Application for Further Review of Protest No. 300422101621; SIPCO Innovations Inc.; USMCA Preference Eligibility for Plant Fertilizer Amendment; Section 301 Trade Remedy

HQ H327577 May 8, 2024 OT:RR:CTF:VS H327577 AMW CATEGORY: Valuation; Origin Center Director, Joanne Colonnello Pharmaceuticals, Health and Chemicals CEE U.S. Customs and Border Protection 1100 Raymond Blvd Newark, NJ Attn: John L. Amaya, Import Specialist, Pharmaceuticals, Health and Chemicals CEE RE: Application for Further Review of Protest No. 300422101621; SIPCO Innovations Inc.; USMCA Preference Eligibility for Plant Fertilizer Amendment; Section 301 Trade Remedy Dear Center Director Colonnello: This is in response to an Application for Further Review (“AFR”) of Protest Number 300422101621, timely filed on behalf of SIPCO Innovations Inc. (“SIPCO” or the “Protestant”), concerning the assessment of the merchandise processing fee and duties pursuant to Section 301 of the Trade Act of 1974 for one entry of Hyshield-brand plant fertilizer amendment. The AFR was forwarded to this office for consideration. FACTS: On August 21, 2020, SIPCO entered “plant fertilizer amendment” sold under the Hyshield brand at the Port of Blaine, Washington under either subheading 3101.00.00 or 3105.10.00, Harmonized Tariff Schedule of the United States (“HTSUS”), depending on the weight of the packaging. On February 22, 2021, the importer filed a post-importation claim under 19 U.S.C. 1520(d), claiming that the entry was eligible for preferential tariff treatment under the United States-Mexico-Canada Agreement (“USMCA”). The merchandise is produced in Canada with ingredients that include Canadian-origin water, citric acid, lactic acid, and potassium benzoate and Chinese-origin chitosan flakes. Upon importation, SIPCO declared the country of origin to be Canada. On March 18, 2022, CBP liquidated the merchandise as Chinese-origin, and classified the product under subheading 3913.90.20, HTSUS, which provides for, “Natural polymers (for example, alginic acid) and modified natural polymers (for example, hardened proteins, chemical derivatives of natural rubber), not elsewhere specified or included, in primary forms: Other: Polysaccharides and their derivatives” and assessed a duty of 5.8% ad valorem as well as an additional 25% duty under Section 301/List 3. The change in tariff classification, resulted in a denial of the USMCA claim, as the non-originating material chitosan flakes are also classified in heading 3913, HTSUS. SIPCO is now protesting the assessment of the duties, including the application of Section 301 duties and merchandise processing fees. In relevant part, SIPCO asserts that Hyshield qualifies for preferential treatment under the USMCA, should be marked a “product of” Canada, and is not Chinese origin for purposes of Section 301 duties. The protest was timely filed on July 5, 2022. The protest describes Hyshield as a “plant fertilizer amendment” used in agricultural and horticultural applications that improves fertilizer and nutrient efficiency. The product’s website further describes Hyshield as “a natural plant immunity booster made from chitosan” that “tricks the plants into thinking it’s being attacked by bugs, and as a result it ups its auto-immune system, keeping pathogens and pests at bay.” The Chinese-origin chitosan is imported in flake form, and is derived from chitin, which is obtained from the exoskeletons of shellfish, including shrimp, lobsters, or crabs. SIPCO purchases the chitosan from a U.S. supplier based in Bellingham, Washington. The protest argues that Hyshield is produced in Canada via a proprietary process (the “Canadian process”) in which the chitosan flakes are combined with various Canadian-origin inputs to create the liquid Hyshield. Specifically, the protest states that lactic or citric acid is added to the chitosan flakes, which causes an acid-base reaction that forms a zwitterion ion with the carboxyl group of the lactic or citric acid. As a result of this acid-base reaction, the imported chitosan’s amino group changes from NH2 to a charged +NH3 in the finished product. This enables the chitosan to be soluble in water. Following this, the Canadian ingredients including water, citric acid, lactic acid, and potassium benzoate, are blended with the chitosan liquid and then filtered to create Hyshield. In denying SIPCO’s protest, the Pharmaceuticals, Health and Chemicals CEE issued the following analysis: The country of origin analysis of the similar fertilizer aid of New York ruling [“NY”] N317486[, dated March 9, 2021] resembles the chitosan. Importer’s representatives indicate that the chitosan is purchased from a US supplier and manufacturer in Bellingham, WA who is both importing and producing Chitosan flakes. The chitosan is considered an active ingredient as a yield enhancing agent in New York ruling D83349. The importer adds acids and preservative to assist in the main purpose of the