Protest and Application for Further Review No 3029-18-100036; Classification of Cryptocurrency Miners

U.S. Customs and Border Protection HQ H310388 July 28, 2020 CLA-2 OT:RR:CTF:EMAIN H310388 PF CATEGORY: Classification TARIFF NO.: 8543.70.99 Port DirectorU.S. Customs and Border ProtectionProtest & Control1100 Raymond BoulevardNewark, NJ 07102 Attn: Tommaso Fiermonte, Import Specialist Re: Protest and Application for Further Review No: 3029-18-100036; Classification of Cryptocurrency Miners Dear Port Director: This is in response to the above-referenced protest and application for further review (“AFR”). The protesting party is Lexon Insurance Company (“Protestant”), surety for importer of record, Giga Watt, Inc. The Protest and corresponding AFR pertain to a decision by U.S. Customs and Border Protection (“CBP”) as to the proper classification of a Pandaminer B3 Plus imported with a Manli GTX 1060 NVIDIA video card (“Miners”) under the Harmonized Tariff Schedule of the United States (“HTSUS”). Our response follows. FACTS: The merchandise subject to this protest was entered between June 26, 2017 through September 11, 2017. On March 2, 2018, CBP liquidated the entries under subheading 8543.70.99, HTSUS, which provides for “Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this chapter; parts thereof: Other machines and apparatus: Other: Other: Other.” On November 28, 2018, protestant filed the protest and AFR regarding the tariff classification of the subject merchandise and claimed that the correct classification of the subject merchandise should be in subheading 8471, HTSUS, which provides for “Automatic data processing machines and units thereof; magnetic or optical readers, machines for transcribing data onto data media in coded form and machines for processing such data, not elsewhere specified or included.” In the alternative, protestant maintains that the subject merchandise should be classified in heading 8473, HTSUS, which provides for “Parts and accessories (other than covers, carrying cases and the like) suitable for use solely or principally with machines of headings 8470 to 8472.” The Miners are graphics-processing unit (“GPU”) type cryptocurrency mining machines. The Miners are specialized and perform the core function of generating hash algorithms to execute blockchain validations or mining cryptocurrency. Cryptocurrency is defined as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Individuals who possess cryptocurrency, such as Bitcoin, Litecoin and Ethereum, and seek to conduct a financial transaction rely on the network of “miners” to validate their transactions through mining. Mining functions are measured in “hash” calculations and are depicted as MH, GH, or TH. The act of “mining cryptocurrency” is the process of updating a ledger of cryptocurrency transactions known as the blockchain. The blockchain is a series of blocks, with each block constituting a collection of cryptocurrency transactions. Mining is done by GPU miners and application specific integrated circuit miners, which compete against other cryptominers in an attempt to guess a specific number that is associated with a block containing transaction data. The first cryptominer to guess the correct number is rewarded by being able to authorize the transaction, update the blockchain, and receive a fraction of cryptocurrency. The Miners employ printed circuit board assembly (“PCBA”) graphics processors that are typically used in personal computers that are identified as GPUs.  The Pandaminer itself consists of an enclosure, a control board, and cooling fans.  The Pandaminer also has various connections such as Ethernet, HDMI and USB ports.  In addition, the Pandaminer uses eight commercially available GPU PCBAs, which is this case are the Manli GTX 1060 NVIDIA video cards, to perform the hash calculations and is shipped with its own power supply adapter/cable.  The Pandaminer is dedicated to performing the function of cryptocurrency mining. With respect to the functionality of the Pandaminer, the Protestant states: What is a GPU Integrated Miner? A GPU integrated miner is a professional altcoin mining device which supports multiple hashing algorithms like ETH and other cryptocurrencies. It is assembled by high configuration graphics cards, customized and highly compatible case, professional rack and other optimized accessories for the highest mining efficiency. With its perfect flexibility, a GPU integrated miner can be applied in multi-hashing algorithm mining, which provides a lot more options to mine cryptocurrencies which have seen surging fever and growing profits. The Miners require at least one separate external power supply unit. Once power is supplied to the Miners, the units are connected to the internet via an Ethernet cable and port. A user will download the Miners’ software on an automatic