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HQ 562343

August 27, 2002

MAR-05 RR:CR:SM 562343 NL


Terrie A. Gleason, Esq.
Baker & McKenzie
815 Connecticut Avenue, NW,
Washington, DC 20006-4078

RE : Inventory Management; FIFO; NAFTA Eligibility; U.S. General Note 20; 9801.00.20, HTSUS

Dear Ms. Gleason:

This is in reply to your letter of February 27, 2002, in which you request a binding ruling on behalf of R.G. Barry Corporation (RG Barry).


This ruling request concerns the appropriate attribution of origin to goods of different countries of origin that are packaged for importation into the U.S. at a foreign distribution center.

A manufacturer and distributor of house slippers, RG Barry is opening a distribution center in Nuevo Laredo, Mexico. The slippers exported to the U.S. from this distribution center fall into several categories with respect to country of origin and Customs treatment.

A large proportion of this merchandise is of Mexican origin, eligible to be entered free of duty and fees under the NAFTA. A small proportion of the merchandise is manufactured in China. The Chinese-origin merchandise enters the distribution center after having been imported, duty paid, into the U.S. Also, certain Mexican-origin merchandise enters the Mexican distribution center after having been imported into the U.S. free of duty and fees under the NAFTA. The activity of importing into the U.S., re-exporting to the Nuevo Laredo distribution facility, and finally packing and shipping bulk containers for importation into the U.S. is conducted by RG Barry for its own account; no sales are involved.

The issue of attribution raised in the ruling request arises because a small portion of the Chinese-origin and Mexican-origin merchandise have the same style numbers. The ruling request seeks approval to identify the country of origin of such merchandise according to a first-in-first-out (FIFO) accounting method when preparing the merchandise for shipment to the U.S. It is understood that such identification, or constructive segregation, would be used in place of physical segregation according country of origin of the merchandise having the same style numbers.

It is submitted that identification of Chinese as opposed to Mexican merchandise on the basis of a FIFO accounting method should be acceptable because the accuracy of the respective quantities to be entered can be verified using invoices and style summary sheets. It is argued that by reason of such records, the quantity of each class of goods can be ascertained by Customs, such that the goods should not be treated as commingled within the meaning General Note 20, HTSUS (prior to 2002, General Note 19). It is suggested that physical segregation of the Chinese and Mexican merchandise having the same style numbers is not necessary because the quantities may be determined by reference to packing lists and other documents filed at the time of entry.

RG Barry also argues that General Note 20 has no application under the circumstances because the rate of duty applicable to the merchandise under both the NAFTA and subheading 9801.00.20 is the same – zero.

You advise that with respect to the Mexican-origin, previously imported merchandise, the Customs Port Director at Laredo, Texas, has approved re-importation under subheading 9801.00.20, HTSUS. However, you state that the previously-entered, Mexican-origin goods will be re-entered into the U.S. under the applicable HTSUS provision for the slippers, free of duty and MPF under NAFTA, rather than subheading 9801.00.20, HTSUS. This Mexican-origin merchandise, having been imported into the U.S. by RG Barry. is delivered by RG Barry on a consignment basis to its Nuevo Laredo distribution center, and then re-imported by RG Barry for its own account.

Subheading 9801.00.20, HTSUS, provides for the duty-free treatment of goods that have been previously imported duty paid if: 1) the article is re-imported without having been advanced in value or improved in condition; 2) the article was exported under a lease or similar use agreement; and 3) the article is re-imported by or for the account of the person who imported it into, and exported it from, the United States.

In your letter requesting this ruling, you state that the Chinese-origin merchandise, we presume previously imported into the U.S. duty paid, consigned to the Mexican warehouse, and re-imported, would be eligible for treatment under subheading 9801.00.20.


May the importer employ a FIFO accounting and inventory management method to constructively segregate Chinese-origin goods eligible for treatment under subheading 9801.00.20, HTSUS from Mexican-origin goods eligible for duty-free and MPF-free treatment under the NAFTA?


Acceptable techniques to identify goods that are subject to differing treatment at entry are indicated in several sections of the Customs laws and Regulations. In this case, both General Note 20, HTSUS, and the inventory management methods permitted under the NAFTA (see, 19 CFR §181 App., Schedule X) are applicable to the circumstances set forth.

