VAL:OT:RR:CTF:VS H109699 RSD
Robert L. Sands, Esq.
Assistant General Counsel
Wal-Mart Stores, Inc.
601 North Walton Blvd
Bentonville, AR 72716
RE: Dutiability of Buying Commissions pursuant to a proposed Buying Agency
Dear Mr. Sands:
This is in response to your June 7, 2010 letter, requesting a ruling concerning the dutiability of certain potential commissions to be paid by Wal-mart Stores Inc. (Walmart) to Direct Sourcing Group for products imported into the United States. You have attached a copy of the proposed buying agency agreement for our review.
You describe the pertinent facts as follows:
Walmart is a discount retailer. On January 28, 2010, Walmart entered into a buying agency agreement with WSG (now called the Direct Sourcing Group or “DSG”) which appointed DSG as Walmart’s buying agent. DSG is a subsidiary of Li & Fung Limited. Pursuant to the buying agency agreement, Walmart will pay to DSG buying commissions for DSG’s work as Walmart’s buying agent.
The buying agency agreement identifies the general duties, services and activities that DSG will perform at Walmart’s direction. These include but are not limited to the following: 1) identify manufacturers and suppliers of merchandise for Walmart’s consideration; 2) make available market research and intelligence on new manufacturers, suppliers, products, supply base trends, market trends,
and pricing; 3) facilitate Walmart’s buying trips; 4) support Walmart’s buyers activities relating to purchase of merchandise; 5) visit manufacturing sites; and 6)
where as directed by Walmart buyers, assist with order placement. For these services that it provides to Walmart, DSG shall receive payments as commissions.
The buying agency agreement specifies the following terms:
Walmart controls DSG and DSG exists solely to operate as Walmart’s buying agent.
The Walmart/DSG relationship is non-exclusive for Walmart, as Walmart may engage manufacturers and suppliers without DSG, and the buying agency agreement does not contain volume commitments.
DSG will not act on Walmart’s behalf without Walmart’s instructions or authorization to do so.
DSG will not represent to its employees or any third party that it is anything other than Walmart’s agent under the terms of the buying agency agreement.
DSG cannot act as the seller in any transaction where it serves as the buying agent.
DSG certifies that it has no financial interest in the manufacturers or suppliers to whom it directs to Walmart and it will receive no compensation from the manufacturers or suppliers to whom it directs to Walmart.
DSG cannot take title to or bear the risk of loss of the merchandise that Walmart purchases in transactions where DSG has acted as an agent.
DSG cannot furnish to manufacturers any materials, dies, molds, patterns, artwork, engineering work, labor or financial assistance, or otherwise assist in the production of the products, ordered by Walmart as a buyer nor shall DSG guarantee to such vendor the cost of such raw materials used in such manufacturing.
Walmart is responsible for paying the seller of merchandise it purchases.
DSG may perform administrative functions in assisting with shipment (Walmart and the seller control the shipments and maintain financial responsibility for the shipment costs and liability for the product).
DSG will inspect the quality of merchandise that Walmart will purchase as Walmart directs.
You state that Walmart has various subsidiaries and affiliated companies that may opt to use DSG for its buying agency services. Typically, the Walmart buyer will instruct DSG to find suppliers or manufacturers for a particular type of merchandise. In carrying its responsibilities, DSG will adhere to Walmart’s buying agency business rules throughout the transaction. The business rules provide standard operating procedures that ensure the parameters of a bona fide buying agency relationship are respected.
For a typical transaction, you indicate that at the buyer’s discretion DSG will find suitable manufacturers or suppliers and have such candidates fill out a quote. The quote will contain product details and costing information. DSG will review the quote to ensure the product will comport with the buyer’s desires. DSG will also review Walmart’s buying agent checklist to ensure that the proposed transaction would satisfy its requirements.