data processing machine (“ADP”) and will type in their wallet address onto the ADP machine, save the file, and configure the Miners. The Miners have minimal onboard flash memory and otherwise do not include a storage medium. There is no method for connecting a storage unit like a solid state drive or hard disk drive. A user cannot install, modify or remove program applications on the Miners. The Miners do not allow for general purpose computing tasks nor are they capable of displaying graphics. The Miners are configured and initialized through a network/Ethernet connected ADP machine. ISSUE: Whether the Miners are classified as ADP machines of heading 8471, HTSUS, as parts of an ADP machine of heading 8473, HTSUS, or as electrical machines and apparatus, having individual functions, not specified or included elsewhere, of heading 8543, HTSUS. LAW AND ANALYSIS: We note initially that the instant protest was timely filed, within 180 days from the mailing of notice of demand for payments against its bond. See 19 U.S.C. § 1514(c)(3). Notice of demand for payment against Protestant’s bond was made on June 1, 2018, and this protest was filed on November 28, 2018, within 180 days. In addition, further review of Protest No: 3029-18-100036 is properly accorded to Protestant pursuant to 19 C.F.R. § 174.24(b) because the decision against which the protest was filed is alleged to involve questions of law or fact, which have not been ruled upon by the Commissioner of Customs or his designee, or by the courts.  Merchandise imported into the United States is classified under the HTSUS. Tariff classification is governed by the principles set forth in the General Rules of Interpretation (“GRIs”) and, in the absence of special language or context which requires otherwise, by the Additional U.S. Rules of Interpretation. The GRIs and the Additional U.S. Rules of Interpretation are part of the HTSUS and are to be considered statutory provisions of law for all purposes. GRI 1 requires that classification be determined first according to the terms of the headings of the tariff schedule and any relative section or chapter notes. In the event that the goods cannot be classified solely on the basis of GRI 1, and if the heading and legal notes do not otherwise require, the remaining GRIs 2 through 6 may then be applied in order. The 2017 HTSUS headings under consideration are as follows: 8471 Automatic data processing machines and units thereof; magnetic or optical readers, machines for transcribing data onto data media in coded form and machines for processing such data, not elsewhere specified or included 8473 Parts and accessories (other than covers, carrying cases and the like) suitable for use solely or principally with machines of headings 8470 to 8472 8543 Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this chapter; parts thereof Additional U.S. Rules of Interpretation 1 (AUSR1), HTSUS, provides, in part: In the absence of special language or context which otherwise requires: a tariff classification controlled by use (other than actual use) is to be determined in accordance with the use in the United States at, or immediately prior to, the date of importation, of goods of that class or kind to which the imported goods belong, and the controlling use is the principal use[.] … a provision for parts of an article covers products solely or principally used as a part of such articles but a provision for “parts” or “parts and accessories” shall not prevail over a specific provision for such part or accessory Section XVI Note 2(a)-(b) provide: 2. Subject to note 1 to this section, note 1 to chapter 84 and to note 1 to chapter 85, parts of machines (not being parts of the articles of heading 8484, 8544, 8545, 8546 or 8547) are to be classified according to the following rules: Parts which are goods included in any of the headings of chapter 84 or 85 (other than headings 8409, 8431, 8448, 8466, 8473, 8487, 8503, 8522, 8529, 8538 and 8548) are in all cases to be classified in their respective headings; Other parts, if suitable for use solely or principally with a particular kind of machine, or with a number of machines of the same heading (including a machine of heading 8479 or 8543) are to be classified with the machines of that kind or in heading 8409, 8431, 8448, 8466, 8473, 8503, 8522, 8529 or 8538 as appropriate. However, parts which are equally suitable for use principally with the goods of headings 8517 and 8525 to 8528 are to be classified in heading 8517; All other parts are to be classified in heading 8409, 8431, 8448, 8466, 8473, 8503, 8522, 8529 or 8538 as appropriate or, failing that, in heading 8487 or 8548. ADP machines are defined in Legal Note 5(A) to Chapter 84, HTSUS, which provide as follows: For the purposes of heading 8471, the expression "automatic data processing machines" means machines