OT:RR:CTF:VS H336680 RRB

Center Director
CEE – Electronics
U.S. Customs and Border Protection
301 E. Ocean Blvd.
Long Beach, CA 90802

Attn: Scott Titus, Import Specialist

RE: Application for Further Review of Protest No. 3901-23-130384; Transaction Value; Assists; Discounts

Dear Center Director:

This is in response to the Application for Further Review (“AFR”) of Protest No. 3901-23-130384, timely filed on October 24, 2023, by Gunster, on behalf of their client, Bidi Vapor LLC (“Protestant” or “Bidi Vapor”), concerning the appraisement of electronic cigarettes under 19 U.S.C. § 1401a. The AFR was forwarded to this office for consideration.

FACTS:

From August 15, 2022, through January 30, 2023, the Protestant filed 28 entries of electronic cigarettes (“e-cigarettes”). The Protestant purchased the e-cigarettes from SMISS Technology, Co. Ltd. (“SMISS”), which manufactured the goods in China. Sales between the Protestant and SMISS were governed by a Manufacturing and IP Ownership Agreement between the parties, dated January 9, 2020 (“Manufacturing Agreement”). According to the Manufacturing Agreement and the Bidi Vapor Organizational Chart, SMISS is an independent contractor that functions as the exclusive manufacturer and supplier of Protestant’s e-cigarettes. The entry documents indicate that Bidi Vapor is both the importer and the ultimate consignee.

According to the protest documentation, the Protestant’s sole customer is Kaival Brands Innovations Group Inc. (“Kaival”). This documentation also indicates that the

1 founder and CEO of Bidi Vapor is also a founder and science officer at Kaival. Kaival purchases e-cigarettes from Bidi Vapor pursuant to an agreement between the parties. 1

Documentation provided by Bidi Vapor indicates that it owns the infrastructure for the e-liquid nicotine production lab and testing equipment to make and test the e-liquid according to specification for quality, reliability, safety, and personalized control. Upon production and testing of the e-liquid nicotine by Bidi Vapor at a laboratory located in China, the e-liquid nicotine gets released to SMISS for incorporation into the finished e- cigarettes prior to importation. As confirmed by the packing lists and other entry documents, the e-cigarettes were imported with the e-liquid nicotine contained within the e-cigarette hardware.

Prior to the importation of the 28 entries at issue, Bidi Vapor entered into two transactions with SMISS, POs (“PO”)-013 and PO-014, for a total of 13.8 million e- cigarettes. Approximately 6.5 million of those e-cigarettes were deemed defective and, following customer complaints and negotiations, SMISS sent a “Statement of Indemnity” to Bidi Vapor on February 20, 2021. In relevant part, the “Statement of Indemnity” advised Bidi Vapor to provide its customers with “replacement products” and stated that Bidi Vapor may reimburse its customer in the form of a discount on subsequent orders from batch PO-015, whereby “[t]he specific discount size depends on the specific circumstances of each order.”

On January 13, 2023, U.S. Customs and Border Protection (“CBP”) issued a Request for Information (CBP Form 28) for the 28 entries, seeking “entry summary packets, invoices, BOL [bill of lading], packing list, and detailed product information/specifications to include color pictures.” On February 15, 2023, CBP issued a Proposed Notice of Action (CBP Form 29), proposing correction of the transaction value of the subject merchandise to “the wholesale value per piece net packed.” The entries were liquidated between April 28, 2023, to July 7, 2023.

Among the protest documents, the Protestant submitted a Microsoft Excel spreadsheet detailing the protested entry numbers, invoice numbers, quantities, unit prices, airway bill numbers, and PO attachments. However, the PO numbers identified on the packing lists for the subject entries do not match the POs attached in the Excel spreadsheet. We also note that one of the protested entries was tied to two separate commercial invoices of different quantities of what appears to be the same merchandise, along with two separate POs. Moreover, one of the protested entries is missing from the Excel spreadsheet. Lastly, in addition to missing POs associated with the protested entries, we also note that one of the protested entries is missing most of the entry documents except for the Entry Summary.