After DSG determines that a proposed transaction would be acceptable, it submits the quote to the Walmart buyer, who will review the quotes and the products. The buyer narrows the number of potential suppliers and directs DSG to communicate with the supplier or manufacturer regarding product details. The buyer will inform DSG about volume and color assortments and instruct DSG to determine whether the potential suppliers can satisfy Walmart’s needs. DSG will report the suppliers’ responses to the buyer, and the buyer will then engage with the supplier or manufacturer including making visits to the supplier’s facilities.
The buyer will choose a supplier or manufacturer and issue a commitment to such supplier, and she will instruct DSG to support the supplier in the supplier “onboarding” and quote approval process. The supplier will enter the product
data into Walmart’s quote system. As the Walmart buying agent business rules direct, DSG will review the quote data and if appropriate, approve the quote. The Walmart Direct Import Classification Team will classify the good and direct review of the good to the Walmart Direct Import Admissibility Team for certain items. The Walmart buyer has final approval of the quote. Assuming the buyer approves the quote, Walmart will issue a purchase order to the supplier. As instructed by the buyer and the buying agent business rules, DSG will communicate with the supplier or manufacturer throughout the manufacturing process. At Walmart’s direction, DSG will inspect the merchandise as production approaches completion.
Once the transaction is complete, the supplier will invoice Walmart for the product, and Walmart will pay the seller through a letter of credit or open account system. DSG is not involved in the payment process. DSG will invoice Walmart
separately for its commissions as outlined in the buying agency agreement. Walmart has no obligation to use DSG and the extent to which Walmart uses DSG will be a consequence of the value DSG adds to Walmart’s sourcing needs. According to your submission, DSG will exist solely to act on Walmart’s behalf.
Whether DSG will be acting as a bona fide buying agent under the terms of the proposed buying agency agreement so that the commissions paid by Walmart to DSG are non-dutiable as bona fide buying commissions.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with the provisions of Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. §1401a; TAA). The preferred basis of appraisement is transaction value, defined as "the price actually paid or payable for merchandise when sold for exportation to the United States." 19 U.S.C. §1401a(b)(1). Accordingly, we have assumed for the purposes of this ruling that transaction value is the appropriate basis of appraisement.
The term "price actually paid or payable" is defined as "the total payment (whether direct or indirect) made, or to be made, for imported merchandise by the buyer to or for the benefit of the seller." 19 U.S.C. §402(b)(4). As a general matter, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. U.S., 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. U.S., 679 F. Supp. 21, 12 CIT 77 (1988); Jay-Arr Slimwear, Inc. v. U.S., 681 F. Supp. 875, 12 CIT 133 (1988).
The existence of a bona fide buying commission depends upon the relevant factors of each particular case. J.C. Penney Purchasing Corp. v. U.S., 451 F. Supp. 973 (Cust. Ct. 1978); Nelson Bead Co., 42 CCPA 175, 183 (1955). In this regard the importer has the burden of proving the existence of a bona fide agency relationship and that payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, 679 F. Supp. at 23, New Trends, Inc. v. U.S., 645 F. Supp. 957, 10 CIT 637 (1986); B.W. Wholesale Co., Inc. v. U.S., 462 F. Supp. 1399, 1403, 58 CCPA 92, C.A.D. 1010 (1971). The alleged agent performs duties on behalf of its principal, the buyer. It may not act as an
independent seller, nor as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969). A relevant factor in determining the relationship is the fact that none of the commission paid by the buyer inures to the benefit of the seller. As stated in Reliance International Corp. v. United States, 62 Cust. Ct. 845, 849, 305 F. Supp. 20, 24 (1969):
Commissions paid by the purchaser to agents for services rendered in procuring the merchandise, inspecting and packing goods, arranging for shipment and acting as a paymaster for account of the buyer, no part of which commissions inure to the benefit of the seller, are buying commissions.
