VAL-2 OT:RR:CTF:VS H213946 RSD
Port Director
U.S. Customs and Border Protection
726 Exchange Street, Suite 400
Buffalo, New York 14210
RE: Reconsideration of Internal Advice Decisions H006576 and H026063 regarding the Valuation of Imported Giftware in Transactions between Related Parties
Dear Port Director:
This is in response to your memorandum dated April 11, 2012, forwarding a request for a partial reconsideration of Headquarters Ruling Letters (HQ) H006576 dated December 19, 2007 and HQ H026063 dated August 17, 2010, submitted by Neville Peterson on December 30, 2011, on behalf of their client Ganz USA LLC (Ganz US). The request for reconsideration challenges the holdings of H006576 and H026063 that the valuation of the imported merchandise should be based on the price actually paid or payable by Ganz’s customers in the United States. A telephone conference was conducted with Ganz US’ counsel on June 29, 2012. Ganz’s counsel followed up with a supplemental submission dated July 23, 2012.
FACTS:
According to the facts set forth in HQ H006576 and HQ H026063, the importer in this case is Ganz US. It is a U.S. company that imports toys, giftware and decorative items for sale in the U.S. Ganz US only acquires merchandise from its related parent company, Ganz Canada, to sell to customers located in the United States. Ganz Canada, the seller, is a privately-held Canadian company with warehouse, distribution, manufacturing, and office facilities located in Canada. The importer is the sole distributor of Ganz’s products in the United States. The seller and the importer are related by common shareholders and officers.
On November 16, 2006, the Office of Regulatory Audit issued an audit report concerning the importer’s import transactions. The audit report concluded that there were inadequate internal corporate controls over the reporting of the complete transaction value for the imported merchandise.
After receiving the audit report, Ganz US submitted to CBP Headquarters a request for a ruling concerning the dutiability of certain service fees that it paid to Ganz Canada. After reviewing the information presented by the Office of Regulatory Audit and the importer, we determined that the transaction between the Canadian seller and the United States importer did not constitute a bona fide sale. Therefore, we issued HQ H006576 dated December 19, 2007, in which we ruled that the transaction between the importer and the seller could not form the basis of appraisement of the subject merchandise. In our decision, it was our understanding that there was an apparent simultaneous transfer of title from the seller to the importer and then to the U.S. customer which suggested that there was only one sale; “namely”, between the Canadian Seller and the ultimate customer in the United States.
In a letter dated April 9, 2008, Ganz US asked CBP to reconsider our holding in HQ H006576 that there was not a bona fide sale between Ganz Canada and Ganz US. After considering the additional documentation presented and the arguments made by Ganz US counsel, we affirmed our decision in HQ H006576, and once again concluded that a bona fide sale had not occurred between Ganz US and its related foreign seller, Ganz Canada. Therefore, we again determined that the transaction between these related parties could not form the basis of appraisement of the imported merchandise. Instead, we again held that the imported merchandise should be appraised using the transaction value based on the price actually paid or payable by the U.S. customers for that merchandise.
Since the issuance of HQ H026063, Ganz US has obtained new counsel and is now once more challenging our determination that the valuation of the subject imported merchandise should be based on the prices that U.S. customers paid for that merchandise. In the most recent submissions, counsel provides additional information regarding Ganz. The information presented indicates that Ganz US was established in the State of Delaware in 1992 as a business corporation which was called Ganz Inc. It was reorganized in 2007 as a Delaware limited-liability company, and at that time the name was changed to Ganz USA, LLC. Its principal business is the sale of Ganz Canada developed merchandise in the United States. Ganz US pays United States income taxes on its earnings, which are recognized as earnings supposedly on the sale of goods. It uses more than 250 full time salaried employees for arranging sales in the
United States. Ganz US also has facilities located in Atlanta, Chicago, Dallas, Las Vegas and a third party logistics center located in Cheektowaga, New York, but the nature of these facilities were not explained.
According to the information provided, the ordering process is generally initiated by Ganz US’ sales representatives who solicit and take orders from U.S. customers (usually gift stores). Sales representatives typically enter the orders in an electronic hand-held computer device, which subsequently transmits them electronically to the Seller’s customer service personnel in Canada. The terms of payment for these U.S. sales are shown on purchase orders addressed to “Ganz 60 Industrial Parkway #043, Cheektowaga, New York 14227-9903” as “Net 30 days, F.O.B., Buffalo, N.Y.” The “Terms and Conditions” on the opposite side of the purchase order form indicate that “sales are final and that Shipments are F.O.B. Buffalo, N.Y., Freight Charge in addition to our F.O.B. cost.” It is claimed that the above Cheektowaga address is provided for customer inquiries and returns. Claims for defective, broken or unshipped merchandise are placed by the customers with Ganz US.
