RR:IT:VA 548097er
Harvey B. Fox, Esq.
Gregory C. Anthes, Esq.
Adduci, Mastriani & Schaumberg, L.L.P.
1200 Seventh Street, NW
Washington, DC 20036
Dear Messrs. Fox and Anthes:
This is in response to your requests for reconsideration, dated January 15 and April 17, 2002 of HRL 547808, dated December 19, 2001, regarding the determination that certain design work provided free of charge by your client, Hallmark Cards, Inc. (“Hallmark”), to foreign manufacturers constitutes an assist within the meaning of 19 U.S.C. 1401a(h). Your request for confidential treatment of the contents of the license agreements, and amendments thereto, as well as certain proprietary information identified within brackets in your request, is granted. Accordingly, all proprietary information in this decision appears within brackets and will be redacted from the public version.
FACTS:
Hallmark provides design work, free of charge, to the foreign producers of imported products. The imported products consist of a wide range of items including greeting cards, guest books, diaries, gift bags, tins, ceramics, photo albums and Christmas ornaments. The design work consists of transparencies and films sent by Hallmark to foreign manufacturers for use in manufacturing the imported merchandise. The transparencies are used in the production of specialty products and the films are used in the production of printed products.
In HRL 547808 this office made the determination that the transparencies and films provided by Hallmark free of charge to the foreign manufacturers constituted assists within the meaning of 19 U.S.C. 1401a(h). The value of the assists was determined to be royalty payments made by Hallmark to a Dutch artist pursuant to a license agreement between the two parties.
Subsequent to counsel’s request for reconsideration, representatives from this office met with you and representatives from Hallmark. At the meeting, you provided additional examples of the design work and provided us with further explanations regarding how the design work is produced.
The Production of the Design Work
According to your submissions, the design process begins when Hallmark designers in the U.S. look through catalogs of the artist’s works and use the works as inspiration to design new products ranging from greeting cards to three-dimensional sculptures. Hallmark’s designers conceive a general design intent for a particular product format (e.g., a winter theme with birds for plates and cups or a box and candle set which incorporates a winter theme). The designers review catalogs of the artist’s original paintings to find various images or portions of images that may be used to construct the Hallmark design. The designers cut and paste parts of these images and apply some or all of the following additional steps in order to complete the design: [ ] Once this portion of the design work is completed, Hallmark’s designers create a tight layout that contains the specifications, including dimensions, shape and format, of the finished product. The tight layout is sent to Repro Wes in the Netherlands.
At this point, the second stage of the design work begins. It is our understanding that Repro Wes is the only company that maintains a digital library of the artist’s original works. Therefore, in order for Hallmark to obtain the digital files of the artist’s works it must work in conjunction with Repro Wes. [ ] This process results in the production of digital files, proofs (wet or Iris) and/or film. The proofs are used by Repro Wes to validate color, integrity and placement. The tight mechanical layout is returned to Hallmark along with the newly created digital file.
The Hallmark designers complete the third and final stage of the production of the design work, creating a new digital file that contains all elements of the new product’s design. [ ]New proofs (Iris/Fiji) are created. Hallmark stores the color correct files into Hallmark’s digital library. These new files are used to create the separations or transparencies supplied to the foreign manufacturers of the imported products.
HRL 547808 dated December 19, 2001.
As noted above, in HRL 547808 this office made the determination that the transparencies and films provided by Hallmark to the foreign manufacturers, free of charge, constitute assists within the meaning of 19 U.S.C. 1401a(h). As stated in HRL 547808, in order for design work to be included in transaction value as an assist, the design work must be undertaken elsewhere than in the U.S. and it must be necessary for the production of the imported merchandise. 19 U.S.C. 1401a(h)(1)(A). In the past, this office has excluded from the value of an assist that portion of the assist undertaken in the U.S. (See, HRL 545341, dated August 3, 1994). Accordingly, in HRL 547808, the value of the design work undertaken by Hallmark designers in the U.S. was not included in the value of the transparencies and films.
In HRL 547808 this office also made the determination that the work undertaken by Repro Wes is not dutiable. Customs reasoned that because Repro Wes does not participate in the creative process or exercise discretion in choosing images or color, nor does it perform any work in the development, engineering, planning or sketching of the product to be manufactured, the work it performs is not an assist.
The remaining portion of the design work examined in HRL 547808 was the artist’s work. Customs ruled in HRL 547808 that the artist’s work is an assist because her artwork is part of the creative process in that she had discretion in creating the images, including their shape and color. Further, the coloring and images are the same in the assist sent to the manufacturers as in the original artwork. Moreover, the artist retained the right to approve or disapprove the use of her artwork. The value of the artwork assist was determined based on the royalty payments made by Hallmark to the artist.
ISSUE:
Whether the transparencies and films provided free of charge by Hallmark to the foreign manufacturers constitute assists? If so, how should the assists be valued?
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). Transaction value, the preferred method of appraisement, is defined in section 402(b) of the TAA as the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions. One of the additions includes the value, apportioned as appropriate, of any assists. 19 U.S.C. 1401a(b)(1)(C).
Are the transparencies and films assists?
The first issue to be resolved is whether the transparencies and film constitute assists. The term “assist” refers to an item that is supplied directly or indirectly by the buyer free of charge or at a reduced cost, for use in connection with the production or sale for export of the imported merchandise. The type of assist at issue in this case is “engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.” 19 U.S.C. 1401a(h)(1)(A)(iv).
