Machine Tool Still Eligible for Unused Merchandise Drawback After Operations in US, CBP Says

Operations including the oiling of a machine, the fitting of a transformer to adjust electrical voltage and the uploading of software patches to a machine tool do not constitute manufacturing or use, and do not render the machine tool ineligible for unused merchandise drawback, CBP said in a recent ruling. The operations do not transform the machine tools into a new product, but merely make them operational for the end customer, CBP told Knuth Machine in HQ H290897, issued July 28 and publicly released Aug. 26.

Knuth imports the machine tools into the U.S., where they undergo certain operations prior to exportation: unpacking, filling with oil, testing, calibration and repacking. For about 30% of the machines, Knuth must fit them with a transformer to transform voltage at the customer’s facility to the voltage the machines are built to operate with. Knuth also occasionally performs software updates or patches to fix the operational software already installed on the machines.

Under 19 USC 1313(j)(1), drawback is allowed if the merchandise was exported or destroyed within five years of the date of importation, and “was not used in the United States before such exportation or destruction.” Under 19 USC 1313(j)(3), unpacking, testing, and repacking are specifically listed as not to be treated as “use” of merchandise, leaving only the oiling, the addition of the transformer, and the uploading of the patch as operations that potentially could be considered use.

“The oiling, adjusting, and calibrating processes do not change the machine tools’ name, use, or character. Additionally, the electrical voltage adjustments are performed to allow proper operational voltage … [and] as such, we find these adjustments also do not amount to a use,” CBP said. “After the lubricating, testing, repairing, adjusting, and calibrating processes, the machine tools maintain the same core function, but are merely repaired to be operational for the end customers,” it said.

CBP noted that “Knuth Machine is not seeking a determination regarding whether the goods qualify for same condition unused merchandise drawback,” and the company specifically said its “operations likely do not meet the stricter criteria” to be considered same condition. “[T]hus, exports to Mexico or Canada would likely be subject to duty-deferral restrictions under the North American Free Trade Agreement and the United States-Mexico-Canada Agreement,” CBP said.