On October 24, 2023, Bidi Vapor filed this Protest and AFR, asserting that the protested entries were liquidated at a higher rate than declared at the time of entry. In

1 According to a letter from Kaival to Bidi Vapor, dated August 1, 2022, “Kaival purchases certain products

from Bidi pursuant to agreement between the parties, as amended and restated from time-to-time (and earlier via its predecessor agreements).”

2 response to the Protest filing, the Electronics Center of Excellence and Expertise (“Electronics CEE”) issued a second CBP Form 28 on November 16, 2023, requesting additional information regarding the relationship between the seller and the importer, details of any additional costs or expenses incurred in the transaction (e.g., packing, commissions, proceeds that accrue to the seller, assists, royalties and/or license fees), a copy of a contract (or PO and the seller’s confirmation thereof) covering the transaction, and a breakdown of components, materials, or ingredients by weight and the actual costs of the components at the time of assembly into the finished article. In a letter, dated December 19, 2023, counsel for the Protestant responded to the November 16, 2023, CBP Form 28. In this letter, counsel for the Protestant asserted that Bidi Vapor is not related in any way to the seller of the merchandise and that there are not any additional costs/expenses incurred in the transaction for any of the 28 entries. They also stated that a copy of the contract covering the transaction, breakdown of components, materials, or ingredients by weight and the actual costs of the components were included as exhibits to the Protest, along with all of the entry documents.

In response to an email inquiry from our office on December 31, 2024, counsel for the Protestant submitted a supplemental submission, dated March 20, 2025. In this submission, counsel explains that the initial import price per unit of merchandise was $1.50 but that as a result of credit negotiations between Bidi Vapor and Kaival, and consistent with the “Statement of Indemnity” issued by SMISS to Bidi Vapor, the import price per unit from SMISS to Bidi Vapor was reduced to $0.802, as noted in the commercial invoices for some of protested entries, 2 “until such time where the discount applied equaled what SMISS owed Bidi Vapor for the defective goods.” Counsel for Bidi Vapor also explained that as part of Bidi Vapor’s overall discussions with Kaival, and to address their disappointment about the defective merchandise, Bidi Vapor agreed to discount their pricing to Kaival by 5% on all future orders for products until the entire total credit given by Bidi Vapor to Kaival in response to the defective merchandise has been exhausted. 3

According to the POs attached to the above-referenced Microsoft Excel spreadsheet for the subject e-cigarettes, the total cost per unit is $1.50, with the merchandise hardware costing $0.80 and the selling, general, and administrative (SG&A) expenses, assembly costs, and product licensing costs totaling $0.70. The POs and commercial invoices associated with the protested entries only describe the “Bidi Stick 10PK” or “Atomizer Device.” Moreover, the product description in the entry documents indicates various flavors of e-liquid contained within the imported e- cigarettes, which was confirmed by photos submitted by the Protestant, photos and inspections by the Electronics CEE, and the Protestant’s narrative about production of the hardware and e-liquid overseas.

2 We note that for six of the 28 entries, the commercial invoices indicated a price per unit of $1.50.

Counsel explained in its March 20, 2025, submission that this was an error and that these entries should have been declared at the $0.802 unit price as indicated in the POs. 3 This arrangement is memorialized in a signed Memorandum of Understanding between Kaival and Bidi

Vapor, dated September 6, 2021, which was amended pursuant to letter agreements, dated April 29, 2022; August 1, 2022; and November 17, 2022.

3 On July 30, 2025, the Electronics CEE explained that the price listed on the entry summary package invoices ($0.80 per e-cigarette unit) was undervalued and did not include the cost of the e-liquid nicotine. Thus, the Electronics CEE determined the proper values of the subject merchandise based on the number of puffs contained in each device. Accordingly, the value of the protested merchandise was appraised at $3.83 per piece based on the number of puffs of similar or identical e-cigarettes sold.

On March 26, 2025, counsel and his client’s representatives met with CBP personnel to discuss this matter and to go over the extensive documentation provided to support the Protestant’s position. The Protestant asserts that the $0.80 per unit price should be used to determine the price actually paid or payable at the time of entry under transaction value and that it represents a discount or price adjustment following the previous importation of e-cigarettes that were defective.

ISSUE:

What is the proper method of appraisement for the entered merchandise?

