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HQ 562393

August 5, 2002
mar-05 RR:CR:sm 562393 Tjm

Category: MARKING

Jeremy Ross Page
Sandler, Travis & Rosenberg, LLC
200 West Madison Street
Suite 2670
Chicago IL 60606

RE: Country of origin marking for automobile parts; inventory management methods; FIFO; fungible good; direct physical identification of country of origin; practical; Volkswagen; 19 CFR § 102.12; 19 CFR part 134; 19 CFR part 181 App. Schedule X; NAFTA; HRL 226319; HRL 224237; HRL 733604; HRL 731506; HRL 733241.

Dear Mr. Page:

This is in reply to your letter dated April 9, 2002, requesting on behalf of Volkswagen of America, a ruling on the use of inventory management methods for purposes of identifying the country of origin of automobile parts. Please find our response below.


Your client, Volkswagen of America, Inc. (“VWoA”), intends to import automobile parts made in various countries including Canada, Germany, Mexico, Brazil, or other countries. These parts will be maintained by several parts distribution centers (“PDCs”) in Canada and in the United States for their use in the North American market. Parts in inventory may be single sourced from a particular vendor in one country or they may be dual-sourced. All of the goods will be physically marked with the actual country of origin.

The PDCs will store all interchangeable or fungible parts bearing the same part number in a single common bin due to space limitations and for other considerations. You state that in all material and commercial respects, any dual-sourced parts will be commercially interchangeable, or fungible for customs purposes, with neither VWoA nor its customers professing any preference for parts sourced from one country or vendor over that sourced from any other country or vendor. As VWoA’s on-site stock of parts is depleted, an order will be placed by VWoA with the nearest PDC that has those parts in stock. If the nearest PDC is situated in Canada, Volkswagen of Canada (“VWC”) would like to fill that order by pulling indiscriminately from the appropriate parts inventory, and utilizing a first in first out (FIFO) inventory management method for any commingled goods to determine and identify their country of origin for invoicing purposes.

You represent that VWoA’s inventory system will provide for the identification of origin on either a “Regular Origin” or a “Batch Manage Origin” basis. Under a Regular Origin identification, VWoA’s system allows only one ISO (International Standards Organization) origin code for all stock on-hand. As a result, all stock must be depleted before another origin can be entered. You state that because VWoA will be receiving parts from multiple countries of origin, reliance on a Regular Origin identification is problematic as there would be no way systemically for VWoA to know that a part is dual-sourced prior to shipment. To avoid this problem, VWoA batch manages origin for all VW parts. Batch management allows for several ISO (origin) codes to be stored with stock quantities and receipt dates attached. Besides permitting the commingling of dual-sourced parts, the use of batch management also provides the foundation upon which VWoA is able to identify origin layers for FIFO inventory management purposes.

You contend that the impracticality of directly identifying country of origin concerns the company’s process for picking of stock from PDC inventory. That process begins with the generation of a picking label which identifies the specific parts that need to be pulled, their intended destination and a country of origin as referenced by VWoA’s batch management program. That label, in turn, will be affixed to the part once pulled from inventory to ensure that it is properly consolidated for shipment. However, while that label will facilitate order fulfillment, because many of these parts are dual-sourced, the origin reflected on that label could conflict with the country of origin marking found on the individually-packaged parts.

VWoA, in turn, intends to rely upon the country of origin reflected on VWC’s invoice for purposes of import declaration, regardless of the fact that such parts may physically bear a country of origin identification that differs from that declared at the time of entry. You stated that while a difference may exist between the country of origin reflected on a commercial invoice and that physically appearing on the individual imported component, VWoA believes that this distinction does not hinder VWoA’s ability to utilize an acceptable inventory management method for purposes of country of origin determination and for complying with Customs’ country of origin marking requirements.

Counsel asserts that by implementing an inventory management process, VWoA would be able to eliminate the country of origin reference from the picking label, thereby eliminating the potential conflict between the origin reflected on the individually-packaged product and that reflected on the picking label. Instead, the only origin that would be significant would be that reflected on the shipping invoice which, in turn, would be used for origin declaration purposes at the time of entry.

Counsel notes that were VWoA not able to rely on inventory management for purposes of origin identification, VWoA would have to attempt to find a “customized solution” to this issue that would require the investment of extensive time and money which, at the least, would prove impractical and, at the most, result in no guarantee of success.

Counsel provided a spreadsheet containing numerous types of parts to be stored in the parts distribution centers. Counsel also notes that VW will not be claiming NAFTA preference on any of the parts withdrawn from the Canadian parts distribution centers.


