A Core Marking Question

It has been a while since I covered a Customs and Border Protection ruling. But, HQ H171035 is right in my wheelhouse of personal and professional interest. It concerns the application of NAFTA and non-NAFTA marking rules to used motor vehicle parts imported for remanufacturing. In the industry, these are called "cores."
 
It is important to note that the ruling does not address the NAFTA origin of or the entry requirement for the dirty core when imported. It appears from the ruling that non-NAFTA claims were involved. The ruling also does not address the origin marking on the outermost packaging of the dirty cores imported for further processing. Rather, it focuses only on the marking of the remanufactured parts, which are presumably sold in the aftermarket.

For core from non-NAFTA countries, the applicable law is that the ultimate purchaser should be able to identify its country of origin from the marking on the imported goods. For this purpose, “country of origin” is defined as the country in which further work or added material effected a “substantial transformation.” A substantial transformation takes place when there is a change in the name, character, or use of the product. If the remanufacturing in the U.S. results in a substantial transformation, then the remanufacturer is the “ultimate purchaser” and no country of origin marking would be required for subsequent sale in the United States. Another way to say that is that a substantial transformation renders the United States as the country of origin of the remanufactured cores.

 
According to Customs, the core components remanufactured in the United States do not undergo a substantial transformation. Customs concluded that the dirty core components have the same name, character, and use as the remanufactured parts. Essentially, Customs believes that the process of converting a dirty, say a used pump into a clean, almost-new pump for resale does not substantially transform the pump.

 Applying this conclusion, Customs determined that the remanufacturer is not the ultimate purchaser for purposes of the marking law. Rather, the parts must be marked when they reach the end-user who purchases the remanufactured part. Customs then held that where the products are marked with their country of origin, that will be the country of origin for marking purposes. For unmarked products, and in the absence of other evidence of origin, the country of origin will be the country in which the parts were used prior to collection.

 With respect to core from a NAFTA country, the analysis is different. Here, the question is whether the production in the U.S. renders the parts “goods of a NAFTA country,” specifically, the United States. If so, the NAFTA marking rules apply (which is clearly a circular analysis). To make this determination, Customs relied on the NAFTA Marking Rules of 19 CFR Part 102. The marking analysis under the NAFTA requires several steps, which are clearly explained in the ruling. Customs ultimately determined that the origin of the remanufactured core is the origin of the material that imparts the essential character, which is the core itself. Thus, Customs concluded that if the core is marked with its country of origin, that is the country of origin for marking purpose. This is consistent with the outcome of the non-NAFTA analysis.

In situations where the core collected in a NAFTA country and is not marked, the result is different. In those cases, the remanufacturing operation in the United States is sufficiently complex (i.e., it is not “minor processing” or “simple assembly”) to provide a new origin to the part. Consequently, for unmarked core imported from a NAFTA country and remanufactured in the U.S., the country of origin is the United States and the remanufacturer is the ultimate purchaser of the imported goods.

 In summary, there are four core remanufacturing scenarios considered in this ruling.

 

1.       Imported from a non-NAFTA county and marked with origin

a.       Remanufacture does not result in substantial transformation

b.      Country of origin is the country marked on the product

c.       Goods must be marked when they reach the end user

 

2.       Imported from a non-NAFTA country and not marked with origin

1. Remanufacture does not result in substantial transformation
2. Country of origin is the country where the parts were used
3. Goods must be marked when they reach the end user 

3. Imported from a NAFTA country and marked with origin
1. Essential character is the core part itself
2. Country of origin is the country marked on the product
3. Goods must be marked when they reach the end user 

4. Imported from a NAFTA country and not marked with origin
1. Country of origin based on location of last processing other than minor processing or simple assembly
2. Country of origin is U.S.
3. Goods need not be marked when they reach the end user

This ruling does not address the country of origin of the dirty core to be reported when it is imported into the United States or the NAFTA origin status of the dirty core. Under the disassembly rule, it is possible that the core might be originating for purposes of the NAFTA even though it is marked with a non-NAFTA country of origin. For example, the part may undergo a qualifying shift in tariff classification from vehicle, for example, to part. In that case, the part would be originating for purposes of the NAFTA. In this circumstance, the so-called NAFTA preference override ( 19 CFR 102.19(a)) makes the country of origin of originating goods the last NAFTA country in which the goods underwent production other than minor process. Accordingly, the part would be originating for purposes of the NAFTA, declared as a product of the NAFTA country at the time of entry and marked consistent with that conclusion (if required under the above tests).