LAW AND ANALYSIS:

This matter is protestable under 19 U.S.C. § 1514(a)(1) as a decision on the value of merchandise. The protest was timely filed on October 24, 2023, within 180 days of the date of liquidation. See Miscellaneous Trade and Technical Corrections Act of 2004, 3 Pub. L. 108-429, § 2103(2)(B)(ii)-(iii) (codified as amended at 19 U.S.C. § 1514(c)(3) (2006)). Further review of this protest is properly accorded to the importer pursuant to 19 C.F.R. § 174.24(b) because the issues protested involve questions of law or fact, which have not been ruled upon.

Merchandise imported into the United States is appraised for customs purposes 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 is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain statutorily enumerated additions, including assists, under 19 U.S.C. § 1401a(b)(1)(A)-(E). Unless there is a bona fide sale of merchandise for exportation to the United States, the transaction value method cannot be used.

When merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), its value is to be determined in accordance with the "fallback" method of 19 U.S.C. § 1401a(f). This method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to arrive at a value.

Nevertheless, under section 500 of the Tariff Act of 1930, as amended, which sets forth CBP’s general appraisement authority, the appraising officer may:

4 Fix 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, or 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 allows Customs to consider the best evidence available in appraising merchandise … . [It] 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 Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. Accordingly, if the value of imported merchandise cannot be determined on the basis of a method derived from sections 402(b)-(e), we find that the value of the imported merchandise may be determined under the fallback method provided for in section 402(f) of the TAA, using all reasonable ways and means

In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the court 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. Id. (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. CBP makes each determination on a case-by- case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise.

The term “price actually paid or payable” is defined as:

[T]he 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)

5 made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.

19 U.S.C. § 1401a(b)(4)(A)

In the instant matter, the Electronics CEE did not question whether this was a bona fide sale for exportation of merchandise to the United States between the Protestant and the manufacturer of the e-cigarettes.

Assists

In the instant protest, Bidi Vapor provided SMISS with the e-liquid nicotine that was incorporated into the hardware of the e-cigarettes prior to importation.

19 U.S.C. § 1401a(h) provides, in pertinent part, as follows:

(1)(A) The term “assist” means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise:

(i) Materials, components, parts, and similar items incorporated in the imported merchandise.

(ii) Tools, dies, molds, and similar items used in the production of the imported merchandise.

(iii) Merchandise consumed in the production of the imported merchandise.\

(iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.

As indicated above, an assist is simply a particular item or service that is supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of that merchandise. An assist includes materials incorporated in the imported merchandise.

The Electronics CEE denied this protest because the price listed on the entry summary package invoices was undervalued, as it did not include the cost of the e- liquid nicotine. The e-liquid nicotine, which was presumably provided free of charge by the Protestant to the manufacturer for incorporation into the e-cigarettes prior to importation, were assists within the meaning of 19 U.S.C. 1401a(h)(1)(A)(i). See, e.g., Headquarters Ruling Letter (“HQ”) H212283, dated June 19, 2014 (where CBP held that care labels and made-in labels, provided free of charge and incorporated into the

6 imported merchandise, were deemed to be assists). We agree with the Electronics CEE that the value of the e-liquid nicotine, apportioned as appropriate, should have been added to the transaction value of the imported merchandise.

Discounts

We will next address the Protestant’s assertion that the declared value of the e- cigarettes at entry was the result of credit negotiations between the Protestant and Kaival following Kaival’s complaints regarding defective merchandise and was consistent with the “Statement of Indemnity” issued by the manufacturer to the Protestant, which stated that the Protestant may reimburse Kaival in the form of a discount on subsequent orders. According to the Protestant, this was why the initial import price per unit was discounted from $1.50 to $0.80.

CBP Regulations provide that in determining transaction value, 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 CBP Regulations further cite the following example:

A seller offers merchandise at $100, less a two percent 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. 19 C.F.R. § 152.103(a)(1), Example 5.

Furthermore, the word “payable” refers to a situation in which the price has been agreed, but actual payment has not 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 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 (appraised value may reflect discount when supplier’s invoice indicated total price, 5% reduction and the discounted price; see also HQ 545659, dated October 25, 1995

7 (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).

