United States government procurements are subject to a variety of “domestic preference” and “country of origin” requirements. Two of the more important and most frequently encountered are the Buy American Act (BAA) and the Trade Agreements Act (TAA). This update focuses on the application of the BAA and TAA and their implementing regulations to acquisitions of supplies and services; it does not address their application to contracts for construction.
II. Buy American Act
The BAA, 41 U.S.C. §§ 8302-8305, applies to contracts for supplies for use within the US that are above the “micro-purchase threshold” (currently $3,000). However, the BAA does not apply to acquisitions to which the TAA applies, see id. (b), and, in practice, most acquisitions of supplies, including commercial products, will be subject to the TAA rather than the BAA.
The BAA restricts, but does not prohibit, the acquisition of supplies that are not “domestic end products.” The BAA uses a two part test to determine whether a manufactured end product is “domestic”: (i) the end product must be “manufactured” in the US and (ii) the “cost of its components” produced or manufactured in US must exceed 50% of the cost of all components. FAR 25.003 defines a “component” in relevant part as an “an article, material, or supply incorporated directly into an end product.” The FAR does not define “manufactured;” however, case law provides some guidance.
There are several exceptions to the BAA which permit the government to acquire a “foreign end product” (i.e., one that is other than a “domestic end product”), including where the head of an agency determines that acquiring a domestic end product is not in the “public interest” or where there has been a determination of “nonavailablity.” The Government may also acquire a foreign end product if the price of a competing domestic end product is “unreasonable.” This exception is implemented through price evaluation preferences afforded to domestic end products, typically ranging from 6% (for large businesses) to 12% (for small businesses). The Government may acquire a foreign end product only if its evaluated price remains lower than that of an eligible domestic end product after the addition of the applicable price evaluation preference to the “foreign” offer.
There are also variations in the application of the BAA. For example, the application of the BAA by the Department of Defense (DOD) includes the concepts of “Qualifying country end product” and “Qualifying country end component,” as defined and explained in 252.225-7000 and 252.225-7001. Similarly, while the BAA generally applies to the acquisition of “commercial items,” the test for determining if an end product is “domestic” is relaxed for Commercial Off-The-Shelf (COTS) items; in those cases, the item must be “manufactured” in the United States but does not need to meet the 50% US cost of components test. Finally, the BAA also does not apply to the acquisition of “information technology” that is a commercial item. However, this exception is likely to be of limited effect in practice if the TAA applies to the acquisition.
III. Trade Agreements Act
The TAA, 19 U.S.C. § 2501, et seq., provides that products and services from a country with which the US has a trade agreement (“designated countries”) will be treated equally with US-made products, and requires the acquisition of only “US-made” or “designated country” end products. “Designated countries” are countries that are signatories to the World Trade Organization Government Procurement Agreement, countries with which the US has free trade agreements (e.g., NAFTA) which provide for reciprocal non-discriminatory treatment for public procurement purposes, and certain developing and Caribbean Basin countries. Countries such as China and India are currently not “designated countries.” The TAA applies to acquisitions of supplies and services with an estimated value of more $202,000, although some trade agreements have lower dollar thresholds.
The TAA does not apply to certain acquisitions, including those set aside for small businesses; to most acquisitions that are exempt from full and open competition under FAR parts 6.2 or 6.3; and to acquisitions of “arms, ammunition, or war materials, or purchases indispensable for national security or for national defense purposes.” It also provides for “nonavailability” determinations. However, the TAA does apply to contracts for commercial items, including GSA Multiple Award Schedule contracts, and, unlike the BAA, does not include an exception for commercial information technology. Finally, the TAA clause at DFARS 252.225-7021 permits acquisitions from “qualifying” as well as from “designated” countries.
Determining “Country of Origin”
A “US-made” end product is one that is either (i) “mined, produced or manufactured in the [US],” or (ii) “substantially transformed in the [US] into a new and different article of commerce with a name, character or use distinct from that of the article or articles from which it was transformed.” “Designated country end product” is similarly defined – the end product is wholly the growth, product or manufacture of a designated country, or was substantially transformed in a designated country. The TAA’s rule of origin provision is derived from Custom’s law principles for determining duties on imports.
