Repair or Alteration; Subheading 9802.00.50, HTSUS; Duty-free treatment under the USMCA

U.S. Department of Homeland Security Washington, DC 20229 U.S. Customs and Border Protection HQ H314955 December 3, 2020 OT:RR:CTF:VS H314955 CMR CATEGORY: Classification Elise Shibles, Esq. Sandler, Travis & Rosenberg 601 Montgomery Street Suite 1208 San Francisco, CA 94111 RE: Repair or Alteration; Subheading 9802.00.50, HTSUS; Duty-free treatment under the USMCA Dear Ms. Shibles: This is in response to your request, dated July 14, 2020, submitted on behalf of your client, Aramark, for a prospective ruling on the eligibility of certain apparel for duty-free treatment under United States – Mexico – Canada Agreement (USMCA) as articles exported to Mexico for repairs or alterations under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS). You indicate that your request pertains not only to the type of operations that will be performed on the apparel, or garments, but also the inventory system that is contemplated to trace the garments. The garments will be entered through various U.S. ports of entry. FACTS: You indicate that garments which have been worn in the United States will be exported from the United States to Mexico where they will be subjected to sorting, quality control stickering, and repair as necessary. You state that all garments will be sorted and stickered, but only some garments will be repaired. However, you have indicated to this office that the intention is for garments being sent to Mexico to be repaired. You state that “[t]he majority of quality control sorting will be done before the garments leave the US to weed out garments that either don’t need repairs or are irreparable. On the chance that a garment wasn’t caught in the first sorting exercise prior to export from the US, and doesn’t need any repairs to go back into circulation, it will receive . . . a sticker on the garment prior to return to the US. . . .” The repairs and alterations made in Mexico will not be done pursuant to any warranty. With regard to the inventory system that is contemplated to track the garments, you indicate that the garments will be tracked on a First In, First Out (FIFO) basis by: (1) shipping container from the United States to Mexico; (2) item number (“captures unique style/fabrication/size/color/gender”); and (3) tariff classification. You have explained that the: [i]tem number is equivalent to SKU level detail. It identifies garment style (including construction), size, color and gender. There are no other details that distinguish a particular item number/sku. . . . Everything with a particular item number would be identical other than origin and value (depending on when originally purchased). You further have explained that “[t]he point here is to assign origin [and] value of returned goods, all with an individual item number (aka SKU), on a FIFO basis. You state that: . . . there will be no apparel in the repair/alteration facility in Mexico that was not previously exported from the United States. The FIFO system will be used to connect goods back to a specific export from the United States. There will be no commingling of new apparel (not previously exported from the US) in the Mexico repair facility. The FIFO system will be done on a SKU to SKU (part to part) basis. ISSUE: Whether the garments exported to Mexico from the United States for sorting, stickering and, if necessary, repair qualify for preferential tariff treatment under the USMCA as good classifiable in subheading 9802.00.50, HTSUS. Whether the proposed inventory system for tracking the garments exported to Mexico in this matter is acceptable. LAW AND ANALYSIS: The USMCA was signed by the Governments of the United States, Mexico, and Canada on November 30, 2018. It was approved by the U.S. Congress with the enactment on January 29, 2020, of the USMCA Implementation Act, Pub. L. 116-113, 134 Stat. 11, 14 (19 U.S.C. § 4511(a)). The USMCA provides at Article 2.8 for goods re-entered after repair or alteration. The agreement states, in relevant part: No Party shall apply a customs duty to a good, regardless of its origin, that re-enters its territory after that good has been temporarily exported from its territory to the territory of another Party for repair or alteration, regardless of whether that repair or alteration could have been performed in the territory of the Party from which the good was exported for repair or alteration or has increased the value of the good. * * * 4. For the purposes of this Article, repair or alteration does not include an operation or process that: (a) destroys a good’s essential characteristics or creates a new or commercially different good; or (b) transforms an unfinished good into a finished good. The provision for articles exported for repair or alteration and re-imported appears at subheading 9802.00.50, HTSUS. This provision provides a partial or complete duty exemption for articles exported from and returned to the U.S. after having been advanced in value or improved in condition by repairs or alterations, provided certain documentary requirements set forth in the Customs and Border Protection (CBP) Regulations are satisfied. See 19 CFR § 10.8. Note 3, Subchapter II, Chapter 98, sets forth additional provisions applicable to subheading 9802.00.50, HTSUS. The Special Program Indicator for the USMCA which appears in the tariff rate column of the tariff is “S” or “S+.” Notes 3(d) and (e), Subchapter II, Chapter 98, indicate, in relevant part, that the symbol “S” in parentheses indicates that the rates of duty in the “Special” column 1 and the “Special” subcolumn of column 1, for goods classified in subheading 9802.00.50, HTSUS, apply to any goods which are returned to the United States after having been repaired in Canada or Mexico, respectively, whether or not such goods are goods of Canada or Mexico under the terms of general note 11 to the tariff schedule. In addition, Note 3(g) Subchapter II, Chapter 98, provides: (i) For purposes of subheadings 9802.00.40 and 9802.00.50, fungible articles exported from the United States for the purposes described in such subheadings— may be commingled; and the origin, value, and classification of such articles may be accounted for using an inventory management method. (ii) If a person chooses to use an inventory management method under this paragraph with respect to fungible articles, the person shall use the same inventory management method for any other articles with respect to which the person claims fungibility under this paragraph. (iii) For the purpose of this paragraph— the term 'fungible articles' means merchandise or articles that, for commercial purposes, are identical or interchangeable in all situations; and the term 'inventory management method' means any method for managing inventory that is based on generally accepted accounting principles. In Headquarters Ruling Letter (HQ) H016584, dated November 8, 2007, this office held that garments that were shipped to Mexico for sorting, inspection and tagging or stickering were eligible for subheading 9802.00.50, HTSUS, treatment. We found the processing in Mexico to be acceptable alterations. Similarly, the ruling found that the FIFO inventory system proposed by the importer was acceptable. See also, New York Ruling Letter (NY) N083610, dated December 1, 2009, wherein CBP found that sorting, grading, fumigation, tagging, sewing of damaged seams, repairing of zippers, and restoring of missing buttons constitute acceptable alterations of garments within the meaning of subheading 9802.00.50, HTSUS; and, HQ 557661, dated November 14, 1994, and HQ 559551, dated September 10, 1996, which both dealt with the exportation of defective telephones for repair and re-importation. In both rulings, a FIFO inventory method was found to be acceptable. Since the issuance of HQ 557661 and HQ 559551, the HTSUS has been amended. Note 3(g), Subchapter II, Chapter 98, specifically allows for fungible goods exported from the United States and re-imported under subheading 9802.00.50, HTSUS. As this note allows for fungible goods, i.e., merchandise or articles that, for commercial purposes, are identical or interchangeable in all situations, to be commingled and have their origin, value, and classification accounted for using an inventory management method, such as FIFO, provided the garments at issue meet the definition of “fungible articles” in Note 3(g), we find the proposed FIFO method with regard to the subject garments acceptable. HOLDING: The operations in Mexico consisting of sorting, stickering and repair, as necessary, constitute "repairs" and “alterations” within the meaning of subheading 9802.00.50, HTSUS. Based on the information provided, it is our opinion that the FIFO proposed methodology identifies the garments as articles sent abroad for “repair or alteration” and returned within the terms of Note 3(g), Subchapter II, Chapter 98. Provided that the port director agrees that the garments otherwise satisfy the conditions and requirements of subheading 9802.00.50, HTSUS, the garments will be entitled to USMCA preferential tariff treatment under this subheading upon re-entry into the United States. Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch