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HQ 221577

February 7, 1990

FOR-2-06-CO:R:C:E 221577 L


Lewis E. Leibowitz, Esq.
Hogan & Hartson
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109

RE: Status of certain vehicles entered for consumption from a foreign trade zone and subsequently returned to the foreign trade zone

Dear Mr. Leibowitz:

Your July 11, 1989, inquiry requested a ruling concerning the status of certain vehicles entered for consumption from a foreign trade zone (FTZ) and subsequently returned to the FTZ.


The operator and user of a FTZ manufactures automobiles. The completed automobiles are sold to an affiliated corporation and delivered to a marshalling yard, which is located within the FTZ as granted, but outside of the activated area of the FTZ, in preparation for shipment. The vehicles are said to be entered at the time of sale under Harmonized Tariff Schedule of the United States (HTS) subheading 8703.23.00, dutiable at the rate of 2.5% ad valorem, with the intent that they become an integral part of United States commerce or that they be exported. Some vehicles, however, have been found to contain defects which are not identified until after the vehicle has been transferred to the marshalling yard and is awaiting shipment. In these situations, the manufacturer needs to return the automobiles to its factory for investigation or repairs because the marshalling yard does not have adequate facilities for such tasks. In this connection, it is stated that only a very small number of the vehicles require inspection or repair.

Repairs that occur in the subzone once the entered vehicle is returned do not result in a change of the vehicle from one tariff classification to another or in the payment of a lower duty.


May automobiles manufactured in a FTZ and subsequently transferred from the zone and entered for consumption be returned in domestic status to the FTZ for repairs when such return is not intended to and does not circumvent any tariff laws of the United States?


The second proviso to section 3 of the Foreign-Trade Zones Act of 1935, as amended, authorizes the Secretary of the Treasury and, by Treasury Department Order No. 165, Revised (T.D. 53654), the Commissioner of Customs, to make such regulations respecting identity and the safeguarding of the revenue as necessary with respect to articles entered into Customs territory and then taken into a zone. By T.D. 86-16, section 146.71, relating to the release and removal of merchandise from a zone, was added to the Customs Regulations. As pertinent here, and as discussed in Headquarters Ruling Letter 218898, 219003, C.S.D. 89-41, the purpose of section 146.71, in part, was to avoid abuse of the second proviso of 19 U.S.C. 81c by an assortment of schemes designed to circumvent provisions of restriction or limitation in the tariff laws or to secure a benefit that would otherwise not be available.

C.S.D. 89-41 also noted that where articles were transferred from a zone, entered for consumption, and subsequently returned to a zone for further manufacture, a judgement would have to be made in each case as to the purpose of the transaction. It was intended that this judgement be made by the district director, the person most cognizant of the actual operations occurring in a zone. A number of factors to be considered in making that judgement were set out in T.D. 86-16 and repeated in C.S.D. 89- 41; but those factors are not all-inclusive. The aim is to attempt to determine the reason for returning previously entered articles to the FTZ. If it appears that the purpose is to circumvent the law or to obtain a benefit not otherwise available, section 146.71(d)(1) provides for cancellation of the entry and the restoration of the article to its last foreign status; if the purpose appears otherwise, section 146.71(d)(3) provides for admission of the article in domestic status.

On the basis of the information submitted by the inquirer, it appears that the purpose of the return of the vehicles from the marshalling yard to the manufacturing subzone is to correct relatively minor manufacturing defects which are detected after the vehicles arrive in the marshalling yard following sale but before shipment for distribution. The repairs performed appear to be in the nature of "warranty" repairs rather than further manufacture of the vehicles even though the repairs may involve manufacturing operations.

On these facts, we would conclude that there is bona fide purpose for the return of the vehicles to the subzone not involving circumvention of the law, and that section 146.71(d)(3), Customs Regulations, providing for admission in domestic status, would be applicable. Nevertheless, the final determination of the applicability of section 146.71(d) will be made by the district director.


Automobiles manufactured in a FTZ, entered for consumption, sold and delivered to a marshalling yard in preparation for shipment may be returned to the FTZ in domestic status pursuant to section 146.71(d)(3), Customs Regulations, for repair of manufacturing defects where the district director determines there is no intent to circumvent, and the return in domestic status does not circumvent, provisions of restriction or limitation in the tariff laws or result in a benefit that would otherwise not be available to the parties.

This holding does not extend to repairs that would result in extensive changes or modifications of the automobiles nor does it remove the requirement for a permit to manufacture and an entry for consumption for the repaired automobile if articles in foreign status are used in the repair of the vehicle, pursuant to sections 146.43(b) and 146.63(a), Customs Regulations.


John Durant, Director

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