Subheadings 9801.00.10, 9801.00.20, 9802.00.50, HTSUS; Application for Further Review of Protest No. 2506-20-100243; Motorcar Parts of America, Inc.

HQ H311202 January 5, 2023 OT:RR:CTF:VS HQ H311202 UBB CATEGORY: Classification Center Director, Aerospace and Automotive CEE 477 Michigan Ave. Detroit, MI 48226 RE: Subheadings 9801.00.10, 9801.00.20, 9802.00.50, HTSUS; Application for Further Review of Protest No. 2506-20-100243; Motorcar Parts of America, Inc. Dear Center Director: This is in reference to Protest No. 2506-20-100243 and the Application for Further Review, dated January 28, 2020, timely submitted by Gibson, Dunn & Crutcher, LLP, on behalf of Motorcar Parts of America, Inc. (“MPA,” “the importer” or “protestant”), contesting the denial of duty-free or partial duty exemption for certain entries made during 2017 and 2018. On August 2, 2019, CBP liquidated approximately 500 entries from 2017 and 2018 for which MPA was the importer of record. These entries had been rate advanced at the conclusion of an audit conducted by CBP to determine if certain prior disclosures filed by MPA starting in 2016 were reasonably accurate and complete. The audit took place over nearly two years and examined all relevant entries from the period of April 1, 2011 to May 31, 2018 after which CBP concluded that the prior disclosures were not reasonably accurate and complete and that MPA could not support its claims for duty-free treatment under subheadings 9801.00.20 and 9801.00.10 of the Harmonized Tariff Schedule of the United States (“HTSUS”). MPA protests the rate advance and liquidation. FACTS: MPA is a remanufacturer, manufacturer and distributor of automotive aftermarket parts, including starters and alternators. MPA has facilities located in the United States (U.S.), Mexico, Malaysia, Singapore and China. The facility located in Tijuana, Mexico, Motorcar Parts De Mexico, S.A. De C.V. (“MPM”), is a manufacturing, remanufacturing, distribution, engineering, packaging and warehousing facility. According to MPA, in 2007, MPM expanded its operations to include warehousing and related operations or shipments from MPA of new starters and alternators. In its protest memo, MPA states that it received these new or newly refurbished starters/alternators either (1) as articles that MPA had imported from non-North American sources and shipped them to MPM immediately after it had entered them for consumption in the U.S. with U.S. customs duty paid, or (2) as articles considered U.S. products that MPA obtained and shipped to MPM. MPA further claims that since 2007, it has returned the first category of articles pursuant to subheading 9801.00.20, HTSUS, and the second category of articles pursuant to subheading 9801.00.10, HTSUS, and that MPM’s receipt of these starters/alternators in Mexico is made pursuant to a bailment agreement between the parties that stipulates that the starters/alternators remain the property of MPA. MPA states that it uses two systems to capture its inventory and track imports and exports: a QAD system that is internal to MPM that captures repairs and/or alterations done to the starters and alternators, and an Import/Export Database that is used by the compliance team to track shipments that enter and depart MPM. In February 2016, CBP commenced an audit of MPA related to its importation of goods entered under subheading 9801.00.20, HTSUS. In its response, MPA was unable to fully support its 9801.00.20 claims through documentation. CBP closed the audit to allow the company to perform self-review and complete its disclosure. Subsequently, MPA filed a prior disclosure disclosing that certain articles were ineligible as claimed under subheading 9801.00.20, HTSUS, as they had been modified in some fashion following exportation from the U.S. Additionally, MPA disclosed that claims may have been made on new goods that were shipped directly from Malaysia to Mexico. On May 1, 2017, CBP initiated an audit to verify MPA’s prior disclosures and to review its methodology. The eventual scope of the 2017-2018 audit included imports under subheadings 9801.00.10 and 9801.00.20, HTSUS, for the period April 1, 2011 to May 31, 2018. As the audit proceeded, MPA supplemented its disclosures, noting that many of the parts and alternators underwent a labeling process while at MPM. CBP closed the audit in November 2018, concluding overall that MPA’s processes, systems, and records could not support the eligibility of conditionally duty-free claims under subheadings 9801.00.1055, 9801.00.20 and 9802.00.50, HTSUS. On February 15, 2019, CBP issued a notice of action rate advancing and liquidating entries from 2017 and 2018 (thus, only a subset of the entries that had been subject to the audit) and the liquidation took place on August 2, 2019. MPA filed a protest on January 28, 2020. MPA claims that it is not liable for additional duties as levied