Ms. Sandra Fallgatter
Manager of Private Brand Compliance
J.C. Penney Corporation
6501 Legacy Drive, M/S 2222
Plano, Texas 75024-3698

RE: Ruling Request on the Dutiability of Foreign Vendor Discount

Dear Ms. Fallgatter:

This is in response to your letter of December 16, 2005, requesting a prospective ruling on behalf of J.C. Penney Purchasing Corporation, Inc. (“JCPPC”), concerning the customs valuation treatment of a vendor discount or price adjustment agreed by JCPPC and its foreign suppliers. A copy of a sample Vendor Agreement Letter was enclosed with your submission.


JCPPC is the international sourcing arm and a wholly owned subsidiary of J.C. Penney Corporation (“JCPenney”), a major United States retailer. JCPenney purchases its merchandise from both U.S.-based suppliers (“indirect sales”) and from JCPPC (“direct buys”). For direct buys, JCPPC in turn contracts with foreign suppliers to produce the merchandise that it later imports and sells to JCPenney. In those cases, JCPPC acts as the importer of record.

You state that JCPPC uses the price it pays its foreign suppliers to determine the customs value under the transaction value method of appraisement. JCPPC takes title and risk of loss after the foreign supplier delivers the merchandise to the foreign freight consolidator. You further explain that title and risk of loss are transferred in the United States from JCPPC to JCPenney after the merchandise is imported and clears U.S. Customs and Border Protection (“CBP”). You state that JCPPC’s contract price for the sale of goods to JCPenney is consistent with Internal Revenue Service (“IRS”) rules on transfer pricing.

JCPenney has initiated a suppliers discount program (“vendor-funded sales and training program”) with its U.S.-based luggage suppliers. The program is known as the Luggage Sales Management Program (“Program”). Under the terms of the Program, JCPenney and its U.S. suppliers agree, in advance to the shipment of the merchandise, to a specific percentage discount deducted from the supplier’s price. You indicate that the Program is intended to provide leadership and product training to the JCPenney store team with luggage responsibility and to assure achievement of sales and profit objectives. As part of the implementation of this Program, JCPenney has opened six new Sales Manager/Trainer positions for the luggage department.

You further state that JCPenney, through its international sourcing arm JCPPC, is considering expanding this Program to its foreign suppliers. Similar to JCPenney’s program for domestic suppliers, JCPPC and its foreign suppliers would agree, in advance to the importation of the merchandise, to a specific percentage discount of the supplier’s price. The actual amount that JCPPC will pay its foreign suppliers will be the supplier’s price minus the specific discount or price adjustment. You further explain that the discounted amount will be reflected in the invoice from the foreign supplier to JCPPC. JCPPC, in turn, will pass on cost savings to JCPenney.

The terms of the suppliers discount Program are spelled out in the sample Vendor Agreement Letter that accompanied your request. The Agreement states that the Program calls for “… a __% contribution with respect to supplier invoices… on new internationally shipped product, an amount equal to ___ % of each such Supplier invoice received… will be contributed to the Program.” The Agreement also specifies that the Supplier will be able to render similar services or funding to JCPenney’s competitors and that either party may terminate the Agreement provided prior written notice of termination is timely furnished. You believe that the discount Program is designed in accordance with the examples set forth in 19 C.F.R. 152.103(a). The scope of this ruling is limited to the treatment of the price adjustment negotiated between JCPPC and the foreign vendors. For purposes of this ruling we assume that transaction value is acceptable under the circumstances. This ruling does not address whether the transaction between JCPPC and the foreign vendors is a bona fide sale conducted at arm’s length in which the merchandise is clearly destined for the United States.


Whether the discounted price, which JCPPC and its foreign vendors agree to prior to importation of the merchandise constitutes the price actually paid or payable for the imported merchandise?


For purpose of this ruling request and based on the information provided, we are assuming that JCPPC and its foreign suppliers are unrelated parties and that transaction value is the applicable basis of appraisement.

Transaction value is the preferred method of appraising merchandise imported into the United States and is defined 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. That section provides, in pertinent part, that 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 five enumerated statutory additions. The term “price actually paid or payable” is more specifically defined in Section 402(b)(4)(A) of the TAA as: The total payment (whether direct or indirect. . . ) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.