General Note (GN) 20 prescribes the tariff treatment to be afforded to goods that are commingled. It provides, in relevant part, that:

(a) Whenever goods subject to different rates of duty are so packed together or mingled that the quantity or value of each class of goods cannot be readily ascertained by customs officers (without physical segregation of the shipment or the contents of any entire package thereof), by one or more of the following means:

(i) sampling,
(ii) verification of packing lists or other documents filed at the time of entry, or (iii) evidence showing performance of commercial settlement tests generally accepted in the trade and filed in such time and manner as may be prescribed by regulations of the Secretary of the Treasury,
the commingled goods shall be subject to the highest rate of duty applicable to any part thereof. (An additional provision concerns segregation under Customs supervision following notification by Customs to the importer that goods are commingled. It does not appear that this is the procedure contemplated by RG Barry for the operations at issue.)

The Regulations for the administration of NAFTA eligibility and marking provide various possibilities for the treatment of commingled goods. In particular, commingled goods that are fungible may be accounted for by the use of specified inventory management methods. Section 102.12 of the NAFTA marking regulations (19 CFR §102.12) provides that

When fungible goods of different countries of origin are commingled the country of origin of the goods: (a) Is the countries of origin of those commingled goods; or (b) If the good is fungible, has been commingled, and direct physical identification of the origin of the commingled good is not practical, the country or countries of origin may be determined on the basis of an inventory management method provided under the appendix to part 181 of the Customs Regulations.

For the purpose of identifying goods manufactured in Mexico that are to be imported under claims of eligibility as NAFTA originating goods, 19 CFR §181 App., Section 7(16)(b) provides:
where originating goods and non-originating goods that are fungible goods are physically combined or mixed in inventory and prior to exportation do not undergo production or any other operation in the territory of the NAFTA country in which they were physically combined or mixed in inventory, other than unloading, reloading or any other operation necessary to preserve the goods in good condition or to transport the goods for exportation to the territory of another NAFTA country, the determination of whether the good is an originating good may, at the choice of the exporter of the good or the person from whom the exporter acquired the good, may be made on the basis of any of the applicable inventory management methods set out in Schedule X.

Part I, Section 11 of Schedule X (19 CFR §181 App.), prescribes the FIFO method of inventory management as one of the four methods of inventory management acceptable for determining whether fungible goods are originating goods.

On the basis of the facts presented and these provisions of the Customs Regulations concerning claims of NAFTA eligibility, this office concludes that:

The merchandise originating in China and the merchandise originating in Mexico that have the same style numbers are fungible goods for the purposes of inventory management; RG Barry’s FIFO accounting as described is one of the inventory management methods acceptable for the purposes of determining and claiming NAFTA eligibility from among fungible goods physically combined in inventory; and Provided that the operations performed on the fungible goods the Nuevo Laredo distribution center are limited to those authorized in 19 CFR §181 App., Section 7(16)(b), RG Barry may elect to employ its FIFO method for the attribution of Mexican origin and NAFTA eligibility to the goods.

With regard to Chinese-origin fungible merchandise to be entered under subheading 9801.00.20, HTSUS, you advise that in support of its claim under this subheading, RG Barry will maintain all copies of CF 7501 relating to the style at issue. It is understood that these would be available, pursuant to 19 CFR 10.108, to establish to the port director’s satisfaction that duty was paid on previous importations of the goods into the U.S. Your submission indicates that the port director already has approved entry under subheading 9801.00.20 for certain Mexican-origin goods on the same basis.

With regard to the method of segregation, RG Barry submits that in most cases it will segregate the Chinese and Mexican merchandise according to packing lists or other documents filed at the time of entry as specified at U.S. General Note 20(a)(ii). In those cases where a single style number has two countries of origin, the FIFO inventory management method would be used.

Under these circumstances RG Barry’s FIFO method would enable Customs officials to ascertain properly the quantity and value of the respective classes of goods.


Upon consideration of the FIFO approach proposed by RG Barry to accomplish the necessary attribution of country of origin in connection with its Mexican distribution operations, we find that FIFO inventory management is consistent with the applicable NAFTA and HTSUS General Notes provisions, and is approved for attribution of origin as described herein.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.


Myles B. Harmon
Acting Director

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