Internal Advice Concerning the Proper Customs Valuation Method for Imported Souvenirs Sold by an Entertainment Company; Fallback Method; Modified Deductive Valuation; 19 U.S.C. § 1401a(f)

HQ H144042 October 30, 2013 VAL OT:RR:CTF:VS H144042 RSD CATEGORY: VALUATION Area Port Director United States Customs and Border Protection 237 West Service RoadChamplain, New York 12919 RE: Internal Advice Concerning the Proper Customs Valuation Method for Imported Souvenirs Sold by an Entertainment Company; Fallback Method; Modified Deductive Valuation; 19 U.S.C. § 1401a(f) Dear Area Port Director: This is in response to your memorandum dated December 29, 2010, regarding an internal advice request concerning the proper methodology for the valuation of imported sweat shirts, tee shirts and other types of souvenirs usually sold at the shows of a leading entertainment company that performs in the United States. The internal advice request was made by the director of logistics of the entertainment company. The entertainment company through its representatives has made a supplemental submission dated April 10, 2012, but subsequently, after several discussions with this office, they revised their proposed valuation methodology. The most recent submission explaining a proposed valuation method was provided August 13, 2013. The entertainment company has requested confidential treatment for certain identifying information, as well as for prices, costs and profit figures contained in their submissions. Inasmuch as the request conforms to the requirements of 19 CFR §177.2(b)(7), the company's request for confidentiality is approved. The information contained within brackets and all attachments to the internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling. FACTS: The importer is a foreign based entertainment company that presents shows in the United States, Canada, and globally. It has several troupes, which present several specific unique shows with different performance plans. In the United States, the shows are performed by the entertainment company’s local U.S. subsidiary. The local U.S. subsidiary sells mementos and souvenirs, such as shirts, sweatshirts, booklets, mugs, compact discs, DVDs and other similar types of merchandise at the shows. The merchandise was manufactured in Asia and then imported into Canada. The entertainment company purchased the merchandise from unrelated suppliers, who made arrangements to have the goods made by the Asian manufacturers. Some of the merchandise is geared toward the entertainment company in general, but certain merchandise will reference specific shows performed in the United States. Certain selected shows are presented only in the United States, and thus the merchandise connected with one of those shows will only be sold in the U.S. market. Initially the merchandise was normally warehoused in Canada. Based on the schedule of shows in the United States, the merchandise inventory was eventually transferred from Canada to the entertainment’s company local U.S. subsidiary’s warehouse in United States. At the time the stock was transferred, it was the intention of the entertainment company and its local U.S. subsidiary for the subsidiary to ultimately buy the merchandise at an agreed upon price. However, the actual title transfer was delayed until closer to a show’s performance, at which time the title to the merchandise formally transferred between the entertainment company and its U.S. local subsidiary. The historical reason for this practice was that the shows were not equipped to carry a large inventory of merchandise when they traveled within the United States. The value of the merchandise the entertainment company declared to Customs and Border Protection (CBP) was based on the alleged sales price paid by the U.S. subsidiary to the entertainment company. The sales price of the imported merchandise was determined based on the sum of several elements. The first element of the sales price was a determination of the cost of goods sold (the purchase price of the goods from the unrelated vendors). Next, a merchandise service fee approximately [ ]% of the merchandise costs was added to the cost of goods sold. Finally, an additional profit or markup on the merchandise service fee of approximately [ ]% was added to arrive at a final sales price of the merchandise. On October 21, 2010, the entertainment company imported a shipment of merchandise through the Port of Champlain, New York. Your office reviewed the entry, and on May 26, 2010, issued a CBP 28, which requested information relating to the value of the goods declared on the entry. To simplify matters, your office and the importer agreed that the specific valuation information and subsequent responses were to be limited to men’s hooded long sleeve sweatshirts, but it was also understood that all of the import transactions undertaken by the entertainment company could be affected by any subsequent determination that CBP made. CBP granted several extensions, and on September 3, 2010, a response to the CBP 28 was received from the importer. After reviewing the response, your office issued a proposed CBP 29 on September 8, 2010. The CBP 29 stated that the information submitted was insufficient to support a sale for export to the United States and the use of transaction value. The importer submitted a response to this CBP 29 dated September 28, 2010 with some additional information. An evaluation of the additional documentation submitted by the importer also determined that it was insufficient to support transaction value and CBP issued a second CBP 28 on October 29, 2010. This second CBP 28 sought additional information relating to the sale between the entertainment company and its U.S. subsidiary. A response was received from the entertainment company dated November 18, 2010, with a request for internal advice, if CBP and the entertainment company could not agree on the proper method of valuing the merchandise imported by the U.S. subsidiary. The position of the entertainment company as stated in its response dated September 3, 2010, was that at the time of their import into the U.S. the “price paid or payable” for the subject goods had already been determined according to an established inter-company pricing model. This is the price that the entertainment company contended