OT:RR:CTF:VS H218759 BGK
Valuation
Paul Fitzpatrick
MIQ Logistics
20 Central Street, Suite 108
Salem, MA 01970
RE: Subheading 9801.00.26, HTSUS; Original duty-free importation; Valuation; Catalogue/Internet returns
Dear Mr. Fitzpatrick:
This is in response to your request for a binding ruling on behalf of your client, the importer (or “the company”), concerning the eligibility of certain catalogue returns for duty-free treatment under subheading 9801.00.26, Harmonized Tariff Schedule of the United States (HTSUS), when the good was originally imported duty-free under the U.S.-Columbia Trade Promotion Agreement. You also request a determination on the appropriate method of appraisement for catalogue returns.
FACTS:
The company is a U.S. retailer specializing in clothing, luggage, and home furnishings, and conducts most of its business through mail order and internet sales. The company sells to customers outside the U.S., and has a return policy that allows for an exchange or refund of the purchase price to the customer’s credit card, referred to as a “credit”. If an international customer wishes to return an item, they are directed to return the item to a central collection point in the country in which the goods were ordered, or for some countries, directly to the company’s U.S. facility. At the central collection points, the goods are inventoried, consolidated, and shipped back to the company in the U.S.
Although the company does not use formal shipping terms in its business-to-consumer transactions, the customer is required to pay shipping in both directions, unless a promotion applies or the return or exchange is due to the company’s error. The customer is also responsible for duties and taxes. In the U.S. export transaction,
the buyer’s credit card is charged and the company recognizes revenue when the ordered goods are loaded into the logistics provider’s trailer, at the company’s U.S. facility, for shipment. If the buyer does not receive the goods, the company reships the order upon confirmation with the logistics provider.
If the goods are returned for a credit, the buyer’s credit card is credited the purchase price upon receipt by the appropriate central collection point, or for countries without a central collection point, the U.S. facility. Credits are never done as merchandise or store credits; it is always a return of the purchase price to the buyer’s credit card. If the goods are exchanged, the return and exchange are treated as separate transactions; a credit is issued for the return and a new charge is created for the new order. The credit occurs in an exchange at the same time as in a return. If the exchange is for the same style item in a different size or color, the credit and charge are for the amount of the original purchase price, regardless of any price changes in the interim. However, if the item is exchanged for a different style number, the cost of the original style would be credited, and the cost of the new style will be charged at the current price for that style.
The goods subject to these returns may have been originally imported in one of two ways. The first possibility is that the company acted as the original importer of record for the merchandise. When the company acts as importer of record, some of the goods may be imported duty-free under the U.S.-Columbia Trade Promotion Agreement. The second possibility is that the company purchased the merchandise landed duty paid, and the vendors acted as importer of record.
When the company acts as the original importer of record, they will have records to determine if the returns were exported within three years of the original importation, are being reimported from the customer within one year of exportation, were sold for exportation and exported to individuals for personal use, are being reimported without having been advanced in value or improved in condition while abroad, and are being reimported as personal returns.
ISSUE:
I. Do the returns qualify for duty-free treatment under subheading 9801.00.26, HTSUS, when your client acted as the original importer of record, and the goods were originally imported duty-free under a preference program?
II. What is the proper method of appraisement for the returned merchandise?
LAW AND ANALYSIS:
I. Subheading 9801.00.26, HTSUS
Subheading 9801.00.26, HTSUS, provides duty-free treatment for:
Articles, previously imported, with respect to which the duty was paid upon such previous importation, if: (1) exported within 3 years after the date of such previous importation; (2) sold for exportation and exported to individuals for personal use; (3) reimported without having been advanced in value or improved in condition by any process of manufacture or other means while abroad; (4) reimported as personal returns from those individuals, whether or not consolidated with other personal returns prior to reimportation; and (5) reimported by or for the account of the person who exported them from the United States within 1 year of such exportation.
You have only asked about subheading 9801.00.26, HTSUS, treatment for returned goods originally imported by the company under a free trade agreement. It is stated that because the company was the original importer of record, it will have records to prove the returns were exported within three years of the original importation, are being reimported from the customer within one year of exportation, were sold for exportation and exported to individuals for personal use, are being reimported without having been advanced in value or improved in condition while abroad, and are being reimported as personal returns. The goods were exported by the company, and are being reimported by or for the account of the company. You seek clarification regarding the first requirement of subheading 9801.00.26, HTSUS: the goods were previously imported with duty paid.
Subheadings 9801.00.20 and 9801.00.25, HTSUS (formerly item 801.00, Tariff Schedule of the United States (TSUS) and item 801.10, TSUS, respectively) also contain duty paid language. In Pub. L. 98-573 (1984), Congress amended item 801.00, TSUS — now subheading 9801.00.20, HTSUS — to include original duty-free importations under the Generalized System of Preferences (GSP) and the Caribbean Basin Initiative (CBI); however, not all duty preference programs were included, for example, the U.S.-Israel Free Trade Agreement. The discussion referenced the development purposes of these programs. See S. REP. No. 98-308, at 13 (1983). The Senate Committee on Finance reported:
Subsequent to the promulgation of item 801.00, however, the Congress enacted two duty preference schemes – [GSP] and [CBI] – that provide for duty-free treatment of certain imports from developing countries. TSUS item 801.00 was drafted in language that precludes its application to
articles that first entered duty-free. Thus the provision in effect acts contrary to those preference programs of encouraging development through trade. Section 118 seeks to correct the unanticipated discriminatory effects of TSUS item 801.00 on eligible products from countries benefiting from these preference programs.