One aspect of this puzzles me and I throw it open to discussion. Why were goods from NAFTA and Non-NAFTA countries treated differently? If you look at the regulations, under 19 CFR 134.1(b) the country of origin for a good of a NAFTA country is the country of origin determined under the NAFTA Marking Rules. So, when making an origin determination, the first thing that must be done is to determine whether you are dealing with a good of a NAFTA country under Part 102. The Part 102 NAFTA Marking Rules do not focus on the country from which the goods were exported, which is how Customs applied the rules. Rather, following 19 CFR § 102.11, Customs is to apply a series of tests until a single country of origin is determined.

If that is true, it applies across the board. Assume that the core in this ruling was collected in and shipped from Bulgaria and either unmarked or marked "Made in Bulgaria."  If the first marking question is to determine whether we are dealing with a good of a NAFTA country, then it is clear at the time of importation we are not. There is no connection to Canada, the U.S., or Mexico. Thus, the normal marking rules apply and Bulgaria will be the country of origin based on substantial transformation if there is evidence for that, the marking itself, or the Ashdown principal of use. If these same goods were marked "Made in Canada," the result is different. Now, have a non-NAFTA originating good (because it was used outside of North America) but the essential character imparted by the core part is Canadian. That makes it the good of a NAFTA country and the country of origin is Canada. In that case, there is no need to apply substantial transformation. Rather, the marking rules already tell us that the origin for marking purposes is "Canada."

The second question that arises is more convoluted. It is whether the Part 102 rules should also be applied to determine whether further processing in the U.S. produces "a good of a NAFTA country." The textual problem with doing so is that Part 102 specifically says it is used to determine the country of origin "of imported goods" for specific purposes including the NAFTA marking determination. See 19 CFR § 102.0 (Scope). Once we are talking about further processing in the U.S., we are no longer talking about imported goods. "Imported goods" is best understood as referring to the goods at the time and in the condition in which they crossed the border. Further, if the Part 102 rules were applied to make the origin determination for goods further processed in the U.S., then (as illustrated above) it should be applied to all such products to determine if they become goods of a NAFTA country (i.e., the United States). If that is true, then the substantial transformation analysis will only follow a Part 102 analysis in which the result is a non-NAFTA country.

I  think a close reading of 19 CFR § 134.32(h), which is the marking exception at issue here, clears this up. That provision reads:

Articles for which the ultimate purchaser must necessarily know, or in the case of a good of a NAFTA country, must reasonably know, the country of origin by reason of the circumstances of their importation or by reason of the character of the articles even though they are not marked to indicate their origin . . . .

The "ultimate purchaser" is defined in § 134.1 as, in part, "for a good of a NAFTA country, the 'ultimate purchaser' is the last person in the United States who purchases the good in the form in which it was imported." The examples in that section make it clear that the Part 102 NAFTA Marking Rules are used to determine whether the goods are sufficiently further processed to allow the importer to be the ultimate purchaser.

To illustrate this inquiry, assume goods are imported from China for further processing by the importer. The importer wants to know whether the finished goods need to be marked. Traditionally, the answer to that question depends on whether a substantial transformation has occurred. But, maybe it is not so. Rather, the first real question might be whether the goods from China that are further processed in the U.S. are goods of a NAFTA country. Clearly, at the time of importation, they are not. When imported, they are to be declared products of China and at least the outermost contain should be marked "China."

What about after processing in the U.S.? One way to decide that is to apply the NAFTA Marking Rules and see whether the resulting country of origin is U.S. If so, then we have produced a good of a NAFTA country and the question is whether the last person in the United States who purchased it in the form in which it was imported reasonably knows the origin. That analysis to goods from China would supplant the substantial transformation test for almost all imports and, as I said, seem not to be what was intended.

Rather, § 134.32(h) refers to goods of a NAFTA country and "the circumstances of their importation." This links their status as goods of a NAFTA country to the time of importation. That means that the Part 102 rules only apply to the further processing question when the goods, as imported, are "goods of a NAFTA country." That limits the application of these rules substantially [sorry for the pun] and preserves substantial transformation as the starting point for most further processing questions. It is also consistent with the Federal Circuit decision in Best Foods, which applied the NAFTA Marking Rules to determine whether peanut butter produced in the U.S. from Canadian materials needed to be marked as an article of Canada. Lastly, it is consistent with how Customs approached this ruling, which takes us back to where we started.