Introduction

United States government procurements are subject to a variety of “domestic preference” and “country of origin” requirements.  One of the more important and most frequently encountered is the Trade Agreements Act (TAA).[i]   This update focuses on the application of the TAA and its implementing regulations to US government procurements of intangible computer software that is downloaded software, not software purchased on and with a disk, device or other carrier medium. 

The TAA, 19 U.S.C. § 2501, et seq., restricts the Government’s purchase of products (and services) to 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) that  provide for reciprocal non-discriminatory treatment for public procurement purposes, and certain developing and Caribbean Basin countries.  Countries such as China and India are currentlynot “designated countries.”  The TAA applies to most acquisitions of supplies and services with an estimated value of more $204,000,[ii] although some trade agreements have lower dollar thresholds and there are some procurements that are exempt from the TAA.[iii]  

Determining Country of Origin Under the TAA

Under the TAA, 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 principles of customs law, as administered by US Customs and Border Protection (CBP), for determining duties on imports.

Substantial Transformation

Country of origin determinations under the TAA frequently turn on whether there has been a “substantial transformation.”  “Substantial transformation” for TAA purposes is determined on a case-by-case basis considering 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.

CBP HQ Ruling H215555, July 13, 2012; see also FAR 25.001(c)(2).

Country of Origin for Intangible Software

The CBP, which has authority to make country of origin determinations for government procurement purposes, has issued numerous rulings over the years involving computer equipment and the origin of goods that included a software download to render them functional.[iv]  However, until recently CBP had never issued a ruling solely on software to be purchased and downloaded in intangible form, without any CD or equipment purchased at the same time.  CBP has now issued two decisions on intangible software, both of which focus on the site of the “software build.”

In a non-binding advisory ruling dated June 8, 2012, HQ H192146, CBP considered the country of origin Talend Inc.’s database management (DM) software and application integration (AI) software.  This software was to be sold to the US government by electronic download upon purchase, that is, the intangible purchase of the software without any device, disk or other carrier medium.  

The CBP described the process for development of the DM software as consisting of seven steps:  (1) research, (2) development of a Graphical User Interface, (3) development and writing of software specifications and architecture, (4) programing of source code, (5) software build, (6) testing and validation, and (7) preparation of the software for distribution (burning on to server media from which it will be downloaded when purchased).

The ruling also set out the country or countries in which each of the steps occurred and Talend’s estimates of the approximate percentage of the workload represented by each step of that process.  CBP explained that the programming involves creation of “components which will be used to build the machine-executable computer software, but it is not the final software product and in fact is not executable computer software code.”  It then described “the software build” as including, in part:

[T]he process of methodically converting source code files into standalone lines, routines and subroutines of software object code files into standalone lines, routines and subroutines of software object code that can be run by a computer.

CBP noted that the first three steps were performed in France and that the programming, or writing of source code components, occurred in China.  The software build, which Talend’s request represented accounted for about 20% of the workload, occurred in France and the testing occurred in China and burning for distribution occurred in France or the United States.  

CBP provided a similar description of the process applicable to the AI software.  It noted that some of the initial steps, such programming occurred in various countries, including France and Germany; while the software build occurred in either France or Germany, and the burning occurred in France.

CBP found that the DM software was substantially transformed in France because the “primary design and software build occur[red] in France.”   Likewise, it found that the AI software was substantially transformed “where the software build is performed (France or Germany).”  Accordingly, it found that the countries of origin for Government procurement purposes of the DM and AI software were France and France or Germany, respectively.  However, the CBP reached this result with almost no substantive analysis.  Rather, CBP repeated the test for “substantial transformation” noted above.  Then, CBP described the decision of the US Court of International Trade in Data General v. United States, 4 CIT 182 (1982),  in which the court found that programming a programmable read-only memory chip substantially transformed the chip and which CBP has repeatedly cited in rulings that involve downloading software to a device or programming some physical device.  However, CBP did not explain how the result for intangible software followed from the holding in Data General or why the software build was critical to CBP’s conclusion on substantial transformation.  Nonetheless this ruling strongly suggests that the site of the “software build” was determinative – at least in this one ruling.

CBP next addressed intangible software in a final determination  more than a year later (HQ H243606, 78 Fed. Reg. 75362 (Dec. 11, 2013)).  This ruling involved AvePoint’s DocAve Software which CBP described as “a comprehensive suite of applications for Microsoft SharePoint.”  CBP again described the software development process as consisting of the seven steps noted above.  It noted that several of the steps (including software build), were performed in the US and that the others (including programing of source code), were performed in the US and China.  Of the total product development effort, approximately 68% of the allocated work took place in the US and 38% in China. 

The CBP found that the “the software build performed in the US substantially transforms the software modules developed in China and the US into a new article with a new name, character and use.”  Accordingly, CBP found that the DocAve software was a product of the United States for purposes of Government procurement.  In doing so, CBP again relied primarily on the decision in Data General but also provided further explanation of the importance of the software build to its determination, stating:

During the software build process, the source code modules developed in the US and China are transferred to a server in the US, where the US software development team creates DocAve Software by compiling the source code into object code, and works out incompatibilities or bugs by re-writing or correcting source code as needed.  Moreover, the US team creates all the lines of the object code, makes all the software executable files in various versions and languages, and constructs the installation package as an easily installable unit.  In addition, 90% of the software development research is performed in the US, as are aspects of programming of the source code and testing and validation, such that 68% of the development of DocAve Software is attributed to work performed in the United States.  Given these facts, we find that the country of origin of DocAve Software is the United States for purposed {sic} of US government procurement.

Thus, while the other steps that occurred either partially or entirely in the United States were noted in the analysis, CBP singled out the “build” as the action that effected a substantial transformation of the product.

Consideration of these two rulings should be an important part of the compliance program for any company selling intangible software to the US government.   Further, as we have previously discussed, 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 CBP as to specific products or representative class(es) of products under 19 C.F.R. Part 177, Subpart B.[v]  An advisory ruling discusses but does not formally apply country of origin legal principles to a particular set of facts.  A final determination interprets and applies established country of origin laws and regulations to a specific set of facts and gives the highest degree of assurance regarding TAA status.