capable of: Storing the processing program or programs and at least the data immediately necessary for the execution of the program; Being freely programmed in accordance with the requirements of the user; Performing arithmetical computations specified by the user; and Executing, without human intervention, a processing program which requires them to modify their execution, by logical decision during the processing run. In understanding the language of the HTSUS, the Explanatory Notes (ENs) of the Harmonized Commodity Description and Coding System, which constitute the official interpretation of the HTSUS at the international level, may be utilized. The ENs, although not dispositive or legally binding, provide a commentary on the scope of each heading, and are generally indicative of the proper interpretation of the HTSUS. See T.D. 89-80, 54 Fed. Reg. 35127 (August 23, 1989). The EN to heading 8471 provide, in pertinent part: AUTOMATIC DATA PROCESSING MACHINES AND UNITS THEREOF Data processing is the handling of information of all kinds, in pre-established logical sequences and for a specific purpose or purposes. Automatic data processing machines are machines which, by logically interrelated operations performed in accordance with pre-established instructions (program), furnish data which can be used as such, or, in some cases, serve in turn as data for other data processing operations.   This heading covers data processing machines in which the logical sequences of the operations can be changed from one job to another, and in which the operation can be automatic, that is to say with no manual intervention for the duration of the task…. However, the heading excludes machines, instruments or apparatus incorporating or working in conjunction with an automatic data processing machine and performing a specific function. Such machines, instruments or apparatus are classified in the headings appropriate to their respective functions or, failing that, in residual headings (See Part (E) of the General Explanatory Note to this Chapter). AUTOMATIC DATA PROCESSING MACHINES The automatic data processing machines of this heading must be capable of fulfilling simultaneously the conditions laid down in Note 5(A) to this Chapter. […] Thus, machines which operate only on fixed programs, i.e., programs which cannot be modified by the user, are excluded even though the user may be able to choose from a number of such fixed programs. These machines have storage capability and also stored programs which can be changed from job to job…. The EN to heading 84.73 provides, in pertinent part, the following: Subject to the general provisions regarding the classification of parts (See the General Explanatory Note to Section XVI) this heading covers parts and accessories suitable for use solely or principally with the machines of headings 84.69 to 84.72. The EN to heading 8543, HTSUS, provides in pertinent part: This heading covers all electrical appliances and apparatus, not falling in any other heading of this Chapter, nor covered more specifically by a heading of any other Chapter of the Nomenclature, nor excluded by the operation of a Legal Note to Section XVI or to this Chapter. The electrical appliances and apparatus of this heading must have individual functions. The introductory provisions of Explanatory Note to heading 84.79 concerning machines and mechanical appliances having individual functions apply, mutatis mutandis, to the appliances and apparatus of this heading.   The EN to heading 8479, HTSUS, provides, in relevant part: For this purpose the following are to be regarded as having “individual functions”: Mechanical devices, with or without motors or other driving force, whose function can be performed distinctly from and independently of any other machine or appliance. The Miners are capable of “storing the processing program or programs and at least the data immediately necessary for the execution of the program;” “performing arithmetical computations specified by the user;” and “executing, without human intervention, a processing program which requires them to modify their execution, by logical decision during the processing run.” See Note 5(A)(i), (iii) and (iv) to Chapter 84, HTSUS. At issue in this case is whether these devices are “capable of … being freely programmed in accordance with the requirements of the user.” See Note 5(A)(ii) to Chapter 84, HTSUS. In Optrex America Inc. v. United States, 427 F. Supp. 2d. 1177 (Ct. Int’l Trade 2006), aff’d, 475 F.3d 1367 (Fed. Cir. 2007) (“Optrex”), the U.S. Court of Appeals for the Federal Circuit (“CAFC”) upheld CBP’s longstanding interpretation that a “freely programmable” ADP machine is one that: (i) applications can be written for, (ii) does not impose artificial limitations upon such applications, and (iii) will accept new applications that allow the user to manipulate the data as deemed necessary by the user. 475 F.3d at 1368. See also Headquarters Ruling Letter (“HQ”) 964880, dated December 21, 2001. The Optrex court noted that “[CBP’s] interpretation is supported by the World Customs Organization’s Explanatory Notes […] which provide that ‘machines which operate only on fixed programs, that is, programs which cannot be modified by the user, are excluded [from heading 8471] even though the user may be able to choose from a number of such fixed programs.’ Explanatory Note 84.71(I)(A).” Id. at 1370. The court added that “[a]pplication programs are not ‘fixed’ because they can be installed or deleted from a machine.” 427 F. Supp. 2d at 1197. CBP has ruled that devices which enable the user to decide which applications to install or delete from the device are freely programmable. For example, in HQ 964880, supra, CBP examined the classification of the Palm VII and VIIx – personal digital assistants (“Palm PDAs”) with Internet connectivity. Both models used Palm’s 3.2.0 OS, a 16MHz microprocessor, and came with 2 MB of random access memory and 2 MB of read-only memory.  They were imported with pre-installed applications (including a date book, an address book, a memo pad, and desk top e-mail connectivity software) and could accept additional applications that were available directly from Palm or from third-party vendors. In finding that the devices were freely programmable, CBP stressed the fact that they could be programmed in several ways: directly on the devices, with a host computer to generate a generic application, or with a host computer to generate a native application. CBP also noted that: the Palm [OS] is an open operating system; programming tools are readily available to any user either directly from Palm or from other commercial sources; programming tools are readily available to any user either directly from Palm or from other commercial sources; [and] hundreds of software applications are currently available for the Palm OS through a variety of vendors who distribute them either as freeware, shareware, or commercial applications … CBP classified the PDAs in subheading 8471.30.00, HTSUS, as portable ADP machines.  Conversely, in HQ H026665, dated July 9, 2008, CBP ruled that the AIDA System Compact II, a machine used in hospitals to archive images, video and audio files associated with patient information onto a database, was not freely programmable because users were not free to add or remove software from the device. There, CBP noted, first, that the importer could not provide “… an affirmative representation that the hardware and software are installed into the AIDA without any proprietary restrictions or blocks” and second, that “the software installation manual and license prohibited the downloading of additional software and also identified such action as an impediment to the operation of the device.”  Similarly, in HQ 964682, dated July 15, 2002, we determined that the Sony PlayStation2 (“PS2”), a video game console, was not freely programmable because:   [p]roprietary blocks in the PS2 prevent the console from running any commercially available Linux OS and only specially designed Sony disks can be read by the system.  If a non-PS2 compatible disc is inserted in the console, the hardware layer (with the firmware) determines that the disc does not contain one of the accepted formats and thus does not acknowledge it as accepted media. Significantly, we noted that to run additional Linux-based programs on the PS2, the user was required to install Sony’s version of the Linux OS, which was not included with the console. Moreover, in HQ 952862, dated November 1, 1994, CBP determined that Teklogix data collection devices were not freely programmable, in part, because they were not “general purpose” machines and were designed for certain specific applications and could not by themselves perform the typical applications of computers or personal computers. HQ 952862 discussed the concept of freely programmable by examining the definitions of computer and personal computer and stated as follows: “In determining whether a particular machine is "freely programmable," it is helpful to examine the definitions of the terms "computer" and "personal computer." A computer, which is freely programmable, is a "[g]eneral-purpose machine that processes data according to a set of instructions that are stored internally either temporarily or permanently." A. Freedman, The Computer Glossary, Sixth Edition, pg. 95 (1993). A personal computer "is functionally similar to larger computers, but serves only one user. It is used at home and in the office for almost all applications traditionally performed on larger computers." Computer Glossary (1993), pg. 400. Personal Computers "are typically used for applications, such as word