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A Perfect Asymmetry: The Interplay Between the
Buy American Act’s Information Technology
Exception and the Trade Agreements Act
BY SEAN P. BAMFORD
Enacted in 1933, the Buy
American Act (BAA), 41
U.S.C. §§ 10a et seq., which
generally applies as a preference for domestic products,
was a legislative attempt to
protect American workers
against competition from inexpensive foreign labor. In
this regard, the BAA is a
classic example of New Deal
legislation. Until 2004 this early twentieth century legislation restricted how the federal government procured information technology (IT) products, most of which had not
been conceived until the late twentieth or early twentyfirst century. The BAA restriction was simply worlds apart
from the reality of the commercial marketplace for IT
products, and, until recently, this disconnect hamstrung
the government in its acquisition of IT products.
On January 23, 2004, President George W. Bush signed
the Omnibus Appropriations Bill (Pub. L. No. 108-199),
which contained in Title V, Section 535, an exception to
the BAA for the purchase of IT products that are commercial items. Section 535 stated:
In order to promote Government access to commercial information technology, the restriction on purchasing no domestic
articles, materials, and supplies set forth in the Buy American
Act (41 U.S.C. 10a et seq.), shall not apply to the acquisition
by the Federal Government of information technology . . . that
is a commercial item.
The initial question posed after the passage of the IT exception was whether this language would be included in
future appropriation acts. The IT exception to the BAA
applies only when an agency uses appropriated funds in a
year for which this exception is included in an appropriations act, as is the case for Fiscal Years 2004 through 2007.1
In 2006, Federal Acquisition Regulation (FAR) section
25.103, which covers exceptions to the BAA, was amended to add the IT exception.2 Though no one within the
Sean P. Bamford is an associate in the Washington, D.C., offices of
Kirkpatrick and Lockhart Preston Gates Ellis LLP.
federal government contracting community viewed the
passing of the IT exception as a deus ex machina3-type resolution to the problems that agencies faced when procuring IT products, most agree that it was a step in the right
direction. However, one significant issue remains: the
interplay between the Trade Agreements Act (TAA) and
the IT exception.
If a contractor’s product meets the IT exception requirements, that product is exempt from the requirements of the
BAA. This does not mean, however, that the contractor
escapes all source restriction statutes and regulations. As
things currently stand, if the acquisition has a value greater
than $193,000, the TAA, which requires that an agency
purchase only United States or “designated country”4 products or services, applies. Consequently, in application, the
BAA IT exception provides only nominal relief to government agencies when procuring IT products.
Unlike the BAA, the TAA is not protectionist legislation; it was enacted to open government procurements to
United States trade partners. However, the TAA, like the
BAA, can trace its roots back to the New Deal. The Hawley-Smoot Tariff Act,5 passed by Congress in 1930, imposed
high tariffs on many of the United States’s trading partners.
Many of those trading partners responded to HawleySmoot by placing tariffs on U.S. products. The “tariff war”
started by Hawley-Smoot was one of the contributing factors to the Great Depression.6 In response to the impact of
Hawley-Smoot, President Franklin D. Roosevelt introduced
the Reciprocal Trade Agreements Act of 1934.7 The Reciprocal Trade Agreements Act amended Hawley-Smoot and
permitted the president to enter into trade agreements with
other countries by his own signature. Furthermore, concessions or tariff cutoffs were given to foreign countries only
when the same or similar concessions or tariff cutoffs were
offered to the United States. The Reciprocal Trade Agreements Act begot the General Agreement on Tariffs and
Trade (GATT), which begot the Trade Act of 1974,8 which
eventually led to the Trade Agreements Act of 1979,9
which implemented the Trade Act of 1974.
Although the BAA and TAA share a similar lineage,
there is one critical difference between their respective requirements. Whereas the BAA provides a preference for
domestic end products, the TAA prohibits the government
from purchasing products that are not U.S.-made end
products or designated country end products, unless one of
the TAA’s limited exceptions applies. Thus, the BAA’s IT
Number 43 • Volume 2 • Winter 2008 • American Bar Association • The Procurement Lawyer
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exception provides limited relief to the government. Most,
if not all, IT procurements exceed the $193,000 TAA
threshold, and consequently, the government is still unable
to purchase many of the IT products that it wishes to procure because of the restrictions of the TAA.10
A “Legislative Palindrome”: Defining the IT
Exception
The BAA applies to the acquisition of supplies by the federal government that are to be used in the United States if
the contract (a) exceeds the micropurchase threshold, or
(b) has a supply portion for services that requires a contractor to furnish supplies in excess of the micropurchase
threshold, unless an enumerated exception applies.11 In
civilian agency acquisitions, an offeror will meet the requirements of the BAA if it offers a product manufactured
in the United States and the cost of the product’s domestic
components exceeds 50 percent of the cost of all components. If the value of the acquisition exceeds any of the
Free Trade Agreements (FTA) or Israeli Trade Act dollar
thresholds found at FAR 25.402(b), then products of FTA
countries or Israel are treated as if they were United States
end products for evaluation purposes.12 The BAA applies
slightly differently to acquisitions made by Department of
Defense (DOD) agencies. In DOD acquisitions, an offeror
will meet the requirements of the BAA if it offers a product
manufactured in the United States or a qualifying country13 and the cost of the domestic or qualifying country
components of that product exceeds 50 percent of the cost
of all components. Furthermore, unless the DOD acquisition is for a product covered under Defense Federal Acquisition Regulation Supplement (DFARS) 225.401-70,
products of FTA countries will not be treated as United
States end products unless the FTA country is also a qualifying country as defined in DFARS 225.872.14
Whether a product meets the BAA “end product” test
hinges on whether a product is manufactured in the United
States, a qualifying country, FTA country, or Israel. Determining whether a process constitutes “manufacturing”
hinges on whether the purchased product is made suitable
for its intended use, and its identity is established, by a
process that occurs in the United States.15 However, there
are certain exceptions to the BAA that allow agencies to
purchase “noncompliant products.” The most common of
these applies when the cost of the domestic product is
deemed unreasonable.16 In such instances an agency may
purchase a noncompliant (i.e., nondomestic) end product.
