Protest and Application for Further Review 2506-16-100029; Disposable Shoe Covers; NAFTA; Regional Value Content

HQ H291701 May 22, 2018 OT:RR:CTF:VS H291701 JMV CATEGORY: Valuation Port Director U.S. Customs and Border Protection Port of Tecate P.O. Box 189 Tecate, CA 91980 RE: Protest and Application for Further Review 2506-16-100029; Disposable Shoe Covers; NAFTA; Regional Value Content Dear Director: This is in response to the Application for Further Review (“AFR”) of Protest No. 2506-16-100029, received on July 15, 2016, and filed against U.S. Customs and Border Protection's (“CBP”) decision to deny the merchandise at issue preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”). The Protestant, Polymer Safety, LLC (“Protestant”) claims that the imported merchandise meets the required regional value content and is entitled to preferential tariff treatment under NAFTA. FACTS: The Protestant is a Delaware based company who manufactures disposable shoe covers in Mexico for sale to various distributors in the United States. The company makes direct purchases of both originating and non-originating raw materials from vendors located in the United States. The Protestant then directly ships the raw material to Tecate, Mexico, where they are manufactured into disposable shoe covers. The shoe covers are then imported back to the United States by Protestant for delivery to U.S. customers. The shoe covers at issue were entered on July 23, 2014, under subheading 6401.92.90, Harmonized Tariff Schedule of the United States (“HTSUS”) and liquidated on February 26, 2016. At entry, the Protestant claimed eligibility for preferential tariff treatment under NAFTA and upon verification, your office determined that the disposable shoe covers did not meet the requirements under General Note (“GN”) 12(t) of the HTSUS, Chapter 64(1). Your office determined the Regional Value Content (RVC) calculation provided by the broker was incomplete. Based on the information provided, your office calculated a RVC of 39.53% under the net cost method. GN 12(t), Chapter 64(1) requires a RVC of at least 55% under the net cost method. After your office met with the Protestant, the Protestant submitted an updated set of documents supporting the RVC calculation, which your office claims omitted countries of origin and changed the values of packaging costs and labor. Your office denied the claim for preferential tariff treatment under the NAFTA and liquidated the merchandise without NAFTA benefits. The Protestant has since explained to our office that the values on the two sets of documents are different because the original documents did not include all labor, overhead and packaging costs. The Protestant explains that the Polymer Safety operation in Mexico was relatively new as it was less than four years old. Protestant asserts that the company’s estimated production runs were significantly higher than the actual production runs, which resulted in a higher added value per unit. Protestant further claims that, for manufacturing operations in Mexico, changes in value are common and expected, and that costs will change based on production volume, operating costs, payroll expenses, and currency fluctuations. Protestant acknowledges that the information it initially provided to CBP during the verification process was not clearly organized. However, Protestant asserts that all facts and data now clearly support a finding of NAFTA eligibility. Protestant states that it did not eliminate the countries of origin on the Bills of Material included in the second set of documents provided, but rather reformatted them. The second submission includes two sets of Bills of Materials: one with the country of origin listed next to each of the listed raw materials, and one without. To support its NAFTA claims, the Protestant has assembled the following documents: Commercial invoices for each one of the raw materials used in the manufacture of the disposable shoe covers, Commercial invoices for packaging materials, Bills of Material for all raw material, labor, and packaging costs, NAFTA Certificates of Origin for NAFTA originating raw materials and packaging materials, A Production Cost Report, which summarizes the expenses associated with the production of the disposable shoe covers, An accounting report validating the accuracy of the financial statements, and Photos from the manufacturing site in Tecate, Mexico. ISSUE: Whether the documentation, submitted by the Protestant, supports the claim for preferential tariff treatment under the NAFTA for the imported disposable shoe covers. LAW AND ANALYSIS: The NAFTA is implemented in GN 12, HTSUS. GN 12(b), HTSUS, sets forth the criteria for determining whether a good is originating under the NAFTA. GN 12(b), HTSUS, (19 U.S.C. § 1202) states, in pertinent part, that: For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as “goods originating in the territory of a NAFTA party” only if-- … (ii) they have been transformed in the territory of Canada, Mexico and/or the United States so that-- … (B) the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; … The shoe covers were classified under 6401.92.90, HTSUS. GN 12(t), Chapter 64(1) provides for a change to headings 6401 through 6405 from any heading outside that group, except from subheading 6406.10, provided there is a regional value content of not less than 55% under the net cost method. The classification is not in dispute and the issue is not whether the imported merchandise met the terms of GN 12 per se, but rather whether the information submitted substantiated the NAFTA claim. To verify or substantiate the NAFTA claim, CBP has the right to seek further information by initiating a NAFTA verification pursuant to 19 C.F.R. § 181.72, which CBP personnel did. Protestant initially submitted documentation that did not include labor costs. Protestant later submitted documentation that included all labor and packaging costs, and explained that the initial inaccuracies in labor and packaging costs were due to a miscalculation in production runs. We note that it is incumbent on the importer to present documentation which CBP personnel will be able to analyze and consider. See Headquarters’ Ruling Letter (“HQ”) H246422, dated February 23, 2016. Although the documentation Protestant initially submitted was incomplete, Protestant has now submitted documentation which shows that the goods met the 55% RVC requirement. Protestant has provided an explanation for the inconsistencies that existed between the original and updated set of documents. Specifically, Protestant explains that the original documents were based on estimated production runs, and did not include all labor and packaging costs. Protestant provided CBP with updated documentation, which Protestant claims reflect the actual costs incurred by Protestant during production of the disposable shoe covers at issue. These updated documents provide evidence supporting the updated cost values in the form of invoices and NAFTA Certificates of Origin, which demonstrate the value of the originating raw materials and originating packaging materials. Additionally, the accounting report and Production Cost Analysis support Protestant’s claim of value added in Mexico by outlining the costs related to labor, rent, utilities, and other expenses. Protestant also explained that the countries of origin were not eliminated in the updated documents, but that the Bills of Materials were reformatted. Protestant has now provided evidence of the countries of origin of all originating material in the form of NAFTA certificates of origin. Therefore, taking into account the NAFTA Certificates of Origin, invoices, accounting report and Production Cost Analysis, we find Protestant has now shown that the disposable shoe covers met the 55% RVC requirement to support its claim for preferential tariff treatment under NAFTA. HOLDING: The protest should be granted. Protestant has provided sufficient explanation and documentation to show that the goods are eligible for preferential tariff treatment under NAFTA. In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant, through its counsel, no later than 60 days from the date of this letter. Any reliquidation of the entry, in accordance with the decision, must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/, which can be found on the CBP website at http://www.cbp.gov and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division