BRO 4-02
OT:RR:CTF:ER
H290002 KF
Damon Piatek Welke Customs Brokers USA, Inc. 36 Delaware St.
Tonawanda, NY 14150
Re: 19 C.F.R. § 111.36; commissions; 19 C.F.R. § 111.37; soliciting customs business
Dear Mr. Piatek,
This is in response to your letter, dated August 11, 2017, for a ruling on the proposed restructuring of the sales force employed by Welke Customs Brokers USA, Inc. (“WUSA”).
FACTS:
WUSA is a duly licensed customs brokerage in operation since 2008. WUSA is a sister company to Welke Customs Brokers Ltd. (“WCAN”), which is privately held and operates in Canada. WUSA is owned by Welke Holdings Ltd. WUSA and WCAN share a website, limited administrative services for marketing, and technology support. WCAN is not licensed nor permitted to conduct any customs business in the United States.
WUSA and WCAN each independently employ a sales force for the purpose of selling customs brokerage and freight forwarding services. All sales representatives are unlicensed persons tasked with contacting prospective clients with a series of questions designed to identify services that could be provided. All sales efforts are conducted on behalf of the company by which a representative is employed. Representatives’ salaries and wages are currently paid by their respective employer.
WUSA and WCAN propose restructuring the tasking and compensation of their sales force. Sales representatives would remain employed by a specific company, but would conduct sales on behalf of both WUSA and WCAN instead of just their respective employer. Representatives’ salaries and wages would continue to be paid by their employer, but would include a “variable pay structure based on new account sales.” WUSA explained in an email dated May 16, 2018, that the pay structure is in fact a commission for brokerage services sold. The commission would be paid by the company that performed the brokerage services sold.
WUSA states that pursuant to an internal Standard Operating Procedure (“SOP”), its sales force is supervised by licensed customs brokers. WUSA notes that WCAN lacks a SOP concerning supervision of its sales force. WUSA further states that both companies independently employ an operations group, which manages all services subsequently performed on behalf of a client by licensed brokers. The functions of a sales force and operations group do not overlap.
WUSA seeks confirmation that the proposed revision to the tasking and compensation of its sales force complies with 19 C.F.R. § 111.36, and is generally permitted under customs law.
ISSUE:
Whether WUSA may pay its unlicensed sales representatives by commission.
Whether WCAN’s unlicensed sales representatives may solicit customs business on WUSA’s behalf.
LAW AND ANALYSIS:
The tasking and compensation scheme proposed by WUSA implicates various customs regulations concerning brokers’ employment of, and conduct with, unlicensed persons. See e.g. 19 C.F.R. §§ 111.4, 111.28, 111.36, & 111.37. Sections 111.36 and 111.37 govern the relationship between licensed Customs brokers, importers, and third parties, and are the two Customs regulations most critical to determining the permissibility of WUSA’s intended scheme. We address each in turn.
Whether WUSA may pay its unlicensed sales representatives by commission.
Pursuant to 19 C.F.R. § 111.36(b): “a broker must not enter into any agreement with an unlicensed person to transact customs business for others in such manner that the fees or other benefits resulting from the services rendered for others inure to the benefit of the unlicensed person.” Thus, CBP Regulations precludes a broker from entering into an agreement with an unlicensed person, except a freight forwarder, to perform Customs business for a third party when fees generated from the transaction inure to the benefit of the unlicensed person. Id. In HQ 113965 (June 6, 1997), CBP determined that this prohibition precluded an agreement wherein unlicensed persons received a commission for marketing/selling customs services on behalf of a brokerage company. CBP held that “[a]s a general rule, commissions are a percentage of the fee paid for [Customs business] services rendered,” such that unlicensed persons could not accept a commission derived from the fees clients paid for customs services performed by the brokerage company. CBP suggested that an alternative payment structure, “such as a flat amount … not tied to any particular transaction” would instead be permissible.