In making this determination, the agency will apply an
evaluation factor whereby the agency “marks up” the price
of nondomestic offers.17 In practice, the IT exception prevents the application of this evaluation factor. However,
even prior to the enactment of the IT exception most agencies rarely applied the evaluation factor when purchasing
IT products because the TAA applied to the acquisition.
Although the IT exception provides limited relief to
agencies in their procurement of IT products, it does serve
as a reprieve from the BAA requirements. Therefore, it is
still important to understand the parameters of the IT exception. For the IT exception to apply to a product acquired by the government, the product must be (1) information technology, and (2) a commercial item. FAR 2.101
defines “information technology” as
any equipment, or interconnected system(s) or subsystem(s) of
equipment, that is used in the automatic acquisition, storage,
analysis, evaluation, manipulation, management, movement,
control, display, switching, interchange, transmission, or reception of data or information by the agency.
Included in this definition are “computers, ancillary
equipment (including imaging peripherals, input, output, and storage devices necessary for security and surveillance), peripheral equipment designed to be controlled by the central processing unit of a computer,
software, firmware and similar procedures, services (including support services), and related resources.”18 Expressly excluded from the definition of “information
technology” is any equipment that
(i) Is acquired by a contractor incidental to a contract; or
(ii) Contains imbedded information technology that is used as an
integral part of the product, but the principal function of which is
not the acquisition, storage, analysis, evaluation, manipulation,
management, movement, control, display, switching, interchange, transmission, or reception of data or information. For example . . . medical equipment where information technology is
integral to its operation, are not information technology.19
Further, as noted above, in order for the IT exception to
apply the product being acquired must, in addition to
being an IT product, also be a commercial item. Generally,
a commercial item, as defined by FAR 2.101, is an item
that: (1) is of a type customarily used by the general public
(i.e., has been sold or licensed or offered for sale or lease to
the general public); (2) evolved from an item customarily
used by the general public through advances in technology
or performance, and is not yet available in the commercial
marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under
a government solicitation; (3) is of a type customarily used
by the general public or evolved from such an item but has
been modified in a manner customary in the commercial
marketplace, or subjected to minor modifications of a type
not customarily available in the commercial marketplace
that were made to meet federal government requirements;
or (4) is a nondevelopmental item “if the procuring agency
determines the item was developed exclusively at private
expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.”20 As
long as an item meets both requirements of the IT excep-
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tion, it is exempt from the requirements of the BAA.
Thus, for example, if an agency was purchasing standard, commercially available desktop computers using a
General Services Administration (GSA) Multiple Award
Schedule (MAS) contract, the IT exception to the BAA
should apply to the procurement. The BAA applies to all
purchases of supplies that exceed the micropurchase
threshold, generally $3,000. The desktop computer procurement would likely exceed the micropurchase threshold
because the value of a GSA MAS procurement is not
based on the value of the purchase order, but rather on the
estimated value of the MAS contract in total. Because a
desktop computer is used for the storage, analysis, evaluation, manipulation, management, movement, control, display, transmission, or reception of data or information and
is commercially available, the IT exception would apply. It
is safe to assume, however, that the value of the MAS contract under which this hypothetical purchase was made is
greater than $193,000, the World Trade Organization
Government Procurement Agreement (WTO GPA)
threshold (commonly referred to as the “TAA threshold”),
and therefore the TAA would apply to this procurement.21
It is interesting to note that prior to the passage of the
IT exception, the result in this hypothetical would have
been the same.22 What Congress did in passing the IT exception was essentially to create a “legislative palindrome”—the problem facing agencies is the same both before and after the passage of the legislative solution. This is
not to say that the IT exception did not provide some relief
to the government. The BAA will not apply to acquisitions of items covered by the IT exception between the
micropurchase threshold and the TAA threshold, currently $193,000. Unfortunately, very few IT acquisitions fall in
the $3,000 to $193,000 range. Consequently, in practice
the TAA will apply to nearly all acquisitions that are exempt from the BAA under the IT exception.
Metaphysical Soup: The TAA and the Substantial
Transformation Test
The TAA is the means by which the WTO GPA, FTAs,
and the Israeli Trade Act are approved and implemented.
The TAA is implemented in FAR subpart 25.4 and agency
supplements thereto.23 For a product, including an IT product, to meet the requirements of the TAA, the product
must be wholly grown, produced, or manufactured in the
United States or a designated country,24 or be substantially
transformed in the United States or a designated country
“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.”25 Whether an IT product
is a United States end product or designated country end
product is generally, with the exception of certain articles
of software, determined by applying the substantial transformation test, since most products are an amalgam of
physical components or source code (modules or add-ons)
manufactured and/or programmed throughout the world.
The focus of the substantial transformation test is where
(i.e., in which country) the product took on its “essential
character” and form. When dealing with sophisticated
technology, the determination as to whether an item has
been substantially transformed is “a mixed question of
technology and customs law, mostly the latter.”26 A common issue in the procurement of IT hardware products is
the determination of whether an assembly of components
changes the character of an article.
Part of the Machine: Applying the TAA to IT Hardware
The U.S. Customs and Border Protection (CBP) agency set
forth the standards to determine when an assembly operation constitutes a substantial transformation in Customs
Service Decision (C.S.D.) 85–25 (September 25, 1984). In
order for an assembly to substantially transform an article, it
must be complex and meaningful, as opposed to a simple assembly. Factors to be considered include the time, cost, and
skill involved, the number of components assembled, and
the number of operations. Furthermore, this analysis often
hinges on whether the individual components lose their
identity and become an integral part of the new article.27
Although very few court decisions address how the substantial transformation test applies to IT hardware products, several CBP rulings apply the general standards noted
above. In Headquarters Ruling Letter (HRL) 734518 (June
28, 1993), CBP held that merely implanting a central processing unit (CPU) chip—the “brains” of the computer—
onto a motherboard does not substantially transform a
computer because no complex and meaningful assembly
occurred. CBP reasoned that there was no substantial
transformation in that case because the most significant aspect of a CPU comes from its development and production, rather than its implantation on a motherboard.28 Further, CBP did not find the fact that implanting the CPU
onto the motherboard resulted in a tariff shift to be dispositive. A tariff shift occurs when, as a result of assembly or
processing, an item’s tariff classification under the Harmonized Tariff Schedule of the United States (HTSUS)
changes. Although supportive of a substantial transformation, a tariff shift does not in an of itself demonstrate that
the processing or assembly has resulted in a substantial
transformation.
The impact of HRL 734518 in the IT hardware arena
becomes clear when it is read together with Customs Ruling Letter NY C88416 (May 29, 1998). In NY C88416,
CBP was asked to determine the proper tariff classification
of a variety of notebook computer subassemblies. One such
notebook computer subassembly included a motherboard/system basic input/output system (BIOS), flat panel
display, keyboard/keyboard BIOS, hard drive, floppy drive,
modem, and CD-ROM drive, but was imported without a
CPU chip. CBP held that this subassembly did not have
the essential character of a complete or finished digital pro-
Number 43 • Volume 2 • Winter 2008 • American Bar Association • The Procurement Lawyer
Published in The Procurement Lawyer, Volume 43, Number 2, Winter 2008. © 2008 American Bar Association.
Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or
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cessing unit (a notebook computer), and thus it was characterized under HTSUS as parts and accessories of a digital
processing unit. Therefore, reading HRL 734518 and NY
C88416 together, it is CBP’s position that implanting a
CPU chip onto a foreign-assembled notebook computer
subassembly in the United States would not result in a substantial transformation, even though it might result in a
tariff shift. This is in spite of the fact that the essential
character of a notebook computer would be defined by implanting the CPU. However, since the implanting of the
CPU chip is merely the merging of two completed products, there is no “complex and meaningful assembly”; thus,
no substantial transformation would occur.29
As discussed above, there are cases in which the processing and/or assembling of components does not result in
a substantial transformation despite the fact that the processing and/or assembly define an item’s essential character. Likewise, there are some instances in which no amount
of additional processing, no matter how complex, would
result in a substantial transformation because the essential
character of an item has already been defined. Take for example a laptop computer, which when imported “is capable of executing, without human intervention, a processing program which requires [it] to modify [its] execution, by
logical decision during the processing run.”30 Here, the laptop computer’s essential character would already be established, as it would be capable of processing information inputted by a user and could display its results to the user.31
At this point no further meaningful processing could be
performed on the end item, save its being a component of a
large/complex end item.
The concept of “essential character” was determined to
be dispositive for purposes of substantial transformation, although in a different context, in HRL 561734 (March 22,
2001).32 In that case, Sharp Electronics Corporation requested that CBP issue an advisory opinion, pursuant to 19
C.F.R. § 177.25, with regard to the country of origin of its
“all-in-one” machines (printer, copier, and fax machines).
CBP held that all-in-one machines assembled in Japan
were a product of Japan for purposes of federal government
procurements. The all-in-one machines were assembled
from 227 parts (108 parts obtained from Japan, 92 from
Thailand, three from China, and 24 from other countries)
and eight subassemblies, each of which was assembled in
Japan, that were joined together in Japan to create the finished multifunctional machine. Two facts considered crucial by CBP were that one of the subassemblies produced
in Japan, the scanner unit (which was described as the
“heart of the machine”), defined the use of the end item,
and that the individual parts and components lost their
separate identities in Japan when they became part of the
multifunctional machine. Timing will be the key issue
when determining whether a substantial transformation
occurred to an item based on the definition of the product’s
essential character. Generally, once a product’s essential
character is established, no amount of further processing
will result in a substantial transformation. However, where
the essential character of a product is determined post-importation via meaningful assembly or processing, a substantial transformation may occur.
