VAL-OT:RR:CTF:VS H259584 AJR
Field Director
Office of Regulatory Audit, Miami
Office of International Trade
U.S. Customs and Border Protection
11232 NW 20th Street
Miami, Florida 33172
RE: Request for Internal Advice; Carnival Corporation
Dear Field Director:
This is in response to your request for internal advice, dated November 19, 2014, concerning the proper valuation of merchandise previously used aboard cruise ships and offloaded for importation into the United States.
FACTS:
Carnival Corporation (“Carnival”) imports various merchandise into the United States to support the operation of its cruise ships. Carnival’s importation activities are broadly categorized as either “non-offload activities” or “offload activities.” A non-offload activity refers to imported merchandise that may be cleared and immediately staged for distribution to a ship, or it may be imported under a warehouse or re-warehouse entry for later withdrawal (such merchandise hereinafter referred as, “Non-Offloads”). An offload activity refers to merchandise that was previously used aboard a cruise ship and then imported without any purchase or payment transaction, sometimes for repair purposes (such merchandise hereinafter referred as, “Offloads”).
On February 21, 2013, the Office of Regulatory Audit in Miami, Florida (“RA”) of U.S. Customs and Border Protection (“CBP”) issued a Focused Pre-Assessment Survey audit report concluding that Carnival did not provide sufficient information to support the declared value of its Offloads under the fallback method of appraisement. To correct the deficiencies identified by RA, Carnival implemented a straight-line depreciation methodology to appraise its Offloads under the fallback method as follows:
Carnival obtains the original purchase value of the Offload from (a) the original acquisition purchase order with the purchase value of the Offload, or (b) the highest price paid for the Offload within the last 12 months;
Carnival inserts the original purchase value into a straight-line depreciation table spreadsheet to calculate the value of the Offload at the time of importation;
The straight-line depreciation table covers various depreciable Offload categories (e.g. Equipment - Engine and Non Engine(s), Furniture and Fixtures, etc.) with Offload lives ranging from one to seven years;
Carnival assumes a full year of depreciation for the year the original acquisition purchase order was issued, as well as for the year the Offload was entered;
Carnival assesses a salvage value of five percent of the original purchase value for fully depreciated offloads (i.e. applied after the full sixth year from the acquisition date); and,
The value of the Offload calculated from the straight-line depreciation table is used on the Offload’s purchase order and/or pro forma invoice, and declared to CBP.
During the follow-up audit, RA identified three entries where Carnival applied straight-line depreciation to appraise Offloads under the fallback method. For two of these Offloads, a bass amplifier and a keyboard, the Port of Long Beach determined that their declared values were not supported by their invoices and related original purchase payment information. Carnival provided the following documentation (Attachment A) to support its declared values for the base amplifiers and keyboard using straight-line depreciation under the fallback method:
An Entry Summary (CBP Form 7501) dated May 27, 2014, for the bass amplifier (line 3) with a declared value of $545, and for the keyboard (line 4) with a declared value of $2,163, entered on May 15, 2015 at the Port of Long Beach in California;
An Inward Cargo Declaration (CBP Form 1302) for the bass amplifier and keyboard with the same values indicated on the Entry Summary;
A pro-forma invoice, dated May 15, 2014, showing that a Mexican-origin amplifier with an acquisition cost of $748 (referencing purchase order 982170), and a depreciation value of $545, was offloaded at the Port of Long Beach on May 15, 2014 for final destination to Carnival in Florida;
An original acquisition purchase order (982170), dated January 21, 2013, showing that Carnival placed an order for two amplifiers, each priced at $748, from vendor, Music Arts Enterprises Inc., a Florida Company;
A straight-line depreciation table for the amplifier listing it under the “Equipment – Engine & Non Engine(s)” category with an original value amount of $748, and a “Year 2” value amount of $544.97;
A pro-forma invoice, dated May 15, 2014, showing that a Chinese-origin keyboard with an acquisition cost of $2,970 (referencing purchase order 986923), and a depreciation value of $2,163, was offloaded at the Port of Long Beach on May 12, 2014;
An original acquisition purchase order (986923), dated March 4, 2013, showing that Carnival placed an order for a keyboard priced at $2,700, from vendor, Sweetwater Music Technology Direct, an Indiana Company; and,
A straight-line depreciation table for the keyboard listing it under the “Equipment – Engine & Non Engine(s)” category with an original value amount of $2,790, and a “Year 2” value amount of $2,163.86.