Whether the FIFO inventory management method is acceptable when actual country of origin marking on the imported automobile parts differ from the country of origin determined under the FIFO inventory management method.


I. Country of Origin Marking Requirements

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. §1304) provides that unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. 19 C.F.R. part 134 implements the country of origin marking requirements of 19 U.S.C. § 1304. Section 134.1(d), Customs Regulations (19 CFR § 134.1(d)), provides that the “ultimate purchaser” is generally the last person in the United States who will receive the article in the form in which it was imported.

Congressional intent in requiring a country of origin marking was “that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of origin of which the goods is the product. The evident purpose is to mark the goods so that at the time of the purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will.” United States v. Friedlander & Co., 27 C.C.P.A. 297 at 302; C.A.D. 104 (1940).

A. Ultimate Purchaser

19 C.F.R. § 134.1(d) defines an ultimate purchaser as “generally the last person in the United States who will receive the article in the form in which it was imported.” For NAFTA purposes, section 134.1(d) defines the ultimate purchaser as “generally the last person in the United States who purchases the article in the form in which it was imported.”

In the instant case, you assert that pursuant to 19 C.F.R. § 134.35(a), the VWoA is the ultimate purchaser because it is the U.S. processor that converts or combines an imported article into a different article of commerce. You stated that these automobile parts are imported by VWoA to be used as service parts for repair/replacement operations performed solely by certified Volkswagen (“VW”) technicians at VW dealerships. As such, you stated that the owners of the individual vehicles on which the parts will be used will never directly receive them nor be able to identify them as they will be further incorporated into an engine or other operational components of the vehicles. In fact, you stated that the repairs will often be performed under warranty, in which case, many of the customers do not directly purchase the parts.

However, the history of Customs rulings shows that the ultimate purchaser for automobile replacements parts is the automobile owner and not the dealership or the mechanic. In Headquarters Ruling Letter (“HRL”) 733604, dated February 15, 1991, Customs reaffirmed its ruling in HRL 731506, dated May 1, 1990. In HRL 733604, Mitsubishi International Corporation imported automotive glass from Japan for the replacement automotive market. The glass was already cut to shape and dedicated to use as either a windshield, rear window, or side window and made to fit a particular automobile type and model. Although on the practical level, the auto owner did not install the window and was unlikely to see the replacement glass until after it was installed by the glass installer, we reasoned that the ultimate purchaser was still the vehicle owner and not the body shop or the installer. In particular, we noted that the question of the ultimate purchaser is intertwined with the issue of whether the replacement window is substantially transformed when installed into the car. Customs’ analysis was that the installation process did not result in an article with a name, character, or use differing from that of the imported article.

Additionally, in HRL 733241, dated August 27, 1990, Customs ruled that the automobile owner was the ultimate purchaser even though the auto parts were sold through catalogue sales to mechanics and were not generally visible once installed in an automobile. In that case, Customs’ reasoning also analyzed the issue of whether the auto parts (which included ball joint, thermo switch, turn signal, brake disc, head gaskets, master cylinder, and piston set) were substantially transformed by the mechanic when installed into the consumer’s car. The determination was based on the fact that the auto parts were imported in a complete finished condition and did not change in its name, character or use upon installation. Therefore, because the parts were not substantially transformed by the mechanic, the automobile owners were the ultimate purchasers. In the instant case, the question of who is the ultimate purchaser also hinges upon whether the parts are substantially transformed by VW dealerships when installed into VW vehicles.

B. Substantial Transformation

The concept of a substantial transformation has been defined and refined by a history of jurisprudence and Customs rulings. In general, a substantial transformation is deemed to have occurred when articles are processed so as to lose their identity and “result in an article having a new name, character or use.” See Uniroyal Inc. v. U.S., 702 F.2d 1022, 1029 (Ct. Int’l Trade 1982), aff’d, 702 F.2d 1022 (Fed. Cir. 1983). See generally, United States v. Gibson-Thomsen Co., 27 C.C.P.A. 267 (1940); National Juice Product Association v. United States 10 C.I.T. 48, 628 F. Supp. 978 (Ct. Int’l Trade 1986); Koru North America v. United States, 12 C.I.T. 48, 701 F. Supp. 229 (Ct. Int’l Trade 1988).