Many country of origin determinations will turn on whether there has been a “substantial transformation.” Substantial transformation determinations can present complex issues of interpretation and application and must be considered on a case-by-case basis. Rulings of the Bureau of Customs and Border Protection (Customs), which has authority to make country of origin determinations for government procurement purposes, as well as for import duty and product marking purposes, can provide guidance in addressing country of origin issues. A contractor or supplier having to make a country of origin representation for government procurement purposes can seek either an “advisory ruling” or a “final determination” from Customs as to specific products or representative class(es) of products. An advisory ruling is a non-binding, non-reviewable written statement issued by the Director, Commercial Rulings Division, Headquarters, US Customs Service, under 19 C.F.R. Part 177, Subpart B. An advisory ruling discusses but does not formally apply country of origin legal principles to a particular set of facts. A final determination is a binding judicially reviewable statement issued by the Assistant Commissioner, Office of Regulations and Rulings, Headquarters, US Customs Service, in response to a written request submitted under the provisions of 19 C.F.R. Part 177, Subpart B. A final determination interprets and applies established country of origin laws and regulations to a specific set of facts. A final determination from Customs gives the highest degree of assurance regarding TAA status.
“Substantial transformation” for TAA purposes is not determined strictly by the value or percentage of US (or designated country) content (components), but, as Customs’ has recently noted, on the “totality of the circumstances,” including:
The country of origin of the item’s components, extent of the processing that occurs within a country, and whether such processing renders a product with a new name, character, and use are primary considerations in such cases. Additionally, factors such as the resources expended on product design and development, the extent and nature of post-assembly inspection and testing procedures, and worker skill required during the actual manufacturing process will be considered when determining whether a substantial transformation has occurred. No one factor is determinative.
For example, in determining the country of origin of computer equipment, Customs typically takes into account the country where the hardware is assembled and where the software was developed and downloaded onto the hardware. The analysis addresses the totality of the circumstances, including, in most cases, cost, assembly procedures, and programming. In most cases, assembly of computer equipment and downloading of software in the same country typically will be found to be a substantial transformation. In a recent advisory ruling, HQ H192146, June 8, 2012, Customs considered the country of origin of intangible software, not downloaded to any device or carrier medium. It concluded that substantial transformation occurred in the country in which the “software build” - - which it described as “the process of methodically converting source code files into standalone lines, routines and subroutines of software object code that can be run by a computer,” is performed.
For other products, including electronic devices, machinery and furniture, which include material or components from different countries, Customs often finds that final assembly transforms those inputs into a new and different product with a different name, character or use, and thus determines the country of origin. However, as noted above, no one factor is necessarily determinative and other factors such as the complexity of the assembly process, where the engineering, research and development were performed, and the country of origin and value of key components can be relevant to the outcome. In addition, the relative value and complexity of the inputs can also be relevant in determining the final product’s country of origin.
As noted above, the TAA also applies to acquisitions of services, subject to certain enumerated exceptions. FAR 25.402(a)(2) provides, in relevant part, that “[t]he contracting officer shall determine the origin of services by the country in which the firm providing the services is established.”
IV. Compliance Considerations
Country of origin provisions in the BAA and TAA are implemented through solicitation provisions and contract clauses. For example, the TAA clauses require an offeror to certify that the end products to be delivered are either US-made or designated country end products, and to identify those, if any, which are not. In addition, the Court of Federal Claims has applied the “Christian Doctrine” in holding the BAA applicable to a contract notwithstanding the omission of the applicable BAA clause.
Country of origin requirements in the TAA and BAA should be addressed prior to proposal submission and award, as non-compliance can present significant issues for contractors. For example, bid protests challenging compliance with the TAAare becoming more frequent, and a number of those protests have been successful.
Downstream, the courts and boards have upheld terminations for default based on BAA and TAA non-compliance. Non-compliance with the country of origin requirements in the BAA or TAA, including improper certifications of compliance, can also result in Government or third party “whistle-blowers” actions under the civil False Claims Act (“FCA”). The FCA provides for treble damages and substantial penalties and there have been a number of multi-million dollar settlements of FCA cases arising out of alleged violations of the TAA. In addition, criminal or civil fraud proceedings can give rise to administrative actions for suspension or debarment.
Finally, suppliers and subcontractors also need to be aware of country of origin requirements. For example, a reseller might ask a supplier for a representation or certification of TAA compliance and/or to accept an indemnification obligation.