Id. Although subheading 9801.00.26, HTSUS, was not in existence at the time, subheading 9801.00.25, HTSUS — item 801.10, TSUS — is a similar provision that was in existence. However, Congress did not amend item 801.10, TSUS, in Pub. L. 98-573, although CBP had already ruled that the duty paid language did not include duty-free entries made under trade preference programs. In HRL 071029, dated November 24, 1982, in analyzing the eligibility of an article originally entered duty-free under GSP for duty-free treatment under item 801.10, TSUS, CBP stated:
[Item 801.10, TSUS] is intended to avoid the payment of duty more than once and therefore requires a factual determination that duty was paid previously. To state that the Congress meant something other than what the clear statutory language says is untenable, and in this regard it is noted that if the Congress had intended otherwise it would have been a simple matter, as in the case of item 808.00, TSUS, [subheading 9803.00.50, HTSUS] to refer to the previous payment of “duty (if any)”.
See also HRL 058225, dated June 14, 1978.
Subheading 9801.00.26, HTSUS, was also implemented to avoid the double payment of duties by catalogue merchants when goods were returned to them from customers abroad. See S. REP. 106-2, at 64 (1999) (“Under current law, some products sold by catalogue merchants face double duties when the goods are returned to them by customers abroad. This provision would ensure that duties are assessed only on the first time a product comes into this country from abroad.”). If the good was initially imported duty-free, no double payment of duties would occur. Therefore, we find that returns reimported by the company are not eligible for duty-free treatment under subheading 9801.00.26, HTSUS, when the goods were originally imported duty-free under the U.S.-Columbia Trade Promotion Agreement or another duty-free preference program.
II. Valuation of the returned merchandise
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. § 1401a. The transaction value of imported merchandise is the “price actually paid or
payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. See 19 U.S.C. § 1401a(b). In order for imported merchandise to be appraised using the transaction value method, it must be the subject of a bona fide sale between a buyer and a seller, and the sale must be for exportation to the United States.
Inasmuch as the transaction value method requires a sale for exportation to the U.S., a bona fide sale between the buyer and seller must exist in order for merchandise to be appraised accordingly. You argue that because the merchandise is returned for credit (exchange or refund) there is no sale for export to the U.S., and therefore, transaction value does not apply.
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)). However, several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of imported merchandise. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See Headquarters Ruling Letter (HRL) H092448, dated May 4, 2010; HRL H012659, dated November 14, 2007; and HRL 548273, dated April 17, 2003.
In HRL 546941, dated August 11, 1999, wearing apparel and footwear were imported from Canada as consolidated returns from customers. The customers received refunds or credits. The catalogue merchant responsible for the shipment of the goods to the customers in Canada acted as the importer of record for the return. CBP held that there was no sale to the customer in Canada, and therefore, the return could consequently not be a sale back to the U.S. CBP held that under Uniform Commercial Code (U.C.C.) sections 2-326 and 2-327 the goods were exported to Canada as part of a “sale on approval.” Under U.C.C. § 2-326 “(1) Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is (a) a “sale on approval” if the goods are delivered primarily for use[.]” U.C.C. § 2-327 provides:
(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; and
(c) after due notification of election to return, the return is at the seller's risk and expense but a merchant buyer must follow any reasonable instructions.
CBP held that because the goods were sold for the customers’ use and were subject to a built in return policy, the transaction was a “sale on approval.” As title and risk of loss remain with the seller until the buyer accepts in a “sale on approval,” there was never a sale when the goods were returned.
However, subsequent to HRL 546941, Jacq Wilson v. Brawn of California, Inc., 33 Cal. Rptr. 3d 769 (Cal. App. 1st 2005), interpreted California Uniform Commercial Code sections 2326 and 2327 as the sections pertain to catalogue transactions with individuals. California Uniform Commercial Code sections 2326 and 2327 are adopted from the U.C.C., just as the jurisdictions, in which the company is incorporated and has its principal place of business, have adopted these sections of the U.C.C. The plaintiff in Jacq Wilson, contended that allowing customers to return goods for a full refund created a “sale on approval.” The court held that the initial flaw in the plaintiff’s argument was under section 2327, which provided that unless otherwise agreed, the risk of loss and title do not pass until acceptance; however, the catalogue merchant required the customer to pay shipping and insurance, which the court said placed risk of loss on the buyer. Additionally, in interpreting section 2326, the court held that “a ‘sale on approval’ is a bailment that gives the purchaser the right to use and the option to purchase after a reasonable period of time.” Id. at 774 (citing Matter of Prior Bros., Inc., 632 P.2d 522, 527-528 (Wash. Ct. App. 1981). With regard to the catalogue sales at issue in the case, the court stated that “[t]he ordinary retail sales contract is not a bailment, and the general presumption runs against delivery to a consumer as being a sale on approval.” Id. at 774 (citing Gold’n Plump Poultry, Inc. v. Simmons Eng. Co., 805 F.2d 1312, 1319 (8th Cir. 1986)). The court pointed out that “a common attribute of a ‘sale on approval’ is that the obligation to pay for the goods does not arise until the goods have been tested and approved by the buyer.” Id. at 775. By contrast, in the typical retail or catalogue sale, the goods are paid for when ordered and the customer pays the shipping. See id. The court concluded that a retailer “permit[ing] a customer to return goods for a refund is a benefit to the customer, but does not in and of itself suggest that the parties intended the seller to retain an interest in the goods until sometime after they are delivered to the customer, and does not convert a routine sale with a right to return into a sale on approval.” Id. at 775.