The third criterion requires that the discount or price adjustment be unconditional, or if conditional, all the conditions must be met prior to importation. CBP discussed 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, CBP held that with respect to both the unconditional and conditional discounts indicated on the invoice at the time of entry when no amount is rebated, these discounts are taken into consideration in determining transaction value. In those instances where the customer has not yet fulfilled the specified purchasing obligation at the time of entry, the conditional discounts are not taken into consideration in determining transaction value. Id.

Here, the Protestant asserts that “[a]s a result of credit negotiations between Bidi and Kaival, the import price from SMISS to Bidi was reduced to $0.802. In other words, given that SMISS was unable to pay Bidi Vapor LLC the cash value of the defective goods, SMISS agreed with Bidi Vapor LLC that they would discount their future shipments ($0.802 instead of $1.50) until such time where the discount applied equaled what SMISS owed Bidi Vapor LLC for the defective goods.” The Protestant also points to the “Statement of Indemnity” between the Protestant and the manufacturer, which advised the Protestant to provide its customers with replacement products and stated that the Protestant may reimburse its customer in the form of a discount on subsequent orders whereby “[t]he specific discount size depends on the specific circumstances of each order.” While the language of the “Statement of Indemnity” notes that Bidi Vapor may reimburse Kaival in the form of a discount, it is silent on the existence of an agreed upon discount with respect to the selling price between SMISS and Bidi Vapor. Moreover, some of the commercial invoices included with the Protest indicate an import price per unit of $1.50. 4 We are also unable to compare these commercial invoices to the POs tied to those entries. 5 Counsel for the Protestant notes that the Protestant agreed to discount their own pricing to Kaival by 5% on all future orders for e-cigarette products until the entire total credit given by Bidi Vapor to Kaival in response to the defective merchandise has been exhausted, as memorialized in a Memorandum of Understanding. This arrangement, however, does not support the existence of any discounts agreed upon between SMISS and Bidi Vapor. In sum, the evidence submitted with this protest falls short in satisfying the three criteria for determining whether a discount or price adjustment should be considered part of the transaction

4 Counsel for Bidi Vapor notes that six of the 28 entries indicate the import price per unit of $1.50 on the

commercial invoices declared for entry, but asserts that this was an error. 5 As noted above, the PO numbers identified on the packing lists for the protested entries do not match

the POs attached in the Excel spreadsheet provided by counsel. We also note that one of the protested entries was tied to two separate commercial invoices of different quantities of what appears to be the same merchandise, along with two separate POs. Moreover, one of the protested entries is missing from the Excel spreadsheet. Lastly, in addition to missing POs associated with the protested entries, we also note that one of the protested entries is missing most of the entry documents except for the Entry Summary.

8 value of imported merchandise. Therefore, a discount or price adjustment in the instant matter should not be considered in determining the price actually paid or payable for the imported merchandise.

Based on the foregoing, we agree with the CEE’s determination that the proposed transaction value set forth by the protestant cannot be used. Accordingly, the CEE continued down the hierarchy of appraisement methods and used all “reasonable ways and means” under the fallback method to determine the value of the e-cigarettes based on their “wholesale value per piece net packed.” As noted above, the price on the entry summary package invoices was either $0.802 or $1.50 per device, while the protest documentation indicated that the cost of the e-liquid nicotine was not included as part of the unit price per device. The CEE concluded that the e-cigarettes were therefore undervalued. Where no accurate invoices or other documentation was available to appraise the merchandise, the CEE used reasonable ways and means to determine the appropriate value using whatever evidence was available within the constraints of section 402 of the TAA. See Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the TAA (October 1981), at 67. Under this fallback approach, the CEE determined the wholesale value per unit to be $3.83. This is consistent with CBP’s authority under 19 U.S.C. §§ 1401a(1)(F) and a(f), and 19 U.S.C. § 1500.

HOLDING:

Based on the information presented, this protest should be DENIED.

You are instructed to notify the protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/, or other methods of public distribution.

Sincerely,

for Yuliya A. Gulis, Director
Commercial Trade and Facilitation Division
U.S. Customs & Border Protection

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