VAL RR:CTF:VS 563462 DCC
U.S. Customs and Border Protection
9901 Pacific Highway
Blaine, WA 98230
RE: Price Adjustments; Discount Programs
Dear Port Director:
This is in response to your memorandum, dated February 17, 2006, in which you request internal advice regarding the valuation of merchandise produced by Northern International, Inc. (“Northern”) of Coquitlam, British Columbia, Canada. Specifically, you request guidance regarding the treatment of certain discounts for customs valuation purposes.
Northern sells outdoor lighting products to [ ], the “U.S. Retailer.” For sales to the U.S. Retailer, Northern is a non-resident importer of record. The parties are unrelated and the terms of sale are governed by a Master Buying Agreement. In addition to that agreement, the parties have implemented two discount programs: 1. the Comprehensive Vendor Discount Program and, 2. the Sustained Sales Growth Program.
The terms of the Comprehensive Vendor Discount Program are governed by an agreement, i.e., the “Vendor Information Sheet,” signed by a representative of Northern on July 20, 2004, and the U.S. Retailer on September 9, 2004. Pursuant to the Comprehensive Vendor Discount agreement, Northern’s sales price is reduced by 10.0%, which is broken down into the following three discounts including: a 3.0% Merchandise Service Allowance; a 5.0% General Advertising Allowance; and a 2.0% Volume Rebate Allowance. The agreement also indicates that the comprehensive vendor discount covers purchases by all of the U.S. Retailer’s divisions and is applied to the net purchases, defined as gross sales minus defective returns.
The Merchandise Service Allowance covers the payments to [
], an unrelated third party Merchandise Servicer for various in-store product support services, such as cleaning and straightening product displays; handling defective merchandise; providing product training to retail employees; and verifying the accuracy of product price information. According to the Volume Rebate Allowance, the sales price is reduced by 2.0% of net sales and applied regardless of whether there are additional sales to the U.S. Retailer.
The second discount program between Northern and the U.S. Retailer is the Sustained Sales Growth Program. Under this program, Northern’s net sales price is reduced by 2.38% and this discount is applied to sales to all of the U.S. Retailer’s divisions. The Sustained Sales Growth discount supercedes two earlier discounts, the New Store Allowance and the New Warehouse Allowance, both of which reduced Northern’s sales price to the U.S. Retailer when the importer purchased merchandise to stock new stores or warehouses. Under the New Store Allowance, the U.S. Retailer received a 50% discount on opening inventory merchandise for new retail stores, and a 25% discount on merchandise to stock new warehouse facilities under the New Warehouse Allowance.
According to information provided, the U.S. Retailer, the Merchandise Servicer, and Northern are unrelated parties. For purpose of this ruling and based on the information provided, we assume that transaction value is the appropriate basis of appraisement.
Whether the price actually paid or payable should be adjusted by the amount of the U.S. Retailer’s discount programs.
LAW AND ANALYSIS:
Transaction value is the preferred method of appraising merchandise imported into the United States and is defined in Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. 1401a. That section provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus five enumerated statutory additions. The term “price actually paid or payable” is more specifically defined in Section 402(b)(4)(A) of the TAA as, “The total payment (whether direct or indirect . . .) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.”
Customs and Border Protection (“CBP”) Regulations further provide that 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 . . .” (emphasis added). See 19 C.F.R. 152.103(a)(1). The term “payable” means that the price has been agreed upon, but the actual payment may not have been made at the time of importation. The following example illustrating a cash discount is contained in Example 5 in 19 C.F.R. 152.103(a)(1): “A seller offers merchandise at $100, less a 2% 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.”
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. 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 (Ct. Int’l Trade 1992) (importer required to affirmatively show that there was a preimportation agreement for the claimed discount). See also Headquarters Ruling Letter (“HRL”) 964192, dated February 15, 2002 (discounted price constituted the price actually paid for the imported footwear when discounts were agreed to and effected prior to importation); and HRL 547019, dated March 31, 2000 (discounted price, which was based on established criteria from a price list and that 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 HRL 547144, dated November 20, 1998 (appraised value may reflect discount when supplier’s invoices indicated total price, 5% reduction and the discounted price); HRL 545659, dated October 25, 1995 (unconditional discount factored into the value declared at the time of entry and reflected on the invoice presented to Customs may be taken into account in determining transaction value); and HRL 546037, dated January 31, 1996 (discount disallowed when importer failed to submit evidence that it took advantage of 2% discount for payment within 45 days of invoice date).
The third criterion requires that the discount or price adjustment be unconditional, or if conditional all the conditions must be met prior to importation. This criterion was discussed in HRL 545659, in which CBP determined that a discount was unconditional when there were no specified purchasing obligations placed on the customer. In that case, CBP held that unconditional discounts, which were reflected on the invoices presented to Customs, could be factored into the declared value of the merchandise, provided the conditions were met before importation. CBP also concluded that, if a conditional discount is agreed to before entry at the time of order placement, and the discount is reflected on the entry documentation presented to CBP, the conditional discount may be used to determine transaction value.
We find that the three discount programs that comprise the Comprehensive Vendor Discount agreement (i.e., the 3.0% Merchandise Service Allowance; the 5.0% General Advertising Allowance; and the 2.0% Volume Rebate Allowance) meet CBP’s established criteria for price adjustments. All three of these discount programs are described in the U.S. Retailer’s vendor information sheets. The vendor information sheets satisfy the requirement for documentary evidence to support the existence of the discount programs and establish that the discounts were in effect for merchandise entered after the sheets were signed by both parties. We also note that all three discounts—including the Volume Rebate Allowance—are unconditional because they are taken automatically by the U.S. Retailer without further obligation. We therefore find that the discounts made pursuant to the Comprehensive Vendor Discount agreement should be taken into account in determining the price actually paid or payable for the imported merchandise.
We also find that the Sustained Sales Growth Program, as well as the superceded New Store and New Warehouse Allowances, satisfy the criteria for price adjustments. Under the Sustained Sales Growth Program, the U.S. Retailer receives a 2.38% discount, which is applied to all sales to the U.S. Retailer. The New Store and New Warehouse Allowances, by contrast, were only applied to merchandise that was purchased to stock new stores or warehouses. The terms for all three of these discount programs are clearly described in the Vendor Allowance Sheets, which were signed and in effect prior to importation of the subject merchandise. Furthermore, the Sustained Sales Growth Program, New Store Allowance, and New Warehouse Allowance are all unconditional in nature since they are applied regardless of whether either party takes further action.
Based on the information submitted, we find that the discounted price reflecting the current discount programs (i.e., the Comprehensive Vendor Discount Program and the Sustained Sales Growth Program) and the previous discount programs (i.e., the Merchandise Service Allowance, General Advertising Allowance, Volume Rebate Allowance, New Store Allowance, and the New Warehouse Allowance) may be used to determine the price actually paid or payable for the imported merchandise.
The discounted prices, which were agreed to prior to importation and applied unconditionally, constitute the price actually paid or payable for the imported merchandise, assuming the transaction value method may be used to appraise the imported merchandise.
A copy of this internal advice should be mailed by your office to the requester no later than sixty days from the date of this letter. Sixty days from the date of this letter, the Office of Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP's web site, and by means of the Freedom of Information Act as well as by other means of public distribution.
Monika R. Brenner, Chief
Valuation and Special Programs Branch