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HQ 220113

February 28, 1989

ENT-6-02-CO:R:C:E GG


TARIFF NO.: 9805.00.50

Robert J. Holz
Vice President and
Associate General Counsel
Continental Bank
231 South La Salle Street
Chicago, Illinois 60697

RE: Returning U.S. military personnel cannot enter leased automobile free of duty under personal exemption; automobile purchased under bona fide conditional sales contract may be entered under exemption

Dear Mr. Holz:

This is in response to your letter dated January 21, 1988 concerning a proposed financing agreement on cars acquired by U.S. servicemen stationed overseas.

Continental Bank has requested advice because it is contemplating entering into an agreement to finance the acquisition of foreign-made motor vehicles by servicemen stationed in Europe. Under the terms of this agreement, servicemen will enter into either a conditional sales agreement or a lease agreement, both of which are governed by West German or English law. The designated seller/lessor is a U.K. corporation not doing business in the United States. Title remains with the seller/lessor until all payments have been made, at which point the servicemen may exercise an option to purchase the vehicle. Although the servicemen take possession of the cars while in Europe, many will transfer back to the United States when title is still vested in the U.K. corporation. Customs has been asked to give an opinion on the tariff consequences of such transactions.

U.S. government personnel returning from extended service overseas may claim a duty exemption on their personal and household effects, provided that their tour of duty is being terminated and lasted at least 140 days. The effects must have been in the direct personal possession of the claimant prior to importation, and cannot be imported for sale or for the account of any ineligible person. Section 148.74, Customs Regulations and subheading 9805.00.50, Harmonized Tariff Schedule of the United States (HTS). Numerous rulings by the Customs Service have held that automobiles are personal or household effects and thus qualify for free entry under this provision.

Personal exemptions are privileges, not rights. E.S. Saterlie v. United States, 39 Cust. Ct. 214, C.D. 1931 (1957). Subheading 9805.00.50, HTS clearly identifies the persons entitled to the exemption (returning U.S. personnel, their families, and evacuees); nobody outside this group may claim free entry under this provision. A concern of the Customs Service is that allowing a serviceman to enter free of duty an automobile not owned by him or his family, would in reality extend the free entry privilege to ineligible persons, in this case the U.K. sellor/lessor or Continental Bank. Under the terms of the proposed agreements, the servicemen would not own the vehicles outright when they claimed the exemption. The issue therefore is whether an automobile, leased, or in the alternative, acquired under a conditional sales contract, is a personal or household effect within the meaning of the statute.

The legal definition of a personal effect is personal, movable property associated with the person. It does not include property belonging to another. Property means ownership of and the exclusive and unrestricted right to possess, use and dispose of the article in question. Black's Law Dictionary (5th ed. 1979) and United States v. One Diamond and Platinum Brooch, 86 F.Supp 329 (D.N.Y. 1949). For the purposes of this inquiry, it must be determined whether the proposed agreements would grant servicemen such exclusive rights of possession, enjoyment and disposal of their automobiles, thus making them "personal effects" and eligible for free entry.

A conditional sales contract is a contract where property sold is delivered to the buyer under an agreement that title will not pass from seller to buyer until the agreed consideration is paid. Taylor v. Graver Tank & Manufacturing Company, 344 P.2d 1045 (Okla. 1959). The buyer has an immediate right to use the property as his own, and has exactly the same power over it and rights in regard to it, as if he had bought and mortgaged it back to secure the price. Williston on Contracts, Section 966 (3d ed. 1961). In contrast, a lease is an arrangement where the lessee pays merely for the use of the item. Under most lease agreements, the lessor retains title when the term of the lease expires. In the Matter of South View Country Club of Mankata, Inc., 229 F.Supp. 105 (D. Minn. 1963).

An automobile acquired under a bona fide conditional sales contract could probably be entered free of duty by a returning serviceman, because once the conditions of the contract have been fulfilled, title will pass to the buyer. The serviceman indicated by entering into the contract that his intent was not only to possess and use the car, but also eventually to own and secure full title to it, i.e., to have it as his personal or household effect. Signing a lease agreement, on the other hand, would indicate a different intent: to pay for the temporary use of the property of another. A serviceman who was a party to a conditional sales contract would have a future right in the car. A lease, while permitting temporary use, would confer no equity in or right to dispose of the vehicle once the term had expired. Full authority over the automobile would revert to the lessor. Thus allowing a serviceman to enter a leased car duty free would be tantamount to transferring the exemption to the lessor/seller or financier, both unintended beneficiaries under subheading 9805.00.50, HTS. Many cars would wrongfully enter Customs territory free of duty. It would also be contrary to Customs' policy of strictly restricting the duty-free importation of leased vehicles, which is set down in 19 CFR 148.39. This provision allows returning residents to bring in rental automobiles without duties being assessed, but requires that the cars be exported within 30 days.

Absent an opportunity to examine the precise wording of the proposed agreements, the Customs Service can offer no definitive answer on whether servicemen would be able to apply the exemption to their automobiles. However, it would be important that a bona fide conditional sales agreement have most if not all of the following features which are typically not found in a lease: the buyer is obligated to pay the total purchase price of the subject of the contract, the total payments exceed the cash price because of accumulated interest, there is a transfer of title provision, and the risk of loss falls on the buyer. In re South View Country Club, 229 F.Supp. 105 (D.Minn. 1963). The mere existence of a purchase option does not per se convert a lease into a conditional sale. In the Matter of the Tax Appeal of Dobbs Houses, Inc., 53 Haw. 195, 490 P.2d 902 (1971). As stated above, free entry would be permitted under a conditional sales contract but denied if the instrument were a lease.

A serviceman can act as importer of record of an automobile, regardless of whether the vehicle was leased or purchased under a conditional sales contract. Only an owner, purchaser or a licensed customs broker can enter merchandise, and for this limited purpose a person who imports under lease is considered an owner or purchaser. The right to enter goods must be distinguished, however, from the right to enter them free of duty. Finally, all imported vehicles must be in conformity with EPA and Department of Transportation requirements.

Please do not hesitate to contact us if we may be of further assistance.


John Durant

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