportation with zero carbon emissions. In some cases, the availability of that transportation may be lifesaving.

Thus, when I see something at work that involves bicycles, I usually take note. Such is the case with the September 21, 2016 Customs Bulleting and Decisions in which Customs and Border Protection revoked a ruling, N269994 (Nov. 20, 2015), on the country of origin of bicycles.

The bicycle in question is assembled in the United States from imported components, including frames. Customs had previously ruled that assembling components to a U.S.-origin frame produces a bike with the U.S. as the country of origin. In N269994, it apparently misapplied that same analysis to find the U.S. to be the country of origin of bicycles with imported frames.

In this new ruling, which is HQ H273304 (Aug. 11, 2016), Customs finds that the country of origin of the frame is the country of origin of the finished bike.

The starting point is the law, which requires that all articles of foreign origin be marked in a manner that will indicate to the ultimate purchaser the name of the country of origin. Note that the analysis is different for goods of a NAFTA country, that is not what we have here.

When the item is imported to be further processed, the question is whether the further processing is sufficient to make the item a product of the U.S. when sold to the ultimate purchaser. According to 19 CFR § 134.1(b), "Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the 'country of origin' within the meaning of this part . . . ." A substantial transformation occurs when the article that emerges from a process has a new name, character, or use different from that possessed by the imported article. When that happens, the processor is considered to be the ultimate purchaser and the imported item is exempt from marking.

Here, Customs ruled that the imported frames were not substantially transformed. Customs reasoned that the frame is the most costly and essential component of the finished bicycle. Furthermore, Customs held that the frame provides the overall shape, size and character of the bicycle. "Because the bicycle is assembled in the United States and is one of the bicycle's essential components, the frame, is made outside of the United States, [Customs and Border Protection found] that the country of origin of the bicycle would be imparted by the frame." Accordingly, the country of origin of the bike is the country of origin of the frame.

I hate this decision. For some reason, Customs and Border Protection did a great job of setting up the issue and explaining the legal test for substantial transformation. Then it whiffed at trying to apply that test. The question is whether the finished bicycle has a new name, character, or use different from the imported frame. The question Customs answered is whether the frame is an expensive and important component. Those questions will not always produce the same answer. Furthermore, it seems likely that the "essential component" test Customs applied is less likely to result in substantial transformations than is the actual legal test.

From Manchester Triathlon Club

Let's try it here:

The imported item is a "frame" at the time of importation. No one would call it a bicycle. True, it is an essential component of the assembled bike. It also dictates many aspects of the nature and use of the bike. But, it is a frame. It just is. That is what it is called. Customs has stated many times that a change in name is the least probative of the three elements of name, character, or use. Nevertheless, it cannot be ignored that there is a name change here.

What about "character?" This test is hard to define. We know a few things for certain. The frame is not a completely assembled vehicle as is a bicycle. It has no moving part and is generally uniform in construction (i.e., it is most likely a collection of metal tubes welded together). If you want to move it, you need to pick it up or drag it along the ground. The finished bike, on the other hand, is an assembled, mechanical vehicle. It has moving parts of gears connected by a chain, it has brakes connected by cables to hand controls. It has wheels that rotate about their axle and a front steering mechanism that works with handlebars connected to the fork through the head tube. If you want to move a bicycle, you can roll it or ride it.

And what about use? The imported frame has exactly one use: it can become part of a finished bicycle. A bicycle has as many uses as you can imagine. It can be used to tackle the cobblestones between Paris and Roubaix. It can be used to race across the continent. A bike can help a girl in India get an education. A bike can be used to get documents across town or in an unsuccessful effort to outrun a tornado. A bike can help you "meet the future" or find the basement at the Alamo. When necessary, and with the right help, it can let you fly.

So, as you might be able to tell. I don't buy it. I think an imported frame--in all its carbon, titanium, steel, or aluminum glory--is a static component of a bicycle. Assembling the finished machine, in my view, substantially transforms the frame into a useful bicycle. Customs and Border Protection might not agree. But, if it is going to disagree, it should apply the proper analysis to get there.


Mr. Micawber said...

Interesting. It seems CBP applied classification principles to an origin issue. It would have been a different, if the issue had been the proper classification of the frame; say, whether it was an article of metal, formed or unformed, or whether it was a part of a bicycle.

Oh well, c'est la aduane.

Michele Mitchell said...

Absolutely! This article struck a chord with me: my company had the exact same circumstance a few years ago with automotive brake calipers. The housing of the caliper (raw cast iron) was imported from Brazil, and as wih the bike frame, it is the most expensive component of the brake. I won't go into detail, but this scenario and reasoning fits almost exactly. It really doesn't make sense if you apply the legal logic, yet we were consistently advised (by Trade experts, not a ruling) that the CO would remain Brazil for the finished brake.
As always, nicely presented opinion. I look forward to your posts.