New Advisory Ruling on Substantial Transformation of Software

Bulletin:  If you have a contract governed by the Trade Agreements Act (“TAA”), you know that each line item on that contract needs to be either manufactured or “substantially transformed” in the United States or a TAA designated country.  The substantial transformation test is often a matter of degree and is far from black and white.  Rather it is a gray area, a sliding scale that is highly fact dependent.

Vendors looking for assistance in making substantial transformation determinations often turn to advisory rulings issued by the Customs and Border Protection (“CBP”).  With respect to software applications, many vendors have been operating under older CBP rulings that implied that the location where the software was downloaded or where it was burned onto a CD was the sole factor in making a country of origin determination.

However, a new ruling by CBP turns this prior understanding on its head.  Issued on June 8, 2012, and released by the requestor, Talend, Inc. on December 6, 2012, the decision makes clear that the programming of some source code in non-designated countries (such as India or China) is permissible as long as certain key steps occur in the United States or a TAA designated country. 

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