Protest and Application for Further Review 0401-24-103269; Prototype; Lithium-ion Batteries

H345030
April 15, 2025
OT:RR:CTF:VS H345030 ACH
CATEGORY: Valuation Center Director Electronics Center of Excellence and Expertise U.S. Customs and Border Protection 301 E. Ocean Blvd. Suite 1400 Long Beach, CA 90802 RE: Protest and Application for Further Review 0401-24-103269; Prototype; Lithium-ion Batteries Dear Director: This is in response to the Application for Further Review (“AFR”) of Protest No. 0401- 24-103269, received on December 30, 2024, and filed against U.S. Customs and Border Protection's (CBP’s) decision to liquidate the merchandise at issue under subheading 8507.80.82, Harmonized Tariff Schedule of the United States (“HTSUS”), which provides for “Electric storage batteries, including separators therefor, whether or not rectangular (including square); parts thereof: other electronic storage batteries: other.” The Protestant, Flux Marine Ltd. (“Flux Marine”), seeks classification under subheading 9817.85.01, HTSUS, which provides for “Prototypes to be used exclusively for development, testing, product evaluation, or quality control purposes.” FACTS: Flux Marine is a developer of electronic propulsion systems for boats. Flux Marine has been engaged in research and development (R&D) since 2015. The goal has been to create purpose-built electric propulsion systems for the demanding conditions of the marine environment. The electric propulsion systems include all-electric outboard motors that are paired with—and are designed to work seamlessly with—high-performance battery packs and smart software to deliver a quiet and efficient boating experience with minimal maintenance requirements. At the time of this Customs entry, the company had been working on the development of its electrical propulsion system for boats since 2015 and had not yet produced or sold a commercial product. It was building prototype systems for R&D design iteration, destructive testing, thermal cycling testing, dyno test, rigging, and life cycle testing.

The subject Customs entry involved the importation of lithium-ion batteries from China. The batteries were declared as prototypes under subheading 9817.85.01, HTSUS. The underlying tariff classification declared for the batteries was subheading 8507.80.82, HTSUS. Customs issued a CBP Form 28 Request for Information, asking for transaction documents, a Statement of Actual Use, and a justification for use of the prototype provision. Flux Marine provided an Actual Use Certification, and transaction and shipment documents. Customs issued a CBP Form 29 Notice of Action Proposed, stating that the definition of prototypes is “originals or models of articles which are either in the pre-production, production, or postproduction stage” and that articles claimed as Prototypes may be imported only in limited, noncommercial quantities that are usual in the industry. Customs proposed reclassification to the underlying tariff classification declared on the Customs entry, subheading 8507.80.82, HTSUS. Flux Marine provided a response, explaining the use of the batteries and provided a table showing their planned use. Flux Marine stated that its R&D could require more than the quantity of batteries imported in this Customs entry. On June 21, Customs issued a CBP Form 29 Notice of Action Taken, denying Flux Marine’s prototype claim and directing tariff classification in subheading 8507.80.82, HTSUS, and, since the battery modules are of Chinese origin, payment of 25% China 301 additional duties under subheading 9903.88.02, HTSUS. Customs liquidated the subject entry on July 5, 2024. ISSUE: Whether the entered merchandise is entitled to treatment as prototypes under subheading 9817.85.01, HTSUS and, if not, whether the entered merchandise should be classified under subheading 8507.80.82 or 8507.60.00, HTSUS. LAW AND ANALYSIS: a. The batteries should be classified under subheading 8507.60.00. Classification under the HTSUS is in accordance with the General Rules of Interpretation (GRIs). GRI 1 provides that the classification of goods is determined according to the terms of the headings of the tariff schedule and any relative section or chapter notes. In the event goods cannot be classified solely on the basis of GRI 1, and if the headings and legal notes do not otherwise require, the remaining GRIs 2 through 6 will then be applied in order. The HTSUS heading and subheadings at issue are the following: 8507 Electric storage batteries, including separators therefor, whether or not rectangular (including square); parts thereof: * * * 2

