The Federal Circuit in Pleasure-Way Industries, Inc. v. United States, 2017-1190 (Fed. Cir. 2018), recently confirmed that importers of motorhomes may not receive duty reductions for vans exported to Canada that were converted to motorhomes and returned to the US. In this case, the importer (Pleasure-Way) claimed that the 2.5% duty applicable to motorhomes (HTS subheading 8703.33) should only be assessed on the costs of converting vans into motor homes in Canada, and should not be assessed on the entire cost of the motorhome according to Harmonized Tariff Schedule of the United States (HTSUS) subheading 9802.00.50 (goods re-entered into the US after repair or alteration in Canada or Mexico).
Pleasure-Way is a manufacturer and seller of Class B motorhomes. Between January 2008 and September 2009, Pleasure-way bought 144 Sprinter vans and exported them for conversion into motorhomes which included fully plumbed bathroom and kitchen fixtures, water heaters, sleeping quarters, kitchen countertops with propane burners, microwave ovens, wall-mounted televisions, and refrigerators. The conversion also included installation of exterior features such as picture windows, porch lights, awnings, and running boards.
Under US law, “[g]oods re-entered after repair or alteration in Canada or Mexico” are only assessed duty on the costs of the repairs or alterations performed in Canada or Mexico. HTS subheading 9802.00.50. However, CBP regulations limit what constitutes qualifying “repairs or alterations” under this provision and state that the foreign activities must “not . . . create a new or commercially different good from the good exported from the United States,” and that the foreign activities must “not destroy the essential characteristics of . . . the good exported from the United States.” 19 C.F.R. § 181.64(a). The regulations also state that goods are not eligible for reduced duty treatment if the goods “are not complete for their intended use” when exported from the US to Canada or Mexico. 19 C.F.R. § 181.64(b).
Pleasure-Way had requested a ruling from CBP that the converted Sprinter Vans be classified under HTS subheading 9802.00.50. CBP initially granted the company’s request, but then changed its position. Based on the regulations, CBP determined that this provision does not apply to the motorhomes that were converted from vans. Pleasure-Way protested CBP’s decision and brought a case before the US Court of International Trade (CIT). The CIT ruled that Pleasure-Way was not entitled to lower duties because the operations in Canada created a new article of commerce and destroyed the essential character of the exported vans. The CIT relied on “changes to the pricing, the applicable tariff heading, the use, and the name of the vans.” Pleasure–Way Indus., Inc. v. United States, 38 I.T.R.D. (BNA) 1889, 2016 WL 6081818, at *6 (Ct. Int’l Trade Oct. 18, 2016).
The Federal Circuit affirmed the CIT decision and determined that Pleasure-Way, in changing the vans into motorhomes, created a commercially different good. The Federal Circuit focused on the CIT’s decision regarding differentiation in the marketplace. It determined that the motorhomes “no longer resembled the exported cargo vans,” and were “no longer classifiable as motor vehicles for the transport of goods.” The court also determined that the motorhomes were sold at “different price points than the exported vehicles.” Id. Therefore, the likely use and consumer base for the Sprinter vans as exported were broadly different from those for the motorhomes imported into the U.S. after leaving the Canadian conversion facility. Accordingly, the Pleasure-Way motorhomes were determined to be commercially different.
Importers may not take pleasure in this result – especially considering the fact that CBP had issued an affirmative ruling. Before investing in foreign operations based on duty reduction strategies, importers should understand that CBP has less than sixty days to revoke any previously issued ruling without notice and such revocation may be applied retroactively, provided the person to whom the ruling was issued has not acted in accordance with its terms and conditions. See, 19 C.F.R. §177.9(c) and §177.12(b); See also, HQ 963543, dated April 16, 2002. After having been in effect for sixty or more days, rulings become binding and may only be revoked prospectively after notice and comment procedures. 19 C.F.R. §177.12(b)(1)-(2)