12

HQ H050895

December 6, 2010

VAL OT:RR:CTF:VS H050895 RSD

CATEGORY: Valuation

Field Director

U.S. Customs and Border Protection

Office of International Trade

Office of Regulatory Audit

2220 Grandview Drive
Fort Mitchell, Kentucky 41017

Dear Field Director:

This is in response to your memorandum dated January 23, 2009, requesting internal advice as to whether certain payments made by the importer, Bass Pro, to three purported buying agents would be non-dutiable as buying commissions. In a letter dated July 29, 2008, Bass Pro’s counsel raised the issue of whether the transactions between Bass Pro and the alleged buying agents are really first sales in multi-tier transactions which should serve as the basis of appraisement under Nissho Iwai American v. United States 982 F.2. 505 (Fed. Cir. 1992). The second issue that your office inquired about in your request for internal advice concerns the dutiability of certain royalty payments made by Bass Pro. The royalties issue will be addressed in a separate decision letter.

FACTS:

The importer in this is matter is Bass Pro, a retailer of fishing gear, hunting paraphernalia, clothing, optics, footwear, home furnishings, camping equipment, jewelry and sporting goods. The Office of Regulatory Audit conducted a Focused Assessment (FA) Audit of Bass Pro’s import operation for the period from January 1, 2006 through December 30, 2006. Part of the FA audit concerned a review of a number of import transactions in which Bass Pro used the services of entities alleged to be buying agents. The alleged agents were Pro Line Manufacturing (Pro Line), Strategic Orient Sources (SOS), and a division of SOS called Sharp Shot. Bass Pro claimed that the money it paid to these entities were bona fide buying commissions, and thus should be excluded from the total value of the merchandise reported to CBP. Your office disputes that these entities were acting as bona fide buying agents. It is your position that any money that Bass Pro paid to Pro Line and SOS/Sharp Shot should be considered dutiable as an addition to the price actually paid or payable of the merchandise that Bass Pro imported into the United States.

Pro Line Agency

The first alleged buying agent, Pro Line, is based in Wayne, New Jersey.

It was formerly known either as Red Line Products and Top Line Products. At the request of the auditors, Bass Pro presented a document from 2006 labeled “Standard Vendor Agreement”. The Agreement listed Pro Line as the “Vendor”, and set forth the conditions and terms that Bass Pro and Pro Line would follow in the purchasing of merchandise. It is noted that the agreement indicates that the vendor is a manufacturer or distributor of goods and/or services, which it desires to sell to the purchaser. There is no indication in the agreement that Pro

Line would function as an agent for Bass Pro. For the period under review in the FA, there is no record of any formalized written buying agency agreement between Pro Line and Bass Pro. However, the record does contain a memorandum written by a vice president from Pro Line dated December 23, 2005. The memorandum indicates that Pro Line’s agent commission will be reduced by two percent. Bass Pro also kept a commission log which listed Pro Line as one of its buying agents, and the log showed the commission rate.

According to the Office of Regulatory Audit, when Pro Line was involved in a transaction, Bass Pro typically entered the merchandise by using a commercial invoice with the heading “Pro Line Manufacturing Co. LLC” and its U.S. based address. In the documents from a sample transaction analyzed by the Office of Regulatory Audit, the Bass Pro’s electronic archive payment report indicated that it made a payment directly to Pro Line. The Pro Line invoices that Bass Pro presented to CBP when it made entry for the merchandise contained no statement to indicate that a commission was being paid to Pro Line on the transaction. Rather, Pro Line generated a second invoice, which contained a certain percentage mark up above the price of the merchandise shown on the invoice presented to CBP. On the invoice the markup was listed as “MISC CHARGES”. The Office of Regulatory Audit requested actual invoices from the factory that produced the imported merchandise. The example factory invoice that was obtained for this transaction showed a price which was $1776 less than the price that Pro Line charged Bass Pro for the merchandise. In addition, the invoice prepare by the factory was dated May 17, 2010, while the invoice that Pro Line issued to Bass Pro was dated May 10, 2006.

In another transaction reviewed by the Office of Regulatory Audit, the Pro Line invoice, which was used to make entry, listed “Pro Line Hangzhou 310021 China” as the manufacturer. No factory invoice was provided to CBP with the entry and the bill of lading provided with the entry listed Pro Line as the shipper. Two additional entries reviewed by the Office of Regulatory Audit included a Pro Line invoice heading, but showed no manufacturer. The invoice also showed that Pro Line was DBA (doing business as) Pacific Eagle Enterprise in Taiwan. In addition, the Office of Regulatory Audit discovered that on Pro Line’s web site, there was indication that the company had ties to a manufacturer and that it had acted as a manufacturer’s representative.

Subsequently, the Port of St. Louis sent Bass Pro a Request for Information on a CBP Form 28, which requested that Bass Pro furnish any written contact that it may have with Pro Line. The Port of St. Louis further asked for details on the alleged buying commission that was paid separately. Bass Pro submitted a copy of a buying agency agreement which was signed by Pro Line on May 15, 2008. Under this buying agency agreement, Bass Pro was to pay a certain buying agency commission to Pro Line based on the FOB price. However, the price that Pro Line charged Bass Pro was higher than the price the factory charged Pro Line. Bass Pro indicated that Pro Line charged a higher price than the factory charged because it included payments for certain functions that Pro Line performed for Bass Pro. The higher price that Pro Line charged Bass Pro was in addition to the commissions that it received.

