One of the most perplexing questions that has plagued the government contracting community in recent years relates to the country of origin for computer software. Where most government procurements restrict the purchase of products that were not manufactured or substantially transformed in an approved country, the question of where software is “substantially transformed” is one of critical importance – particularly where the government buys more and more software products, and particularly where those software products are distributed via direct download. The Department of U.S. Customs and Border Protection has long resisted issuing any authoritative guidance on the country of origin for computer software, leaving industry to reach its own conclusions, conclusions that hopefully will be adjudged as reasonable in the event of later Government scrutiny or challenge. But Customs has recently issued an advisory opinion that may finally shed some light on this dark and murky topic.

In an advisory opinion issued on June 8, 2012 (but not released publicly until December 2012), Customs concluded that computer software was “substantially transformed” in the country where the software was compiled (or “built”) and converted into object code. See HQ H192146 (Jun. 8, 2012).

Viewing software through a “manufactured product” paradigm, industry has long tried to consider where software was “built” or “manufactured.” This has commonly forced companies to consider where the underlying source code was written – the component “parts” that are assembled together into the “final” software product. But determining where the code was written is often an extremely difficult exercise, particularly where software is designed and developed all around the world by individuals of different nationalities, often incorporating pre-existing source code (some of it open source) from unknown origins. Looking to where the source code was “written” has always been an unsatisfying, if not impossible, task. But this new Customs decision provides a more definite, more easily fixed point in the software development process that companies can use to determine the country of origin under the Trade Agreements Act (“TAA”) for their software products.

This new guidance is of critical importance because it appears to be the first time that Customs has opined on where downloaded software is “substantially transformed” under the TAA (as opposed to where hardware incorporating new software was “substantially transformed”). Customs has long advised that CDs or hard-media containing computer software are “substantially transformed” at the location where the software is burned to or installed on a tangible medium. See, e.g., HQ 732087 (Feb. 7, 1990); HQ 561011 (Sep. 22, 1998). But where most software is now distributed via direct download, those decisions offered little authoritative guidance.

While this decision is a non-binding advisory opinion, it should be helpful in shedding a little light on the question of where computer software is “substantially transformed.” Sheppard Mullin specializes in helping companies assess their hardware and software products in order to determine whether the products satisfy the legal requirements of the TAA. Particularly with regard to companies selling software products to the U.S. Government, our team of specialists can help government contractors ensure that they are in full compliance with their contract’s country of origin requirements.