This does not mean that computer or IT hardware will
only be considered substantially transformed when the
hardware was assembled via complex operations. To the
contrary, the programming of hardware could also be significant enough to trigger a substantial transformation. In
Data General Corp. v. United States, 4 CIT 182 (1982), the
Court of International Trade held that a PROM (programmable read-only memory) fabricated in a foreign country
but programmed in the United States for use in a computer
circuit board assembled abroad was substantially transformed in the United States. As in the product assembly
cases, the cost and skill involved in the transformative
process played a prevalent role in the court’s decision. In
Data General the programming introduced an electronic
pattern onto the circuit and gave the PROM the function
of a read-only memory. The court held that the essence of
the PROM—its pattern of interconnection or stored memory—was established by programming, and thus a substantial transformation occurred. In a case like Data General,
where the substantial transformation is the result of programming, the programming must make a permanent
change to the item and be considered integral to proper
functioning of the end item, thus creating a new and different article of commerce, for programming to result in a
substantial transformation.33
The Court of International Trade and CBP decisions
illustrate that there is no hard and fast rule that can be applied to determine when an IT hardware product has been
substantially transformed; the inquiry will be very fact-specific. However, the court and the CBP have provided these
guiding principles: (1) in order for a process to substantially
transform an article, it must be complex and meaningful,
and not mere assembly; and (2) when combining multiple
components, they must lose their individual identities and
become an integral part of the new article. Further, while
in some cases a substantial transformation will occur where
and when the product takes on its essential character, this
is not always dispositive in determining if a substantial
transformation occurred.
The Paradox Principle: Applying the TAA to
Software Procurements
While determining the country of origin of an IT hardware
product can be less than clear, determining the country of
origin for software is murky at best. The difficulty stems in
part from the very nature of software. Unlike IT hardware,
which is a tangible product that an agency will own, when
an agency purchases software it is merely granted permissions and rights that allow it to use the software with certain
restrictions. Based on this distinction, some have questioned
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whether the TAA applies to software at all because the
agency is not purchasing a product, but is instead granted a
license. Although this position makes some sense conceptually, it breaks down upon a review of the FAR and DFARS.
FAR 25.403(b)(1) establishes how and when the TAA
applies to rentals, leases, and lease-to-own transactions.
Arguably, the licensing of software is similar to leasing or
renting a product, since the agency does not “own” the
product under either transaction. Although there are some
distinctions between the two transactions—for example,
when leasing a car, any authorized government user can
use it, but when licensing software, a limited number of
agency employees are permitted to use the software—in
both cases the agency’s rights and obligations are governed
by a contract. From the perspective of DOD, this
lease/purchase distinction is not material and does not remove software from the purview of the TAA. DFARS
225.401-70, which lists the federal supply groups (FSG)
covered by the TAA in DOD procurements, includes FSG
70, “General purpose ADPE [automated data processing
equipment], software, supplies, and support equipment,” as
items covered by the TAA. Accordingly, it is DOD’s position that software is covered by the TAA.
Although the issue of whether the TAA applies to software may be fairly easily resolved, the real debate centers
on exactly how to apply the TAA to software procurements.
Applying the TAA to IT hardware is straightforward,
because, as with most products, one is dealing with a combination of tangible parts, which creates the end product.
Software, on the other hand, with the possible exception
of software provided on a diskette (CD/DVD), involves a
combination of services, i.e., computer programming. Under
the TAA, the country of origin for services is the “country in
which the firm providing the services is established.”34
A compelling argument can be made that the country of
origin of a particular software module or component should
be determined in the same manner that the country of origin for services is determined. For example, if UPFB Software, Inc., a United States corporation, had source code
written in its facility in India, the county of origin for this
source code should be the United States, since that is the
country in which UPFB Software, Inc. was established.
However, this argument is at odds with customs and trade
law, specifically HQ 114459 (September 17, 1998) and Former Employees of Computer Sciences Corp. v. Secretary of
Labor35(CSC). The ruling of HQ 114459 is fairly straightforward: software modules imported into the United States
are merchandise, as defined by 19 U.S.C. 1401(c), but are
not subject to duty when imported into the United States
via the Internet. CSC, however, contains a deeper analysis
of the issue of whether a software module/source code is a
product. That case dealt with the issue of whether programmers are eligible for Trade Adjustment Assistance benefits
under the Trade Act of 1974 when their jobs are outsourced
or transferred to another country.
The Trade Act of 1974 provides that workers may qualify for Trade Adjustment Assistance36 if there has been a
shift in production to a foreign country by a domestic company of articles like or directly competitive with the articles produced by the company in the United States. In
CSC, the Department of Labor (DOL) argued that the
source code written by the U.S. programmers is intangible
until it is incorporated onto a physical medium at another
facility, and therefore the code is not an article for the purposes of Trade Adjustment Assistance certification. DOL
equated the source code to a process or an idea that eventually leads to the development of software, which is not
an article in and of itself. The primary focus of DOL’s argument was the fact that the source code, which was written
in India, was not transferred onto physical media, packaged, and made ready for sale until after it was sent to the
United States. It was this lack of physical form that led
DOL to determine that source code was not a component
of software, and thus not an article. The court, however,
found this argument unpersuasive, noting that source code
would fall under the HTSUS definition of a component.
The HTSUS defines a component as something that gives
an item its essential character.37 Therefore, as source code
creates the functionality of software and thus defines the
essential character of software, the source code must be a
component of software and an aspect in the production of
software. The court pointed out that, based on DOL’s own
characterization, if source code is a process that leads to the
creation of software, then source code “must also be considered a component of such software.”38
The impact of CSC on the argument that the country
of origin for software under the TAA should be determined
in the same manner as for services is best demonstrated
using a hypothetical. Assume that UPFB Software, a United States corporation, moved all of its programmer jobs to
India. Although UPFB Software could still claim that its
software is a product of the United States, its displaced employees would likely be entitled to Trade Adjustment Assistance benefits because of the shift in production to a foreign country of articles that are directly competitive with
the articles that were produced by UPFB Software in the
United States. It is counterintuitive to think that a company’s software would be considered a United States end
product under TAA if its former employees were entitled
to Trade Adjustment Assistance benefits. Although CSC
might not be a death knell to the software/service country
of origin argument, it is persuasive to say the least.