by the port in the rate advance and liquidation that took place in 2019. Briefly, MPA argues that MPA and MPM’s internal procedures and documentation satisfied CBP’s 9801.00.10/.20, HTSUS, entry requirements because the same type of documentation was deemed acceptable by a San Diego port for earlier entries and because the regulations do not contain a requirement that exported and re-imported merchandise be traceable from beginning to end of the transaction. MPA also argues that MPM’s labeling operations do not disqualify its imports from entry under 9801.00.10/.20, HTSUS. MPA argues that it is not liable for additional duties for the starters/alternators that were reworked or modified in Mexico because the rework/modification operations merely restored defective units to the “new” condition under which they had originally been purchased, and in any event, the units would be eligible for entry under 9802.00.50, HTSUS. Finally, MPA argues that CBP has a duty to arrive at the correct classification for the units before levying additional duties, and that pursuant to the offsetting provisions of 19 U.S.C. § 1509(b)(6), MPA owes no further duties as the duties owed on the items as declared under 9810.00.10/9810.00.20, HTSUS (i.e. zero) were equal to or more than the duties that would be owed on the items if they were classified under 9802.00.50, HTSUS (i.e. also zero). In support of this protest MPA has provided a memo that provides a narrative explanation of its position and legal arguments, supported by various attachments. The attachments consist of a declaration provided by the Assistant Vice President and Plant Manager of Operations, Global Distribution and Logistics at MPM (Attachment I to the protest memo, hereafter “MPA Declaration” or “Declaration”), an explanation of MPM’s reworking operations and an explanation of MPM’s modification operations. The declaration and flow-charts detail MPA’s operations, with some printouts of its QAD system showing how it tracks the parts and alternators. According to the Declaration, the starters and alternators received at MPM may be treated in different ways. Upon receiving imported articles from the U.S., MPM inspects either 100% of the units (for shipments from unaffiliated suppliers) or a sample of shipments (for shipments from affiliated suppliers). These inspections take place in an area that MPM denotes as “INSPC” in its internal inventory tracking system (also known as its QAD system). If a sample of units passes inspection, the entire shipment is then released to a storage area denoted as “ASSY”. If a unit in a sample fails inspection, that shipment is quarantined, and each unit is inspected. MPM then reworks or repairs defective units, after which the reworked or repaired units are moved to the “ASSY” area and then to general inventory. According to MPA, some units may also be modified to make them saleable for a broader range of uses, such as to expand the model year of vehicles with which they can be used. Once reworked or modified, the units are moved to the “ASSY” area, from where all units are sorted into part-number based storage for general inventory. When a customer places an order, units from the part-number bins are collected to fulfill the order. Some of the starters and alternators require labeling. According to MPA’s protest memo and supporting Declaration, some vendors ship starters and alternators to MPM with labels affixed to each unit. The label displays the MPA part number and its country of origin. In cases where no such label is included on the units received, MPM adds such a label to the part and in many cases the label remains on the part the entire time the part is at MPM. In other cases, MPA’s customer for a particular part may request that its own or another part number be included on the part that MPM will ship back to the United States. In these cases, MPM adds a new label with the customer’s part number and the country of origin. This label is added directly over the preceding label. MPA claims that it is able to sufficiently track the parts and alternators at the MPM warehouse using the internal QAD tracking system, unit part numbers, a country-of-origin label (that conforms to U.S. country of origin labeling requirements), and a system of inventory sheets attached to individual baskets containing parts or alternators, pick tickets and pallet content sheets. MPA does not provide any information on how any information gathered via this internal tracking system is then shared with the Import/Export system or how it ensures that only those parts eligible for duty-free treatment under subheadings 9801.00.10, 9801.00.20, or 9802.00.50, HTSUS are declared as such. ISSUES: Whether MPA has shown that it can support its use of subheadings 9801.00.10 and 9801.00.20, HTSUS. Whether MPA may seek to reclassify eligible entries pursuant to 9802.00.50, HTSUS, by