The transparencies and films that are provided free of charge by the buyer to the foreign manufacturers of the imported products constitute design work and fall within the scope of the elements described by section 402(h)(1)(A)(iv). The transparencies and films impart the essence of the product design to the imported merchandise, without which the manufacturers could not produce the imported merchandise. Accordingly, we find that the design work is “necessary for the production of the imported merchandise” within the meaning of 19 U.S.C. 1401a(h)(1)(A)(iv). To the extent that part of the production of the transparencies and films occurs in the Netherlands, the design work is “undertaken elsewhere than in the United States”. Accordingly, it is our determination that the design work meets the definition of an assist. The remaining question, therefore, is how to value the transparencies and films.
As described above, transparencies and films are produced in three stages. One stage is undertaken in the Netherlands and the other two are undertaken in the United States. In the past, Customs has ruled that in such circumstances, only the portions of the design work undertaken outside the U.S. are dutiable. See HRL 545341, dated August 3, 1994. Accordingly, in HRL 547808, we ruled that the portion of the design work undertaken in the United States, i.e., the work performed by the Hallmark designers, is not a dutiable portion of the assist provided to the foreign manufacturers. We believe that this determination was correctly reached in HRL 547808.
In HRL 547808 we ruled that the artist’s work is an assist because her artwork is part of the creative process in that she had discretion in creating the images, including their shape and color. Further, the coloring and images are the same in the assist sent to the manufacturers as in the original artwork. Moreover, the artist retained the right to approve or disapprove the use of her artwork. In HRL 547808, we also ruled that the work performed by Repro Wes, even though undertaken elsewhere than in the U.S., is not an assist as the involvement of Repro Wes does not involve creative process or the exercise of discretion in choosing images or color. As you have requested a de novo review of the ruling, we will reexamine both of these two determinations reached in HRL 547808.
Valuing the transparencies and films.
The valuation statute addresses valuing assists that are produced in the United States and elsewhere than in the United States. Specifically, for purposes of determining the value of assists described in 19 U.S.C. 1401a(h)(1)(A)(iv) the valuation statute provides:
If the production of an assist occurred in the United States and one or more foreign countries, the value of the assist is the value thereof that is added outside the United States.
19 U.S.C. 1401a(h)(1)(C)(ii).
Upon reconsideration, we find that it was incorrect in HRL 547808 for this office to subject each stage of the assist’s production process to a separate assist analysis, as though each stage of production results in the creation of a separate assist. The statute does not provide that each stage of the production of the assist must individually meet the definition of an assist; only that the value of the assist is the value thereof that is added outside the U.S.
In HRL 547808 we specifically analyzed whether the work performed by Repro Wes constituted an assist. This analysis is incorrect as it centers upon whether Repro Wes’ work meets the definition of an assist instead of focusing on whether the work performed by Repro Wes constitutes a dutiable portion of the completed design work provided to the manufacturers - - i.e. the completed transparencies and films. Likewise, we made the same error in our analysis of the artist’s work, concentrating on whether her artwork is an assist, instead of whether her artwork is a dutiable portion of the assist provided to the sellers.
As set forth under 19 U.S.C. 1401a(h)(1)(C)(ii), quoted above, the issue with which we need to be concerned is whether the work performed by each party is part of the production process of the assist, and if so, where each stage of the assist production was performed, such that the value of the finished assist is determined based on its production elsewhere than in the U.S.
According to counsel’s submissions, the design process begins when Hallmark designers in the U.S. look through catalogs of the artist’s works and use the works as inspiration to design new products ranging from greeting cards to three-dimensional sculptures. Given the fact that the artist’s work precedes the inception of the production of the assist and is the result of her own artistic endeavors, undertaken without knowledge of or regard for the imported products, we find her work to be outside the scope of the assist production process. This artwork is the inspiration from which the design work is conceived and is not part of production process of the assist itself. Accordingly, the royalty payments made by Hallmark to the artist pursuant to the license agreement between the two parties are not a dutiable portion of the assist.
Unlike the artist’s work, however, the work performed by Repro Wes begins after the inception of the assist production process by Hallmark, and precedes the final steps performed by Hallmark to fully complete the transparencies and films. As Repro Wes is the only company that maintains the digital files of the artist’s work, Hallmark must contract with Repro Wes. However, Repro Wes’ digital color separation is not compatible to Hallmark’s production systems without further manipulations in the U.S. Nor does the digital file supplied by Repro Wes contain all the essential elements of the design. Repro Wes’ contribution is a middle step in the production of the assist, with Hallmark’s designers completing the process upon receipt of the digital file. Accordingly, because Repro Wes’ contribution is part of the assist production process and because it occurs in the Netherlands, pursuant to 19 U.S.C. 1401a(h)(1)(C)(ii), the payments made to Repro Wes’s by Hallmark represent the value of the assist added outside the United States, and are dutiable.
HOLDING:
Upon reconsideration of HRL 547808 we find that the design work was properly determined to constitute an assist within the meaning of 19 U.S.C. 1401a(h)(1)(A)(iv). However, HRL 547808 is modified to the extent that the value of the assist is determined based on the payments made by Hallmark to Repro Wes and not based on the royalty payments made by Hallmark to the Dutch artist.
Sincerely,
Larry Burton
Acting Director, International Trade
Compliance Division