U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS; duty-free; Statistical Note 2; General Statistical Note 2, HTSUS

HQ W557512 May 6, 1994 CLA-2 CO:R:C:S W557512 MLR CATEGORY: Classification District Director U.S. Customs Service 312 Fore Street Portland, Maine 04112-4688 RE: U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS; duty-free; Statistical Note 2; General Statistical Note 2, HTSUS Dear Sir: This is in response to a memorandum dated July 27, 1993 (copy enclosed), from the Chief, National Import Specialist Branch 8, New York Seaport, concerning the payment of duty on entries of leather moccasin "uppers" to be imported through your district by L.L. Bean Inc. ("Bean") from the Dominican Republic, pursuant to section 222 of the Customs Trade Act of 1990 (Public Law 101-382), which amended U.S. Note 2, Subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS) {hereinafter "Note 2(b)"}. New York informed us that the Note 2(b) determination is not at issue, solely whether a partial duty payment is applicable. We apologize for the delay in our response; however, we have been anticipating some changes to the Note 2(b) program. FACTS: Bean operates a manufacturing facility in Maine, which produces a line of hand-sewn moccasins and hunting boots. A part of Bean's footwear production is conducted off-shore at American Sports Co. ("AS") in the Dominican Republic, who makes the leather and textile uppers which Bean further processes into the completed footwear. Your office issued a preclassification covering 15 stock numbers, each a variant of two basic styles: the Camp-Moc and the Blucher, both of which are wholly of leather. The imported uppers are not back-lasted and are not closed at the bottom. Bean claims that the uppers are eligible for duty-free treatment under Note 2(b). The documentation submitted conforms with 19 CFR 10.9(e), and includes a list of all component materials, identifying stock numbers, U.S. vendors and their addresses. Bean asserts that the imported uppers are assembled/processed in whole of U.S. components, processed in a beneficiary country and shipped directly to the U.S. Therefore, your office determined that since AS performs more than mere assembly operations, that subheading 9802.00.5010, HTSUS, is applicable, and that no merchandise processing fee will be assessed. Bean is not related in any way to AS, whose invoice price includes a cost of processing and a percentage for profit and general expenses. No royalties, proceeds of subsequent resale, or commissions are paid. Bean provides the materials and tooling free of charge; all of the leather, threads, eyelets and laces are furnished to AS, along with lasts, dies, handsewn needles and other minor equipment. The cost of these assists, plus the freight from the U.S. to the foreign manufacturer is declared on the entry summary documents so that the entered value may be properly adjusted. Only the value of the material components at the point of exportation from the U.S. is claimed under subheading 9802.00.5010, HTSUS; the remainder of the assist is included in the value of the line classified in Chapter 64. For example, the invoice price of a Camp-Moc style is $4.55, adjusted by the addition of $10.40 for the upper leather, $1.18 for other materials, $.60 for freight from the U.S., and a $.40 amortization of the tooling. New York contends that if Note 2(b) applies, no duty should be payable on the shipment of the uppers, otherwise they would be considered "a foreign article." We understand that your office has verbally instructed Bean to enter the assist, the freight of the components to the Dominican Republic, and the foreign processing cost under subheading 6406.10.6500 (the classification of the uppers if Note 2(b) is not applicable) and to pay duty at 3.7 percent for that portion of the total cost even if Note 2(b) applies. ISSUE: Whether a portion of the upper's value is dutiable even if Note 2(b) is applicable. LAW AND ANALYSIS: Section 222 of the Customs and Trade Act of 1990 (Public Law 101-382) amended U.S. Note 2, Subchapter II, Chapter 98, HTSUS, {"Note 2(b)"}, to provide for the duty-free treatment of articles, other than certain specified products, which are assembled or processed in a Caribbean Basin Economic Recovery Act (CBERA) beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin. Note 2(b) provides as follows: (b)No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum, provided for in heading 2709 or 2710) may be treated as a foreign article, or as subject to duty, if-- (i) the article is-- (A) assembled or processed in whole of fabricated components that are a product of the United States, or (B) processed in whole of ingredients (other than water) that are a product of the United States, in a beneficiary country; and (ii)neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country. To implement this provision, two new statistical breakouts were created in Chapter 98, HTSUS. The new classifications are 9802.00.5010, which is for articles processed in whole of ingredients that are a product of the