The principles stated in Jacq Wilson apply in this case. The fact that the company offers a full refund or exchange on every order does not change this traditional catalogue sale into a sale on approval. As stated above, the general presumption runs against a sale on approval. Additionally, according to U.C.C. § 2-327, unless otherwise stated, under a “sale on approval” the return is at the seller’s risk and expense and title
does not pass until the buyer has accepted the goods. In the transactions at issue, the buyer pays shipping in both directions, and the buyer’s credit card is charged when the goods are loaded with the logistics provider at the company’s location. As such, the transactions at issue are not “sales on approval” and the transactions must be examined under the factors laid down by the Court of Appeals for the Federal Circuit.
In the U.S. export transaction, the company and the customer function as buyer and seller. The buyer’s credit card is charged when the goods leave the seller, and unless a promotion applies, the buyer pays shipping as well. We find that the U.S. export transaction is a sale, and it is therefore necessary to determine whether the return transaction is a sale.
The return transaction may involve two different scenarios: (1) an exchange or (2) a return for credit. A customer may choose to exchange the item for a good of the same style in a different color or size or a different item. Exchanges may be a form of countertrade, which was discussed in General Notice, Countertrade Transactions, 25 Cust. Bul. 6 (February 6, 1991). In the General Notice, CBP, citing World Customs Organization (WCO) Technical Committee on Customs Valuation Advisory Opinion 6.1, stated that:
1. International barter takes various forms. In its purest form, it consists of an exchange of goods or services of approximately equal value, without recourse to a common unit of measure (money) to express the transaction. . . .
2. Disregarding the question as to whether a sale has occurred in cases of pure barter, where the transaction is neither expressed nor settled in monetary terms, and there is no transaction value or objective and quantifiable data for determining that value, the Customs value should be established on the basis of one of the other methods set out in the [Customs Valuation Agreement], taken in the sequence prescribed.
The exchange transaction is treated as two separate transactions; a return for credit and a second order. It is stated that almost all the circumstances related to title and shipping for the original sale and returns for credit are the same for exchanges. The difference is that if a style is exchanged for the same style in a different size or color, and the price has changed in the interim, the price charged on the new order will be the same as the original order. Additionally, for some countries, shipping will be covered by the company should the buyer exchange the good for the same style in a different size or color, and shipping will be covered by the company if the return is due to the company’s error. Although the company pays shipping in some instances, this is a service to the buyer, and does not affect the passage of title upon return to the collection point or U.S. facility. Additionally, even when the new good is priced at the previous transaction’s price, the company treats the exchange as two separate transactions. As the two transactions are separate, they can each be expressed in monetary terms. This case is not a true exchange or barter. As such, we do not consider this to affect the determination of whether a sale exists. We find returns and the returns completed as part of exchanges are the same for the purposes of valuation and the analysis of whether a sale exists.
In the case of the returns and exchanges, the company refunds the purchase price to the buyer at the time the good is received at the collection point or U.S. facility. The company does not consider these transactions as sales from the buyer to the company. However, under VWP of America, a sale is a transfer of title from one party to another for consideration, and in this case, upon receipt of the returned goods, the company credits the full purchase price to the customer’s credit card. This is a transfer of title for consideration, and thus a sale. Additionally, although the goods in some countries are sent to a central collection point and not directly to the company’s U.S. facility, the purpose of the collection point is to return the goods to the U.S. and is the point at which title transfers. We find that the sale is a sale for export to the U.S., and transaction value applies. As we have found a sale occurs from the customer to the company, it is unnecessary to consider the different methods proposed under “fallback” for goods originally imported by the company and those originally purchased landed duty paid.
HOLDING:
Returns reimported by the company are not eligible for duty-free treatment under subheading 9801.00.26, HTSUS, when the good was originally imported duty-free under the U.S.-Columbia Trade Promotion Agreement or another duty-free preference program.
The returns and exchanges represent sales from the customer to the company, and thus, transaction value is the appropriate method of appraisement.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Sincerely,
Monika R. Brenner
Chief, Valuation & Special Programs Branch