chitosan. The essential character of the preparation remains that of the chitosan salts which do not change other than being dissolved into water, which is a more dispersible form. There was no substantial transformation as the subheadings of the chitosan salts are in the same subheading as the chitosan as in New York ruling N310660. The combining process in Canada appears to be a minor one that leaves the identity of the chitosan intact and a substantial transformation has not occurred. Under General Note 11(n)(ii) Non-qualifying operations[,e]ach USMCA country shall provide that a good shall not be considered to be an originating good merely by reason of-- (A) mere dilution with water or another substance that does not materially alter the characteristics of the good[….] Likewise, as in General Note 11(v)(B) there is no “chemical reaction”. As the preparation process in Canada does not result in a molecule with a new structure by breaking intramolecular bonds and by forming new intramolecular bonds, or by altering the spatial arrangement of atoms in a molecule [no substantial transformation occurs]. On May 5, 2023, CBP’s Laboratory and Scientific Services Directorate (“LSSD”) determined that the Canadian process used to convert chitosan to zwitterionic chitosan “involves a chemical reaction that fundamentally alters its chemical structure.” LSSD further advised that the two chemicals have distinct chemical formulas, physical properties, and chemical activities. ISSUES: What is the proper classification of the imported fertilizer amendment under the Harmonized Tariff Schedule of the United States?  Whether the imported fertilizer amendment qualifies for preferential tariff treatment under the USMCA? What is the proper country of origin marking of the imported fertilizer amendment? Whether CBP properly assessed Section 301 Trade Remedy Duties on the imported fertilizer amendment? LAW AND ANALYSIS: We note that this matter is protestable under 19 U.S.C. § 1514(a)(5) as a decision relating to the liquidation or reliquidation of an entry. The protest was timely filed, within 180 days of liquidation for the entry. See Miscellaneous Trade and Technical Corrections Act of 2004, Pub. L. 108-429, § 2103(2)(B)(ii)-(iii) (codified as amended at 19 U.S.C. § 1514(c)(3) (2006)). Further review of this protest is properly accorded to the importer pursuant to 19 CFR § 174.24(b) because the issues protested involve questions of law or fact, which have not been ruled upon. Classification Classification under the HTSUS is made in accordance with the General Rules of Interpretation (“GRI”). GRI 1 provides that the classification of goods shall be determined according to the terms of the headings of the tariff schedule and any relative section or chapter notes. In the event the goods cannot be classified solely on the basis of GRI 1, and if the headings and legal notes do not otherwise require, the remaining GRIs may then be applied. The HTSUS provisions under consideration are as follows: 3101.00.00: Animal or vegetable fertilizers, whether or not mixed together or chemically treated; fertilizers produced by the mixing or chemical treatment of animal or vegetable products 3105.10.00: Mineral or chemical fertilizers containing two or three of the fertilizing elements nitrogen, phosphorus and potassium; other fertilizers; goods of this chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg: Products of this chapter in tables or similar forms or in packages of a gross weight not exceeding 10 kg 3913.90.20: Natural polymers (for example, alginic acid) and modified natural polymers (for example, hardened proteins, chemical derivatives of natural rubber), not elsewhere specified or included, in primary forms: Other: Polysaccharides and their derivatives. Note 6 to Chapter 31 provides: 6. For the purposes of heading 3105, the term “other fertilizers” applies only to products of kind used as fertilizers and containing, as an essential constituent, at least one of the fertilizing elements nitrogen, phosphorous or potassium. The General Explanatory Note (“EN”) to Chapter 31 provides, in pertinent part: This Chapter covers most products in general use as natural or artificial fertilisers.   On the other hand, the Chapter does not cover products which improve rather than fertilise the soil, …   This Chapter also excludes micronutrient preparations which are applied to seeds, to foliage or to soil to assist in seed germination and plant growth.  They may contain small amounts of the fertilising elements nitrogen, phosphorus and potassium, but not as essential constituents (e.g., heading 38.24).   