In determining whether an agency relationship exists, the primary consideration is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. Jay-Arr Slimwear, 681 F. Supp. at 879. The degree of discretion granted the agent is a further consideration. New Trends, 645 F. Supp. 957. The existence of a buying agency agreement, moreover, has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. U.S., 67 Cust. Ct. 503, 512, R.D. 11753 (1971). In addition, the courts have examined such factors as whether the purported agent's actions were primarily for the benefit of the principal; whether the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principal-agent relationship; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise. New Trends, 645 F. Supp. 957.
It is the position of CBP that "having legal authority to act as buying agent and acting as buying agent [are] two different matters" and that CBP is entitled to examine evidence that proves the latter. U.S. Customs Service General Notice, 11 Cust. Bull. & Dec. 15 (March 15, 1989).
You make the following assertions: all of the activities of the agent are subject to the direction and discretion of the requester; the requester maintains control and decision making authority over factory and vendor selection; the requester assumes the risk of loss for lost and damaged merchandise; the requester controls the manner of payment and absorbs the costs associated with shipping and handling; the requester retains the rights to purchase goods without using an agent; and the agent is not related to any vendor or manufacturer.
In the proposed transactions you have described, as outlined in the proposed buying agency agreement, DSG will be performing services on behalf of the buyer, Walmart, that are typically performed by a bona fide buying agent. DSG’s primary function is to find suitable manufacturers or suppliers and to have such potential suppliers fill out quotes for Walmart. It will also make available to
Walmart its market research and intelligence on new manufacturers, suppliers, products supply base trends, market trends and pricing. Among the other duties that DSG will perform is to negotiate the best deal in terms of price and quality for Walmart. It will also review the quotes and carry out other functions such as submitting samples, advising the purchaser on new items, and arranging for the shipping of merchandise. Significantly, the agreement also provides that DSG will perform these services on the behalf and at the direction of Walmart. In addition, DSG will inspect the finished goods at the direction of Walmart.
The control that the purchaser exercises over the agent is shown by the provisions in the agency agreement whereby the agent does not have the authority to bind the purchaser except upon the written order or authorization of the purchaser. Moreover, the agreement states that the agent will use its best efforts to protect the interest of the purchaser in the event of claims by and in behalf of or against, the purchaser. Another important factor establishing that DSG would be acting as a bona fide buying agent and not as an independent seller is that it never holds title to the merchandise. Title to the merchandise immediately vests with Walmart upon the purchase of the merchandise. We note that the agent would be detached from the manufacturer and vendor of the merchandise because its sole source of compensation in transactions is the commissions it earns from the Walmart. The agent will receive no part of the payments that Walmart makes to the manufacturers or vendors, nor will it receive any payment from the manufacturers or vendors.
Consequently, based upon the proposed buying agency agreement and the other documents presented, we are satisfied that DSG will be a bona fide buying agent for Walmart. Therefore, it is our position that any commissions paid by the requester to the agent are bona fide buying commissions and are not a part or an addition to the price actually paid or payable.
Please note, however, that the existence of a buying agency relationship is factually specific. The actual determination as to the existence of a buying agency will be made by the appraising officer at the applicable port of entry and will be based on the entry documentation submitted. The totality of the evidence must demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent nor an independent seller. See 23 Cust. B. & Dec., No.11, General Notice dated March 15, 1989 at 9; HQ 545660 dated February 10, 1995.
Based on the information submitted, we find, provided that the parties' actions conform to the terms of the proposed buying agency agreement submitted, DSG would be a bona fide buying agent of Walmart. We conclude, therefore, that the agency commissions paid by Walmart to DSG constitute bona fide buying agency commissions and would not be included in the transaction value of any merchandise imported into the United States.
A copy of this ruling letter should be attached to the entry documents filed at the time the subject goods are entered. If the documents have been filed with a copy, this ruling letter should be brought to the attention of the CBP officer handling the transaction.
Monika Brenner, Chief
Valuation and Special Programs Branch