OT:RR:CTF:VS H301764 CMR
Mel Moreland
Center Director
Consumer Products and Mass Merchandising
U.S. Customs and Border Protection
157 Tradeport Dr.
Atlanta, GA 30354
RE: Internal Advice; Dutiability of Certain Testing Fees and Certification Fees
Dear Center Director:
This in response to a request for internal advice submitted to the Port of Long Beach/Los Angeles, by Venable, LLP, pursuant to 19 CFR § 177.11(b)(2), on behalf of their client, Kent International, Inc., (hereinafter, Kent) regarding the dutiability of certain testing and certification fees paid by Kent with regard to merchandise imported into the United States. Questions arose regarding the dutiability of these fees as the result of a Focused Assessment Audit by the Office of Regulatory Audit. The request for internal advice pertains to the appropriate valuation of certain entries entered from January 2011 to the present. In addition, the internal advice request asks U.S. Customs and Border Protection (CBP) to confirm that the provision to overseas manufacturers of tooling which was not used in the production of merchandise imported into the United States was properly excluded from the declared values for the merchandise when imported. We note that the Office of Regulatory Audit did not identify tooling payments as an issue.
FACTS:
During a Pre-Assessment Survey and CBP Focused Assessment of Kent, questions arose as to the dutiability of certain payments made by the company to an overseas agent, specifically payments for testing and certification services. The company indicates that the payments for the testing services, provided by third-party providers on finished goods, were made to Kent’s independent buying agent in Hong Kong, who acts as a liaison between Kent’s Compliance Department and smaller overseas factories. According to the company, the buying agent coordinates payments, including payments to various accredited Consumer Product Safety Commission (CPSC) testing facilities which perform testing on finished products and issue certifications with respect to certain products which are subsequently imported into the United States. The company indicates that the testing and certification services are contractually required by the company’s U.S. customers, but are not required by law or regulation for importation of the merchandise into the United States.
The company submits that the payments for testing and certifications are made to third-party testing facilities through the buying agent and are not dutiable as they are performed on finished products; are paid for by the buyer for the benefit of the buyer; are not indirect payments to the manufacturer; and are not necessary for the production or sale of the merchandise for export to the United States.
The Office of Regulatory Audit provided this office with a copy of the “Non-Exclusive Buying Agent Agreement between Kent International, Inc. and [their buying agent].” The agreement is dated February 1, 2016. The agreement provides that the merchandise that Kent sells, i.e., bicycles and related accessories, “are subject to various regulatory and safety requirements, including those imposed by the U.S. Consumer Product Safety Commission, such as the Consumer Product Safety Improvement Act.” The agreement provides that the “Buyer requires that all of its suppliers perform quality control testing on any products purchased.” It further states, in relevant part:
To ensure that the purchased products meet Buyer’s needs and that testing has been properly performed, Buyer engages Agent to: (i) ensure that the appropriate testing is arranged; (ii) confirm that the appropriate post-production testing has been performed by the supplier and has been performed satisfactorily, and (iii) pay for the testing, as necessary, on the Buyer’s behalf, which is then directly reimbursed by Buyer to Agent. To perform such services, Agent agrees to be stationed at the premises of the supplier, but will be engaged solely by the Buyer for the performance of its services.
The company also requests that CBP confirm that the provision to overseas manufacturers, at no cost or a reduced cost, of tooling which was not used in the production of merchandise imported into the United States is not a dutiable assist to be included in the dutiable value of the importer merchandise. The Office of Regulatory Audit did not identify tooling as an issue.
ISSUE:
Whether the payments for testing and certification services which have been identified by the Office of Regulatory Audit are dutiable assists that should be added to the value of the imported merchandise for purposes 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 (TAA) codified at 19 U.S.C. § 1401a. The preferred method of appraisement under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions, including "the value, apportioned as appropriate, of any assist." 19 U.S.C. § 1401a(b)(1)(C). These additions apply only if they are not already included in the price actually paid or payable.
In this case, the buying agent agreement clearly states that the products which Kent sells, i.e., bicycles and related accessories, are subject to regulatory and safety requirements, including the Consumer Product Safety Improvement Act of 2008 (CPSIA). Counsel for Kent states in the request for internal advice that “the testing and certification services [ ] are contractually required by the Company’s U.S. customers, but [ ] are not required by law or regulation for the importation into the United States.” This directly conflicts with the statement in the buying agent agreement that indicates that the testing is not simply being done for quality control.
With respect to the dutiability of testing services, this office has issued numerous rulings. As part of the Customs Service (now, Customs and Border Protection (CBP), this office issued Customs Service Decision (C.S.D. 81-162), TAA #11 (542187), dated November 7, 1980, in which we determined that the payment of testing costs by the U.S. purchaser to the Italian exporter to test steel units to insure that the design is accurate and the structure is capable of carrying specified loads was included as part of the price actually paid or payable. This was true regardless of the fact that the testing cost was separately quoted or invoiced. However, in Headquarters Ruling Letter (HQ) 542946, dated January 27, 1983, we determined that testing costs were not part of the price actually paid or payable. In that case, an importer planned to enter into manufacturing contracts in various countries for the production of integrated circuit breakers. The importer also planned to contract with another company in each country to test the finished circuits. The foreign manufacturer would produce the circuits and ship them to a tester in the same country who would test the products and return them to the producer. The producer would then ship the goods to the importer with an invoice for the cost of manufacturing the goods. The tester would send a separate invoice to the importer for the cost of testing the goods. We held that “[i]nasmuch as payment for the subject testing costs would not be made, either directly or indirectly, to, or for the benefit of, the seller, it is clear that these costs would not be a part of the price actually paid or payable.” As such, we held that the testing costs would not be included in the transaction value of the imported integrated circuits. See also, 544035, dated November 23, 1987, citing HQ 542946. We have reiterated this position that when testing is performed by independent (third-party) testers for the benefit of the buyer, not the seller, and is paid for by the buyer, such testing costs are not part of the price actually paid or payable for the merchandise. See HQ H256223, dated August 20, 2014 and citations therein. In HQ 548540, dated July 28, 2004, we stated:
. . . testing may constitute one of the enumerated assists if the testing (1) is supplied directly or indirectly, free of charge or at a reduced cost, by the buyer of the imported merchandise for use in connection with the production or the sale for export to the United States of that merchandise and (2) is essential to the production of that merchandise. See 19 U.S.C. 1401a(h)(1)(A) and see generally HQ 544508 (June 19, 1990); HQ 545170 (October 27, 1994); and HQ 545500 (March 24, 1995).