It also excludes prepared plant growing media such as potting soils, based on peat or mixtures of peat and sand or of peat and clay (heading 27.03) and mixtures of earth, sand, clay, etc. (heading 38.24). All these products may contain small quantities of the fertilising elements nitrogen, phosphorus or potassium. The Protestant claims classification of the instant product in heading 3101, HTSUS, as a vegetable fertilizer. Like fertilizers, Hyshield serves to stimulate and promote plant growth. However, not all nutrient preparations aiding in plant growth are considered fertilizers for the purposes of classification in Chapter 31. In fact, the ENs and Chapter Notes make an important distinction between fertilizers and other nutrient preparations designed to aid in plant growth. The General Explanatory Note to Chapter 31 states that “the Chapter does not cover products which improve rather than fertilise the soil,” and specifically excludes “micronutrient preparations which are applied to seeds, to foliage or to soil to assist in seed germination and plant growth.  They may contain small amounts of the fertilising elements nitrogen, phosphorus and potassium, but not as essential constituents.” Similarly, Note 6 to Chapter 31, in reference to heading 3105, states that “the term ‘other fertilizers’ applies only to products of a kind used as fertilizers and containing, as an essential constituent, at least one of the fertilizing elements nitrogen, phosphorus or potassium.” (Emphasis added). The reference to “essential constituents” in the General Explanatory Note ties it directly to Note 6. While the Explanatory Notes can neither expand nor limit the scope of a heading, they can and do define terms, and they constitute the official interpretation of the Harmonized System. In this case, they seek to define the term “fertilizer” for the purposes of Chapter 31. Reading the Explanatory and Chapter Notes together, it is clear that fertilizers of Chapter 31 are limited to those products which contain nitrogen, potassium or phosphorous as “essential constituents.” See e.g., Headquarters Ruling Letter (“HQ”) H291205, dated May 3, 2019; NY N257882, dated October 30, 2014. In the instant case, the protest indicates that Hyshield does not contain nitrogen or phosphorous, but does contain some amount of potassium benzoate. The protest further states that the potassium benzoate is added to help effect the process by which the chitosan flakes are dissolved into the solution. The protest does not indicate that the potassium benzoate is included to stimulate plant growth on its own, and it does not appear that the potassium benzoate is an “essential constituent” of the product. Instead, the protest makes clear that the chitosan itself is the active ingredient. Indeed, rather than describe the imported Hyshield as a fertilizer, the protest states that Hyshield is a “fertilizer amendment” that “improves fertilizer and nutrient efficiency,” which further indicates that the product is not a “fertilizer” in its own right. As a result, the imported Hyshield is not eligible for classification as a fertilizer under headings 3101 or 3105, HTSUS. Instead, classification under subheading 3913.90.20 is consistent with prior CBP rulings. In NY N250372, dated March 10, 2014, CBP previously considered the tariff classification of a similar liquid solution containing “natural base biopolymer compound in liquid solution that contains free amino acids, derivatives of chitin (glucosamine and chitosan), with soluble minerals derived from the exoskeletons of shrimp.” Similar to Hyshield, the product as issue in N250372 was intended to stimulate plant growth and prevent fungus growth. In that ruling, CBP determined the applicable tariff classification to be subheading 3913.90.20, HTSUS, which provides for, “Natural polymers (for example, alginic acid) and modified natural polymers (for example, hardened proteins, chemical derivatives of natural rubber), not elsewhere specified or included, in primary forms: Other: Polysaccharides and their derivatives.” Based on the foregoing, and by application of GRIs 1 and 6, the subject Hyshield is classified under 3913.90.20, HTSUS. USMCA Eligibility The USMCA was signed by the Governments of the United States, Mexico, and Canada on November 30, 2018. The USMCA 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)). General Note (“GN”) 11, Harmonized Tariff Schedule of the United States (HTSUS), implements the USMCA. GN 11(b) sets forth the criteria for determining whether a good is an originating good for purposes of the USMCA. GN 11(b) states, in relevant part: For the purposes of this note, a good imported into the customs territory of the United States from the territory of a USMCA country … is eligible for the preferential tariff treatment provided for in the applicable subheading and quantitative limitations set forth in the tariff schedule as a “good originating in the territory of a USMCA country” only if-- (i) the good is a good wholly obtained or produced entirely in the territory of one or more USMCA countries; (ii) the good is a good produced entirely in the territory of one or more USMCA countries, exclusively from originating materials; (iii) the good is a good produced entirely