Marking Unassembled Products
I do a lot of training talks for lots of organizations and I am happy to do so. One of my go-to examples for tariff classification is a complete bicycle imported unassembled in a retail box. This is a good way to discuss General Rule of Interpretation 2(a), which tells us that goods imported in an unassembled or disassembled condition will be classified as the finished article if, when imported, it is complete or has the essential character of the complete article. In my bike example, that means that the unassembled bicycle is classified as if it were assembled.
What I don't usually talk about in the context of that example is the marking of the disassembled bicycle in a retail box. I am, however, thinking about that because Customs and Border Protection recently published a proposal to revoke the ruling NY N015337 (Aug. 23, 2007) in which it addressed the marking of an unassembled child carrier/seat for a bicycle. The proposal is in the Customs Bulletin starting at page 39.
The product involved is the rack mount Bell Cocoon Child Carrier. I think this is it:
Some of the parts for this seat were imported from China. Others were imported from Taiwan (more on the geopolitics later). The molded plastic bucket seat and other components were produced in the United States. After importation, the foreign and domestic components were packaged together for retail sale in an unassembled state.
In proposed new ruling HQ H234565, Customs identified two questions. First, how should the individual components be marked at the time of importation? Second, how should the unassembled seat be marked for retail sale?
First, some background: U.S. law requires that unless an exception applies, all articles of foreign origin imported into the United States must be marked with their country of origin. 19 USC 1304. The marking has to be conspicuous and as legible, indelible, and permanent as the nature of the article (or its container) will permit. The marking must indicated the English name of the country of origin of the article so that the ultimate purchaser of the item should be able to identify the country of origin and, "buy or refuse to buy them, if such marking should influence his [or her] will." U.S. v. Friedlaender & Co., 27 CCPA 297, 302 (1940). The ultimate purchaser is generally the last person in the U.S. who received the goods in the form in which they were imported.
This is where things get difficult in this case. Here, as in my bicycle example, the numerous parts are packaged together but not otherwise changed in any way. In the notice, Customs asserts that means the retail purchaser of the seat is the ultimate purchaser of the components. That means that "The Chinese [and Taiwanese] components must be marked at importation." That does not strike me as a big deal or hard to implement by the importer. The parts are likely imported in bulk and, I am guessing, are properly marked if not on the parts then on the containers.
Related to this is the fact that the importer knows it will be repackaging the seat parts into seat kits. Consequently, Customs helpfully pointed out the requirement that the importer provide a repacker's certificate to the Port of Entry. That certificate states that the importer who repacks goods will not obscure the origin marking on the products or will repack in such a way as to properly communicate the country of origin. See 19 CFR 134.26 for details.
Now, what about that retail marking? Keeping in mind that Customs says that the retail customer is the ultimate purchaser of the imported parts, this is where things get more difficult for the importer. According to Customs, the outside of the retail container must state the country of origin of each component. Customs cites a number of prior rulings in support of this proposition.
The important take away here is what Customs did not do. Many importers might have assumed that because the kit will, by virtue of GRI 2(a), be classified as an entirety, that it will be treated as a single item with a single country of origin. After all, if the parts were assembled into the seat prior to sale, there would probably be a substantial transformation from foreign components to finished seat. In that case, the article would not be "foreign" and would not need to be marked at all. Customs also did not fall back on selecting a single country of origin based on the one component that provides the essential character to the finished article. That can work in the NAFTA marking context, but not here (at least according to Customs).
Assuming the seat kit is packaged in an opaque box, this means that the origin label on this retail box will be complicated. It will apparently have to list the origin of each foreign component at retail sale.
Is this the right result? I'm not sure, for a couple reasons.
First, the ultimate purchaser of the components may not be the retail customer. I realize that nothing beyond repacking is done to the components. Nevertheless, the components are presumably imported in bulk and classified as individual items. The commercial reality of the retail sale is that, consistent with GRI 2(a), a single item has entered the commerce of the United States. The retail customer did not select the various components when it purchased the kit in exactly the same way that the retail customer would not select the components of an assembled seat. On that basis, even though only packaging into kits has occurred, it strikes me that the component importer is the ultimate purchaser. If that is true, then the kit would not need to be marked.
Second, I am continually hung up on when the NAFTA marking rules apply. They clearly do not apply to the components from China and Taiwan when imported. Those are not goods of a NAFTA country. But, what about the kit? The kits are not the imported products, and the marking rules do not apply to the kits as a whole, only to the imported components.
