When procuring products, governments around the world historically have shown a preference for domestically produced products. Laws exist that require government funds to be used only for the purchase of domestic products, or at least provide a price preference for such products. The law implementing the U.S. Government’s preference for domestic products is known as the Buy American Act (“BAA”). The BAA, however, is not always applicable due to the Trade Agreements Act (“TAA”). The TAA allows for the procurement of products from certain countries other than the United States . Understanding whether the BAA or TAA applies to your procurement, and whether your products are compliant with the applicable standard is crucial to avoid liability under the False Claims Act and termination of a contract award.
The BAA applies to supply contracts exceeding the $2,500 micro-purchase threshold, but that are below the TAA threshold (currently at $193,000). To be BAA compliant, the product provided must qualify as a domestic end product. A domestic end product is (1) an unmanufactured end product mined or produced in the U.S. ; or (2) an end product manufactured in the U.S. if the cost of components mined, produced or manufactured in the U.S. exceeds 50 percent. Unlike the TAA, if a product is not BAA compliant the product may still be purchased by the U.S. Government. A non-BAA compliant product is penalized by adding 6% or 12% (depending on whether small or large businesses are involved) to its price for comparison to BAA compliant products offered by competitors. Note, in addition to domestic end products, DoD procurements allow the use of products from “Qualifying Countries” without a pricing penalty. A list of “Qualifying Countries” for DoD procurements can be found at DFARS ¶ 225.872-1. For DoD procurements, if the product is neither a U.S. domestic end product or Qualifying Country end product, then it will be assessed a 50% price penalty.
In general, the TAA applies to U.S. Government acquisitions over a certain dollar threshold, generally $193,000 for the acquisitions of supplies or services, although some individual Free Trade Agreements (e.g., Canada , Mexico , Chile , and Australia ) apply lower thresholds. The TAA provides that the U.S. Government may acquire only U.S.-made or designated country end products. A list of designated countries can be found at FAR ¶ 25.003. The TAA does not use the 50% cost-of-components test like the BAA. Instead, the TAA employs a different country of origin test, called the “substantial transformation” test. The determination of whether there has been substantial transformation for TAA purposes is not based primarily on the value or percentage of U.S. (or designated country) content (components), but on whether the product has been given a different character or use as a result of the process it underwent in the U.S. (or designated country).
Determination of the TAA threshold varies by agency. Some agencies apply the determination of whether the BAA or TAA applies (i.e. whether the $193,000 threshold is met to apply the TAA) on an overall contract basis, while others apply it on a line item basis. As such, it is not unusual to have a procurement where both the BAA and TAA will apply based on the expected dollar value of each line item.
Determining the country of origin for BAA and TAA purposes can present complex issues of interpretation and application that must be considered on a case-by-case basis, based on determinations of the Bureau of Customs and Border Protection (“Customs”). Companies that fail to accurately identify whether their products are compliant or non-compliant with the BAA or TAA requirements are at great risk of having their contract award terminated and being liable to the U.S. Government under the False Claims Act. In the past few years, violations have cost companies tens of millions of dollars in fines and terminated contracts.