CBP reiterated this position in HQ H276784 (Dec. 29, 2016), holding that WUSA could not utilize commissions to pay business development organizations for soliciting clients on its behalf. WUSA had proposed paying two non-profit organizations a finder’s fee for promoting WUSA’s brokerage services to prospective clients. The finder’s fee was described as “a commission plan … calculated as a percentage of the entry fee[,] paid either per importer or per shipment.” CBP determined that because the commission was derived from the fees paid for customs services, pursuant to 19 C.F.R. § 111.36(b), the finder’s fee constituted an impermissible benefit to unlicensed persons from the transaction of customs services.
The present compensation scheme proposed by WUSA entails unlicensed sales representatives receiving a flat amount for salaries and wages earned, and a commission based on brokerage services sold. WUSA describes the commission as a “variable pay structure based on new account sales,” paid per brokerage service sold. We find that the flat amount received by sales representatives for salaries and wages earned is permissible, as established in HQ 113965, because it is not tied to any particular customs business transacted by WUSA. However, we again find that WUSA may not utilize commissions as payment because unlicensed persons may not receive a benefit derived from fees earned by transacting customs business. Akin to the finder’s fee proposed in HQ H276784, WUSA’s current proposal entails a fee tied to specific customs transactions it performs, in violation of 19 C.F.R. § 111.36(b).
Whether WCAN’s unlicensed sales representatives may solicit customs business on WUSA’s behalf.
Pursuant to 19 C.F.R. § 111.37: a “broker must not allow his license, permit or name to be used by or for any unlicensed person (including a broker whose license or permit is under suspension), other than his own employees authorized to act for him, in the solicitation, promotion or performance of any customs business or transaction.” In HQ 225023 (February 23, 1994), CBP held that a Canadian broker could solicit clients on behalf of its subsidiary in the United States so long as the solicitation did not entail customs business. CBP explained that the purpose of 19 C.F.R. § 111.37 is to prevent unlicensed persons from preparing customs entries in reliance on the name and license of a broker. CBP determined that unlicensed persons may therefore solicit customs business on behalf of a broker, so long as they did not participate in the broker’s customs business.
In HQ 113965, CBP stressed that absent a bona fide employment relationship between an unlicensed person soliciting customs business and a broker, special caution must be taken to ensure adequate supervision of the solicitation activities. See 19 U.S.C. § 1614(b)(4) (a “customs broker shall exercise responsible supervision and control over the customs business that it conducts”). To exercise special caution, in HQ H276784, CBP advised WUSA that any unlicensed entity it utilizes to solicit customs business should directly warn its employees not to perform any task for WUSA that may be considered customs business.
The present solicitation scheme proposed by WUSA entails the solicitation of customs business by unlicensed sales representatives which it employs, and those employed by WCAN. We find that solicitation by unlicensed sales representatives, which WUSA employs, is permissible because it occurs in the context of a bona fide employment relationship and proper supervision can be maintained. We find that solicitation by unlicensed sales representatives employed by WCAN may be permissible, but requires special caution. Akin to the subsidiary in HQ 225023, WUSA will solicit customs business via an unlicensed Canadian broker. Since WUSA noted that WCAN lacks a SOP concerning supervision of its sales force, we advise WUSA to ensure WCAN representatives are directly warned not to perform any task on its behalf that may be considered customs business.
We note that violation of either 19 C.F.R. §§ 111.36 or 111.37 may result in the imposition of penalties or other sanctions pursuant to 19 U.S.C. § 1641(b)(6) and/or 19 U.S.C. § 1641(d)(1)(C).
HOLDING:
Based on the above, we find that: (1) WUSA may not pay its unlicensed sales representatives by commission, and, (2) WCAN’s unlicensed sales representatives may solicit customs business on WUSA’s behalf subject to adequate supervision.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruing letter, either directly, by reference, or by implication, is accurate and complete in every material respect.” If any fact in the transaction varies from the facts stipulated to herein, this decision shall not be binding on CBP, as provided for in 19 C.F.R. § 177.9(b).
Sincerely,
Gail G. Kan, Branch Chief
Entry Process and Duty Refunds