But, if we look just at the retail kit, it is likely that under 19 CFR 102.11, the country of origin would be the U.S, either because of tariff shifts or because the piece that imparts the essential character is the U.S.-origin plastic seat. We don't really know, I am just making assumptions as an academic exercise. If that is the case, then the retail kit would qualify as the good of a NAFTA country for marking purposes. It would not be NAFTA originating, but it would qualify as a U.S.-origin product and not require marking.
This is not an accepted application of the NAFTA rules. Do not apply them in this way without getting legal advice. I am not aware of any rulings that apply the NAFTA marking rules in this way. But, I think this is consistent with the way they are written. Customs would agree with my caveat above that the imported foreign articles are the components from China and Taiwan. The marking rules are applied to them in both their imported form and as parts of the kit. It would not be proper, under this analysis, to apply different rules to the kit in a way that avoids marking the foreign non-NAFTA products.
But, I think that two-part marking analysis is exactly what happens in the traditional application of substantial transformation to products that are further processed in the U.S. Forget the NAFTA rules for a second. If the components are imported in bulk, they need to be marked so that the ultimate purchaser knows the origin. But, if subsequent processing in the U.S. results in a substantial transformation, then the new product is considered to be of U.S. origin for purposes of marking. That second look at the finished product is exactly how I am suggesting that the NAFTA rules can be read.
Another apparent problem with my theory is that it means all foreign products subjected to further processing in the U.S. would be analyzed under the NAFTA rules and substantial transformation would be completely eliminated. That is a canard; and is not what happens. Substantial transformation would only be obviated in those cases where, after the NAFTA rules are applied, it is determined that a result showing the U.S., Canada, or Mexico as the country of origin. In this case, if China or Taiwan were determined to be the country of origin, the final marking determination would fall back to the traditional substantial transformation approach. To me, that makes sense in the NAFTA context and here.
But, and this is important, that is not how Customs sees things. To the best of my knowledge, every ruling issued by CBP on the application of the NAFTA marking rules has involved a product shipped from, processed in, or containing materials from Canada or Mexico. I am not aware of Customs ever applying the NAFTA marking rules to goods of non-NAFTA origin that were further processed in the U.S.
So, the lesson here is two fold. One, the non-NAFTA marking requirement for unassembled components in kits is that the retail packaging must not obscure the marking on the components or must display the origins of the components. Second, with respect to the NAFTA part, I am prone to thinking too much about this particular topic.
If, by chance, you want to comment on the CBP proposal, the due date is August 2, 2012.
Finally, I think it is interesting that the proposal clearly states that the component parts are from China (i.e,, the Peoples Republic of China) and Taiwan (i.e., the Republic of China). In history and politics, that is an important distinction. Nevertheless, it looks to me that Customs conflated the two into "China." Customs might want to change that before it gets a call from one or two angry ambassadors.
What I don't usually talk about in the context of that example is the marking of the disassembled bicycle in a retail box. I am, however, thinking about that because Customs and Border Protection recently published a proposal to revoke the ruling NY N015337 (Aug. 23, 2007) in which it addressed the marking of an unassembled child carrier/seat for a bicycle. The proposal is in the Customs Bulletin starting at page 39.
The product involved is the rack mount Bell Cocoon Child Carrier. I think this is it:
In proposed new ruling HQ H234565, Customs identified two questions. First, how should the individual components be marked at the time of importation? Second, how should the unassembled seat be marked for retail sale?
First, some background: U.S. law requires that unless an exception applies, all articles of foreign origin imported into the United States must be marked with their country of origin. 19 USC 1304. The marking has to be conspicuous and as legible, indelible, and permanent as the nature of the article (or its container) will permit. The marking must indicated the English name of the country of origin of the article so that the ultimate purchaser of the item should be able to identify the country of origin and, "buy or refuse to buy them, if such marking should influence his [or her] will." U.S. v. Friedlaender & Co., 27 CCPA 297, 302 (1940). The ultimate purchaser is generally the last person in the U.S. who received the goods in the form in which they were imported.
This is where things get difficult in this case. Here, as in my bicycle example, the numerous parts are packaged together but not otherwise changed in any way. In the notice, Customs asserts that means the retail purchaser of the seat is the ultimate purchaser of the components. That means that "The Chinese [and Taiwanese] components must be marked at importation." That does not strike me as a big deal or hard to implement by the importer. The parts are likely imported in bulk and, I am guessing, are properly marked if not on the parts then on the containers.
Related to this is the fact that the importer knows it will be repackaging the seat parts into seat kits. Consequently, Customs helpfully pointed out the requirement that the importer provide a repacker's certificate to the Port of Entry. That certificate states that the importer who repacks goods will not obscure the origin marking on the products or will repack in such a way as to properly communicate the country of origin. See 19 CFR 134.26 for details.
