VAL CO:R:C:V 545192 GG
Mr. John Heinrich
District Director
U.S. Customs Service
300 S. Ferry St.
Terminal Island
San Pedro, CA 90731
RE: Request for Internal Advice; Toyota Motor Sales, U.S.A. Inc; acid rain damaged vehicles; defective merchandise allowance
Dear Mr. Heinrich:
This is in response to a ruling request submitted to the Office of Regulations and Rulings by Toyota Motor Sales, U.S.A., Inc. ("TMS"), on January 6, 1993. Supplements from TMS dated December 13, 1993, June 20, 1994, and October 19, 1994 have been added to the file. In addition, the issues were discussed on September 9, 1994 by Customs and TMS representatives during a meeting a Customs Headquarters. The ruling request concerns a shipment of vehicles from Japan that was damaged by acid rain prior to exportation. Questions have arisen about the amount of the allowance that should be made in the appraised value on account of the damage. Given the current status of this transaction, we are treating the ruling request as an internal advice request. Ms. Ann Stanley, Field National Import Specialist, is aware of this action. Toyota has requested that certain information supplied in connection with the internal advice be treated as confidential pursuant to section 177.2(b)(7), Customs Regulations (19 CFR 177.2(b)(7)). Any such information that appears in this decision has been bracketed and will be deleted from any published versions.
FACTS:
It is alleged that in September 1992, Toyota and Lexus vehicles staged at the dock in Japan for shipment to the United States were exposed to a pH [xxx] acid rain shower. The vehicles consisted of cars and trucks dutiable at 2.5% and 25% ad valorem, respectively. Toyota Motor Corporation (TMC) notified TMS, the importer, of the fact that the vehicles had been exposed to acid rain, and advised that the paint surfaces probably had been damaged.
Upon arrival at U.S. destination ports, the vehicles were
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washed with an alkaline solution to neutralize the acid rain deposit to ensure that no further damage after importation occurred. The vehicles were then surveyed to determine the extent of the damage at the time of importation. The surveys were conducted according to Toyota's published acid rain inspection and repair procedures. At TMS's request, damaged vehicles were inspected by Customs representatives in Long Beach. One of those representatives states that at no time was the damage verified, or comments made on its extent, by Customs. The vehicles were entered at full value. The entries were not liquidated but will remain open pending a resolution of this matter.
[xxx]
TMS states that the damage allowance it will claim will be based on evidence of the extent of the damage, vehicle by vehicle. The extent of the damage will differ with each vehicle. Some vehicles have been repaired and sold to the general public at the going price for new vehicles, while others were sold or leased at reduced cost.
TMS proposes that the damage allowance for vehicles that were repaired at unrelated local body shops will be the cost of repair. The repairs were also performed by a TMS subsidiary. TMS reports that the rates charged by the related body shops were comparable to the rates charged by the unrelated body shops. In each instance the actual costs of repair will be supported by invoices or other cost documentation.
Initially, TMS proposed that the allowance for vehicles that were sold at a discount without repair should be equal to the amount of the discount from the normal dealer price. TMS advised us that "normal dealer price" is the price listed by TMS to its Toyota dealers. The manufacturer's suggested retail price (MSRP) is the normal dealer price inclusive of the dealer's markup. [xxx]
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Following the meeting at Customs Headquarters on September 9, 1994, TMS amended its proposal that the value allowance be based on the discount. TMS now suggests that the extent of the damage for the cars that were not repaired but were sold at a discount be pegged at [xxx] for each Toyota and [xxx] for each Lexus. These figures represent floors below which repair costs would not have fallen had repairs been made. Such representations can be made, according to TMS, because estimates were made of the cost of repair to each car. TMS posits that in all cases it would have cost more than these minimum amounts to repair the vehicles.
TMS also initially recommended that the allowance for vehicles that were leased to employees for a year at a discounted lease cost should be the amount by which the lease was reduced from the normal employee lease rate over a twelve month period. [xxx] Again, using the same rationale discussed in the preceding paragraph, TMS now suggests that the [xxx] Toyota and [xxx] Lexus figures be substituted for the lease discount as a measure of the extent of the damage.
Finally, TMC has reimbursed TMS for the cost of the repairs and the special discounts.
ISSUE:
Are motor vehicles that sustained acid rain damage prior to importation considered partially damaged under 19 C.F.R. 158.12 and subject to appraisement in their condition as imported, with an allowance in value equal to either (1) the cost of repairing the damage, or (2) the amount of any discount actually given when the vehicles were sold or leased without repair, or (3) a set minimum amount for each vehicle?
LAW AND ANALYSIS:
The Statement of Administrative Action, which has the force of law, states that "where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made". Section 158.12 (a) of the Customs Regulations (19 CFR 158.12(a)) provides that merchandise which is subject to an ad valorem or compound rate of duty and found by the district director to be partially damaged at the time of importation shall be appraised in its condition as imported, with an allowance made in the value to the extent of the damage.
The vehicles are subject to ad valorem duties, therefore meet the first requirement for a value allowance. Value
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adjustments, however, can only be made where there is sufficient evidence to establish that the merchandise was defective at the time of importation. See Customs Service Decision (C.S.D.) 81144; HRL 543106, dated June 29, 1983; HRL 543091, dated September 29, 1983; and HRL 543537, dated February 14, 1986. According to TMS, Customs was alerted to the acid rain damage prior to entry. The Customs officers who surveyed the vehicles, however, were not convinced that all of them were acid rain damaged. They indicate that some of the claimed damage appeared to be water spots, which rubbed right off. Therefore, vehicle by vehicle verification that there was indeed acid rain damage is a prerequisite to an allowance in the value being made.
The question of how much of an allowance will be made, if appropriate, will depend on the extent of the damage and will require an objective measure of the damage. To this end, a determination that the damage to a particular vehicle falls into the [xxx] category, if supported by the necessary documentation, will show the extent of the damage.
TMS indicates that some of the vehicles were repaired, while others were sold or leased at a discount without repair. We will first examine the situation involving the repaired vehicles.
The imported vehicles were repaired either at local body shops or by a TMS subsidiary. The actual repair costs are supported by invoices or other cost documentation. Repair costs on defective imported merchandise have been used as an accurate measure of the extent of the damage. See HRL 543106, dated June 29, 1983. Thus, costs for repair work performed on TMS's vehicles by body shops and TMS subsidiaries can serve as a measure of the damage caused by the acid rain. However, Customs must be satisfied that the relationship between TMS and its subsidiaries has not influenced the repair costs. TMS has addressed this concern by stating that the rates charged by TMS subsidiaries were generally comparable to the rates charged by the unrelated body shops. Of course, this claim is subject to verification by Customs.
The fact that TMC reimburses TMS for the cost of the repairs does not disqualify TMS from receiving a value allowance. By authority of 19 CFR 158.12(a), the vehicles that were defective at the time of importation would be entitled to an allowance in their value to the extent of the damage.
The next situation involves acid rain damaged vehicles that were not repaired but were sold at a discount, either to TMS employees or to unrelated third parties. The first issue is whether an allowance can be made in the value of the imported cars equal to the discount from the normal dealer price. Section 158.12 (a) of the Customs Regulations clearly requires that there be a correlation between the value allowance and the extent of
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damage. TMS has offered no evidence to show that the [xx] discount offered to its employees, and the [xxx] discount per vehicle offered to unrelated purchasers, reflects the amount of the damage. We doubt that it does, because reason dictates that the percentage or dollar discount should vary for each vehicle, depending on the severity of the damage. Absent the necessary correlation, no allowance can be made. Furthermore, to qualify for an value allowance, the discounts must not only be linked to the extent of the damage, but also must be the same for TMS employees and unrelated purchasers. This is because to affect an allowance in the value of the imported vehicles the size of the discount must be based on the magnitude of the damage, not on the buyer's relationship to TMS.
TMS proposes that an allowance in the value of the damaged vehicles be made equal to [xxx] of the normal twelve month lease payment. Once again, TMS has offered no proof that this figure represents an accurate measure of the extent of the damage. For this reason, basing the value allowance on a predetermined lease discount is unacceptable.
An alternative proposal put forth by TMS for vehicles both sold and leased at a discount is to use a pre determined set amount as a gauge of the damage. The suggested figures are [xxx] per Toyota and [xxx] for each Lexus vehicle. TMS argues that the real figures would have been higher had repairs actually been made. An allowance in the value in this instance would be inappropriate, we believe, because the amount of the value allowance would not, as the law requires, accurately reflect the extent of the damage.
Finally, counsel for TMS argues that the sold or leased vehicles qualify for the value allowance based on precedent set in HRL 543061, dated May 4, 1983. In that case, merchandise was received in poor condition, therefore, the price was renegotiated. A corrected invoice reflecting the new lower price was submitted to Customs to replace the original invoice used at the time of entry. An allowance in the value was made because the lowering of the price provided sufficient evidence of the defective nature of the merchandise. That holding is not applicable here, however, because HRL 543061 involved only one item, 45,035 yards of cotton greige sheeting, and a link between the extent of the defect and the price reduction could thus be established. As noted above, the necessary nexus is absent from the situation under review.
HOLDING:
An allowance in the value of the repaired motor vehicles may be made equal to the repair costs, in instances where Customs is satisfied that the repairs were made on account of acid rain damage and reasonable and well documented repair costs are
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presented to Customs.
No allowance based on a discount from the normal dealer price or from the twelve month lease rate, or alternatively based on minimum floors below which repair costs would not go, can be made where the importer fails to prove that the discount or floor has a direct correlation to the extent of the damage.
Sincerely,
John Durant
Director, Commercial
Rulings Division