U.S., and 9802.00.8040 which is for articles assembled in whole of fabricated components that are a product of the U.S. The tariff description for both provisions reads as follows: "Articles for which duty-free treatment is claimed under U.S. note 2(b) to this subchapter." Although articles qualifying for Note 2(b) treatment are entered under 9802.00.80 (if merely assembled in a BC), or 9802.00.50, which only provide for a partial duty exemption, this is for statistical purposes only and because a specific tariff provision, i.e., heading or subheading pertaining to such goods was not created by the Customs and Trade Act of 1990. Both 9802.00.8040 and 9802.00.5010 reference Statistical Note 2, Subchapter II, Chapter 98, HTSUS. Statistical Note 2 to Subchapter II, Chapter 98, HTSUS, states: 2.For articles for which duty free treatment is claimed under U.S. Note 2(b) to subchapter II of this chapter, the citation to be used in statistical reporting shall be the 10-digit statistical reporting number provided in this subchapter followed by the reporting number of the provision in chapters 1 through 97 which would ordinarily apply to the articles. The unit of quantity reported hereunder for such articles shall be the same as the unit of quantity for the provision from chapters 1 through 97. For articles admitted under statistical reporting numbers 9802.00.5010 and 9802.00.8040 two values shall be reported--the first following the first statistical reporting number of the statistical citation (i.e., 9802.00.5010 or 9802.008040) and the second following the statistical reporting number of the provision in chapters 1-97 which would ordinarily apply: (a) For statistical reporting number 9802.00.5010: (i)The total value of the article less the value of the foreign processing; and (ii)The dutiable value, i.e., the value of the foreign processing, respectively. (b) For statistical reporting number 9802.00.8040: (i)The value of the U.S. fabricated components or materials; and (ii)The dutiable value, i.e., the total value of the articles less the value of the U.S. fabricated components, respectively. (Emphasis added) New York believes that the references in the Statistical Note to a "dutiable value" are errors which are contrary to the clear meaning of Note 2(b). However, since the Statistical Note is not part of the "legal text" of the HTSUS pursuant to General Statistical Note 2(b), New York believes these references should be ignored. General Statistical Note 2, HTSUS, states: (a)The statistical annotations to the Harmonized Tariff Schedule of the United States consist of -- (i)the 2-digit statistical suffixes and any article descriptions applicable thereto, (ii)the indicated units of quantity, and (iii) the statistical notes and annexes. (b)The legal text of the Harmonized Tariff Schedule of the United States consists of the remaining text as more specifically identified in the general rules of interpretation. We agree with New York. The Statistical Notes in the HTSUS are mainly established for Bureau of the Census purposes to establish an enumeration of articles imported and exported to and from the U.S. See 19 U.S.C. 1484(a) and (e). We are aware that the references in Statistical Note 2, Subchapter II, Chapter 98, to a "dutiable value" and the entry of the articles qualifying for Note 2(b) treatment under 9802.00.80 or 9802.00.50 are confusing. Currently, we are working with the United States Trade Representative (USTR) and International Trade Commission (ITC) to create a special tariff provision for the Note 2(b) program. Even though a detailed description of the assembly operations to be performed in the Dominican Republic was not provided, it would appear based on several prior rulings that the uppers are eligible under this tariff provision if all materials are of 100 percent U.S.-origin and these materials are shipped directly to the BC where they are assembled and/or processed, and the uppers are shipped directly to the U.S. without entering the commerce of any foreign country other than a BC and the applicable documentary requirements are satisfied. Furthermore, although U.S. Note 2(b)(i)(A) and (B) are separated by the word "or", it is our opinion that Congress did not intend to preclude free treatment under this provision to an article which is created in a BC both by assembling and processing U.S. fabricated components and by processing U.S. ingredients. Headquarters Ruling Letter (HRL) 556434 dated April 1, 1992, held that boot inserts which were processed "and" assembled in a BC were entitled to duty-free treatment under Note 2(b), although the language of the U.S. Note 2(b) uses "or". Consequently, you are correct that if more than mere assembly operations are performed in the Dominican Republic, the uppers should be entered under subheading 9802.00.5010, HTSUS. However, no duty is payable, and the reference to the "dutiable value" in Statistical Note 2, Subchapter II, Chapter 98, HTSUS, should be ignored. Sincerely, John Durant, Director Commercial Rulings Division Enclosure cc: Chief, NIS Branch 8 New York Seaport