SOS/Sharp Shot Agency

The record contains a buying agent agreement that Bass Pro and SOS signed on April 14, 2005. The agreement was submitted by Bass Pro’s broker to the Port of St. Louis on May 10, 2005. The buying agent agreement specifies that the principal has control over the agent, and the principal is active in selecting the merchandise and the factories, while the agent has discretion in the purchase of the merchandise. The merchandise is purchased by the agent on behalf of the principal and the factories are aware that the principal and not the agent is the purchaser of the merchandise. The agent is to be compensated solely by the commission paid by the principal, and it receives no remuneration from the factories, nor does it share its commission with any of the manufacturers. The agent does not buy for its own account, but only for the principal’s account and only upon the instructions from the principal.

The Office of Regulatory Audit reviewed a typical transaction in which SOS was involved. In the transaction, Bass Pro entered the merchandise by presenting a commercial invoice with a SOS heading to CBP. The SOS invoice showed an amount for the value of merchandise, a certain percent buying commission, for a grand total amount which was equal to the total value of the merchandise plus the buying commission. The subtotal amount listed before the addition of the invoice commission was the value of merchandise that Bass Pro reported to CBP, when it entered the merchandise. However, the amount shown on “Grand Total” line, which included the commissions, was the total amount of money that Bass Pro actually paid to SOS to obtain the merchandise. The purchase order price was higher than the amount shown on the invoices. For the sample transaction, the purchase orders issued by Bass Pro to SOS showed that the individual purchase orders unit price included the commission amount. In other words, the buying commission was built into the price that SOS charged Bass Pro for the merchandise. This alleged commission percentage amount was then deducted on a per-unit price basis to arrive at a lower SOS invoice price that would be reported to CBP when the merchandise was entered. Basically, the entered invoice unit prices were the specified percentage lower than those listed on the purchase order that SOS issued to Bass Pro. The amount that Bass Pro paid to SOS was the figure shown on SOS’s purchase orders that included the certain percent commission.

Factory invoices were not usually provided with the entry documents presented to CBP for the transactions in which S0S/Sharp Shot were involved. The Office of Regulatory Audit requested and reviewed the factory invoices for seven SOS transactions and two Sharp Shot transactions. The Office of Regulatory Audit tried to determine whether the amounts that the actual manufacturer or vendor charged for the merchandise agreed with the amounts that SOS and Sharp Shot charged Bass Pro. On the seven SOS entries and two Sharp Shot entries reviewed in the sample transactions, the amounts that the factory or vendor charged did not match the amount that the agent was charging Bass Pro because prices shown on the agent’s invoice were always higher than the amount that the factory or vendor charged.

When asked why there is a difference between the prices shown on the factory invoices and the prices shown on the SOS/Sharp Shot invoices, the Office of Regulatory Audit was informed that SOS/Sharp Shot performed many functions on Bass Pro’s behalf to maintain the quality standards and social accountability requirements for its private label brand goods. SOS/Sharp Shot performed these services in addition to their standard buying agent duties, and these services would vary with different product types and factory locations. Because of the variance in product types and factory locations, the additional expense had to be built into the cost of the goods.

FIRST SALE

After receiving an analysis from the Office Regulatory Audit that the payments to Pro Line and SOS should be considered as dutiable and should be added to the price actually paid or payable (Finding Sheet 1 of the Focused Assessment Report), Bass Pro obtained the services of outside counsel. Counsel contends that if Pro Line and SOS/Sharp Shot are determined not to be bona fide buying agents, then they should instead be considered resellers and that the correct appraised value is the price paid by them to the manufacturers plus any assists or other statutory additions to this price as set forth in Nissho Iwai American Corp. v. United States 982 F.2d. 505 (Fed. Cir. 1992).

Counsel indicates that the terms of sale between the alleged middlemen and manufactures were identical, suggesting that there was a simultaneous passage of title from the manufacturers to the middlemen and from the middlemen to Bass Pro. Counsel also submitted a series of transaction documents from the entries involving Pro Line and SOS to demonstrate that these entities acted as sellers and that the merchandise was destined to the United States. The documents include a Bass Pro purchase order, a factory invoice, invoices from Pro Line and SOS, proof of payment and bills of lading. We note that the factory invoices and other documents submitted do not identify Pro Line or SOS as buyers of the imported merchandise from factory.

ISSUES:

1) Whether certain payments made by Bass Pro to Pro-Line and SOS/Sharp Shot constitute bona fide buying commissions such that they would not be added to the price actually paid or payable under 19 U.S.C. §1401a(b)?

2) In the alternative, whether the transactions between Bass Pro and Pro Line and S0S/Sharp Sharp constitute a sale for exportation which may form the basis of appraisement for the imported merchandise?


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 as it regards 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). Buying commissions are fees paid by an importer to his agent for the service of representing him abroad in purchasing the good being valued. As a general matter, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, (CIT 1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, (1988); Jay-Arr Slimwear, Inc. v. United States, 681 F. Supp. 875, (CIT 1988).

The existence of a bona fide buying commission depends upon the relevant factors of each particular case J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). 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, Inc. v. United States, Supra; New Trends, Inc. v. United States., 645 F. Supp. 957, (CIT 1986); B.W. Wholesale Co., Inc. v. United States., 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 considering 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, 849, 305 F.Supp. 20, 24 (Cust. Ct. 1969):