represented the transaction value of the imported merchandise. In support of their position, they contend that there was a sale for exportation from the entertainment company to the U.S. subsidiary. After the internal advice request was sent to our office for review, we determined that even if the entertainment company could establish that there was a bona fide sale for exportation to the United States between it and its U.S. subsidiary, the evidence presented was still insufficient to demonstrate that the price paid for the merchandise was not influenced by the relationship of the parties. The entertainment company made several attempts to present evidence showing that the price its subsidiary paid for the imported merchandise was not influenced by their relationship, but it eventually agreed that the imported merchandise should not be appraised using transaction value based on a sale with its related U.S. subsidiary. Instead, the entertainment company developed a new method to appraise the merchandise using a modified deductive value under the fallback value provisions. Under this approach, the entertainment company provided its deductive value calculations for the merchandise that was first sent to Canada and then subsequently imported into the United States for the period beginning in 2009 through October 2011. The deductive value calculations were applied to imported sweatshirts which were entered into the United States on October 21, 2009. The starting point for the deductive value calculations was the price that retail customers paid for the sweatshirts at U.S. shows. From the retail price of the sweatshirts, the profits and the various general expenses incurred in connection with the sales of merchandise after their importation were deducted. According to the entertainment company’s representative, the deductive value calculations reconcile to the entertainment company’s accounting records. In their view, the underlying accounting records that support the deductive value were prepared in accordance with Generally Accepted Accounting Principles (GAAP). The deductive value calculations for the imported sweatshirts are based on the unit U.S. selling price at the shows of $[ ]. To determine their deductive value, the price of the sweatshirts was reduced by amounts for profits $[ ], general expenses $[ ], the actual and associated costs for transportation and insurance $[ ], and Customs duties, and Federal taxes currently payable of the merchandise concerned by its importation $[ ]. There were no deductions made for packing costs. After all the deductions from the resale price were made, the value calculated for a sweatshirt under the proposed deductive value method was determined to be $[ ]. In addition to the sweatshirts, the entertainment company also calculated the total deductive value for all the items they imported from 2009 through October 2011. The entertainment company presented a chart showing the total revenue they received for selling the imported goods to its customers in the United States for the years 2009, 2010, and 2011. The next row of the chart indicates that the imputed cost of the goods sold for those years, which is the amount they paid their suppliers for the goods. The revenue obtained from selling the goods to customers in the United States minus the imputed cost of goods sold yields a gross margin. They also provided a list of the expenses involved in selling the goods after they were imported in the United States. Most of these post-importation general expenses were incurred in connection with selling the merchandise at the various shows performed in the United States. The expenses include items such as payments for salaries, benefits, and payroll taxes for the employees who sell the items at the performances. Other selling expenses include security costs, travel expenses for non-artist employees, set-up costs, energy and utility costs, maintenance costs, and other logistical costs. The entertainment company considers these costs as being directly attributable to reselling the imported goods at its shows performed in the United States. ISSUE: Whether the proposed method of valuing the imported merchandise using a modified deductive value under section 402(f) as described above is an acceptable method of appraisal under the valuation law? 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; 19 U.S.C. § 1401a). The primary basis of appraisement is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. 1401a(b)(1). The term “price actually paid or payable” means the 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) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. §1401a(b)(4)(A). In determining transaction value, the price actually paid or payable is considered without regard to its method of derivation. Pursuant to section 402(b)(2)(A)(iv), the transaction value of imported merchandise shall be acceptable only if the buyer and the seller are not related, or if the buyer and the seller are related, the transaction value is acceptable under section 402(b)(2)(B). (Emphasis added.) In this case, the entertainment company imports various souvenir items into the United States, which were transferred to a local U.S. affiliated company for sale to consumers at shows performed in the United States. Based on the evidence available, it is not clear that the transfer of the merchandise between the related parties would constitute a bona fide sale for exportation. However, even if it could be established that there was a bona fide sale, we note that that the transaction was between related parties. 