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Bringing a new product to market often requires creating a product prototype. Developing a product prototype does not only allow companies to conduct a series of tests on their new or redesigned product, but also attract potential investors or get customer feedback before the mass production begins.
To promote product development and testing in the U.S., the U.S. allows for the importation of prototypes on a duty-free basis under the subheading 9817.85.01, Harmonized Tariff Schedule of the United States (HTSUS). In this article, we are going to look at what are the requirements of such importation.
What is the prototype?
For the purposes of the U.S. customs, the term “prototypes” as defined in U.S. Note 7(a) to subchapter XVII of Chapter 98, HTSUS, means originals or models of articles pertaining to any industry that are either in the preproduction, production or postproduction stage and are to be used exclusively for development, testing, product evaluation, or quality control purposes. Additionally, the term “prototypes” also applies to originals or models of articles that are either in the production or postproduction stage, and that are associated with a design change from current production (including a refinement, advancement, improvement, development, or quality control in either the product itself or the means for producing the product).
It is important to note that articles classifiable as prototypes under the HTSUS subheading 9817.85.01 encompass articles of any industry. Thus, it can be high-tech products, chemical compounds, or even articles of apparel provided that all other requirements set forth in section § 10.91 of Title 19, Code of Federal Regulations, (19 CFR) are met.
What are the requirements?
Now, let us look at what restrictions apply to articles that may be classified as prototypes. Section § 10.91 (b) of 19 CFR lists the following requirements:
- Limited quantity
Prototypes may be imported in limited noncommercial quantities in accordance with industry practice only. Therefore, it depends on the specific product and the industry when determining the “limited quantity.” It can be as much as 250 kg of chemical compound imported in bulk form for the sole purpose of phase III clinical trials, or it can also be various motor vehicle parts and components intended to build 70 prototype vehicles. Such determination can thus be made only on a case-by-case basis, and the U.S. Customs and Border Protection (CBP) may reject an entry if it considers that the quantity of the articles classified under HTSUS subheading 9817.85.01 is excessive for the relevant industry.
- Sale is prohibited after entry and prior to use
Prototypes or parts of prototypes may not be sold or be incorporated into other products that are sold into the commerce of the U.S., except that, after having been used for the purposes for which they were entered, they may be sold as scrap, waste or for recycling. In such a case, the duty must be paid at the rate of duty in effect for such scrap, waste, or recycled material at the time the protypes are entered for consumption, and importer must provide notice of such a sale to the CBP.
It is important to clarify that articles imported as prototypes do not only have to be sold as scrap, waste, or recycled after being used for the purposes they were imported. Such articles may also be destroyed, donated, retained, or exported. In such a case, there is no requirement to notify the CBP of such alternative disposition, nor are there any dutiable consequences.
However, it is important to note that articles imported under the subheading 9817.85.01 HTSUS must be used for the purposes they were imported, i.e., for development, testing, product evaluation, or quality control, and may not be exported, scraped, or recycled prior to being used for these purposes. Otherwise, the importer will have to pay the duty that would otherwise apply on such articles.
- Articles excluded from being prototypes
Some products are excluded from being classified as prototypes. These are articles that are, at the time of entry, subject to quantitative restrictions, antidumping orders, or countervailing duty orders. Therefore, before classifying a product as a prototype, it is necessary to check whether the article is not subject to these restrictions or orders.
- Articles subject to laws of another agency
In addition, articles that are subject to laws of agency other than CBP or that are subject to licensing requirements, may also be imported as prototypes provided that on top of meeting all the above-mentioned conditions, they must also meet all the applicable provisions of the laws regulating these articles.
As an example, we can think of a prototype medical device. The Food and Drug Administration (FDA) imposes some requirements on the importation of medical devices, therefore, when importing a prototype, the importer would not only need to meet the conditions set out in § 10.91 (b) of the Title 19 CFR, but also the requirements imposed by the FDA on such devices.
Administrative burden and liquidation
Chapter 98 is a special category within the HTSUS reserved for national use and contains many opportunities for duty savings. However, importers are sometimes reluctant to take advantage of it due to a high administrative burden, uncertainty whether the item would qualify for classification under this chapter, and more importantly, higher scrutiny from the CBP.
With prototype classification, there is, however, minimal administrative burden. The importer does not need to submit any documentation beforehand. The only downside is that the Port Director may request a submission of proof of actual use. If such proof is requested, the importer must provide it within three years after the date the article is entered (or withdrawn from warehouse). This has an impact on liquidation of such entry, which may be extended until the requested proof or declaration of actual use is received or until the three-year period from the date of entry allowed for the receipt of such proof has expired. If the requested proof of use is not timely received, the entry will be liquidated as dutiable under the tariff provision that would otherwise apply to the imported article. Thus, when taking advantage of this HTSUS code, it is necessary to keep the proper documentation for this type of entry for the period of three years in which the proof of actual use may be requested, as opposed to one year for “normal” entries.
That said, even though the administrative burden is low, the importer should always do a duty analysis before using the HTSUS code for prototypes. Oftentimes, the regular duty on the imported article is very low and the importer might want to import a limited number of items; or the “normal” duty is free. In such cases, it is simply easier (and cheaper as no analysis needs to be done) to import under the regular HTSUS code.
If you have any questions about importing prototypes, or you want to learn more about possible duty savings under chapter 98 HTSUS or other regulations, please contact Allyn International at firstname.lastname@example.org.
Contributor: Alena Gaye
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit www.allynintl.com.