VAL CO:R:C:V 544634 DPS

Alan G. Lebowitz, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
12 East 49th Street
New York, N.Y. 10017

RE: Dutiability of Buying Commissions

Dear Mr. Lebowitz:

This is in response to your submission dated January 21, 1991, requesting a ruling on behalf of Lillian Vernon Corp. (LVC or Lillian Vernon), an importer of general merchandise. You request a ruling regarding the dutiability of certain commissions paid by Lillian Vernon to its buying agent in Hong Kong, Trade Exploit, Ltd. (TEL or Trade Exploit).


In response to a recent audit report issued by Customs Regulatory Audit Division (New York) concerning LVC, LVC has voluntarily restructured its invoicing procedures, despite the fact that LVC disagrees with the conclusions of the audit report. Customs at the Port of Norfolk has raised concerns with the proposed revised invoicing procedures. Accordingly, this ruling request seeks confirmation of the non-dutiable status of buying commissions paid by Lillian Vernon to Trade Exploit under revised invoicing procedures and a new buying agency agreement. Norfolk Customs is aware of the ruling request and seeks Headquarters resolution of the issue.

Before examining the details of the proposed transactions, a historical perspective on the parties' past Customs transactions as they relate to the issues presented is relevant. LVC and Trade Exploit have had a buying agency agreement in effect since November 1, 1980. That agreement provided that Trade Exploit would perform services which included "purchasing according to orders," performing the "inspection of goods" and "repacking of merchandise." In return for these services, LVC agreed to pay a commission. On July 1 1983, LVC, through its Customs broker, received internal advice from Customs acknowledging that Trade Exploit was a bona fide buying agent.

On May 16, 1989, Customs began an audit of Lillian Vernon Corporation. During the audit, items charged by Trade Exploit over and above the vendors' invoices, e.g., certain packaging charges, were examined and explained. Counsel also explained that in some cases, Trade Exploit, the buying agent, received a 5 percent discount from Chinese vendors. After this discussion, counsel asserted that the commissions paid were non-dutiable, but asked that the disclosures regarding the nature of the Trade Exploit commission be accorded prior disclosure treatment, should the commissions eventually be determined to be dutiable.

After the audit, Regulatory Audit personnel questioned the bona fide nature of buying commissions paid to Trade Exploit. The audit report stated:

Our review of the data supporting commission payments to TEL and the data LVC furnished to U.S. Customs in their ruling request regarding subject commission payments, disclosed that LVC furnished incomplete and inaccurate data to U.S. Customs. LVC's ruling request [for the 1983 ruling] did not disclose TEL's sales mark-up of the manufacturer's invoice nor did it disclose TEL's 5% commission/discount received from certain manufacturers from China....

Trade Exploit continues to deal on behalf of LVC with suppliers located in Hong Kong and the People's Republic of China (PRC). Trade Exploit's duties entail sourcing merchandise, assisting in negotiations for merchandise, purchasing merchandise pursuant to Lillian Vernon's orders, opening letters of credit to suppliers, consolidating merchandise, inspecting merchandise, packing merchandise and arranging for exportation and shipment of merchandise to the U.S.

Based on statements made by counsel: (1) LVC always retains authority over the choice of suppliers, and LVC is always aware of the identity of its suppliers; (2) TEL's involvement in transactions is limited to assistance--LVC must always approve the actual terms of sale; (3) TEL cannot finalize an agreement without prior approval by LVC; (4) TEL has never ordered merchandise of the type ordered by LVC for its own account; and (5) Trade Exploit does not sell merchandise to Lillian Vernon.

In the past, merchandise has been entered under Trade Exploit's invoice, and payment has been made directly to Trade Exploit by letter of credit. In order to draw on the letter of credit, Trade Exploit prepares an invoice written in the full amount of the transaction to tender to the issuer bank. TEL then opens a back-to-back letter of credit to the supplier for the purchase price of the merchandise, retaining only its commission and any charges incurred on behalf of LVC, such as packaging and handling.

Although Lillian Vernon disagreed with the auditor's conclusions, it has since revised its buying agency agreement and invoicing procedures with respect to future transactions. The new agreement and procedures as they relate to future transactions only, are the subject of this ruling. Lillian Vernon and Trade Exploit executed a new buying agency agreement on January 14, 1991, which contains an extensive recitation of the duties and responsibilities Trade Exploit is to undertake in its capacity as buying agent. These duties include: visiting manufacturers; obtaining samples; assisting in the negotiations of favorable prices; quoting prices at which the merchandise can be shipped; familiarizing itself with the principal's needs and surveying the potential markets to obtain the best available merchandise; placing orders on behalf of the principal upon explicit instructions from the principal; arranging payment terms to manufacturers and suppliers pursuant to the principal's instructions; purchasing quota at the direction of the principal; inspecting the quality of the merchandise to be shipped to the principal and determining conformity with the purchase order; assisting the principal in the return of defective merchandise, and assisting in the recovery of monies due the principal from the manufacturer as a result of defective merchandise or shortages; providing inspection certificates for each shipment; and arranging for insurance on behalf of the principal to protect against risk of loss relating to the principal's merchandise shipped from the People's Republic of China to Hong Kong for consolidation on C.I.F., Hong Kong terms.

In addition to the duties described above, the buying agency agreement also states that the agent may not provide additional services on behalf of the principal, including the purchase of quota, foreign currency, fabric, trim, etc., without prior approval of the principal. In the event that the agent provides such additional goods or services, then the agent is required to separately itemize the cost of such goods and services on its commission invoices to the principal. The agreement eliminates Trade Exploits receipt of manufacturers discounts, and requires the separate itemization of its packaging charge.