The CBP Regulations further provide that the price actually paid or payable “will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula…” (emphasis added). See 19 C.F.R. 152.103(a)(1). The following example illustrating a cash discount is contained in Example 5 in 19 C.F.R. 152.103(a)(1):

A seller offers merchandise at $100, less a 2% discount for cash. A buyer remits $98 cash, taking advantage of the cash discount. The transaction value is $98, the price actually paid or payable.

Furthermore, the term “payable” means that the price has been agreed upon, but the actual payment may not have been made at the time of importation.

CBP has consistently enumerated three criteria in determining whether a discount or price adjustment should be considered part of the transaction value of imported merchandise. First, the discount or price adjustment must be agreed on prior to the importation of the merchandise. See, Allied International v. United States, 16 CIT 545, 795 F. Supp. 449 (1992) (importer required to affirmatively show that there was a preimportation agreement for the claimed discount). See, also Headquarters Ruling Letter (“HRL”) 964192, dated February 15, 2002 (discounted price constituted the price actually paid for the imported footwear because the discounts were agreed to and effected prior to importation); and HRL 547019, dated March 31, 2000 (discounted price, which was based on established criteria from a price list and that was agreed to prior to importation, constituted the price actually paid or payable for the imported merchandise).

The second criterion is that the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. See HRL 547144, dated November 20, 1998. See, also HRL 545659, dated October 25, 1995 (unconditional discount factored into the value declared at the time of entry and reflected on the invoice presented to Customs may be taken into account in determining transaction value); and HRL 546037, dated January 31, 1996 (discount disallowed when importer failed to submit evidence that it took advantage of an alleged 2% “45 day discount”).

The third criterion requires that the discount or price adjustment be unconditional, or if conditional all the conditions must be met prior to importation. We articulated this criterion in HRL 545659, supra, in which we determined that a discount is unconditional when there are no specified purchasing obligations placed on the customer. In that case, we held that unconditional discounts, which were reflected on the invoices presented to Customs, could be factored into the declared value of the merchandise, provided the conditions were met before importation. We also concluded that, if a conditional discount is agreed to before entry at the time of order placement, and the discount is reflected on the entry documentation presented to Customs, the conditional discount may be used to determine transaction value. Id.

Your factual situation is similar to that in HRL 547144, where we applied the above-described criteria. In HRL 547144, we considered the dutiability of a 5% discount that an importer received from its Korean supplier of costume jewelry. In that case, the discount was described as a contribution that the supplier had agreed to provide for the renovation of the importer’s retail stores, and in hopes that the stores would attract more customers, boost sales and generate increased orders for the company. The supplier’s invoices reflected a total price, the 5% reduction and the discounted price. In that instance, we determined that the discount was unconditional, agreed to and in effect prior to the importation of the merchandise. Thus, we determined that the discount should be taken into account when determining the price actually paid or payable for the imported merchandise.

In the instant case, like in HRL 547144, the specific percentage discount will be negotiated and agreed to between JCPPC and its foreign suppliers prior to the importation of the luggage. As per the terms in the sample Vendor Agreement Letter, the discount will be treated as a contribution and reflected in the foreign suppliers’ invoices to JCPPC, with no specified obligations or restrictions imposed on JCPPC. Therefore, we find that the discount will be unconditional. We also find that the intended discount arrangement is consistent with the cash discount example (Example 5) set out in 19 C.F.R. 152.103(a)(1). It therefore follows, that the discount amount should be considered in determining the customs value of the imported merchandise.

Based on the information submitted, it appears that all three criteria described above are satisfied. Consequently, pursuant to 19 C.F.R. 152.103(a)(1) and our analysis in prior rulings, we find that the discounted price, which JCPPC and its foreign suppliers agree to prior to importation of the merchandise, may be considered in determining the transaction value of the imported merchandise. Please note, however, that the actual determination as to the dutiability of the discounted or adjusted price will be made by the appraising officer at the applicable port of entry and will be based on the documentation submitted. HOLDING:

The discounted price, which JCPPC and its foreign vendors agree to prior to importation of the merchandise and is sufficiently documented, constitutes the price actually paid or payable for the imported merchandise, assuming the transaction value method may be used to appraise the imported merchandise.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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.


Monika R. Brenner, Chief
Valuation and Special Programs Branch