Furthermore, in National Hand Tool Corp. v. U.S., 16 C.I.T. 308 (Ct. Int’l Trade 1992), the Court held that imported parts, which underwent some processing such as heat treatment or plating and assembly in the United States, did not undergo a substantial transformation. The Court reasoned that the “use of the imported article was predetermined at the time of importation.” National Hand Tool Corp., 16 C.I.T., at 311. Cf., Belcrest Linens v. U.S., 6 C.I.T. 204; 573 F. Supp. 1149 (Ct. Int’l Trade 1983). Although the use of imported articles were predetermined, it does not necessarily preclude the finding of a substantial transformation. Rather, the Court in National Hand Tool Corp. opined that given the totality of the evidence, the parts did not change in name, character, or use.

In the instant case, the installation of the replacement parts into the VW vehicles in the United States does not qualify as a substantial transformation. As noted by the Court in National Hand Tool Corp., the use of the parts at issue is predetermined before importation into the United States. The facts presented do not evidence any type of processing in the United States to these parts that would qualify as a substantial transformation in the United States. Consistent with the courts’ jurisprudence on substantial transformation and Customs’ past rulings on this question, the installation of replacement parts into VW vehicles in the instant case does not qualify as a substantial transformation. Therefore, the ultimate purchaser in the instant case is the VW vehicle owner and not the VW dealership or the VWoA. Consequently, the intent of the marking statutes must apply to the benefit of vehicle owners.

Inventory Management Method/Fungible Good

Turning to the issue of whether an inventory management method is acceptable in this case, general requirements and examples relating to inventory management methods for NAFTA preference purposes are outlined in part 181, Customs Regulations (19 C.F.R. part 181). Additionally, part 102, Customs Regulations (19 CFR § 102.0 et seq.), which sets forth the rules of origin for marking and duty purposes under the NAFTA, provides for the use of inventory management methods within that provision.

However, counsel notes that VW will not be claiming NAFTA preference or origin. Therefore, counsel concedes that the provisions of 19 C.F.R. § 102.12(b) are not, as a legal matter applicable. However, counsel asserts that the principles contained in 19 C.F.R. § 102.12(b) should govern the analysis herein. Customs in the past has applied principles relating to the use of inventory management methods to non-NAFTA cases. See for example, Headquarters Ruling Letter (HRL) 226319, dated July 23, 1996 (allowing FIFO in cases of customs bonded warehouses); C.S.D. 83-63; HRL 224237, dated January 26, 1993; and HRL 227905, dated July 31, 1998 (allowing FIFO for purposes of temporary import bonds).

Specifically, section 102.12, Customs Regulations, (19 C.F.R. § 102.12), provides for the use of inventory management methods when certain criteria are met for purposes of determining the country of origin for marking and duty purposes under the NAFTA.

Section 102.12, Customs Regulations (19 CFR § 102.12), states that when fungible goods of different countries of origin are commingled, the country of origin of the goods:

Is the countries of origin of the commingled goods; or 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 any inventory management method provided under the appendix to part 181 of the Customs Regulations.

As the regulation noted above (19 C.F.R. § 102.12(b)) states, an inventory management method is allowed to determine country of origin for marking purposes if: 1) the good is fungible; 2) has been commingled; and 3) direct physical identification of the origin of the commingled good is not practical.

Section 102.1(f), Customs Regulations (19 CFR §102.1(f)), defines fungible goods or fungible materials as “goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical.” Automobile parts satisfying the above definition qualify as fungible goods.

Commingled goods are defined as goods that are “physically combined or mixed.” See 19 C.F.R. § 102.1(b). Although certain parts listed in your submission may clearly qualify as “commingled goods,” it is questionable whether large parts such as transmissions and auto body parts could satisfy the requirement that they be physically combined or mixed.

Furthermore, the fact that parts are individually packaged and individually marked is inconsistent with the contention that direct physical identification of origin is not practical. Direct physical identification is defined as “identification by visual or other organoleptic examination.” See 19 C.F.R. § 102.1(c). Therefore, in regard to the facts presented in this case, we are not persuaded that direct physical identification of the country of origin of the goods is not practical. Thus, we find that the use of the proposed FIFO inventory management method to determine the goods’ country of origin is not warranted in this case. The countries of origin of the imported goods in the instant case are the actual countries of origin of the auto parts, as indicated by the marking on the parts.


Since direct physical identification of the country of origin is not impractical in this case, the use of an inventory management method, such as the FIFO accounting method to determine the parts’ countries of origin, is precluded. The countries of origin of the goods at issue are the actual countries of origin of the automobile parts, as indicated by the marking on these parts.

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


Myles B. Harmon, Acting Director
Commercial Rulings Division

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