means of this protest. LAW AND ANALYSIS: In simple terms, this protest is about whether the importer can support its use of subheading 9801.00.10/.20 (or, for a subset of entries, change its classification to subheading 9802.00.50, HTSUS) for certain entries made in 2017 and 2018 (hereafter, “subject entries”). The subject entries are limited to those entries that were rate advanced in the February 15, 2019 notice of action and subsequently liquidated on August 2, 2019. CBP concluded that MPA could not support its claims for preferential duty treatment under subheadings 9801.00.10 and 9801.00.20, HTSUS because the parts could not be traced through MPM’s systems to support its claim that the merchandise exported from the United States to Mexico was the same merchandise being re-imported back to the United States. Whether MPA has shown that it can support its use of subheadings 9801.00.10 and 9801.00.20, HTSUS Section 141.2 of the Customs Regulations (19 C.F.R. § 141.2) states that “Dutiable merchandise imported and afterwards exported even though duty thereon may have been paid on the first importation, is liable to duty on every subsequent importation into the Customs territory of the United States” unless specifically exempted therefrom under the HTSUS. Entry under 9801.00.10, HTSUS Section 904(b) of the Trade Facilitation and Trade Enforcement Act of 2015 (Pub. L. 114-125, February 24, 2016) amended subheading 9801.00.10, HTSUS, to include any products which are returned within 3 years after having been exported. Previously, subheading 9801.00.10, HTSUS, only applied to products of the United States. Subheading 9801.00.10, HTSUS, now provides for the duty-free treatment of: Products of the United States when returned after having been exported, or any other products when returned within 3 years after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad. However, operations which either advance the value or improve the condition of the exported product render it ineligible for duty free entry upon return to the United States. Border Brokerage Company, Inc. v. United States, 314 F. Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970). Section 10.1, CBP Regulations (19 C.F.R. § 10.1) sets forth the documentary requirements for entry under subheading 9801.00.10, HTSUS. We note that CBP has not yet amended the regulations to implement the change to subheading 9801.00.10, HTSUS. Nonetheless, 19 C.F.R. § 10.1(a)(1) provides that the foreign shipper declare the following information with regard to articles in a shipment valued over $2,500: the port of exportation, the date of exportation, the quantity, the description of the merchandise, the value of the merchandise, the date of the declaration, and whether the articles were returned without having been advanced in value or improved in condition by any process of manufacture or other means. Specifically, the regulations also require that the declaration must include the “marks and numbers” relating to the goods in addition to the description of the articles. These documentation requirements ensure that articles that are returned to the U.S. and entered under subheading 9801.00.10, HTSUS, may be traced back to prior exports from the U.S. containing those specific articles. See Headquarters Ruling Letter (“HQ”) 559719 (July 11, 1996) (“Customs also requires additional evidence that supports a port director’s ability to trace the exportation and subsequent importation of the article in question as well as documentation on supporting the importer’s claim that the article was not advanced in value or improved in condition abroad.”), and HQ 560807 (May 6, 1998) (“The Customs Service requires that sufficient documentation be submitted to establish that the importer articles are in fact of U.S. origin.”) These requirements are designed to prevent, to the extent possible, the substitution of new or remanufactured articles for the articles that were exported from the U.S. Entry under 9801.00.20, HTSUS Subheading 9801.00.20, HTSUS, provides duty-free treatment for: [a]rticles, previously imported, with respect to which the duty was paid upon such previous importation or which were previously free of duty pursuant to the Caribbean Basin Economic Recovery Act or Title V of the Trade Act of 1974, if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States. As is the case for 9801.00.10, HTSUS, operations which either advance the value or improve the condition of the exported product render it ineligible for duty free entry (under subheading 9801.00.20, HTSUS) upon return to the United States. See Border Brokerage Company, Inc. v. United States, 314 F. Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970). Section 10.108, Customs Regulations (19 C.F.R. § 10.108), provides, in relevant part, that free entry shall be accorded under subheading 9801.00.20, HTSUS, whenever it is established to the satisfaction of the port director that the article for which free entry is claimed was duty paid on a previous importation, is being reimported by or for the account of the person who previously imported it into, and exported it from the United States, without the article having been advanced in value or improved in condition by any process of manufacture or other means, and was exported from the U.S. under a lease or similar use agreement. It should be noted that CBP has denied treatment under subheading 9801.00.20, HTSUS, in situations where such evidence was not provided. See, e.g., HQ 556538, dated May 27, 1992 (duty-free status under subheading 9801.00.20, HTSUS, denied because documentary requirements were not satisfied, and no evidence was provided to indicate that the subject merchandise was exported under a lease or similar use agreement). MPA argues that the statute and regulations do not require the importer to “trace” the articles from the time that they are exported from the United States until the point of reimportation. In support, MPA notes that in five prior instances (in 2012) concerning duty-free entry of goods under subheading 9801.00.20, HTSUS, CBP did not request (and MPA did not provide) any information relating to the receipt of the items in Mexico or any documentation regarding MPA or MPM’s inventory control or other procedures in Mexico. Thus, MPA maintains that CBP does not have precedent or authority to require documents or procedures that “trace” the starters and alternators through MPM’s facility. MPA is mistaken. The legal requirements for eligibility for subheadings 9801.00.10 and 9801.00.20, HTSUS, are clear: the articles being reimported must be the same articles that were previously exported from the United States, and they must not have been advanced in value or improved in condition while abroad. The statute and regulations cited above affirm that MPA needs to show, to CBP’s satisfaction, that the starters and alternators being imported into the United States are the same starters and alternators that were previously exported, and that they have not been advanced in value or improved in condition while in Mexico. It follows, that the importer must be able to show with specificity that the conditions above have been met, i.e. the importer must be able to trace the articles throughout the transaction. See, HQ 559719 and HQ 560807. The regulations pertaining to subheading 9801.00.10, HTSUS, set forth a specific procedure by which to show that the articles being reimported were the same articles previously exported, as noted in more detail above. The regulations pertaining to subheading 9801.00.20, HTSUS, do not prescribe a specific process by which the importer needs to show this, but rather, leave it up to the discretion of the port director that he or she is satisfied that the requirement was met. Regardless, the importer’s ability to show that the articles being reimported are the same articles that were previously exported underpins eligibility for entry pursuant to both subheadings 9801.00.10 and 9801.00.20, HTSUS. As noted above, in support of this protest MPA has provided a memo that provides a narrative explanation of its position, supported by various attachments. The attachments consist of a declaration by the MPA representative for logistics and customs compliance covering the period of the audit (MPA Declaration), an explanation of MPM’s reworking operations and an explanation of MPM’s modification operations. The declaration and flow-charts detail MPA’s operations, with some printouts of its QAD system showing how it tracks the parts and alternators. According to MPA’s submissions, the parts, regardless of whether they are inspected and cleared or quarantined and subsequently reworked/repaired/modified all end up in the same storage area (“ASSY”) from where they are sorted into part-numbered bins. The fact that MPA’s systems are not adequate to separate out the parts that have not been altered (and are therefore eligible for 9801.00.10/.20, HTSUS) from the parts that have been altered (and are therefore precluded) is evidenced by MPA’s admission that it had to recalculate the costs relating to reworking and modification for the purpose of this protest. That is, MPA had to recalculate these costs to capture costs that had been missed as part of its earlier disclosures that led to the audit. While MPA provides a large number of documents in support of its position, the documents merely track self-selected parts through MPA’s system. Moreover, the single entry that MPA chooses to illustrate its inventory tracking processes is taken from the information it had already provided to CBP Audit in response to a Request for Information (“RFI”) issued by CBP during the 2016 audit. As such, it is part of the documentation already reviewed by CBP as part of its two audi