CLA-02 RR:CTF:VS H048152 RSD
Mr. Thomas G. Groene
West Chester Holdings
100 Corridor Park Dr.
Monroe, Ohio 45050
RE: Volume Discounts, the Price Paid or Payable, 19 U.S.C. § 1401a(b)(4)(B)
Dear Mr. Groene:
This is in response to your letter dated December 12, 2008, requesting a ruling on the proper valuation of imported industrial work gloves. You made an additional submission dated February 25, 2009, which contained purchase orders, invoices and evidence of payments to your overseas suppliers.
FACTS:
West Chester Holdings, Inc. (West Chester) is an importer of industrial work gloves located in Monroe, Ohio. The gloves are for use in the home, manufacturing plants, laboratories, distribution centers, etc. West Chester’s three major vendors have granted the company a one percent discount on the price of the merchandise. You have advised that while the agreement with the vendors is only verbal, it applies to pre-importation costs. You further explained that the discount with the three Chinese vendors was based on the volume of business. However, you note that the discount is currently characterized as a “rebate” on the vendor invoices.
In support of to the ruling request, you submitted letters from each of the three Chinese vendors. All three letters read the exact same way. The letters state that based on the volume of business that West Chester has had, the manufacturer has agreed to extend a one percent discount off the base price. The letters further indicate that the one percent discount is applicable for all purchase orders placed by West Chester since April 11, 2007 and that the discount will continue until further notice or otherwise agreed upon. In addition, the invoices will be modified so that the column heading will be read “Discount” instead of rebate.
In a second submission dated February 25, 2009, you furnished three sets of documents from the three vendors. Each packet contains:
“Debit Advice” indicating the dollar amount that was electronically sent to the vendor.
Respective vendor’s invoices
Associated purchases orders from each line item on the invoices.
Inasmuch as West Chester has been paying its vendors the FOB price less a one percent discount, you contend that the one percent discount should be taken into account in determining the transaction value of the imported merchandise.
ISSUE:
Whether the one percent volume discount, which West Chester and its foreign vendors agreed to should be included in determining the price actually paid or payable for the imported merchandise?
LAW AND ANALYSIS:
For purposes of this ruling request and based on the information provided, we are assuming that West Chester 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: 19 U.S.C. 1401a), as 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…" 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. See e.g. Headquarters Rulings (HQ) 563419, dated May 4, 2006. First, the discount or price adjustment must be agreed on prior to the importation of the merchandise. See Allied International v. United States, 795 F. Supp. 449 (CIT 1992) (importer required to affirmatively show that there was a pre-importation agreement for the claimed discount). See also HQ 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 HQ 547019, dated March 31, 2000 (discounted price, which was based on established criteria from a price list and 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 HQ 547144, dated November 20, 1998. See also HQ 545659, dated October 25, 1995, (unconditional discount factored into the value declared at the time of entry and reflected on the invoice presented to CBP, may be taken into account in
determining transaction value); and HQ 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 HQ 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 CBP, could be factored into the declared value of the merchandise, provided that 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 CBP, the conditional discount may be used to determine transaction value. Id.
In HQ 547144, dated November 20, 1998, CBP considered a 5 percent 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, 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, CBP determined that the discount was unconditional, and agreed to and in effect prior to the importation of the merchandise. Thus, CBP determined that the discount should be taken into account when determining the price actually paid or payable for the imported merchandise.
In this case, West Chester states that the agreement with its three Chinese vendors concerning the one percent discount in the FOB price was only verbal and nothing was put in writing. The letters from the three vendors were written and dated only after CBP’s inquiry regarding the discount. However, we note that the one percent discount is shown on the vendors’ invoices that West Chester submitted. The Debit Advices further show that the electronic payments West Chester made to the vendors included the one percent discount.
In HQ 544371, dated June 11, 1990, the importer and its related party manufacturer agreed to a .75 percent discount that was given on every shipment to cover any defective merchandise. This discount was deducted from the FOB Hong Kong value of the merchandise and was reflected on the commercial invoices. CBP ruled that because the invoice price reflected the discount, this discount should be taken into account in determining the transaction value of the imported merchandise. Similarly, in this instance, the invoices and the proof of payments shown on the Debit Advices from West Chester to the vendors, indicate that the parties agreed to a one percent discount. Because the invoices are dated earlier than the CF 28 before the merchandise was shipped to the United States, we are satisfied that the one percent discount was agreed to before the merchandise was imported into the United States. Therefore, based on the documentation submitted, we find that the one percent discount should be included in determining the price actually paid or payable of the imported merchandise. So long as the invoices reflect a discount, that discount should be included in determining the transaction value of the imported merchandise. However, at their discretion, the ports in question may continue to verify the discount by requiring the importer to present proof of payment to its vendors.
HOLDING:
It has been sufficiently documented that West Chester and its foreign suppliers agreed to a one percent volume discount prior to the importation of the merchandise. Therefore, the one percent discount should be included in determining the price actually paid or payable for the imported merchandise, assuming transaction value is the appropriate basis of appraisement of 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. Sincerely,
Monika R. Brenner, Chief Valuation and Special Programs Branch