Now, what about that retail marking? Keeping in mind that Customs says that the retail customer is the ultimate purchaser of the imported parts, this is where things get more difficult for the importer. According to Customs, the outside of the retail container must state the country of origin of each component. Customs cites a number of prior rulings in support of this proposition.
The important take away here is what Customs did not do. Many importers might have assumed that because the kit will, by virtue of GRI 2(a), be classified as an entirety, that it will be treated as a single item with a single country of origin. After all, if the parts were assembled into the seat prior to sale, there would probably be a substantial transformation from foreign components to finished seat. In that case, the article would not be "foreign" and would not need to be marked at all. Customs also did not fall back on selecting a single country of origin based on the one component that provides the essential character to the finished article. That can work in the NAFTA marking context, but not here (at least according to Customs).
Assuming the seat kit is packaged in an opaque box, this means that the origin label on this retail box will be complicated. It will apparently have to list the origin of each foreign component at retail sale.
Is this the right result? I'm not sure, for a couple reasons.
First, the ultimate purchaser of the components may not be the retail customer. I realize that nothing beyond repacking is done to the components. Nevertheless, the components are presumably imported in bulk and classified as individual items. The commercial reality of the retail sale is that, consistent with GRI 2(a), a single item has entered the commerce of the United States. The retail customer did not select the various components when it purchased the kit in exactly the same way that the retail customer would not select the components of an assembled seat. On that basis, even though only packaging into kits has occurred, it strikes me that the component importer is the ultimate purchaser. If that is true, then the kit would not need to be marked.
Second, I am continually hung up on when the NAFTA marking rules apply. They clearly do not apply to the components from China and Taiwan when imported. Those are not goods of a NAFTA country. But, what about the kit? The kits are not the imported products, and the marking rules do not apply to the kits as a whole, only to the imported components.
But, if we look just at the retail kit, it is likely that under 19 CFR 102.11, the country of origin would be the U.S, either because of tariff shifts or because the piece that imparts the essential character is the U.S.-origin plastic seat. We don't really know, I am just making assumptions as an academic exercise. If that is the case, then the retail kit would qualify as the good of a NAFTA country for marking purposes. It would not be NAFTA originating, but it would qualify as a U.S.-origin product and not require marking.
This is not an accepted application of the NAFTA rules. Do not apply them in this way without getting legal advice. I am not aware of any rulings that apply the NAFTA marking rules in this way. But, I think this is consistent with the way they are written. Customs would agree with my caveat above that the imported foreign articles are the components from China and Taiwan. The marking rules are applied to them in both their imported form and as parts of the kit. It would not be proper, under this analysis, to apply different rules to the kit in a way that avoids marking the foreign non-NAFTA products.
But, I think that two-part marking analysis is exactly what happens in the traditional application of substantial transformation to products that are further processed in the U.S. Forget the NAFTA rules for a second. If the components are imported in bulk, they need to be marked so that the ultimate purchaser knows the origin. But, if subsequent processing in the U.S. results in a substantial transformation, then the new product is considered to be of U.S. origin for purposes of marking. That second look at the finished product is exactly how I am suggesting that the NAFTA rules can be read.
Another apparent problem with my theory is that it means all foreign products subjected to further processing in the U.S. would be analyzed under the NAFTA rules and substantial transformation would be completely eliminated. That is a canard; and is not what happens. Substantial transformation would only be obviated in those cases where, after the NAFTA rules are applied, it is determined that a result showing the U.S., Canada, or Mexico as the country of origin. In this case, if China or Taiwan were determined to be the country of origin, the final marking determination would fall back to the traditional substantial transformation approach. To me, that makes sense in the NAFTA context and here.
But, and this is important, that is not how Customs sees things. To the best of my knowledge, every ruling issued by CBP on the application of the NAFTA marking rules has involved a product shipped from, processed in, or containing materials from Canada or Mexico. I am not aware of Customs ever applying the NAFTA marking rules to goods of non-NAFTA origin that were further processed in the U.S.
So, the lesson here is two fold. One, the non-NAFTA marking requirement for unassembled components in kits is that the retail packaging must not obscure the marking on the components or must display the origins of the components. Second, with respect to the NAFTA part, I am prone to thinking too much about this particular topic.
If, by chance, you want to comment on the CBP proposal, the due date is August 2, 2012.
Finally, I think it is interesting that the proposal clearly states that the component parts are from China (i.e,, the Peoples Republic of China) and Taiwan (i.e., the Republic of China). In history and politics, that is an important distinction. Nevertheless, it looks to me that Customs conflated the two into "China." Customs might want to change that before it gets a call from one or two angry ambassadors.
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