OT:RR:CTF:VS H284207 RMC
Lars-Erik A. Hjelm
Akin Gump Strauss Hauer & Feld, LLP
1333 New Hampshire Ave., N.W.
Washington, DC 20036-1564
RE: First Sale; First Aid Kit Bags
Dear Mr. Hjelm:
This is in response to your request of March 3, 2017, on behalf of your client, [ ] (“Importer”), for a prospective ruling request on the use of “first sale” appraisement for imported merchandise.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
The merchandise in the transaction at issue consists of first aid bags and accessories including coupon books, “belly bands,” information cards, and stickers. You state that the bags are classified under subheading 4202.92.90, Harmonized Tariff Schedule of the United States (“HTSUS”) and are dutiable at a 17.6% ad valorem rate. You also state that the accessories are classified in subheadings 4911.10.00, 4821.10.20, 4911.99.60, and 4901.10.00, HTSUS, all of which are duty-free. Importer distributes these bags and accessories to its U.S. customers, who fill them with first-aid items.
The proposed multi-tier transaction involves four parties: (1) the Importer, a U.S. entity that will serve as the importer of record; (2) [ ] (“the Middleman”), a U.S.-based entity that will purchase the bags and accessories from the manufacturers and sell them to the Importer; (3) [ ] (“Manufacturer 1”), a Chinese entity that will manufacture the bags; and (4) [ ] (“Manufacturer 2”), a Hong Kong entity that will provide the related accessories. You note that none of the parties in this transaction are “related parties” under 19 U.S.C. § 1401a(g). In your submission, you request confirmation that the Importer may use the sales price that the Middleman pays to the Manufacturers as transaction value for the imported first aid bags and accessories.
The documentation provided describes a proposed transaction structured in the following way. First, the Importer will a submit purchase order (“PO”) for the medical bags and accessories to the Middleman. The Middleman, who has the authority to negotiate with suppliers, establish purchasing terms and conditions, and select the supplier, will then issue purchase orders to Manufacturer 1 for the bags and to Manufacturer 2 for the accessories. You note that the Importer will not participate in the negotiations with Manufacturer 1 or with Manufacturer 2, nor will it work directly with these entities or communicate with them in any way.
In addition to selecting manufacturers, the Middleman will be responsible for producing “specification analysis sheets” for the bags and accessories. These documents, which will be subject to the Importer’s review and approval, will provide instructions for Manufacturer 1 and Manufacturer 2 on how to construct, test, and mark the bags and accessories. Once the Importer approves the specification analysis sheets, Manufacturer 1 and Manufacturer 2 will produce the goods to conform to the specification analysis sheets.
The Middleman will then invoice the Importer for the merchandise, and Manufacturer 1 and Manufacturer 2 will separately invoice the Middleman for the merchandise. The invoices will show that the Middleman pays a lower price for the merchandise than the Importer. Payment will be achieved by separate, direct payments (from the Importer to the Middleman and from the Middleman to Manufacturer 1 and Manufacturer 2).
The merchandise will be shipped directly from China to the United States. Although, as explained further below, the Middleman will retain title to the goods during shipment, the Importer will arrange ocean freight and act as the importer of record. The terms of sale between Manufacturers 1 and 2 and the Middleman will be FOB. Accordingly, you state that the title and risk of loss for the merchandise will shift from Manufacturer 1 and Manufacturer 2 to the Middleman when the merchandise arrives at the port of exportation in China. Then, according to the Sales Terms and Conditions between the Middleman and the Importer, title and risk of loss for the goods will transfer “upon receipt and acceptance of the products at the Importer’s distribution center,” which is located in California. Based on the structure of this proposed transaction, you argue that the merchandise may be appraised based on the “first sale,” i.e., the price that the Middleman pays to Manufacturer 1 and Manufacturer 2.
The Importer’s submission also contains an example of a recent transaction which “generally represents the documents and factual circumstances of all of [the Importer’s] multi-tiered transactions with [the Middleman] and the foreign manufacturers for the sale of the first aid bags and accessories.” As the sample transaction of imported merchandise was entered before this ruling request was submitted, it was not appraised on the basis of the first sale. Nonetheless, according to counsel, it represents the type of transactions that should be eligible for first-sale appraisement in the future.
The Importer’s sample transaction involves an entry of first aid bags and duty-free bag accessories. The Entry Summary provided indicates that the merchandise was entered on April 6, 2016. The total entered value of the merchandise was listed as $100,532.16.
The Importer provides a complete paper trail to document the transaction. On December 21, 2015, the Importer issued a PO to the Middleman for a specific number of first aid bags and accessories. The “Total PO Amount” listed on the PO was $100,532.16, i.e., the same as the entered value of the merchandise. That same day, the Middleman issued a PO to Manufacturer 1 for the same quantity of bags, at a price of $61,537.19, and a PO to Manufacturer 2 for the same quantity of accessories, at a price of $11,653.72. The total amount of the two POs (the Middleman to Manufacturer 1 and Middleman to Manufacturer 2) was $73,190.91.
The POs between the Middleman and Manufacturers 1 and 2 list the shipping terms as “FOB Yantian.” The invoice between the Importer and the Middleman lists shipping terms as “FOB Shenzhen.” However, according to the “Sales Terms and Conditions” document provided, which governs the Importer’s purchase of goods from suppliers, “unless otherwise specified in the PO, title of Products shall pass to [the Importer] upon receipt and acceptance of Products by [the Importer] at [its] distribution center,” which is in California. The Sales Terms and Conditions document also provides that the Importer has 90 days to give notice of rejection of the merchandise, in which case responsibility for the rejected merchandise falls on the Middleman.