processing, spreadsheets, database management and various graphics-based programs, such as computer-aided design (CAD) and desktop publishing. They are also used to handle traditional business applications, such as invoicing, payroll and general ledger. At home, personal computers are primarily used for games, education and word processing." A. Freedman, The Computer Glossary, Fourth Edition, pg. 524 (1989). Because they can perform any of the above-listed applications, personal computers are considered to be "freely programmable." Applying Optrex and CBP’s administrative precedent, we conclude that the Miners are not freely programmable ADP machines. The Miners are specialized and perform the exact core function: to generate hash algorithms to execute blockchain validations or mining. In our view, the validating of cryptocurrency blockchain transactions is synonymous to the mining of cryptocurrency: both functions validate generated data blocks against the same set of network rules and both have the possibility of a reward in the form of a cryptocurrency. As stated by the Protestant, the Miners, are GPU integrated miners which “support[] multiple hashing algorithms like ETH and other cyptocurrencies [and] can be applied in multi-hashing algorithm mining, which provides a lot more options to mine cryptocurrencies. . . .” Therefore, the Miners are specifically designed to perform a singular function, which is mining. In addition, a user cannot install, modify or remove program applications on the Miners. For example, the Miners cannot receive third-party applications, such as a word processing program, spreadsheet, or a virus protection program. EN 84.71(I)(A) provides that machines which operate only on fixed programs that cannot be modified by the user are excluded from heading 8471, HTSUS, even when the user may be able to choose from a number of such fixed programs. In this case, the Miners operate on fixed programs and do not accept the installation or removal of applications at will. The protestant alleges that the Miners run on a form of Linux operating system. However, the existence and use of an open source OS does not make the Miners fully programmable because the Miners are limited in the programs that can be written for and used with the device. Users simply do not have the practical ability to add or remove programs and applications of their choosing. As an example, the Miners are not intended to be used to perform spreadsheet or word processing tasks but instead have a specialized purpose of performing hash calculations. The Miners are not general purpose machines because they cannot perform general purpose computing tasks. The Miners are also not capable of displaying graphics. See HQ 952862 (noting that a lack of graphic display and pixel configuration was a factor in finding that the data collection devices were not ADP machines). Its functions as imported have a specialized purpose. These limitations preclude the use of the Miners for the typical applications associated with ADP machines. We also note that EN 84.71(I)(A) requires that ADP machines have “storage capability and also stored programs which can be changed from job to job.” The Miners have minimal onboard flash memory that is used merely to configure the machines for the type of cryptocurrency being mined and addresses of mining pools. The Miners also do not have the capability of connecting to a storage unit such as a solid state drive or hard disk drive. As a result, the Miners does not have sufficient memory to store and execute standard applications, unlike the Palm PDAs in HQ 964880. For the foregoing reasons, we find that the Miners are not “freely programmable” as required by Note 5(A)(ii) to Chapter 84, HTSUS. Therefore, the Miners do not meet the requirements of Note 5(A) to Chapter 84, HTSUS, and are not ADP machines of heading 8471, HTSUS. In the alternative, the protestant maintains that the Miners are parts of an ADP machine, and are classified in heading 8473, HTSUS. The language of heading 8473, HTSUS, requires that the good at issue must be “suitable for use solely or principally with machines of headings 8470 to 8472.” For articles governed by principal use, Additional U.S. Rule of Interpretation 1(a), HTSUS, provides that, in the absence of special language or context which otherwise requires, such use “is to be determined in accordance with the use in the United States at, or immediately prior to, the date of importation, of goods of that class or kind to which the imported goods belong, and the controlling use is the principal use.” In other words, the article's principal use at the time of importation determines whether it is classifiable within a particular class or kind of merchandise. BenQ Am. Corp. v. United States, 646 F.3d 1371, 1379-81 (Fed. Cir. 2011). While Additional U.S. Rule of Interpretation 