HQ 555198: GSP Direct Costs of Processing Operations

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 555198
                         August 25, 1989

CLA-2  CO:R:CV:V  BJO

CATEGORY: Classification

Mr. Richard G. Seley
Rudolph Miles & Sons, Inc.
4950 Gateway East
P.O. Box 144
El Paso, Texas 79942

RE: GSP Direct Costs of Processing Operations

Dear Mr. Seley:

     This is in response to your letter on behalf of Electrical
Systems Division of Bristol Corp. ("importer") dated November 28,
1988, in which you request a ruling that certain fringe benefits
are direct costs of processing for purposes of the Generalized
System of Preferences (19 U.S.C. 2461-2466).  We regret our
delay in responding to your request.

FACTS:

     The importer has a plant in Mexico for the assembly and
packaging of small electrical appliances.  You state that in
addition to a minimum wage, the Mexican government requires the
importer to pay the plant employees vacation pay plus a 25%
bonus and a Christmas bonus, and pay the Mexican government, on
behalf of each individual employee, social security taxes,
employee housing fund, federal payroll taxes, state payroll
taxes, and a nursery tax.  In addition, you state that the
importer supplements the employees' wages by paying directly to
the employees an attendance bonus and, to the extent necessary
for the completion of job tasks related to production of GSP
eligible articles, travel expense and tuition reimbursement.
Finally, you state that the importer provides a cafeteria subsidy
to the employees to allow them to eat at reduced prices, a
transportation subsidy to allow employees to travel to and from
work at reduced prices, and a sports team subsidy which may be
used by some employees.  You ask whether these payments and
subsidies, to the extent they are made to employees engaged in
direct labor and to the extent they are included in appraised
value, may be considered direct costs of the processing operation
for purposes of the GSP.

                              - 2 -

ISSUE:

     Whether vacation pay, Christmas bonuses, social security
taxes, housing funds, federal payroll taxes, nursery taxes, and
cafeteria, transportation, and sports team subsidies paid to or
on behalf of employees directly engaged in production of GSP-
eligible articles are direct costs of processing operations for
GSP purposes.

LAW AND ANALYSIS:

     Under the GSP, eligible articles imported directly from
designated beneficiary countries are entitled to duty-free entry
if the sum of (1) the cost or value of materials produced in the
BDC, plus (2) the direct costs of processing operations performed
in such BDC is not less than 35% of the appraised value of the
article at the time of its entry into the customs territory of
the U.S.  See 19 U.S.C. 2463.

     Direct costs of processing operations are those costs which
are either directly incurred in, or which can be reasonably
allocated to, the growth, production, manufacture, or assembly of
the specific merchandise under consideration.  19 CFR 10.178(a).
They include "all actual labor costs involved in the growth,
production, manufacture, or assembly of the specific merchandise,
including fringe benefits," but do not include general expenses
of doing business which are not so related, such as
administrative salaries.  19 CFR 10.178(a)(1) and (b).

     In accordance with that definition, our previous rulings
have generally held that whether a particular labor cost is a
direct cost of processing is determined by the function that the
employee performs.  See HQ 555043, dated November 21, 1988.  For
example, we have ruled that Christmas bonuses, vacation pay,
social security taxes, cost of a nursery, housing allowances,
payroll taxes, and the cost of daily bus transportation are
direct costs of the processing operation to the extent they are
costs incurred on behalf of employees who are directly engaged in
production of GSP eligible articles.  See HQ 555316, dated April
26, 1989; HQ 555043, dated November 21, 1988; HQ 541689, dated
March 7, 1978.  On the other hand, costs of employees who
perform administrative functions, such as a general manager, a
personnel manager, or accounting and payroll employees, are not
direct costs.  See Internal Advice Request 83/76 (HQ 541249,
dated February 24, 1977).  If a benefit, such as a nursery, is
available to both employees directly engaged in production of GSP

                              - 3 -

eligible articles and to those who perform administrative tasks,
then only that portion of the cost of the benefit which may be
reasonably allocated to production employees is a direct cost.
See HQ 555043.  If the payment or benefit is for employees
directly engaged in production of GSP eligible articles, it is a
direct cost of processing, whether it is in the form of a payment
directly to the employee, such as a bonus, payment to a
government agency, such as payroll or social security taxes, or
payment to a third party, such as cafeteria or transportation
subsidies.

     If, as you state, the described costs are paid to, or
incurred on behalf of, employees directly engaged in the
production of GSP eligible articles, they are direct costs of
the processing operation, subject to the limitations described
above.

CONCLUSION:

     The costs of vacation and Christmas bonuses, social security
taxes, housing funds, federal payroll taxes, nursery taxes, and
cafeteria, transportation, and sports team subsidies, to the
extent they are incurred for employees directly engaged in
production of GSP eligible articles, are direct costs of
processing operations and therefore may be included toward the
GSP 35% value-content minimum.

                                Sincerely,




                                John Durant, Director
                                Commercial Rulings Division