Also included in the documentation provided are specification sheets that the Middleman issued to both Manufacturer 1 and Manufacturer 2. The specification and analysis sheets include a description of the item and its material components, marking requirements, packing instructions, and testing requirements, along with images including pictures and drawings. The testing requirements also reference 16 C.F.R. Part 1303, which is a set of regulations promulgated by the U.S. Consumer Product Safety Commission that bans lead-containing paint and certain consumer products bearing lead-bearing paint.
Invoicing for the merchandise began on February 1, 2016, when Manufacturer 2 issued a commercial invoice in the amount of $11,653.72 for the sale of the accessories, referencing the Middleman’s PO. On March 18, 2016, Manufacturer 1 issued a commercial invoice for $61,537.19, referencing the Middleman’s PO. Finally, on March 21, 2016, the Middleman issued a commercial invoice for $100,532.16, referencing the Importer’s PO.
The bill of lading lists the shipper as the Middleman and the consignee as the Importer. The Port of Loading is listed as Yantian, which is one of the six districts of Shenzhen, China, and the Port of Discharge is listed as Los Angeles. The description of the merchandise states that one container contains “CTNS FABRIC BAG.”
Payment for the merchandise began on February 18, 2016, when the Middleman sent a wire transfer in the amount of $11,653.72 to Manufacturer 2 for the accessories, referencing the Manufacturer’s PO. Next, on April 7, 2016, the Middleman sent a wire transfer in the amount of $61,537.19 to Manufacturer 1 for the bags, referencing the Middleman’s PO. Finally, on April 28, 2016, the Importer sent a wire transfer to the Middleman in the amount of $100,532.16 for the bags and accessories. A hand-written note on the “payment advice” document indicates that the payment was for the Middleman’s invoice.
ISSUE:
Whether the merchandise will be eligible for appraisement based on the first sale between the Importer and the Middleman.
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 preferred method of appraisement is transaction value, which is defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutory additions. 19 U.S.C. § 1401a(b)(1).
In Nissho Iwai American Corp. v. United States, 982 F. 2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the U.S. The case involved a foreign manufacturer, a middleman, and a U.S. purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the U.S. See also Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993).
In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States” within the meaning of 19 U.S.C. § 1401a.
In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now U.S. Customs and Border Protection (“CBP”)) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the U.S. The documents may include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (e.g., correspondences) that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
The first issue in this case is therefore whether a bona fide, arm’s-length sale will occur between the Middleman and Manufacturers 1 and 2. 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 Headquarters Ruling Letter (“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 HQ 545705, dated January 27, 1995. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ H005222, dated June 13, 2007. Finally, pursuant to the CBP's Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provides or could provide instructions to the seller, is free to sell the transferred item at any price he or she desires, selects or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
Here, the terms of sale listed on the POs that the Middleman submits to Manufacturer 1 and Manufacturer 2 are FOB Yantian. According to the INCOTERMS 2010 rules, FOB means that “the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment . . . [and] the risk of loss or damage to the goods passes when the goods are on board the vessel . . . .” See Incoterms 2010, International Chamber of Commerce, http://iccwbo.org/resource
s-for-business/incoterms-rules/incoterms-rules-2010/ (last visited July 14, 2017). Consequently, title and risk of loss for the goods will pass from Manufacturer 1 and 2 to the Middleman when the goods are loaded on board the vessel in Yantian, China.
The PO from the Importer to the Middleman and the invoice from the Middleman to the Importer also list the shipping terms as FOB. However, the Sales Terms and Conditions provide that “unless otherwise specified in the PO, title of Products shall pass to [the Importer] upon receipt and acceptance of Products by [the Importer] at [its] distribution center,” which is in California. Because the PO does not purport to modify the Terms and Conditions document, the Middleman will hold title and risk of loss to the merchandise until the Importer receives and accepts the merchandise in California. This interpretation is consistent with the other terms of the Sales Terms and Conditions document, which provide that the Middleman is financially responsible for any merchandise that the Importer rejects during its inspection in California.
In terms of payment, the documents provided for the sample transaction show that consideration will pass from the Middleman to Manufacturer 1 and 2, and that the consideration will be linked to the specific import transactions based on the PO number and invoice number. Additionally, as the parties are unrelated, we presume that the sale is at arm’s length. See, e.g., Treasury Decision (T.D.) 96-87 (“[i]n general, Customs will consider a sale between unrelated parties to have been conducted at ‘arm’s length’”). Because the transaction is at arm’s length and the Middleman will accept title and risk of loss for the merchandise, we find that a bona-fide sale will occur in the proposed transaction.
The second issue in this case is whether the sale of the imported merchandise will be “clearly destined for the United States.” Here, the specification sheets that the Middleman issues to the manufacturers reference U.S. legal requirements, i.e., 16 C.F.R. Part 1303. Counsel states that these references are provided in accordance with the legal requirements from the U.S. Consumer Safety Product Commission. Most importantly, the bill of lading provided for the sample transactions demonstrates direct shipment from Yantian, China, to Los Angeles. The transaction documents provide no indication that the goods are diverted from their final destination in the United States. Based on the information submitted, we find that the merchandise will be “clearly destined for the United States” when it is sold to the Middleman.
HOLDING:
Because the merchandise will be subject to a bona fide, arm’s-length sale between the Middleman and the Manufacturer 1 and 2, and the merchandise will be “clearly destined for the United States” when it is sold to the Middleman, the merchandise will be eligible for first sale appraisement in accordance with Nissho Iwai American Corp. v. United States, 982 F. 2d 505 (Fed. Cir. 1992). Accordingly, the price paid between Manufacturers 1 and 2 and the Middleman may serve as the basis of appraisement under the transaction value method of appraisement.
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 ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents 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 CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch