RR:IT:VAL 546941 GG
Port Director
U.S. Customs Service
477 Michigan Avenue
Detroit, MI 48226
RE: Applications for Further Review of Protests No. 3801-96-101820, 3801-97-100742, and 3801-98-100517; Merchandise Returned From Customers in Canada; “Fall back” Method of Valuation; 19 CFR §10.151; Subheading 9801.00.25, HTSUS.
Dear Sir:
This is in response to the applications for further review and protests referenced above. The protests were timely filed, and they protest the manner of appraisement of imported merchandise. They also make claims for duty-free entry on other grounds. Our response is based on the arguments made on the Customs Form 19's and in a subsequent submission dated December 20, 1998. We also take into consideration comments sent to us by your office on January 26, 1999.
The protestant has requested that confidential treatment be conferred on these protests. We grant that request, and redact the information contained in brackets in copies disseminated to the public.
FACTS:
The merchandise at issue is wearing apparel and footwear imported from Canada by [ ]. [ ] is a catalog retailer of this type of merchandise. The protests cover entries of merchandise which consists of customer returns from Canada to the United States. The customers receive refunds or credits. [ ] has structured its Canadian returns so that customers send their packages to an agent in Canada, [ ], which then consolidates the packages and ships them to the United States in several truckloads each week. [ ] is listed as the importer of record on the ensuing consolidated entries.
The returned merchandise includes articles of U.S. origin, articles previously imported by [ ] as the importer of record, and articles previously imported by parties other than [ ] which [ ] then purchased domestically on a “landed” basis. This protest concerns the last category of merchandise, since the first two receive duty-free treatment under various tariff provisions.
[ ] has been declaring the value of this merchandise as the sales price charged by [ ] to its Canadian customers. It now protests the use of transaction value as a basis of appraisement and makes the argument that the use of a “fall back” value based on [ ] initial average cost for these items would be more appropriate. [ ] states that the absence of a sale for exportation renders transaction value inapplicable.
In your memorandum addressing the issues raised by [ ] in its protest, you argue that the transaction value method of appraisement is appropriate. In your opinion, the return of merchandise constitutes a sale from the Canadian customer to [ ], triggering a valid “sale for exportation” for transaction value purposes. In your opinion the entered and appraised values were accurate.
The protestant raises the alternative claims that duty-free entry should be afforded these returned items under Section 10.151 of the Customs Regulations, or under subheading 9801.00.25 of the Harmonized Tariff Schedule of the United States (“HTSUS”). We note that the protestant also originally argued that the returns could be appraised under the deductive value method; however, it withdrew this argument in its December 30, 1998, submission in support of the protests.
ISSUE:
1) What is the correct basis of appraisement for goods ordered by Canadian customers, which are then returned to the U.S. seller for refund or credit?
2) Whether the returned items are eligible for duty-free entry under either 19 CFR §10.151 or subheading 9801.00.25, HTSUS?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary basis for appraisement is transaction value, i.e., the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for five statutorily enumerated additions. Accordingly, there must be a sale for exportation for transaction value to be used as the appraisement method.
For Customs purposes, the word “sale” is generally defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 24, C.A.D. 1139, 505 F.2d 1400, 1406 (1974). In this case, resort must be made to general commercial law to determine whether a return of previously ordered merchandise constitutes a bona fide sale. Under Section 2-326 of the Uniform Commercial Code (“UCC”), “unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is a “sale on approval” if the goods are delivered primarily for use.” Section 2-327 of the UCC in turn provides that:
(1) Under a sale on approval unless otherwise agreed
(a) although the goods are identified to the contract the risk of loss and the title do not pass to the buyer until acceptance; and
(b) use of the goods consistent with the purpose of trial is not acceptance but failure seasonably to notify the seller of election to return the goods is acceptance, and if the goods conform to the contract acceptance of any part is acceptance of the whole.
Applied here, the transactions between [ ] and its Canadian customers are “sales on approval”, because the items are sold for the customers’ personal use and there is a built-in return policy. Title and risk of loss remain with [ ] until the buyer “accepts” the goods under the sales contract. A timely return of the merchandise to [ ] indicates that acceptance never occurs. In such situations, title and risk of loss remain with the seller and therefore, there never is a sale between [ ] and the Canadian customer. It follows that there is no second sale between the Canadian customer and [ ] upon the return of the merchandise to [ ] in the United States. Consequently, there is no sale for exportation to the United States and transaction value cannot be used as the appraisement method. (See also Headquarters Ruling Letter (HRL) 546092, dated September 16, 1996, in which transaction value was ruled out as the basis of appraisement when the sale of aircraft sent from the U.S. to Canada was not finalized, resulting in the return of the aircraft to the United States.)
When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. See, §402(a)(1) of the TAA. The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (§402(c) of the TAA); deductive value (§402(d) of the TAA); computed value (§402(e) of the TAA); and the “fall back” method (§402(f)).
Transaction value of identical or similar merchandise is based on sales at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as the merchandise being appraised. (§402(c)). Counsel for the protestant states that it is unlikely that there is any information relating to importations of identical or similar articles being returned from consumers in Canada. Similarly, they are not aware of any sales to [ ] involving individual units of a particular style. Therefore, transaction value of identical or similar merchandise is unavailable as a valuation method.
Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the United States in the greatest aggregate quantity at or about the time of importation, subject to certain statutorily enumerated deductions. The protestant contends that it would be commercially unfeasible to appraise the returns under deductive value because: 1) the returned merchandise reenters [ ] inventory and is commingled with existing inventory and sold on a FIFO basis at various prices; 2) some of the goods are not sold at all, due to damage, use, or other reasons; and 3) the consolidated entry covers many different styles of merchandise, rendering it cost-prohibitive for [ ] to track their actual resale values. We agree; therefore, deductive value cannot be used as a viable means of appraising the returned items.
Likewise, computed value cannot be used to appraise the merchandise. Under computed value the following items are added together: (1) the cost or value of the materials and processing costs incurred in the production of the imported merchandise; (2) the profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise; (3) the value of any assists; and (4) the packing costs. [ ] was not the original direct importer of these goods, and contends that it is not in any position to determine any of the elements of computed value.
Therefore, the only method left for appraising the merchandise is §402(f) of the TAA. This section provides that if the value of imported merchandise cannot be determined under subsections (b) through (e) then:
...the merchandise shall be appraised for the purposes of this Act on the basis of a value this is derived from the methods set forth in such subsections, with such methods being reasonably adjusted to the extent necessary to arrive at a value.
We note that values which are determined pursuant to §402(f) of the TAA will be based, to the greatest extent possible, on previously determined values. See, Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 63-64.
[ ] takes the position that the returned items should be appraised under §402(f), using a valued derived from the prices [ ] paid to the original importers of the merchandise. As noted previously, [ ] was not the original importer and thus does not have access to the values declared to Customs at the time of entry. [ ] sourced the merchandise from various importers in the United States. A particular item might have been purchased from several different vendors. The price paid to any one vendor for a particular item might have had a range to take into account different attributes, such as color. With that in mind, [ ] has compiled lists of the average prices it originally paid to each vendor for a particular item of merchandise. For purposes of appraising the returned items covered in its protest, [ ] proposes to pay duty based on the highest average price which [ ] paid for each item amongst all of its vendors. As a hypothetical example, if [ ] originally paid average prices of $10, $10.15, and $10.30 to three vendors, respectively, for Item A, then [ ] would like to use the price of $10.30 as the value of any returned Item A’s on the consolidated entry.
[ ] proposed value methodology is unacceptable because of prohibitions on the use of certain bases of appraisement listed in Section 402(f)(2) of the TAA. Among these is §402(f)(2)(C), which precludes appraisement on the basis of the price of merchandise in the domestic market of the country of exportation. In this particular case, there were two countries of exportation - the United States and Canada. [ ] suggested average prices relate to sales made to [ ] by vendors of imported merchandise in the U.S. domestic market prior to the merchandise’s eventual resale and exportation to Canada. The use of a price established for the domestic market in the country of exportation would be a clear violation of §402(f)(2)(C).
Pursuant to §402(f)(1) of the TAA, a reasonably adjusted transaction value may be the basis of appraisement. Under this section, it is our position that a reasonable adjustment to transaction value would be to recognize that there was a “sale” between the Canadian customers and [ ]. This approach would resemble that taken in HRL 546953, dated May 5, 1999, a case in which the use of transaction value was rejected because of the absence of a transfer of ownership, the lack of payment, and the existence of a relationship which influenced the price. Notwithstanding the finding that the merchandise could not be appraised under transaction value, it was determined that for purposes of §402(f), a sale could be deemed to have occurred to arrive at a “reasonably adjusted transaction value”. Applied here, we deem a sale to have taken place between the Canadian customers and [ ]. The “price paid or payable” is the amount of the refund or credit extended to the customers for returning the merchandise. This amount is written, evidently either by the customers or by [ ] Canadian agent, on the return forms prepared by the customers and sent with the returned merchandise to the Canadian agent for consolidation.
We note that the entered and appraised value of this merchandise was based on the invoice prices charged to the Canadian customers of [ ]. Although these prices may be identical to the amount of the refunds or credits extended to the Canadian customers, for clarity we wish to point out that they may not be used as the basis of an adjusted transaction value. This is because §402(f)(2)(e) prohibits the use of a value which is based on the price of merchandise for export to a country other than the United States.
The protestant also makes claims for duty-free entry of the returned items under §10.151 of the Customs Regulations and under subheading 9801.00.25, HTSUS. These claims fail for the following reasons. Section 10.151 is a provision deriving its authority from 19 U.S.C. §1321(a)(2)(C). This allows for the duty-free importation of articles imported by one person on one day with a fair retail value not to exceed $200. Duty-free entry under §321 is inapplicable to [ ] situation because [ ] is the importer of record and the value recorded on the entries clearly exceeds $200. Similarly, the use of subheading 9801.00.25, HTSUS must be ruled out because that tariff provision permits duty-free entry only if the articles are being reimported by or for the account of the person who imported them into, and exported them from, the United States. Since [ ] was not the original importer of the goods in question this tariff provision may not be used here.
We wish to point out that the Miscellaneous Trade and Technical Corrections Act of 1999 (“the Act”), Public Law 106-36, enacted on June 25, 1999, created a new tariff provision which provides for the duty-free reimportation of merchandise of this kind. The new subheading 9801.00.26, HTSUS, went into effect for goods reimported into the United States 15 days after the enactment of the Act. This will have a direct impact on current and future returns made by [ ] customers in Canada. However, the new subheading 9801.00.26, HTSUS, does not have retroactive effect, and thus is not applicable to the 1996, 1997, and 1998 entries under protest here.
HOLDING:
1) Appraisement should be based on the amount of the refund or credit extended by [ ] to the Canadian customers who are returning the merchandise, as a reasonably adjusted transaction value pursuant to §402(f) of the TAA.
2) The returned articles are not eligible for duty-free entry under either 19 CFR §10.151 or subheading 9801.00.25, HTSUS.
The protest should be DENIED. In accordance with §3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Thomas L. Lobred
Chief, Value Branch