1(a), HTSUS, provides general criteria for discerning the principal use of an article, it does not provide specific criteria for individual tariff provisions. However, the courts have provided factors which are indicative but not conclusive, to apply when determining whether merchandise falls within a particular class or kind. They include: general physical characteristics, the expectation of the ultimate purchaser, channels of trade, environment of sale (accompanying accessories, manner of advertisement and display), use in the same manner as merchandise which defines the class, economic practicality of so using the import, and recognition in the trade of this use. See United States v. Carborundum Co., 63 C.C.P.A 98, 102, 536 F. 2d 373, 377 (1976), cert. denied, 429 U.S. 979. CBP has applied this principle in subsequent rulings. See, e.g., HQ 082780, dated December 18, 1989. This principle has been carried over to the HTSUS, as courts have determined that principal use under the HTSUS is defined as the use which “exceeds all other uses.” See Lenox Collections v. United States, 20 C.I.T. 194, 196 (1996). The Miners are stand-alone machines. The Miners are marketed as a “professional altcoin mining device” and not as parts of an ADP machine. There is no dispute that the Miners receive their configuration and initialization instructions from an ADP system via a network connection. However, once the Miners are configured, they receive data from a mining pool and begin to randomly produce hash calculations until solved. The Miners are continuously communicating with a mining pool after they are configured and initialized. The Miners perform the hash calculations autonomously and, as a result, the Miners are dedicated to a particular function that does not rise to the level of “solely or principally used in an [ADP] system.” While an ADP system is used to set-up and configure the Miners, their controller board and GPU perform the principal function of the machine, which is to perform hash calculations. Each GPU performs the specific function of solving the mathematical problems using internal programming it receives from the controller PCBA. The result of these thousands of cryptographic hash calculations per second is the possibility for an associated block of data to be completed, thereby receiving compensation, which we identify as mining. This function is performed without the assistance of an ADP system, which only serves as an interface to the Miners. Based on the Carborundum factors and the information above, we find that the principal use of the subject Miners are not as parts of an ADP machine. Since the function of hash calculating is not a defined function within the tariff, and the subject Miners are electrical, they are provided for in heading 8543, HTSUS. Heading 8543, HTSUS, provides for “[e]lectrical machines and apparatus, having individual functions, not specified or included elsewhere in this chapter, parts thereof[.]” EN 85.43 also provides that the “heading covers all electrical appliances and apparatus, not falling in any other heading of this Chapter, nor covered more specifically by a heading of any other Chapter of the Nomenclature, nor excluded by the operation of a Legal Note to Section XVI or to this Chapter.” Furthermore and as stated above, the Miners performs the function of hash calculations independently and apart from other machines. Therefore, the Miners are classified in heading 8543, HTSUS. Our decision is consistent with HQ H300195, dated December 11, 2019 and HQ H300063, dated December 11, 2019. In HQ H300195, CBP affirmed NY N297495, dated June 8, 2018, where CBP classified two cryptocurrency mining machines, including the subject the Antminer S9, in heading 8543, HTSUS. In both HQ H300195 and HQ H300063, CBP determined that the cryptocurrency machines were not freely programmable and therefore did not satisfy the terms of heading 8471, HTSUS. HOLDING: By application of GRI 1, the Miners, are classified in heading 8543. By application of GRI 6, the Miners are classified in subheading 8543.70.99 of the 2017, HTSUS, which provides for “Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this chapter; parts thereof: Other machines and apparatus: Other: Other: Other.” The 2017 general column one, rate of duty is 2.6% ad valorem. Duty rates are provided for your convenience and are subject to change. The text of the most recent HTSUS and the accompanying duty rates are provided on the internet at www.usitc.gov/tata/hts/. You are instructed to DENY the Protest. 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 no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing 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 CBP website at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Craig T. Clark, Director Commercial and Trade Facilitation Division