The new buying agency agreement and invoicing procedures were provided to the District Director in Norfolk. Counsel states that the District Director objected to the new procedures because: (1) the suppliers' invoices did not explicitly note that LVC was the purchaser; (2) the supplier's CIF Hong Kong terms did not indicate insurance was payable to or by Lillian Vernon; and, (3) there is no provision for deducting a buying commission from the price paid or payable unless a separate invoice identifies the buying agent's commission.

In response to the District Director's concerns, counsel has indicated that Trade Exploit will supply Lillian Vernon with a copy of the seller's commercial invoice for all future transactions in which Trade Exploit acts as a buying agent. In addition, Lillian Vernon will have future suppliers' invoices indicate sale to "Trade Exploit for the account of Lillian Vernon" or words to that effect. With regard to insurance, paragraph 2(m) of the new buying agency agreement states:

The Agent shall arrange for insurance on behalf of the principal to protect against risk of loss relating to the Principal's merchandise shipped from the People's Republic of China to Hong Kong for consolidation on C.I.F., Hong Kong terms. In the event of a loss, the Agent shall file insurance claims as necessary on behalf of the Principal. The Agent shall forward all resulting insurance recoveries to the Principal which are in excess of the sums advanced by the Agent on behalf of the Principal.

In addition to the above paragraph, counsel has represented that risk of loss for transactions involving Trade Exploit has always been and will continue to be borne by Lillian Vernon.

With regard to invoicing, LVC will make entry with an invoice prepared by TEL in connection all shipments involving TEL. As evidenced by the sample invoice submitted with this ruling request, the invoice indicates the unit price paid by Lillian Vernon to the seller for each individual item, as well as a total price paid. The invoice separately lists the cost of labels, quota, handling and packing charges by line item, if such charges are incurred by TEL. These amounts are then totalled and the buying commission is calculated based on that total (not the CIF Hong Kong price). Following this, a total price is set forth on the Trade Exploit invoice.


Whether, based upon the new buying agency agreement between LVC and TEL, and implementation of new invoicing procedures, a bona fide buying agency relationship exists between LVC and TEL such that the buying commissions paid by LVC to TEL can be treated as nondutiable.


For the purpose of this prospective ruling request, we are assuming that transaction value will be applicable as the basis of appraisement. Transaction value is defined in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b);TAA) as the "Price actually paid or payable for the merchandise" plus amounts for the five enumerated statutory additions in 402(b)(1). Buying commissions are not specifically included as one of the additions to the "price actually paid or payable." The "price actually paid or payable" is more specifically defined in 402(b)(4) as: "The total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer to or for the benefit of, the seller." It is clear from the statutory language that in order to establish transaction value one must know the identity of the seller and the amount actually paid or payable to him.

Whether or not a bona fide buying agency exists between an importer and an alleged "buying agent" is not determined by any single factor, but depends upon the relevant facts of each case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary consideration in determining whether a bona fide buying agency relationship exists between an importer and an alleged buying agent is the right of the principal to control the agent's conduct with respect to matters entrusted to the agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA 92, C.A.D. 1010, 436 F.2d 1399 (1971).

In a general notice published in the Customs Bulletin on March 15, 1989, Customs provided an explanation of its position on buying commissions. The following excerpts illustrate that position:

While bona fide buying commissions are nondutiable, evidence must be submitted to Customs which clearly establishes that fact. In this regard, Headquarters Ruling Letter 542141, dated September 29, 1980, also cited as TAA No. 7, provided: invoice or other documentation from the actual foreign seller to the agent would be required to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. Furthermore, the totality of the evidence must demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent or an independent seller.

In New Trends Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986), the Court of International Trade set forth several factors upon which to determine the existence of a bona fide buying agency. These factors include: whether the agent's actions are primarily for the benefit of the importer, or for himself; whether the agent is fully responsible for handling or shipping the merchandise and for absorbing the costs of shipping and handling as part of its commission; whether the language used on the commercial invoices is consistent with the principal-agent relationship; whether the agent bears the risk of loss for damaged, lost, or defective merchandise; and whether the agent is financially detached from the manufacturer of the merchandise. In addition, the importer must show that "none of the commission inures to the benefit of the manufacturer." J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp. at 984.

As the above cited court decisions make clear, any determination of whether a bona fide buying agency relationship exists, depends on the facts in each particular case. Here, we must determine the validity of the purported buying agency relationship, between LVC and TEL.

Based on the information submitted, ie., the buying agency agreement, sample invoices, and counsel's explanation, the new arrangements appear to satisfy the criteria for a bona fide buying agency relationship between LVC and TEL. As long as TEL remains under the control of the principal, LVC, and documents the transactions in accordance with the legal requirements set forth above, and the methods described by counsel in the ruling request submission, the buying commissions at issue appear to qualify for non-dutiable status as bona fide buying commissions.


If the actions of the parties conform to the descriptions provided by counsel regarding the subject prospective transactions, and the terms of the agency agreement are met to the extent that the importer will exercise the requisite degree of control over the buying agent as specified in the agreement, it is our conclusion that the commissions to be paid to Trade Exploit to perform the services of purchasing merchandise from manufacturers are to be considered bona fide buying commissions. Note, however, that the degree of control asserted over the agent is factually specific and could vary with each importation. The actual determination as to the existence of a buying agency will be made by the appraising officer at the applicable port of entry upon the presentation of the proper documentation as described in TAA No. 7.


John Durant, Director
Commercial Rulings Division

cc: District Director, Norfolk