The fact that software can be delivered in three different
ways—by purchasing the software on a diskette (CD/DVD),
by downloading the software directly to the customer’s computer (“direct download”), or through a software as a service
(SaaS) application delivery model—complicates matters
further. For purposes of the substantial transformation test,
software purchased on a diskette tends to pose few complex
issues; this is partially because CBP has addressed the coun-
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Published in The Procurement Lawyer, Volume 43, Number 2, Winter 2008. © 2008 American Bar Association.
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try of origin issue when dealing with software on diskettes,
but has not issued any rulings that deal with direct download
software.39 In HRL 732087 (February 7, 1990), CBP held
that copying software onto a blank diskette changes the
character of the diskette from one of a blank storage medium
to one with a predetermined pattern coded on it. The use of
the diskette also changed from unreadable and of little value
and usefulness to an article of software that enables a computer to perform various commands. CBP, not unlike the
Court of International Trade in Data General, focused on the
fact that the programming defined the end item’s character
and use for the ultimate purchaser, and thus the end item,
the diskette, was considered to be substantially transformed.40 This case, however, does not address how the substantial transformation test applies to direct download software or if it applies at all to SaaS, nor does it provide any
assistance in determining the country of origin for direct
download software or SaaS.
When determining the country of origin for direct
download software, the government and contractors are
faced with an issue that can be ignored when purchasing
software that has been burned onto a CD: where the software’s source code was written. Determining the country of
origin for source code is difficult. The crux of the difficulty
in determining the country of origin for direct download
software is that it is neither tangible nor transmitted on
tangible media like a CD. However, direct download software does not exist in the “ether”; it exists in a tangible
form, to some degree, when created on the hard drive
where the software’s source code is written. Once the conceptual issue has been addressed, and assuming software is
not a service, the determination of the country of origin for
direct download software is fairly straightforward. In addition to applying the substantial transformation test to determine the country of origin of an article, in cases where
no substantial transformation has occurred, the country of
origin will be decided by determining where the article was
wholly grown, produced, or manufactured. Under both
HQ 114459 and CSC, source code is an article (merchandise/goods) and so it is appropriate to apply the “place of
production test” to determine the country of origin. Under
the “place of production test,” the country of origin of
source code is the country in which the code was written.
The country of origin analysis of direct download software
does not end there, however.
Generally, finished software consists of several source
code modules that are combined and compiled into object
code to create the finished article of software. Therefore,
even after the country of origin for a particular source code
module is determined, the country of origin for the combined and compiled code, i.e., the finished article of software, must be determined. Although determination of the
country of origin for combined source code (or software
modules) has not been addressed by CBP or any court, the
IT hardware decisions discussed above can provide some
guidance, depending on the facts of a particular case.
At first blush, the easiest case is where new source code
is added to the existing software to increase its functionality. The first issue to be addressed is whether the process of
combining the existing software with the new source code
results in a substantial transformation. Key in this analysis
is determining whether the existing and new source code,
as a result of the combination, lose their individual identities and become an integral part of the new article.41 If the
combination is minimal or simple, as opposed to complex
or meaningful, it will generally not result in a substantial
transformation. Here, an argument can be made that the
combination of code from the existing software, “heart of
the software,” and the new source code does not change
the name, character, or use of the existing software. Although the new source code does lose its identity, the original software does not, and the process of combining the existing software source code and new source code could be
classified as minimal in most cases.42 Therefore, the country of origin for the new version of the software would likely be the country of origin for the existing software, not
where the new source code was written or where the source
code was combined. However, the preceding discussion is a
watered-down version of how source code, existing and
new, is assembled. In the case of well-known and highly
advertised “name” software, more people are involved in
putting together the original program, and thus not only is
the original programming more complex, but the way the
code is assembled and compiled to prevent hackers from
reverse-engineering and decompiling the object code also
adds layers of complexity. In these cases, determining
whether a meaningful change to the existing software occurred as a result of the addition of the new code is extremely difficult.
Another difficult case is that in which new software is
created and the source code is written in a variety of countries. Here, the IT hardware decisions again provide some
guidance. Since the individual software/source code modules are components of software, establishing the country
of origin of the finished article of software will involve determining whether the process of combining and compiling the source code is complex and meaningful, and not
merely assembly. In order to make this determination, it is
necessary to have a general understanding of what the
compiling of software entails. To this point, the focus of
discussion has been on source code, but source code cannot
be run by a computer unless and until it is transformed into
object code. The translation from source code, a high-level
programming language, to object code (binary code), a
lower-level language, is accomplished via a utility (a computer program or a set of programs) called a compiler. The
United States International Trade Commission (ITC) in
interpreting section 337 of the Tariff Act of 1930, 19
U.S.C. § 1337, has treated software codes, regardless of
form, as essential equivalents.43 The ITC has noted that
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even though the substance—the intellectual property—of
software is embodied in the programmer’s source code, “all
[forms of software] are equivalent because one form is easily
and automatically produced from another form.”44
Based on the ITC’s interpretation of software code,
merely compiling source code would not result in a substantial transformation because the essential character of
the end product embodied in the source code (the intellectual property) is determined prior to the compiling and
does not change as a result of the compiling. However, as
in HRL 561734, even if several source code modules are
written in various countries, if many source code modules
are written in country X and the models are combined and
compiled, obfuscating the source code to prevent hackers
from reverse-engineering (decompiling) the object code in
country X, it is likely that country X would be the country
of origin of the software. It is also conceivable that the assembling and compiling of software modules could result in
a substantial transformation where none of the modules
individually defines the essential character of the software,
but when combined they all lose their identity and become
an integral part of the new article, taking on the essential
character of the end product.45 Since the possible scenarios
are numerous, a fact-specific analysis is necessary to determine the country of origin for any article of software, but
the same guiding principles used to determine the country
of origin for IT hardware can be utilized when determining
whether the assembly and compiling of software modules
results in a substantial transformation. The same, however,
cannot be said for SaaS.
As with direct download software, determining the
country of origin for SaaS is difficult, and this difficulty
stems to some degree from the relative “newness” of this
software delivery method. SaaS differs from the traditional
software license in many respects. Under the SaaS model,
the software is not housed on the user’s server or desktop
computer, but is made available to the user over a network
(the Internet) through an interface that defines the boundaries of the “service.”46 The user neither has access to nor
owns a copy of the software’s object code, as would be the
case under a traditional software license. The SaaS service
provider enters into an arrangement with the user, that
pays for access to the software either based on actual software usage or on a fixed monthly, quarterly, or annual fee.
Because the customer is not required to have a license for
each employee user, the cost of SaaS is generally significantly less than that of a traditional software license. Perhaps as significant as the price difference between SaaS
and a traditional software license, though, is the fact that
under the SaaS model the onus of upgrading the software
lies with the service provider, not the customer. Thus, part
of what the customer is paying for under the SaaS model is
IT management and planning. The question, then, for purposes of the TAA, is whether SaaS is in fact a service or
nothing more than a disguised software license.
On its face, SaaS appears to be a service similar in many
ways to any other Internet-based subscription service, such
as Internet-based legal research services. Under the Internet-based legal research model, customers need not purchase hard copies of legal texts, but rather utilize an Internet-based service that provides access to a wide range of
legal research databases. Here, the customers pay for the
services of computer-aided legal research and access to the
databases, but the customers do not own the databases,
they merely have access to them.
Under SaaS, on the other hand, the user is paying for
access to software that it likely used to purchase either
under a fixed-term or perpetual license. However, the SaaS
user does not “own” a tangible product, and this lack of
tangibility is a more meaningful distinction than it was in
CSC because the user does not take possession, even for
the term of the license, of any property. Therefore, a strong
argument can be made that SaaS is not an item of supply,
i.e., a product, as defined by FAR 2.101.47 Unlike many Internet-based subscription services, under SaaS the user is
receiving multiple services, e.g., IT management and planning, that provide additional support for the argument that
SaaS is a service because the user is purchasing nothing
more than a bundle of services.
Conversely, an argument can be made that SaaS is
nothing more than a term software license and, as such,
FAR 25.403(b)(1) governs how the TAA should apply.
Therefore, as the argument goes, the country of origin of
SaaS would be determined in the same way that the country of origin is determined for direct download software.
The major weakness of this argument, however, as noted
above, is that the SaaS user does not “own” a copy of the
software’s object code and there is no transfer of anything
tangible to the user as there is in the standard software license. Assuming that SaaS is a service may allow the government to side-step the country of origin issue, but the
government will face other, equally troubling issues, such
as a verity of digital security issues.
Disconnected: Questions Still Remain
Although it was the intent of Congress in passing the IT
exception to the BAA to remove source restriction requirements from purchases of IT products by federal agencies, Congress fell short of that goal. Even when the BAA
IT exception applies, the procurement will still be covered
by the TAA, which raises its own issues, many of which
have no concrete answers. Based on the Court of International Trade and CBP rulings discussed above, it is clear
that there is nothing straightforward about applying the
substantial transformation test to, or even determining the
country of origin of, IT products. Although the basic concepts or processes of the underlying technology may dictate
when an item is substantially transformed, this is not always the case. Given the dearth of decisions in this area, it
would be prudent for a contractor with questions concern-
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ing a country of origin issue—especially when dealing with
issues relating to software—to request an advisory ruling or
final determination from CBP pursuant to 19 C.F.R. §§
177.21 et seq. This may be the only way for a contractor to
resolve the country of origin issue in an area where many
questions still remain. PL
Endnotes
1. The exception can also be found in section 617 of the Financial
Serivces and General Government Appropriations Act, 2008, H.R.
2829, which was passed by the House of Representatives and has
been placed on the Senate’s legislative calendar.
2. 48 C.F.R. § 25.103.
3. “[A] person or thing that appears or is introduced into a situation suddenly and unexpectedly and provides an artificial or contrived solution to an apparently insoluble difficulty.” Encyclopedia
Britannica Online, http://www.britannica.com/eb/article9030116/deus-ex-machina.
4. 48 C.F.R. § 25.003.
5. See Pub. L. No. 71-361 (1930) (codified as amended at 19
U.S.C. § 1654 (2000)). The Hawley-Smoot Act is also known as the
Smoot-Hawley Act.
6. Although Hawley-Smoot was enacted after the 1929 stock
market crash, many people believe that it was a contributing factor
to the Great Depression that followed. See generally Kenneth W.
Dam, Cordell Hull, the Reciprocal Trade Agreement Act, and the
WTO 4 (Oct. 10, 2004) (working paper), available at
http://www3.brookings.edu/views/papers/20041010dam.pdf.
7. See Pub. L. No. 73-316 (1934) (codified as amended at 19
U.S.C. § 1351 (2000)).
8. See Pub. L. No. 93-618 (1975) (codified as amended in scattered sections of 19 U.S.C.).
9. See Pub. L. No. 96-39 (1979) (codified as amended in scattered
sections of 19 U.S.C.).
10. This is not to say that there were not some within the federal
government who believed that the IT exception was unnecessary.
During the notice and comment period for the amendment to FAR
25.103 to incorporate the IT exception, the DOD Office of Inspector General criticized the exception and suggested that it should not
be applied to DOD or its agencies for security reasons. See Comment
Letter from Patricia A. Brannin, Asst. Inspector Gen. for Audit Policy & Oversight, Dep’t of Def., to Laurieann Duarte, FAR Secretariat, General Services Administration (Mar. 2, 2006) (on file with author). The only contractor comment that was received was submited
by CDW Government, Inc. (CDWG), which supported the FAR
Case. See Comment Letter from Kevin P. Adams, VP Program Sales,
CDW Government, Inc., to Laurieann Duarte, FAR Secretariat,
General Services Administration (Mar. 6, 2006) (on file with author). It is interesting to note that an award to CDWG, for thin
client computers, led to the filing of a protest on the grounds of noncompliance with the TAA. Wyse Technology, Inc., B-297454, (Jan.
24, 2006), 2006 CPD ¶ 23 (CCH). Some point to this case as support that there is confusion about the application of the TAA in this
area. CDWG did not certify that the products it would supply were
compliant with TAA nor did it intervene in the protest.
11. 48 C.F.R.§ 25.100.
12. See 48 C.F.R. § 25.502(c)(1). However, if no offeror proposes
to supply a domestic end product, the evaluation factor described in
note 14, infra, will not be applied. See 48 C.F.R. § 25.502(c)(2).
13. See 48 C.F.R. § 225.872.
14. Israel is a qualifying country under DFARS 225.872.
15. See Hamilton Watch Co., Inc., B-179939 (June 6, 1974), 74-1
CPD ¶ 306 (CCH). The analysis under the BAA is different when
dealing with a single-component end item. See City Chemical LLC,
B-296135.2, B-296230.2 (June 17, 2005).
16. 48 C.F.R. § FAR 25.103(c); 48 C.F.R. § 225.103(c).
17. Generally, for non-DOD agencies, a 6 percent markup will be
added to an offer of a foreign end product when the government also
receives an offer proposing to supply a domestic end product. If the
low offer is a domestic end product and it is submitted by a small
business, a 12 percent markup will be added to an offer of a foreign
end product. A DOD agency will add 50 percent to an offer of a foreign end product when it also receives an offer that proposes to supply a domestic end product. In addition, when dealing with DOD acquisitions, qualifying country end products, see DFARS 225.872-1,
will be treated as if they were domestic end products.
18. 48 C.F.R. § 2.101
19. Id.
20. Id.
21. FAR 25.403(c)(1) states:
[u]nder the Trade Agreements Act (19 U.S.C. § 2512), in
acquisitions covered by the WTO GPA, acquire only U.S.made or designated country end products or U.S. or designated
country services, unless offers for such end products or services
are either not received or are insufficient to fulfill the requirements. This purchase restriction does not apply below the
WTO GPA threshold for supplies and services, even if the
acquisition is covered by an FTA.
22. Under FAR 25.402(b), the TAA applies to acquisitions equal
to or greater than thresholds set forth in FAR 25.402. Further, the
U.S. Trade Representative has waived the Buy American Act and
other discriminatory provisions from application to eligible products
(i.e., products of WTO GPA, Free Trade Agreements, or the Israeli
Trade Act countries). 48 C.F.R. § FAR 25.402(a)(1). The FAR also
states that the BAA’s evaluation factor shall not be applied to procurements covered by the TAA. Id. at §§ 25.001(b), 25.105(a)(2).
23. See, e.g., DFARS subpart 225.4; NASA FARS subpart 1825.4.
24. See 48 C.F.R. § 25.003.
25. See 19 U.S.C. § 2518(4)(B); United States v. Gibson-Thomsen Co., 27 C.C.P.A. 267, 270 (1940); Koru N. Am. v. United
States, 701 F. Supp. 229 (Ct. Int’l Trade 1988); Nat’l Juice Prods.
Ass’n v. United States, 628 F. Supp. 978 (Ct. Int’l Trade 1986);
DFARS 252.225-7021; see generally FAR subpart. 25.4; DFARS
subpart 225.4.
26. Tex. Instruments, Inc. v. United States, 681 F.2d. 778, 783
(C.C.P.A. 1982).
27. See Belcrest Linens v. United States, 573 F. Supp. 1149 (Ct.
Int’l Trade 1983), aff'd, 741 F.2d 1368 (Fed. Cir. 1984) [hereinafter
Belcrest]; HRL 561568 (Mar. 22, 2001), reprinted in 66 Fed. Reg.
17,222 (Mar. 29, 2001).