The third Offload concerns a ship coupling that was offloaded for repair. Carnival did not initially apply its straight-line depreciation methodology to the ship coupling, and instead used a quoted refurbished value of $85,000, which was determined by Carnival’s ship engineer. Carnival did not have the original purchase cost for the ship coupling, but provided a quotation repair sheet from the ship coupling’s manufacturer, Geislinger Corporation (“Geislinger”), listing the replacement value of the ship coupling at $121,881.71. The Port of Miami reappraised the declared value at $121,881.71 because Carnival did not provide information to support the calculation of the refurbished value, but permitted Carnival to dispute the reappraisal. Carnival then indicated that the ship coupling was unrepairable and therefore worthless, and reappraised it using straight-line depreciation under the fallback method, applying the full seven-year depreciation life for the Offload at the five percent salvage value. Carnival provided the following documentation (Attachments E and F) to support its declared value of the ship coupling using straight-line depreciation under the fallback method:
An Entry Summary (CBP Form 7501) dated May 21, 2014, for the ship coupling (line 13) with a declared value of $85,000, entered on May 11, 2014 at the Port of Miami in Florida;
An Inward Cargo Declaration (CBP Form 1302) for the ship coupling with the same value indicated on the Entry Summary;
A technical operations purchase order, dated May 7, 2014, showing that Carnival offloaded an Austrian-origin coupling at the Port of Miami on May 11, 2014, for repair by vendor, Geislinger Corporation (“Geislinger”), listing an $85,000 “Approx. Value”;
A repair quotation sheet, dated January 23, 2013, issued by Geislinger to Carnival showing a replacement coupling cost of $121,881.71, an “In house Repair” of the coupling cost of $108,634.77, and a recertification of the coupling cost of $4,500;
An e-mail, dated October 29, 2014, from Geislinger to Carnival indicating that the coupling was manufactured and shipped from Austria to Carnival in Italy on November 11, 2001; and,
A straight-line depreciation table for the coupling listening it under the “Equipment – Engine & Non Engine(s)” category with an original value amount of $121,881.71, and a “Year 7” value amount of $6,095.09.
Additionally, Carnival submitted its compliance improvement plan (Attachment B) and standard operating procedures for shore side and ship board vessels (Attachments C and D), which explain the straight-line depreciation methodology discussed above, and its implementation on these cruise lines.
RA seeks advice to determine if the straight-line depreciation method is acceptable under the fallback method, and whether the original purchase orders, or if they are not available, the highest price paid by Carnival within the last 12 months for the Offloads are sufficient to support the declared value. We note that Carnival, RA, and the Ports involved with the Offloads at issue agree that the fallback method is the appropriate appraisement method under these circumstances.
ISSUES:
Whether the proposed fallback method of appraisement using straight-line depreciation may be used to appraise the Offloads; and,
Whether the submitted documentation is sufficient to support the values declared under the proposed fallback method of appraisement?
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 (19 U.S.C. § 1401a; TAA). The primary method of appraisement is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States” plus the value of certain statutorily enumerated additions thereto. 19 U.S.C. § 1401a(b)(1). However, in order for transaction value to be applicable, there must be a “sale” for exportation to the United States. In this case, there is no “sale” when the imported Offloads enter the United States because the Offloads are entered without any purchase or payment transaction. Therefore, the Offloads cannot be appraised under transaction value.
When transaction value is not available as an appraisement method, the remaining methods of appraisement set forth in 19 U.S.C. § 1401a must be applied in sequential order. The alternative methods of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and, the "fallback" method (19 U.S.C. § 1401a(f)).
Considering the facts presented in this case, without available or applicable information pertaining to 19 U.S.C. § 1401a(c)-(e), we agree with RA and the Ports that these various methods of appraisement are not applicable. We specifically note various CBP rulings where merchandise used abroad for various years, under bailment, consignment, and other scenarios lacking title transfer, were imported into the United States without a sale and appraised under the fallback method. See Headquarters Ruling Letter (“HQ”) 563355, dated January 18, 2006; HQ H249191, dated February 3, 2014; and, H019710, dated December 18, 2009.
When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b)-(e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the “fallback” valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. See 19 U.S.C. 1401a(f); see also 19 CFR § 152.108.
Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
[F]ix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding[.]
19 U.S.C. § 1500(a).
In this regard, the Statement of Administrative Action (“SAA”), which forms part of the legislative history of the TAA provides, in pertinent part:
Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations…. Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.
In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402.
Statement of Administrative Acton, H.R. Doc. No. 153, 96 Cong., 1st Sess. Pt 2, reprinted in Department of Treasury, Customs Valuation under the Trade Agreements Act of 1979 (Oct. 1981), at 67.
Section 152.107, CBP Regulations (19 CFR § 152.107), provides:
Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used.
Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs valuation of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used.
In this case, though we accept the fallback method as the appropriate appraisement method for the Offloads at issue, we seek to verify whether straight-line depreciation is a reasonable adjustment for purposes of determining a value under the fallback method, and whether the value is properly derived from 19 U.S.C. § 1401a(b)-(e) on the basis of Carnival’s submitted documentation.
Whether the proposed fallback method of appraisement using straight-line depreciation may be used to appraise the Offloads?
In HQ 563355, dated January 18, 2006, CBP considered the valuation methodology of test fixtures that were owned by a company, supplied to and used by a manufacturer abroad, and then imported back to the company in the United States, without a sale. The company owned each test fixture throughout this time period and traced it accordingly in its asset database, which maintained the product’s acquisition cost, and current book value, which was adjusted for depreciation on a seven-year straight-line depreciation scale. CBP found that the method for appraisement used by the company, based on adjusting the original purchase price to reflect reasonable depreciation for the period that the good was used, was acceptable as a fallback method pursuant to 19 U.S.C. § 1401a(f).
In HQ 543637, dated December 2, 1985, the original purchase price was adjusted downward to reflect depreciation for the time period the parts were used abroad. In HQ 544256, dated November 15, 1988, CBP allowed the depreciation of equipment returned to the owner after use abroad. See also HQ 543970, dated March 13, 1989; HQ 548211, dated July 2, 2003; and, HQ 544377, dated September 1, 1989.
In HQ 229377, dated May 30, 2003, an importer entered 24-year old merchandise that was not sold, but provided by a related party. CBP held that the merchandise should be appraised under the fallback method, and in accordance with generally accepted accounting principles (“GAAP”), the original purchase price should be adjusted downward to reflect reasonable depreciation for the time period that the article was used abroad. However, the value resulting from this downward depreciation had to approximate the actual market value of the article at the time of its exportation to the United States. See also HQ 543450, dated June 25, 1985, noting that capital assets being depreciated over their useful lives, and although they may be considered expenses by GAAP, are not necessarily assets with a zero book value for CBP valuation purposes that require determining whether any book value remains for that asset.
Based on the above rulings, we find that Carnival’s seven-year straight-line depreciation method is a reasonable adjustment to values derived from 19 U.S.C. § 1401a(b)-(e) under the fallback method, provided it is applied in accordance with GAAP and approximates the actual value of the Offloads at the time of their exportation to the United States. As noted in HQ 563355, a seven-year straight-line depreciation has been held to reflect a reasonable depreciation of imported merchandise for the time period such had been used abroad. Thus, so long as Carnival employs this method in accordance with GAAP to approximate the actual value of the Offloads when they are exported to the United States, we find this adjustment to the value of the Offloads is reasonable under the fallback method.
Whether the submitted documentation is sufficient to support the values declared under the proposed fallback method of appraisement?
Though the adjustment for depreciation may qualify as a reasonable adjustment under the fallback method, this adjustment is made to a value derived from 19 U.S.C. § 1401a(b)-(e), and thus we must determine whether the starting values used for the Offloads were properly derived from 19 U.S.C. § 1401a(b)-(e).
The starting values used for the base amplifiers and keyboard appear to derive from the transaction value pursuant to 19 U.S.C. § 1401a(b) because the submitted documents (Attachment A) show the “price actually paid or payable” for the base amplifiers and keyboard at issue. Similar to HQ 563355, Carnival shows the original acquisition cost for these products by providing their original acquisition purchase orders, and corresponding pro-forma purchase invoices, in Attachment A. These documents respectively align in purchase order numbers, product quantities and descriptions, buyer and seller, dates, and other aspects, while providing no indication that these Offloads were acquired under different circumstances. Accordingly, we find that Carnival has provided sufficient documentation to support the declared values of the base amplifiers and keyboard by showing their original acquisition cost and corresponding purchase date, and using that cost in the seven-year straight-line depreciation table to calculate the declared values of these Offloads.
