By Kathleen M. Murphy and Beata K. Spuhler
Despite software’s intrusion into almost every aspect of our lives, U.S. Customs and Border Protection (CBP) has issued very little guidance on how to determine a software’s country of origin, particularly in situations where a substantial transformation may have occurred. CBP guidance on this issue could touch Government procurement requirements, free trade agreements, and the valuation of imported goods. So, a recent ruling released by CBP regarding the substantial transformation of software could be very important.
CBP issued the ruling on June 8, 2012. but publicly released it just last week. Although the ruling at issue is a non-binding, advisory ruling, it is very useful as evidence of how CBP may come to regard software’s substantial transformation in the future. In HQ H192146, CBP considered the country of origin of database management systems for purposes of determining whether an article is or would be a product of a designated country for purposes of granting waivers of the “Buy American” Act restrictions. Under the applicable rule of origin, an article is a product of a country only if it is (i) wholly the growth, product or manufacture of that country or (ii) it has been substantially transformed into a new and distinct article of commerce with a name, character or use distinct from that of the article from which it was so transformed.
In order to determine where the software originated, CBP analyzed the steps of the manufacturing process. For both database management systems, the research, development and specification and architecture of the system were completed in European countries while the programming of the source code was done in China. The “software build” occurred in France or Germany and consisted of source code being methodically converted into standalone lines and incompatibilities or bugs being exorcised by re-writing and correcting code. The systems were then tested and validated in China or Germany and then burned onto server media in France or the United States.
CBP applied the analysis laid out by the Court of International Trade in Data General v. United States, 4 CIT 182 (1982) to determine which step altered the character of a program. In Data General, the CIT held that programming substantially transformed a memory chip by changing the pattern of interconnections, which gave the chip its “essence.” Here, CBP found that the systems were substantially transformed in the country where the software build occurred.
Thus, when considering whether your software meets the requirements of a free trade agreement or government procurement requirements, or whether the design work is an assist for valuation purposes, HQ H192146 can be instructive. Specifically, your software may have been substantially transformed in the country in which the source code is built into a program.
If you have any questions about this ruling and its possible application to your business, please contact Kathi Murphy, Beata Spuhler or any member of Drinker Biddle & Reath, LLP’s Customs & International Trade team.