As if guaranteeing Trade Agreements Act (“TAA”) compliance on U.S. government contracts was not difficult enough, two recent developments arguably make that job even more challenging. Specifically, seprate judicial fora have reached opposite country-of-origin results on the same set of facts ,and U.S. Customs and Border Protection (“CBP”) has proposed new origin rules that will do away with the well-known “substantial transformation” test.

By way of background, under the TAA, companies are only allowed to sell products to the U.S. government from the United States, certain “designated” countries, countries with whom the United States has free trade agreements, and certain Caribbean Basin and least-developed countries. To determine the origin of a manufactured item, regulation and jurisprudence has relied upon the well-known “substantial transformation” test derived from Customs law. Violations of the TAA can result in significant fines and penalties, open the company up to False Claims Act liability and qui tam lawsuits, and even result in suspension and debarrment from governhment contracting.

In two separate adjudications regarding Klinge Corp., the U.S. Government Accountability Office (“GAO”) (Kinge Corp., B-309930.2, 2008 CPD ¶ 102) and the U.S. Court of Federal Claims (“COFC”) (Kinge Corp. v. U.S., No. 08-134C, Fed. Cl. June 10, 2008), reached the opposite results regarding the origin of the same refrigeration units. The GAO ruled that the products at issue were from the United States (OK to sell under the TAA) and the COFC ruled that the products were from China (not OK to sell under the TAA). Neither for a seemed to rely heavily on Customs substantial transformation authority.

In the wake of the GAO and COFC Klinge determinations, CBP has issued a Notice of Proposed Rulemaking that proposes to eliminate the substantial transformation test in its entirety for all country-of-origin purposes, including marking. 73 F.R. 43385 (July 25, 2008). Specifically, the Notice proposes to substitute the substantial transformation test for a “tariff shift” analysis that is normally utilized in determining country of origin for preferential trade agreements like the NAFTA. If the substantial transformation test goes by the wayside, and TAA compliance has rested on decades of substantial transformation jurisprudence, companies are going to need to need a significant compliance upgrade. It may be the case that significant categories of products that could have been sold to the U.S. government under the TAA will no longer be eligible for sale. Comments on the proposed rule to do away with the substantial transformation test are due to Customs by Sept. 23, 2008.

While TAA compliance has always been taxing, these two developments make the task no easier.