28. In somewhat of a departure, CBP made a similar determination
in HQ H009107 (Aug. 2, 2007), reprinted in 72 Fed. Reg. 42,566
(Mar. 29, 2001). In HQ H009107, CBP held that the United States
was not the country of origin for recycled printer cartridges that were
disassembled and reassembled in a foreign country, but shipped to
the United States for final production. The final production of the
printer cartridges in the United States included inspection, filling
and sealing, mechanical assembly, testing, cleaning, installation of a
computer chip (that was developed and manufactured in the United
States) and preparation and packaging for shipment. CBP held even
though the final production of the cartridges occurred in the United
States, the cartridges were made functional again at the foreign facility.
Therefore, the completed cartridges were not a United States end
product. With regard to the insertion of the computer chip in the
United States, which was required for the cartridge to be operational, the CBP found, as in HRL 734518, that the bringing together
of the subassemblies (chip and cartridge) was not a complex and
meaningful assembly and thus no substantial transformation occurred. However, unlike HRL 734518, in HQ H009107 the most significant aspect of the product in question, which is the recycled
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printer cartridge, comes from the computer chip without which the
cartridge would not be functional. As the chip was programmed and
added to the printer cartridge in the United States, an argument can
therefore be made that in HQ H009107 the country of origin for the
printer cartridges should have been the United States.
29. HQ 735608 (Apr. 27, 1995) also supports the position that
merely implanting a CPU into a computer does not constitute a substantial transformation. Here, Acer America Corporation requested,
pursuant to 19 C.F.R. § 177.25, that CBP issue an advisory opinion
with regard to the county of origin of its desktop computers under
four separate scenarios. For two of the scenarios, CBP held that no
substantial transformation occurred because Acer was merely implanting a CPU into a complete unit. However, CBP ruled that a
substantial transformation did occur under the other two scenarios.
In these scenarios, Acer was implanting and assembling a great number of components of various origin, some of which are processed further before being assembled (partially completed motherboards are
inserted with the CPU, system BIOS and keyboard BIOS prior to
being assembled into desktop computers). CBP rule that the assembly and processing here constituted a substantial transformation because the components lost their individual identity and merged into
a new article. HQ 735608 illustrates that a substantial transformation can occur as the result of processing and/or assembly. However,
this processing and/or assembly must be meaningful in order to result
in a substantial transformation.
30. HQ 560633 (Nov. 13, 1997).
31. Id.
32. HRL 561568 (Mar. 22, 2001), reprinted in 66 Fed. Reg. 17,222
(Mar. 29, 2001).
33. N005927 (Feb. 23, 2007) (imported printed circuit boards in
plastic smart card reader housings are substantially transformed into
smart card readers as a result of the U.S. programming).
34. 48 C.F.R. § FAR 25.402(a)(2). Although the term “established” is not defined, the most probable meaning is the country in
which the company was incorporated, where a partnership was
formed, or simply where the business entity came into existence.
35. 414 F. Supp. 2d 1334 (Ct. Int’l Trade 2006).
36 The Trade Adjustment Assistance, Trade Act of 1974 tit. II, 19
U.S.C. § 2271, assists trade-impacted workers gain or enhance jobrelated skills and find new jobs.
37. See General Rules of Interpretation 3(b), HTSUS.
38. 414 F. Supp. 2d at 1344.
39. This is not surprising as General Note 3(e) to the HTSUS
states that “telecommunications transmissions” are “not goods subject to the provisions of the tariff schedule” and the software code is
generally imported from another country via the Internet or a company’s intranet, i.e., via a telecommunications transmission.
40. This ruling is similar to the CBP’s dealing with the country of
origin of books. These cases focus not on where the book was written, but rather where the book was printed. See, e.g., NY 818633
(Feb. 9, 1996).
41. See Belcrest, supra note 26.
42. Uniroyal, Inc. v. United States, 542 F. Supp. 1026, 1029 (Ct.
Int’l Trade 1982), aff’d, 702 F.2d 1022 (Fed. Cir. 1983) (“If the manufacturing or combining process is merely a minor one which leaves
the identity of the article intact, a substantial transformation has not
occurred.”).
43. See Certain Hardware Logic Emulation Systems and Components Thereof, USITC Pub. 3089, Inv. No. 337-TA-383 (Mar.
1998) (Comm’n Op. on Remedy, the Pub. Interest & Bonding)
[hereinafter Hardware Logic]; n. 84.
44. Hardware Logic, supra note 43.
45. See HQ 735608; supra note 29. Although this is conceivable,
an argument can be made that even if word processing and spreadsheet software consisted of code that was almost identical, the source
code that defined one software as word processing and spreadsheet
software would define the “essential character” of the software.
Therefore, the country of origin for the software as a whole is where
the word processing and spreadsheet source code was written.
46. The interface uses a Service-Oriented Architecture, which allows for interoperability of the software across a varied base of underlying and ever-changing technologies.
47. 48 C.F.R. § 2.101. “Supplies” defined as
all property except land or interest in land. It includes (but is
not limited to) public works, buildings, and facilities; ships,
floating equipment, and vessels of every character, type, and
description, together with parts and accessories; aircraft and aircraft parts, accessories, and equipment; machine tools; and the
alteration or installation of any of the foregoing.
Number 43 • Volume 2 • Winter 2008 • American Bar Association • The Procurement Lawyer
Published in The Procurement Lawyer, Volume 43, Number 2, Winter 2008. © 2008 American Bar Association.
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by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.