Regarding the ship coupling, the submitted documents (Attachments E and F) do not provide the “price actually paid or payable.” Instead, the documents provide a technical operations purchase order listing the ship coupling with an approximate refurbished value of $85,000 (the “refurbished” value), and a repair quote from the ship coupling’s manufacturer, Geislinger, with a replacement cost of $121.881.71 (the “replacement” value).
In HQ W548618, dated November 23, 2005, mobile phones were sent for repair to Mexico and then returned to the United States for distribution to customers in need of replacement phones. Due the circumstances found in W548618, the only applicable appraisement method was under the fallback method, and CBP permitted them to be appraised using either book values or price quotes by reputable U.S. resellers of refurbished phones.
In HQ H010504, dated August 22, 2007, used aircraft parts were imported that had been previously exported for repair or rebuilding. CBP held that the aircraft parts were properly appraised under the fallback method, using a value based on the export value declared when the article was sent to repair. The export value was derived from the original cost of the part (19 U.S.C. § 1401a(b)), or alternatively, from the cost of an identical or similar new part (19 U.S.C. § 1401a(c)), adjusted downwards to account for the estimated repair cost. When the part was imported, the declared value was the export value plus the cost of repairs, with upward or downward adjustments for changes in the price of the new parts.
In HQ 563470, dated June 12, 2006, aircraft parts were imported into the United States for repair, and the importer proposed using the fallback method, accounting for the cost of the repair on the part and the depreciation of the part between its original date of purchase and its date of import for servicing. The importer used the part’s current list price and deducted the cost of repair and depreciation by calculating a factor equivalent to a certain percentage of the current list price using data from numerous service transactions covering certain parts that represented the majority of repairs the importer undertook during a given time period, recalculated annually based on its ongoing repair value. When the current list price was not available for the part, the importer proposed to use the part’s production cost plus overhead and profit mark-up, or if that information was not available, an estimate of the price based on the current list price of similar parts still being produced. After determining that the other methods were not applicable, CBP found that the fallback methodology proposed by the importer was acceptable because the formula for estimating the repair cost and depreciation would be updated and recalculated annually.
In this case, the refurbished value for the ship coupling was obtained from a technical operations purchase order issued by Carnival. Because this purchase order was issued by Carnival without any particular affirmation from Geislinger, the listed vendor responsible for repairing the ship coupling it manufactured, we can only infer that Carnival determined this refurbished value. However, Carnival is not a U.S. seller of refurbished ship couplings, and, as noted by RA, there is no indication how Carnival assessed this to be the refurbished value of the ship coupling. Accordingly, because we have no basis from which to rely on Carnival’s quotation of $85,000, we find that such value is not properly derived from 19 U.S.C. § 1401a(b)-(e) for purposes of the fallback method.
In contrast to the refurbished value, the replacement value ($121,887.71) was obtained from a repair quote from Geislinger, the manufacturer of the ship coupling. Geislinger has informed us that the replacement value constitutes the price of a new ship coupling with the same part number and identification number as the old ship coupling, and that the quoted “In house Repair” ($108,634.77) is a different option, in case Carnival wants to repair the ship coupling instead of replacing it. Additionally, Geislinger has informed us that the quoted recertification ($4,500) is a standard inspection service fee added to either the replacement or “In house Repair” option for certification of the ship coupling with Lloyd’s Register. Accordingly, we find that Carnival has provided sufficient documentation to support the declared value of the ship coupling by showing the current list price of a new replacement ship coupling, and using that cost in the seven-year straight-line depreciation table to calculate the declared value of this Offload.
HOLDING:
Carnival has provided sufficient documentation to substantiate the declared values for the bass amplifiers, keyboard, and ship coupling. Therefore, these Offloads may be appraised under the fallback method proposed by Carnival.
This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public, on the CPB Home Page on the World Wide Web at http://www.cbp.gov, by means of the Freedom of Information Act, and other methods of public publication.
Please do not hesitate to contact us at (202) 325-0226 if you have any questions or concerns.
Sincerely,
Monika R. Brenner, Chief
Valuations and Special Programs Branch