8507.60 Lithium-ion batteries * * * 8507.80 Other storage batteries: It is undisputed that the subject batteries are classified under heading 8507, HTSUS, meaning the principal dispute occurs at the six-digit level. The batteries are eo nomine classified as lithium-ion batteries based on the materials provided, include labeling and advertising of the batteries as lithium-ion batteries. Therefore, they are classified under subheading 8507.60, which provides for “[l]ithium-ion batteries.” b. Prototypes. Pursuant to section 1433 of the Product Development and Testing Act of 2000 (PDTA), enacted as part of the Tariff Suspension and Trade Act of 2000 (Pub.L. 106-476, § 1433), articles described as “prototypes” under the Act may be imported duty-free. To provide for duty-free entry of prototypes, section 1433 of the PDTA inserted subheading 9817.85.01 into Subchapter XVII of Chapter 98, HTSUS, which states: Prototypes to be used exclusively for development, testing, product evaluation, or quality control purposes … U.S. Note 7 to Subchapter XVII, Chapter 98, HTSUS (“Note 7”), provides, in relevant part: The following provisions apply to heading 9817.85.01 : (a) For purposes of this subchapter, including heading 9817.85.01 , the term “prototypes” means originals or models of articles that – (i) are either in the preproduction, production, or post production stage and are to be used exclusively for development, testing, product evaluation, or quality control purposes; and (ii) in the case of originals or models of articles that are either in the production or postproduction stage, 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). For purposes of clause (i), automobile racing for purse, prize, or commercial competition shall not be considered to be "development, testing, product evaluation, or quality control." 3

(b) (i) Prototypes may be imported only in limited noncommercial quantities in accordance with industry practice. (ii) Except as provided for by the Secretary of the Treasury, prototypes or parts of prototypes may not be sold after importation into the United States or be incorporated into any other products that are sold. . . . Flux Marine’s protest cites to Headquarters Ruling Letter (“HRL”) H166815, dated August 1, 2011, for support that the subject batteries should be treated as prototypes. In H166815, Honda imported developmental units of the Honda Fit EV and spare parts for maintaining these vehicles. Though Customs acknowledged that the spare parts were used to develop prototypes, the ruling also held that the spare parts themselves were prototypes. This is because the spare parts were considered preproduction parts imported for testing and product evaluation. They were also still subject to evaluation once installed in the EV vehicles. Here, Flux Marine has provided no evidence that the batteries are in preproduction or are subject to a design change from their current production. The documents provided by Flux Marine indicate that the batteries are being sold as completed goods and not as prototypes. The manufacturer states that they are standard modules. This indicates that the batteries are not specific to Flux Marine’s designs or subject to change based on its needs. Therefore, the batteries are not prototypes. HOLDING: By application of GRIs 1 and 6, the subject batteries are classified in heading 8507, HTSUS, and specifically in subheading 8507.60.00, HTSUS, which provides for “Electric storage batteries, including separators therefor, whether or not rectangular (including square); parts thereof: Lithium-ion batteries.” The column one, general rate of duty for merchandise of this subheading is 3.4% ad valorem. The subject batteries do not meet the requirements for classification as prototypes under subheading 9817.85.01, HTSUS. Pursuant to U.S. note 20 to subchapter III, chapter 99, HTSUS, products of China classified under subheading 8507.60.00, HTSUS, unless specifically excluded, were subject to an additional 7.5 percent ad valorem rate of duty. At the time of importation, an importer was required to report the chapter 99 subheading, i.e., 9903.88.15, HTSUS, in addition to subheading 8507.60.00, HTSUS, listed above. You are instructed to DENY the protest, except to the extent reclassification of the merchandise as indicated above results in a net duty reduction and partial allowance. You are instructed to notify the Protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the 4

Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, or other methods of public distribution.
Sincerely,
for Yuliya Gulis, Director Commercial and Trade Facilitation Division 5