VAL CO:R:C:V 544634 DPS
Alan G. Lebowitz, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
12 East 49th Street
New York, N.Y. 10017
RE: Dutiability of Buying Commissions
Dear Mr. Lebowitz:
This is in response to your submission dated January 21,
1991, requesting a ruling on behalf of Lillian Vernon Corp.
(LVC or Lillian Vernon), an importer of general merchandise.
You request a ruling regarding the dutiability of certain
commissions paid by Lillian Vernon to its buying agent in
Hong Kong, Trade Exploit, Ltd. (TEL or Trade Exploit).
FACTS:
In response to a recent audit report issued by Customs
Regulatory Audit Division (New York) concerning LVC, LVC has
voluntarily restructured its invoicing procedures, despite
the fact that LVC disagrees with the conclusions of the audit
report. Customs at the Port of Norfolk has raised concerns
with the proposed revised invoicing procedures. Accordingly,
this ruling request seeks confirmation of the non-dutiable
status of buying commissions paid by Lillian Vernon to Trade
Exploit under revised invoicing procedures and a new buying
agency agreement. Norfolk Customs is aware of the ruling
request and seeks Headquarters resolution of the issue.
Before examining the details of the proposed
transactions, a historical perspective on the parties' past
Customs transactions as they relate to the issues presented
is relevant. LVC and Trade Exploit have had a buying agency
agreement in effect since November 1, 1980. That agreement
provided that Trade Exploit would perform services which
included "purchasing according to orders," performing the
"inspection of goods" and "repacking of merchandise." In
return for these services, LVC agreed to pay a commission.
On July 1 1983, LVC, through its Customs broker, received
internal advice from Customs acknowledging that Trade Exploit
was a bona fide buying agent.
On May 16, 1989, Customs began an audit of Lillian
Vernon Corporation. During the audit, items charged by Trade
Exploit over and above the vendors' invoices, e.g., certain
packaging charges, were examined and explained. Counsel also
explained that in some cases, Trade Exploit, the buying
agent, received a 5 percent discount from Chinese vendors.
After this discussion, counsel asserted that the commissions
paid were non-dutiable, but asked that the disclosures
regarding the nature of the Trade Exploit commission be
accorded prior disclosure treatment, should the commissions
eventually be determined to be dutiable.
After the audit, Regulatory Audit personnel questioned
the bona fide nature of buying commissions paid to Trade
Exploit. The audit report stated:
Our review of the data supporting commission
payments to TEL and the data LVC furnished to
U.S. Customs in their ruling request regarding
subject commission payments, disclosed that
LVC furnished incomplete and inaccurate data
to U.S. Customs. LVC's ruling request [for
the 1983 ruling] did not disclose TEL's sales
mark-up of the manufacturer's invoice nor did
it disclose TEL's 5% commission/discount
received from certain manufacturers from
China....
Trade Exploit continues to deal on behalf of LVC with
suppliers located in Hong Kong and the People's Republic of
China (PRC). Trade Exploit's duties entail sourcing
merchandise, assisting in negotiations for merchandise,
purchasing merchandise pursuant to Lillian Vernon's orders,
opening letters of credit to suppliers, consolidating
merchandise, inspecting merchandise, packing merchandise and
arranging for exportation and shipment of merchandise to the
U.S.
Based on statements made by counsel: (1) LVC always
retains authority over the choice of suppliers, and LVC is
always aware of the identity of its suppliers; (2) TEL's
involvement in transactions is limited to assistance--LVC
must always approve the actual terms of sale; (3) TEL cannot
finalize an agreement without prior approval by LVC; (4) TEL
has never ordered merchandise of the type ordered by LVC for
its own account; and (5) Trade Exploit does not sell
merchandise to Lillian Vernon.
In the past, merchandise has been entered under Trade
Exploit's invoice, and payment has been made directly to
Trade Exploit by letter of credit. In order to draw on the
letter of credit, Trade Exploit prepares an invoice written
in the full amount of the transaction to tender to the issuer
bank. TEL then opens a back-to-back letter of credit to the
supplier for the purchase price of the merchandise, retaining
only its commission and any charges incurred on behalf of
LVC, such as packaging and handling.
Although Lillian Vernon disagreed with the auditor's
conclusions, it has since revised its buying agency agreement
and invoicing procedures with respect to future transactions.
The new agreement and procedures as they relate to future
transactions only, are the subject of this ruling. Lillian
Vernon and Trade Exploit executed a new buying agency
agreement on January 14, 1991, which contains an extensive
recitation of the duties and responsibilities Trade Exploit
is to undertake in its capacity as buying agent. These
duties include: visiting manufacturers; obtaining samples;
assisting in the negotiations of favorable prices; quoting
prices at which the merchandise can be shipped; familiarizing
itself with the principal's needs and surveying the potential
markets to obtain the best available merchandise; placing
orders on behalf of the principal upon explicit instructions
from the principal; arranging payment terms to manufacturers
and suppliers pursuant to the principal's instructions;
purchasing quota at the direction of the principal;
inspecting the quality of the merchandise to be shipped to
the principal and determining conformity with the purchase
order; assisting the principal in the return of defective
merchandise, and assisting in the recovery of monies due the
principal from the manufacturer as a result of defective
merchandise or shortages; providing inspection certificates
for each shipment; and arranging for insurance on behalf of
the principal to protect against risk of loss relating to the
principal's merchandise shipped from the People's Republic of
China to Hong Kong for consolidation on C.I.F., Hong Kong
terms.
In addition to the duties described above, the buying
agency agreement also states that the agent may not provide
additional services on behalf of the principal, including the
purchase of quota, foreign currency, fabric, trim, etc.,
without prior approval of the principal. In the event that
the agent provides such additional goods or services, then
the agent is required to separately itemize the cost of such
goods and services on its commission invoices to the
principal. The agreement eliminates Trade Exploits receipt
of manufacturers discounts, and requires the separate
itemization of its packaging charge.
The new buying agency agreement and invoicing procedures
were provided to the District Director in Norfolk. Counsel
states that the District Director objected to the new
procedures because: (1) the suppliers' invoices did not
explicitly note that LVC was the purchaser; (2) the
supplier's CIF Hong Kong terms did not indicate insurance was
payable to or by Lillian Vernon; and, (3) there is no
provision for deducting a buying commission from the price
paid or payable unless a separate invoice identifies the
buying agent's commission.
In response to the District Director's concerns, counsel
has indicated that Trade Exploit will supply Lillian Vernon
with a copy of the seller's commercial invoice for all future
transactions in which Trade Exploit acts as a buying agent.
In addition, Lillian Vernon will have future suppliers'
invoices indicate sale to "Trade Exploit for the account of
Lillian Vernon" or words to that effect. With regard to
insurance, paragraph 2(m) of the new buying agency agreement
states:
The Agent shall arrange for insurance on
behalf of the principal to protect against
risk of loss relating to the Principal's
merchandise shipped from the People's Republic
of China to Hong Kong for consolidation on
C.I.F., Hong Kong terms. In the event of a
loss, the Agent shall file insurance claims as
necessary on behalf of the Principal. The
Agent shall forward all resulting insurance
recoveries to the Principal which are in
excess of the sums advanced by the Agent on
behalf of the Principal.
In addition to the above paragraph, counsel has represented
that risk of loss for transactions involving Trade Exploit
has always been and will continue to be borne by Lillian
Vernon.
With regard to invoicing, LVC will make entry with an
invoice prepared by TEL in connection all shipments involving
TEL. As evidenced by the sample invoice submitted with this
ruling request, the invoice indicates the unit price paid by
Lillian Vernon to the seller for each individual item, as
well as a total price paid. The invoice separately lists the
cost of labels, quota, handling and packing charges by line
item, if such charges are incurred by TEL. These amounts are
then totalled and the buying commission is calculated based
on that total (not the CIF Hong Kong price). Following this,
a total price is set forth on the Trade Exploit invoice.
ISSUE:
Whether, based upon the new buying agency agreement
between LVC and TEL, and implementation of new invoicing
procedures, a bona fide buying agency relationship exists
between LVC and TEL such that the buying commissions paid by
LVC to TEL can be treated as nondutiable.
LAW & ANALYSIS:
For the purpose of this prospective ruling request, we
are assuming that transaction value will be applicable as the
basis of appraisement. Transaction value is defined in
section 402(b)(1) of the Tariff Act of 1930, as amended by
the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b);TAA) as
the "Price actually paid or payable for the merchandise" plus
amounts for the five enumerated statutory additions in
402(b)(1). Buying commissions are not specifically included
as one of the additions to the "price actually paid or
payable." The "price actually paid or payable" is more
specifically defined in 402(b)(4) as: "The total payment
(whether direct or indirect...) made, or to be made, for
imported merchandise by the buyer to or for the benefit of,
the seller." It is clear from the statutory language that in
order to establish transaction value one must know the
identity of the seller and the amount actually paid or
payable to him.
Whether or not a bona fide buying agency exists between
an importer and an alleged "buying agent" is not determined
by any single factor, but depends upon the relevant facts of
each case. See J.C. Penney Purchasing Corp. v. United
States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary
consideration in determining whether a bona fide buying
agency relationship exists between an importer and an alleged
buying agent is the right of the principal to control the
agent's conduct with respect to matters entrusted to the
agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA
92, C.A.D. 1010, 436 F.2d 1399 (1971).
In a general notice published in the Customs Bulletin on
March 15, 1989, Customs provided an explanation of its
position on buying commissions. The following excerpts
illustrate that position:
While bona fide buying commissions are nondutiable,
evidence must be submitted to Customs which clearly
establishes that fact. In this regard,
Headquarters Ruling Letter 542141, dated September
29, 1980, also cited as TAA No. 7, provided:
...an invoice or other documentation from the
actual foreign seller to the agent would be
required to establish that the agent is not a
seller and to determine the price actually paid or
payable to the seller. Furthermore, the totality
of the evidence must demonstrate that the purported
agent is in fact a bona fide buying agent and not a
selling agent or an independent seller.
In New Trends Inc. v. United States, 10 CIT 637, 645 F.
Supp. 957 (1986), the Court of International Trade set forth
several factors upon which to determine the existence of a
bona fide buying agency. These factors include: whether the
agent's actions are primarily for the benefit of the
importer, or for himself; whether the agent is fully
responsible for handling or shipping the merchandise and for
absorbing the costs of shipping and handling as part of its
commission; whether the language used on the commercial
invoices is consistent with the principal-agent relationship;
whether the agent bears the risk of loss for damaged, lost,
or defective merchandise; and whether the agent is
financially detached from the manufacturer of the
merchandise. In addition, the importer must show that "none
of the commission inures to the benefit of the manufacturer."
J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp. at 984.
As the above cited court decisions make clear, any
determination of whether a bona fide buying agency
relationship exists, depends on the facts in each particular
case. Here, we must determine the validity of the purported
buying agency relationship, between LVC and TEL.
Based on the information submitted, ie., the buying
agency agreement, sample invoices, and counsel's explanation,
the new arrangements appear to satisfy the criteria for a
bona fide buying agency relationship between LVC and TEL. As
long as TEL remains under the control of the principal, LVC,
and documents the transactions in accordance with the legal
requirements set forth above, and the methods described by
counsel in the ruling request submission, the buying
commissions at issue appear to qualify for non-dutiable
status as bona fide buying commissions.
HOLDING:
If the actions of the parties conform to the
descriptions provided by counsel regarding the subject
prospective transactions, and the terms of the agency
agreement are met to the extent that the importer will
exercise the requisite degree of control over the buying
agent as specified in the agreement, it is our conclusion
that the commissions to be paid to Trade Exploit to perform
the services of purchasing merchandise from manufacturers are
to be considered bona fide buying commissions. Note,
however, that the degree of control asserted over the agent
is factually specific and could vary with each importation.
The actual determination as to the existence of a buying
agency will be made by the appraising officer at the
applicable port of entry upon the presentation of the proper
documentation as described in TAA No. 7.
Sincerely,
John Durant, Director
Commercial Rulings Division
cc: District Director, Norfolk