When customers pay by checks, the payments are all made to Ganz US and are received at the Cheektowaga facility. In addition, a substantial percentage of Ganz US receivables are paid through credit accounts and the receipts are held in Ganz US’ account at M&T Bank in Buffalo, New York.
According to counsel, when Ganz US receives an order from a customer, it will place a corresponding purchaser order with its parent company, Ganz Canada. Each Ganz US salesperson operates a mobile data terminal in which information of sales to customers in the United States are entered. The software in the terminals consolidates the purchase orders and forwards them to the Ganz US order system. The price that Ganz Canada charges Ganz US for the imported merchandise is allegedly dictated by a transfer pricing study prepared by the accounting firm of Pricewaterhouse Coopers, Inc. The prices that Ganz Canada charges Ganz US are substantially lower than the prices that Ganz US charges its unrelated customers in the United States. Ganz Canada issues a daily invoice to Ganz US showing the agreed upon transfer price on all of the goods shipped during a particular day. The terms of payment are Net 30 days. Ganz Canada also provides Ganz US with a current statement of account showing amounts owed. However, the transaction documents between Ganz Canada and Ganz US do not specifically indicate the terms of sale regarding the transfer of the imported merchandise between these related parties. The transfer price study states that the terms of sale are EXW Ganz Canada warehouse in Woodbridge, Ontario, Canada. Counsel asserts this means that title to the merchandise passes from Ganz Canada to Ganz US[A] at the loading dock at Ganz Canada’s warehouse. At that point, the goods are loaded onto an international carrier contracted by Ganz US for the transportation internationally to Buffalo, New York. At the Buffalo facility, the goods are packed in domestic UPS packages for dispatch to Ganz’s US’ customers.
ISSUE:
Should the imported merchandise be appraised based on the price paid by the U.S. customers or on the price paid by the importer to its related seller?
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 (19 U.S.C. §1401a; TAA). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. §1401a(b)(1). The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C §1401a(b)(4)(A).
In order for transaction value to be used as a method of appraisement, it must first be established that there is a “sale” between the parties. Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. In VWP of America, Inc. v. United States,175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term "sold" for purposes of 19 U.S.C. 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See also HQ 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995.
In HQ H006576, after reviewing the information presented by your office, the Office of Regulatory Audit, and Ganz’s counsel, we determined that the transactions between the seller and the importer did not constitute bona fide sales. Therefore, we ruled that the transactions between Ganz Canada and Ganz US could not form the basis of appraisement of the imported merchandise. After reviewing additional documentation Ganz presented in H026063, we affirmed our prior determination that a bona fide sale had not occurred between the importer and its related foreign seller. While Ganz’s new counsel asserts that there is indeed a sale of merchandise for exportation to the United States between Ganz Canada and Ganz US, we continue to believe that Ganz has failed to present sufficient evidence to support such a proposition.
With respect to identifying the buyer and seller to a sale, whether a buyer-seller relationship exists between two parties is to be determined by the substance of the transaction and not by the labels that parties attach to it. No single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. See Dorf International, Inc. v. U.S., 61 Cust. Ct. 604, 610; 291 F. Supp. 690, 694; A.R.D. 245 (1968).
In this instance, information available indicates that the related parties are so closely intertwined that it is difficult to conclude that Ganz US acts separately and apart from its parent company in Canada. We again note that Ganz has not presented any new evidence to indicate that Ganz US and Ganz Canada kept separate books for the years under review. During the course of their audit, the Office of Regulatory Audit reviewed the company records. They observed that Ganz US maintained none of its own financial records and that for the years under review, only one set of books for both companies was kept. In addition, during the time of the audit, all of the Ganz US’ financial records were kept in Toronto, Canada at Ganz Canada’s facilities under the total direction of Ganz Canada’s employees. This meant that Ganz Canada’s employees maintained the general ledger and the accounts payable records. As such, there appears to be virtually no separation between Ganz Canada and Ganz US in handling the company’s financial records. Although the checks for merchandise paid by U.S. customers may have been made out to Ganz US, we note that the Office of Regulatory Audit observed that Ganz US’s bank account was still totally under the control of Ganz Canada’s employees located at its facilities in Ontario, Canada.
