OT:RR:CTF:VS H263559 RMC
Port Director
Port of Buffalo
U.S. Customs and Border Protection
726 Exchange Street, Suite 400
Buffalo, NY 14210
Re: Application for Further Review of Protest No. 0901-14-100221; Transaction Value; Bona Fide Sale
Dear Port Director:
This is in response to the Application for Further Review (“AFR”) of Protest No. 0901-14-100221, timely filed by Sandler, Travis & Rosenberg, P.A. on behalf of their client [U.S. Affiliate]. This AFR concerns the proper method of appraisement under 19 U.S.C. § 1401a of apparel imported from Canada. [U.S. Affiliate] protests the Port’s decision that the imported merchandise should be appraised based on the price between [U.S. Affiliate] and its U.S. customers.
Counsel for [U.S. Affiliate] has asked that certain information submitted in connection with this decision be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this decision, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision.
FACTS:
This AFR arises out of transactions between [Canadian Company] a Canadian garment producer and supplier, and [U.S. Affiliate], [Canadian Company’s] wholly-owned subsidiary that is incorporated in Delaware. [Canadian Company] sells apparel to Canadian retailers and to [U.S. Affiliate], which is the sole distributor of [Canadian Company’s] products in the United States. In short, and as explained in greater detail below, [U.S. Affiliate] engages contract workers in the United States who solicit orders to be processed, invoiced, and shipped from [Canadian Company’s] warehouse in Canada. The goods are then shipped to a [third party] warehouse near Buffalo in New York, where they are subsequently forwarded to the U.S. end customer.
[Canadian Company] charges [U.S. Affiliate] an intercompany price based on the Canadian price plus freight, embroidery or screen-printing costs, and a mark-up of [X%]. Based on the structure of the relationship between the parties and the pricing of the deal, [Canadian Company] claims that a “bona fide sale for export” occurs between [Canadian Company] and [U.S. Affiliate] when [Canadian Company] sends goods from its Canadian warehouse to [U.S. Affiliate’s] [third party] warehouse in New York. [U.S. Affiliate] therefore declares the intercompany price as transaction value for customs purposes instead of the price that [U.S. Affiliate] charges the U.S. end customer.
The controversy over the correct valuation of [Canadian Company’s] transactions with [U.S. Affiliate] began in March 2012 when the Port of Buffalo issued a CBP 28 requesting appraisement information on two shipments of apparel. After [U.S. Affiliate’s] response, a follow-up questionnaire, a follow-up response, a meeting between CBP and counsel for [U.S. Affiliate], and a site visit to [U.S. Affiliate’s] warehouse near Buffalo, the following factual record was developed.
Structure of Relationship Between [U.S. Affiliate] and [Canadian Company]
As noted above, [U.S. Affiliate] is a separate entity that is incorporated in Delaware. The two companies share the same corporate offices and board of directors. Although legally distinct from [Canadian Company], [U.S. Affiliate] does not have a written intercompany agreement with [Canadian Company] that establishes terms of services or fee arrangements. Nevertheless, [U.S. Affiliate] is the exclusive distributor of [Canadian Company’s] products in the United States.
All of [U.S. Affiliate’s] merchandise can be found in a catalog that it shares with [Canadian Company]. [U.S. Affiliate] solicits orders through a network of 38 independent salespeople who work on commission. All salespeople, including the U.S. sales manager, are “independent contractors.” Prices are determined jointly by the U.S. sales manager and [the CFO], who acts as the CFO of both [U.S. Affiliate] and [Canadian Company].
[U.S. Affiliate] also acts as the importer of record for merchandise imported directly into the United States from unrelated parties in China. [U.S. Affiliate’s] purchases from unrelated parties, however, also are linked to [Canadian Company]: once the goods arrive in the United States, they are exported to [Canadian Company] in Canada to be screen printed. Once [Canadian Company] screen prints the merchandise in Canada, [U.S. Affiliate] brings it back to the United States under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (“HTSUS”), and passes it on to the end U.S. customer.
Each year, [Canadian Company’s] CFO—also the CFO of [U.S. Affiliate]—estimates the value of administrative services that [U.S. Affiliate] receives from [Canadian Company] and charges [U.S. Affiliate] a fee. Those administrative services include warehousing, processing orders, invoicing (including preparation of invoices for U.S. customers), collections, sales representative and customer support, and distribution of merchandise.
[U.S. Affiliate] provided copies of purchase orders, invoices, and proof of payment from the ultimate purchaser in the United States to demonstrate how sales are structured. The Port, however, was unable to link purchase orders and invoices to particular entries of merchandise.
[U.S. Affiliate’s] U.S. Operations
[U.S. Affiliate’s] U.S. operations are focused on its warehouse near Buffalo, NY. As noted above, orders are fulfilled by [Canadian Company] in Canada, so [U.S. Affiliate’s] [third party] warehouse houses only about five skids of blank and returned merchandise. When CBP visited the warehouse, inspectors found that the merchandise was shrink-wrapped and put on pallets and that some of the merchandise dated back to 2005. [U.S. Affiliate] pays [third party] by the hour for the services that it provides at the warehouse, which consist mostly of removing the pre-packaged, labeled, and ready-to-ship merchandise from [Canadian Company’s] pallets and shipping it to the end U.S. customer.
[U.S. Affiliate’s] purchase orders to [Canadian Company] state shipping terms as “Our Freight – FOB Toronto.” However, neither [U.S. Affiliate] nor [Canadian Company] presented sales agreements or contracts between the parties that set forth the terms of sale or that detail the passage of title and risk of loss of the imported merchandise.
The [third party] warehouse near Buffalo, NY also has a mailbox that [U.S. Affiliate] uses to receive payments from its U.S. customers. Checks received at [U.S. Affiliate’s] [third party] warehouse are then forwarded to [Canadian Company’s] headquarters in Canada where they are processed.
[U.S. Affiliate’s] operations do not include any of the following: processing of orders, invoicing, billing, collections, sales representative and customer support, administrative services, or maintenance of bank accounts and corporate books.
Financials
[U.S. Affiliate] maintains separate records, books, and bank accounts in its name. However, all of these appear to be controlled by [Canadian Company] in Canada. For example, the general ledger, financial records, and accounts payable records are located in Canada and are maintained by [Canadian Company] employees. Although [U.S. Affiliate] receives payment in a U.S. bank account in its name, the address listed on the account is Canadian.
Similarly, [U.S. Affiliate’s] purchase orders and invoices follow this trend. Because [U.S. Affiliate] has no U.S. employees to perform administrative functions, purchase orders and invoices are issued from [Canadian Company] in Canada. Invoices from [U.S. Affiliate] to U.S. customers list [Canadian Company’s] Canadian address in Richmond Hill, Ontario and a telephone number with a Canadian area code. When a Senior Import Specialist from the Port attempted to contact [U.S. Affiliate] at the Canadian telephone number on August 5, 2013, a recorded message informed him that the office was closed in observance of the Canadian Civic Holiday. Furthermore, purchase orders show [U.S. Affiliate] followed by the same Canadian address.
Based on the factual record described above, the Port of Buffalo believes that there is no “bona fide sale for exportation” between [U.S. Affiliate] and [Canadian Company]. Instead, because [U.S. Affiliate’s] entire operation is based in Canada and because the two companies are inextricably intertwined, the Port believes that [U.S. Affiliate] acts merely as an agent that solicits orders for [Canadian Company]. As such, there is no sale between [Canadian Company] and [U.S. Affiliate], and the sale between [U.S. Affiliate] and the end U.S. customer is the actual “bona fide sale for exportation” for customs valuation purposes. [U.S. Affiliate] contends that the evidence establishes that [U.S. Affiliate] and [Canadian Company] are separate entities that deal in an arm’s-length manner and that sales between the entities should therefore be considered “bona fide sales for exportation” to the United States.
ISSUE:
Whether there is a bona fide “sale for exportation to the United States” between [Canadian Company] and [U.S. Affiliate].
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). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. § 1401a(b)(1). The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C § 1401a(b)(4)(A). In order for transaction value to be used as a method of appraisement, it must first be established that there is a sale between the parties. Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP will consider whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise and whether consideration has passed.
After several questionnaires, a meeting, and a site visit to [U.S. Affiliate’s] warehouse near Buffalo, the Port of Buffalo concluded that the transactions between [Canadian Company] and [U.S. Affiliate] were not “bona fide sales.” Therefore, the Port of Buffalo ruled that transactions between [Canadian Company] and [U.S. Affiliate] could not form the basis of appraisement of the imported merchandise. While counsel for [U.S. Affiliate] argues that transactions between [U.S. Affiliate] and [Canadian Company] are indeed “bona fide sales,” we agree with the Port of Buffalo’s finding that the evidence does not support this position.
The evidence shows that the entities are so closely intertwined that [U.S. Affiliate] acts as a selling agent of [Canadian Company] rather than as an arm’s-length buyer. [U.S. Affiliate] also sells merchandise strictly from product lists that [Canadian Company] provides and is the exclusive distributor of [Canadian Company’s] products in the United States. Although [U.S. Affiliate] is incorporated separately from [Canadian Company], the entities have overlapping management and boards of directors. Furthermore, although [U.S. Affiliate] does have separate books, they are located at [Canadian Company’s] facility in Canada and are maintained by [Canadian Company’s] employees. Thus, [Canadian Company’s] employees maintain total control over [U.S. Affiliate’s] books, ledger, and records. Moreover, commercial documents such as invoices and purchase orders list the same Canadian address and phone number for both [Canadian Company] and [U.S. Affiliate] and could not be linked to the entry at issue in this case.
[U.S. Affiliate’s] presence and operations in the United States are minimal. It has no permanent employees in the United States and instead relies on a network of independent contractors to solicit orders. Its physical presence in the United States is limited to part of a [third party] warehouse near Buffalo, New York. Any payments received at the [third party] warehouse are routed to Canada for processing. Furthermore, because [Canadian Company] processes and fulfills U.S. orders at headquarters in Canada, the [third party] facility does not maintain any real inventory. When U.S.-bound orders arrive from Canada at the [third party] facility, they are merely forwarded on to the end U.S. customers.
Under these circumstances, [U.S. Affiliate] never obtains title to the goods or bears risk of loss. [U.S. Affiliate] claims that title for the product passes from [Canadian Company] to [U.S. Affiliate] when [third party] picks up the merchandise at [Canadian Company’s] warehouse in Canada because the sales invoice states “Our Freight – FOB Toronto.” However, there are no sales agreements or contracts between [Canadian Company] and [U.S. Affiliate] that set forth the terms of the sale or detail the passage of title for the goods. Further, the certificate of insurance lists [Canadian Company] and [U.S. Affiliate] as though the companies are interchangeable. Therefore, we find that “Our Freight – FOB Toronto” merely indicates that the risk of loss and title passes from [Canadian Company] to the end U.S. customer in Toronto.
Taken together, these findings lead us to the conclusion that [U.S. Affiliate] operates not as a buyer, but as a selling agent for [Canadian Company’s] products. Therefore, a bona fide sale does not occur between [Canadian Company] and [U.S. Affiliate].
HOLDING:
We find that a bona fide sale has not occurred between [Canadian Company] and [U.S. Affiliate]. Therefore, the transaction between these parties cannot form the basis of appraisement of the imported merchandise. Instead, the merchandise should be appraised using transaction value based on the price actually paid or payable by [U.S. Affiliate’s] customers in the United States.
In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP website at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division