in the territory of one or more USMCA countries using nonoriginating materials, if the good satisfies all applicable requirements set forth in this note (including the provisions of subdivision (o)); …. The subject merchandise is not wholly obtained or produced entirely in the territory of one or more USMCA countries nor is it produced entirely in the territory of one or more USMCA countries exclusively from originating materials. Therefore, the merchandise is not eligible for treatment as an originating good pursuant to General Notes 11(b)(i) and 11(b)(ii). Instead, pursuant to General Note 11(b)(iii), we look to whether the nonoriginating materials satisfy the requirements contained elsewhere in GN 11, including GN 11(o). Accordingly, the applicable chapter rule for the subject merchandise, which is classified under subheading 3913.90.20, stipulates: A change to headings 3901 through 3915 from any other heading, including another heading within that group, provided that the originating polymer content of headings 3901 through 3915 is not less than 50 percent by weight of the total polymer content. It is undisputed that imported chitosan flakes have consistently been classified by CBP in heading 3913, HTSUS, which provides for, “Natural polymers…and modified natural polymers…not elsewhere specified or included….” Furthermore, as outlined above, the subject fertilizer amendment is also classified under heading 3913, HTSUS. Because the Chinese-origin chitosan and the imported Hyshield are classified under the same subheading, there is no change in subheading as required in the applicable rule. As a result, the imported Hyshield produced in Canada from Canadian and Chinese-origin inputs does not qualify for USMCA preferential by virtue of the tariff shift requirements of HTSUS GN 11(o). Nonetheless, the subject merchandise may yet qualify as an originating good by virtue of GN 11(n)(v), which stipulates: (v) A good of any heading in chapters 39 through 40 that satisfies one or more of the provisions enumerated in this subdivision shall be treated as an originating good, except as otherwise specified in those rules. Notwithstanding the preceding sentence, a good is an originating good if it meets the applicable change in tariff classification or satisfies the applicable value content requirement in subdivision (o) of this not. (A) A good of chapter 39 through 40 that results from a chemical reaction in the territory of one or more of the USMCA countries shall be treated as an originating good. Based on the foregoing, GN 11(n)(v) provides that a good of chapter 39 is an originating good if it results from a “chemical reaction” in one or more USMCA countries. GN 11(n)(v)(B), meanwhile, defines “chemical reaction” as follows: (B) For the purposes of this rule, a “chemical reaction” is a process (including a biochemical process) that results in a molecule with a new structure breaking intramolecular bonds and by forming new intramolecular bonds, or by altering the spatial arrangement of atoms [in] a molecule. The following are not considered to be chemical reactions for the purposes of determining whether a good is an originating good under this note: (1) dissolution in water or in another solvent; (2) the elimination of solvents, including solvent water; or (3) the addition or elimination of water or crystallization. The Protestant asserts that the subject Hyshield is indeed produced by a chemical reaction occurring in Canada. Specifically, the protest states that “the chitosan flakes are dissolved into liquid form using a proprietary process, either lactic or citric acid is then added, causing an acid-based reaction. This reaction alters the characteristics of the chitosan via forming a zwitterion ion with the carboxyl group of the lactic and citric acid.” For its part, LSSD confirmed that a chemical reaction occurs during the manufacturing process: “the addition of lactic and/or citric acid does create a chemical reaction that results in a change of structure” in which “[t]he amine functional groups on the poly d-glucosamine chain (R-NH2) are converted from an amine to the zwitterionic amine form (R-NH3+).” Furthermore, the subject reaction does not fall under the exclusions outlines in GN 11(n)(v)(B)(1)-(3). First, the chitosan itself is not soluble in water; the lactic or citric acid is needed to cause the chemical reaction to create the zwitterionic form, which makes the chitosan soluble in water. Second, the solvents, including the water and acids used to create the resultant Hyshield, are not removed from the product. Third, the product does not undergo crystallization and does not function solely by the addition or elimination of water—water is added but only for use as a medium to enable the chemical reaction, which then changes the chitosan from its insoluble to soluble form. As such, Hyshield, which is a good under chapter 39, is the product of a chemical reaction occurring in