VAL RR:IT:VA 546720 EK
David R. Stepp, Esquire
Stein, Shostak & O’Hara
515 S. Figueroa Street
Los Angeles, California 90071-3329
RE: Request for Valuation Ruling; Wal-Mart Stores, Inc.; Assists
Dear Mr. Stepp:
This is in response to your request of April 14, 1997, requesting a valuation ruling on certain prospective transactions regarding your client, Wal-Mart Stores, Inc. Your letter of
June 8, 1998, states that you have since changed law firms, and that your new firm, Stein, Shostak & O’Hara, is now representing Wal-Mart. On May 17, 1999, you met with a member of my staff regarding this ruling request. We regret the delay in responding to your request.
FACTS:
You state that Wal-Mart’s buying agent, Pacific Resources Export, Ltd. (PREL), intends to purchase a computer aided device (CAD) that will be used to communicate color specifications from Wal-Mart’s U.S.-based buyers (buyers for Wal-Mart) to overseas manufacturers that produce wearing apparel for Wal-Mart. These buyers are domiciled within the United States.
These buyers for Wal-Mart research the latest styles and colors and determine the design of the garment including color combinations. The buyers then forward the color specifications to PREL via e-mail communications. A non-technical employee of PREL such as a secretary enters the color information into the CAD system in Hong Kong to produce a color print of a garment in various color combinations. These written specifications are essentially color numbers that are used to transmitted to PREL data that the employee relies upon to create the color prints. You have submitted samples of color prints that are produced by the CAD system.
- 2 -
You indicate that the CAD-generated prints are not essential for the production of the wearing apparel. You further explain that neither the PREL employee nor the CAD will create new designs or color tones. Rather, the prints are stock outlines of garments that are reproduced only for the purpose of conveying the buyers’ requested color combinations. Moreover, you state that the garment outlines are not patterns used for the apparel production. The color
combinations could be communicated in other ways, such as through oral instructions or via facsimile. You state that the CAD sketches provide for an efficient, alternative means of communicating the color specifications and options to the manufacturer.
ISSUE:
Whether the CAD-generated prints supplied by the buyer, through its buying agent, to the overseas manufacturers constitute assists within the meaning of section 402(h)(1)(A)(iv) of the TAA.
LAW AND ANALYSIS:
Merchandise that is 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). Transaction value, the preferred method of appraisement, is defined in section 402(b) of the TAA as the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions. One of the additions to the “price actually paid or payable,” provided for in section 402(b)(1)(C) of the TAA, is an assist. The term is more specifically defined in section 402(h)(1)(A) as:
. . . any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or of the sale for export to the United States of the merchandise:
(i) Materials, components, parts, and similar items incorporated in the imported merchandise.
(ii) Tools, dies, molds, and similar items used in the production of the imported merchandise.
(iii) Merchandise consumed in the production of the merchandise.
(iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and necessary for the production of the imported merchandise.
- 3 -
As indicated above, the actual design and color combination determination occurs in the United States by the Wal-Mart buyers. Therefore, pursuant to section 402(h)(1)(A)(iv) of the TAA, the “design work” involved in determining the color combinations and patterns of the garments does not constitute an assist since it is undertaken within the United States.
The remaining issue is whether the input of information and creation of the CAD-generated prints in Hong Kong is either artwork or design work that is necessary for the production of the imported merchandise.
In HQ Ruling No. 544621 dated April 22, 1991, Customs held that “colorway” activities were necessary for the production of the imported merchandise and constituted assists within the
meaning of section 402(h)(1)(A)(iv). In that case, “colorways” were defined as designs or patterns of shapes with color combinations in the design. The designs were colored by an artist mixing various color paints to arrive at a desired color and then applied that color to the design. Some designs were more basic and most of the art work was in the mixing and application. Once the colorway was completed with color, it was sent to the art or printing department for matching and printing onto the fabric. As indicated in that ruling, colorways are produced in a variety of ways, ranging from the very simple with little effort to the very intricate, using the labor and skills of many individuals. The ruling further held that the colorways were “necessary for the production of the merchandise,” since in order to be suitable for retail sale, the textile article must be colored.
In your ruling request, you attempt to distinguish the above-referenced ruling by indicating that Customs stressed the level of skill required by the artist in the arrangement and choice of colors. You indicate that the colorways instructed the manufacturer on how to color the article.
We agree with your conclusions that HQ 544621 is not controlling in this case. As indicated in 544621, the colorways in that case were deemed to constitute artwork in that the colorists who produced the color schemes were in fact artists, and the activity involved required a skill in the arrangement and choice of color. In this case, you indicate that the PREL clerical employee produces the prints from the CAD device by inputing data provided by the buyers for Wal-Mart. The employee merely inputs the color number provided. The PREL employee does not have any discretion in creating or arranging the color schemes, and from your description, it appears as though the activity is clerical in nature. Essentially, the color is computer generated in Hong Kong by the PREL employee and has no “artistic” value.
In a more recent ruling, i.e., HQ 546511 dated April 15, 1999, this office concluded that sketches of new shoe styles performed by designers constituted design work within the meaning
of section 402(h)(1)(A)(iv) of the TAA. In that case, the payments at issue were recorded on the importer’s books as design payments, and the information submitted was insufficient to determine whether in fact the work performed by the designers was or was not necessary for the production
- 4 -
of the imported merchandise. No documentation was provided to substantiate the nature of the
work undertaken, and the payments were added to the price actually paid or payable in the determination of transaction value.
In this case, sufficient information has been presented regarding the nature of the work undertaken in Hong Kong. It is our conclusion that the input of information and creation of the CAD-generated prints in Hong Kong is not “artwork” or “design work” within the meaning of section 402(b)(1)(A)(iv) of the TAA. We base this conclusion on the fact that the PREL employee is not an artist or designer engaged in preparing original designs or sketches. Further, the CAD sketches provided free of charge to the manufacturers are merely a means of conveying the buyers’ color combination choices to the manufacturers. The color choices could have been conveyed by less sophisticated methods such as by facsimile or oral instruction.
HOLDING:
The artwork and design work associated with producing the CAD-generated prints is undertaken within the United States. The input of information and creation of the CAD-generated prints in Hong Kong is neither artwork nor design work that is necessary for the production of the imported merchandise. Therefore, the CAD-generated prints are not assists within the meaning of section 402(b)(1)(A)(iv) of the TAA.
Sincerely,
Thomas L. Lobred, Chief
Valuation Branch