Further, in HQ W563480, dated June 9, 2006, we ruled on the dutiability of testing services paid by an importer to unrelated third parties for testing fabrics prior to production of garments or accessories from that fabric. The tests were done prior to acquisition of the fabrics by the factories producing merchandise for sale to the importer and were done for the purpose of quality assurance. Customs (now, CBP) concluded that the testing costs were not part of the price actually paid or payable for the imported merchandise as the importer made the payments for the testing to an independent third-party tester and not to, or for the benefit of, the seller of the imported goods. The ruling also stated that the fabric testing did not appear to amount to production related design or development of the imported merchandise.
In addition, in HQ 542387, dated May 15, 1981, this office ruled on the dutiability of certain costs, including testing, incurred by an importer who supplied material to garment manufacturers. In that decision, the importer bought material from unrelated sellers and tested the material for quality. The importer sold the material at its original purchase price to an unrelated garment manufacturer. The importer did not charge the garment manufacturer the cost for testing the material. Since the importer did not provide the material to the garment manufacturer for free or at a reduced cost, but for the actual purchase price, we concluded the fabric was not an assist. We further stated that “we would not consider the cost of warehousing or testing material to be part of the ‘cost of acquisition’ of the material had it been an assist.”
More recently, in HQ H255442, dated October 9, 2014, we found that the costs of pre-production testing of samples by third-party testers to determine the suitability of materials for production and the costs of post-production testing by third-party testers, when paid for by the buyer, were not dutiable as they were not assists, nor indirect payments to the manufacturer. However, when a buyer made payments to a seller for tests performed by the seller on the merchandise before it was imported, such payments were a part of the price actually paid or payable, and as such, were dutiable. The “used in production” restriction which applies to whether something is an assist, does not apply to payments made by the buyer to the seller for testing costs. See HQ 544884, dated April 15, 1992. In HQ H270670, dated February 17, 2016, we noted that “as a general proposition, CBP considers fees paid to third parties, to the extent that they are similar to bona fide buying commissions, generally not to be part of the price actually paid or payable for the imported merchandise. . . . however, . . . when inspection or consulting-type services are at issue and entail quality control along the lines of production related to design or development, then the fees may be dutiable either as part of the price actually paid or payable, or as an assist.”
While counsel has asserted that “the manufacturer is not involved in, and potentially does not even have knowledge of, the testing at issue[,]” the buying agent agreement and documentary evidence provided by the Office of Regulatory Audit indicate otherwise. The buying agent agreement states that Kent, the buyer, “requires that all of its suppliers perform quality control testing on any products purchased.” The agreement further provides that the agent will ensure that “the post-production testing has been performed by the supplier.” In the documents provided to this office by the Office of Regulatory Audit, there is an invoice from a manufacturer [xxxxxxxxxxxxxxxx] for a testing charge, for the account of Kent. There is also a debit note from Kent’s agent showing the agent paid the manufacturer, on behalf of Kent, for the testing charge. To the extent that Kent, directly or through its agent, pays manufacturers for post-production testing of products imported into the United States, those payments are dutiable in accordance with HQ 542187. The documents reviewed by this office also show Kent’s agent paid testing companies directly. To the extent that Kent, directly or through an agent, pays third-party testing companies for post-production testing of products imported into the United States, those payments are not dutiable in accordance with HQ 542946.
As to the payments for certification services, Kent’s counsel has provided additional clarifying information. For instance, the Office of Regulatory Audit provided a debit note from a manufacturer for payment of an ICTI Certificate charge and a debit note from Kent’s agent showing the agent paid the manufacturer, on behalf of Kent, for the charge. ICTI stands for the International Council of Toy Industries. The ICTI Certificate referenced in the manufacturer’s invoice is for a factory audit as part of the ITCI CARE process whereby factories are audited on an annual basis for compliance with the ITCI’s code of business practices. We agree with counsel that this type of certification expense is unrelated to the production or sale to Kent of the merchandise imported into the United States. This type of certification differs from obtaining certificates of testing of the products to be imported.
In 19 U.S.C. § 1401a(b)(1), the statute provides that the price actually paid or payable for imported merchandise shall be increased by the amounts, not otherwise included in the price, attributable to packing costs, selling commissions, assists, royalties or license fees, and proceeds, as set forth in the statute, and no others. The certification expense does not fall within any of the additions set forth in 19 U.S.C. § 1401a(b)(1). Nor does it fall within the scope of the price actually paid or payable as it is not made for the imported merchandise.
HOLDING:
Based upon the information provided to this office, payments by Kent, directly or through its agent, to manufacturers for post-production testing of products imported into the United States are dutiable as part of the price actually paid or payable. Payments by Kent, directly or through an agent, to third-party testing companies for post-production testing of products imported into the United States are not dutiable. Payments for certification services that are factory audits to ensure compliance with certain codes of business practices are not dutiable as they do not relate to the production or sale of the imported merchandise to Kent.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Program Branch