Although Ganz US was separately incorporated and it may have had its own staff of sales employees, we continue to believe that the evidence shows that it really functioned as a selling division under the direction of its parent company, Ganz Canada. Based on information presented, there is little doubt that Ganz products were sold in the United States strictly under the control of Ganz Canada, because Ganz US could not function independently from Ganz Canada. Ganz US sales representatives sold merchandise strictly from product and price lists prepared and furnished by Ganz Canada. This meant that Ganz Canada determined what products Ganz US would sell in the United States, and what prices U.S. customers would pay for those products. Even if U.S. customers were on occasion offered discounts, they had to be approved by Ganz Canada before they could be applied. In other words, rather than functioning as
a separate buyer and reseller, Ganz US’ role was basically to serve as a sales division for selling Ganz’s products in the United States under the auspices of Ganz Canada.
We also find it significant that Ganz US did not maintain any of its own inventories of merchandise. Ganz Canada was responsible for all warehousing, purchase order processing, invoicing including invoices prepared for U.S. customers, and distributing and shipping of the merchandise to the U.S. customers. Despite claims to the contrary, if a U.S. customer had any issue with a product, they would have to contact Ganz Canada for a resolution because Ganz Canada also maintained and supported the telecommunications infrastructure connected with the sale of merchandise. This is demonstrated by the fact that the telephone numbers shown for customer service on Ganz US’ documents are Canadian telephone numbers that connect to Ganz Canada’s facility in Ontario. Along these lines, the Office of Regulatory Audit’s site visit revealed that Ganz US’ operation in Cheektowaga, New York was in fact only a UPS facility that was not staffed by any Ganz personnel.
The ordering process and the way merchandise was shipped further casts doubt on whether there were bona fide sales between Ganz Canada and Ganz US. When a Ganz US sales representative received an order from a U.S. customer, the order was transmitted from the customer in the United States directly to Ganz Canada’s office through electronic handheld computer devices. After an order was placed, Ganz Canada’s employees in Canada processed that order and had the merchandise sent to the United States. There is no indication that the orders from U.S. customers were processed in the United States by Ganz US employees. After receiving an order at Ganz’s warehouse in Canada, the merchandise was loaded onto a carrier who transported it to a UPS facility located in Buffalo. At the Buffalo facility, the merchandise was sorted into smaller packages so that it could be delivered to Ganz’s U.S. customers. In other words, no processing of the merchandise ever took place in the United States. All that was done in the United States was to transfer the merchandise from one carrier to a second carrier for delivery to the U.S. customers. Consequently, we believe that the transaction between Ganz Canada and Ganz US should be considered a movement of merchandise from one unit of the company to another unit within that same company rather than as a sale, as Ganz Canada seemed to be in control of the entire transaction.
In addition, to see if there is any support for finding whether bona fide sales took place between Ganz US and Ganz Canada, we have also again reviewed the transaction documents and the arguments that counsel has presented. Once more, we find no substantiation to establish that bona fide sales occurred between the related parties. Ganz has still not presented any transaction sales agreements or contracts between the related parties that show the terms of sale or indicate that there was a passage of title and risk of loss for the imported merchandise between Ganz Canada and Ganz US. The only indication regarding the transfer of title to merchandise in the transactions between the related parties was contained in a Transfer Pricing Study prepared by Pricewaterhouse Coopers. However, as we explained in H026063, no documentation was presented to backup the conclusions made in the Transfer Pricing Study. The claims made in the Transfer Pricing Study regarding risk of loss and the transfer of title were apparently based solely on discussions with Ganz’s management without any written documentation for such claims. Therefore, we must conclude Ganz has not sufficiently established that Ganz US obtained title or bore the risk of loss for the merchandise. While the purchase orders with U.S. customers and Ganz US indicate that the sales terms for the merchandise was “FOB Buffalo”, the use of this language only indicates that the risk of loss and title passed from the Ganz facility to the U.S. customers in Buffalo, New York. It does not establish that there was, in fact, a sale between Ganz Canada and Ganz US. In this instance, we find that Ganz Canada exercised such a high degree of control over the transactions that Ganz US undertakes with its U.S. customers that Ganz US cannot be considered a separate buyer and reseller of the imported merchandise.
Additionally, the fact that Ganz US files an income tax return with the United States Internal Revenue Service does not necessary mean that it functions as an independent buyer and seller of the imported merchandise. For example, an entity may function as a selling agent in the United States which is under the control of a seller. The fact that such an entity earns income in fees, commissions, etc. that must be reported to the Internal Revenue Service for federal income tax purposes does not mean that such a party functions as a separate buyer and seller under the Customs valuation law. We believe that Ganz US functions more akin to a sales agent than as an independent buyer and reseller. Similarly, the fact that Ganz US obtained state sales tax waivers could mean that the transactions were deemed to be business-to-business transactions not covered by state sales tax requirements, rather than business-to-consumer transactions which would require the reporting and collecting of state sales tax revenues.
In HQ 546858 dated June 2, 2000, CBP ruled that a bona fide sale occurred between a U.S. customer and the foreign supplier with the importer acting as a selling agent. We conclude that the same principle would apply in this situation. Although it is the transaction between Ganz US and the U.S. customers that triggers the merchandise being shipped from Canada to the United States, based on the information presented, we conclude that the transactions between Ganz Canada and Ganz US did not constitute bona fide sales. Instead, rather than two separate sales, there is only one sale for exportation between Ganz Canada and the ultimate purchaser in the United States, with the affiliated company, Ganz US, serving, in effect, as a sales representative of Ganz Canada for the transactions under review. Under these circumstances, because we continue to conclude that the sales for exportation
were between Ganz Canada and the purchasers in the United States, the subject imported merchandise must be appraised using transaction values based on the sales to Ganz’s customers in the United States.
Counsel argues that if the sale between Ganz Canada and Ganz US is not used for valuing the imported merchandise, then deductive value would be the appropriate method for valuing the imported merchandise under 19 U.S.C. §1401a. However, we believe that appraising the imported merchandise using deductive value would not be acceptable in this instance. First, as noted, because we have determined that there is, in fact, a sale for exportation between Ganz Canada and the U.S. customers, under 19 U.S.C. 1401a, this sale must be used to appraise the merchandise, unless there is a reason why appraisement under this transaction value would be invalid. Furthermore, there are other circumstances in this case which would prevent applying the deductive value method to appraise the imported merchandise. Under the deductive value method, imported merchandise is appraised on the basis of the price at which it or identical or similar merchandise is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. §1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. §1401a(d)(3). In other words, in order to apply deductive value, the imported merchandise must be sold after it is imported into the United States. In this instance, deductive value would not be an appropriate method of valuing the imported merchandise because the merchandise is imported from Canada into the United States as a result of sale to the U.S. customers and it was not sold after it was imported into the United States. Here, a sale was made between Ganz Canada and the U.S. customers, with Ganz US serving in effect as a sales agent. The transaction occurred before the merchandise was imported into the United States. There was not a sale between the Ganz US and the U.S. customers which occurred after the merchandise was imported into the United States to use in computing deductive value.
In addition, to be able to apply the deductive value method, the deduction made for profits and general expense shall be based upon importer’s profits and general expenses unless such profits and general expenses are inconsistent with those reflected in sales in the United States of imported merchandise of the same class or kind, in which case the deduction shall be based on the usual profit and general expenses of Ganz US from sufficient information. In this case, we do not have sufficient information to conclude that the profits and general expenses of Ganz US are consistent with sales of imported merchandise of the same class or kind. Thus, because we do not have information regarding Ganz US’ profits and general expenses, the imported merchandise cannot be appraised through deductive value.
Although our decisions in H026063 and H006576 are affirmed,
we do note, however, any costs involved in shipping the merchandise to its ultimate destination that is included in the price of the goods may be deducted from the value as international freight expenses, provided that those freight costs are actually documented. See HQ 546858, Supra.
HOLDING:
After reviewing the additional documentation and submissions presented, we find that a bona fide sale has not occurred between the importer and the related foreign seller. Therefore, we find that the transaction between these parties cannot form the basis of appraisement of the imported merchandise. Instead, we hold that the merchandise should be appraised using the transaction value based on the price actually paid or payable by Ganz’s customers in the United States. Therefore, the holdings of HQ H006576 and H026063 are affirmed, with the exception related to freight costs noted above.
This decision should be mailed by your office to the party requesting internal advice no later than 60 days from the date of this letter. On that date, Regulations and Rulings will make the decision available to CPB personnel, and
to the public on the CPB Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division