19 U.S.C. 1401a(b)(2)(B) provides that the transaction value between a related buyer and seller is only acceptable if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between the parties did not influence the price actually paid or payable, or if the transaction value of the imported merchandise closely approximates certain test values. Under the circumstances of the sale test, if it is shown that the buyer and seller, albeit related, buy and sell to each other as if they are not related, this will demonstrate that the price has not been influenced by the relationship. See also 19 CFR § 152.103(j)(2). Although the entertainment company’s representative described a rather complicated process how the price the entertainment company’s local subsidiary paid for the imported merchandise was determined, insufficient evidence was presented to show that the transactions between the related parties was settled in an arm’s length manner and that the price paid for the imported merchandise was not influenced by the relationship of the parties. Consequently, in this instance, we conclude that transaction value was an unacceptable basis of valuation. When imported merchandise cannot be appraised on the basis of transaction value, it is to be appraised in accordance with the remaining methods of valuation, applied in sequential order. The alternative methods of appraisement in order of precedence are: the transaction value of identical merchandise; the transaction value of similar merchandise; deductive value; and computed value. If the value of imported merchandise cannot be determined under these methods, it is to be determined in accordance with section 402(f) of the TAA. 19 U.S.C. § 1401a(a)(1). The first and second alternative basis of appraisement are the transaction value of identical merchandise and the transaction value of similar merchandise, as determined in accordance with section 402(c) of the TAA. Appraised values of identical and similar merchandise are based on values that are acceptable as appraised values under section 402(b) of the TAA. 19 U.S.C. § 1401a(c)(1). We have no information regarding any merchandise that would be considered "identical" or "similar" to the merchandise being appraised pursuant to section 402(c) of the TAA. We note that most of the imported merchandise under consideration bears specific trademarks, trade names and copyrighted logos that connect it to the entertainment company or one of its shows, and that a large part of the value of the imported goods is connected with this intellectual property. Thus, no such comparable identical or similar merchandise is available for the purpose of appraisal. Consequently, in this situation neither the transaction value of identical merchandise, nor the transaction value of similar merchandise, is an acceptable basis of appraisement. Deductive value pursuant to section 402(d) of the TAA is the next sequentially applicable basis of appraisement and is based on the unit price at which the merchandise concerned is sold in the greatest aggregate quantity, generally in the condition as imported and at or about the time of importation of the merchandise being appraised, or before the close of the 90th day after the date of importation. Provided the merchandise is not further processed, the unit price at which imported merchandise is sold in the greatest aggregate quantity means the unit price at which it is sold to unrelated persons at the first commercial level after importation. See 19 U.S.C. 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. The rules for deducting profit and general expenses are set forth in 19 CFR 152.105(e). The deduction made for profits and general expenses shall be based upon the importer’s profits and general expenses, unless such profits and general expenses are inconsistent with those reflected in sales in the United States of imported merchandise of the same class or kind, in which case the deduction shall be based on the usual profit and general expenses reflected in such sales, as determined from sufficient information and Section 152.105(e)(1), CBP Regulations (19 CFR 152.105(e)(1). In the instant case, a significant portion of the merchandise was not sold to unrelated parties within 90 days of its importation. Although some of the imported merchandise was sold in the United States to consumers within 90 days of its importation, the entertainment company’s representative has explained that there were no recordkeeping procedures in place to keep track of the imported items sold in the United States within 90 days after their importation and those that were not. It is further indicated that many articles were shipped for sale to the United States in anticipation of being sold during a show’s performance, but may not have been sold at that time. In that situation, the merchandise was usually returned back into inventory for a subsequent attempt to sell the merchandise at a different performance of the show. Consequently, since there is no way to identify the imported merchandise actually sold in the United States within the allowable 90 day time constraints of 19 CFR 152105(c)(2), deductive value would not be an appropriate method of valuation, and other means of appraisement must be considered. See Headquarters Ruling (HQ) 546120, dated March 26, 1996. The next method of appraisement is the computed value method, set forth in section 402(e) of the TAA. Computed value is defined as the sum of, inter alia: the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; and an amount for profit and general expenses equal to that usually reflected in sales for export to the U.S., by producers in the country of exportation, of merchandise of the same class or kind. 19 U.S.C. § 1401a(e)(1). In this instance, the computed value method cannot be used because all of the cost and profit/general expense information necessary to compute this value is not available prior to importation. Again, because necessary information is not available, the computed value cannot be used to determine the value of the imported merchandise. When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b) through § 1401a(e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the "fallback" valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108. Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may: 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, 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 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations….Section 500 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. 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. Section 152.107 of the CBP regulations (19 CFR § 152.107) provides: (a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used. The entertainment company has proposed using a modified deductive value method under the fallback method of 19 U.S.C. § 1401a(f) for appraising the imported souvenirs and mementoes in cases where the merchandise was not sold in the United States within 90 days after its importation. The CBP regulations specifically provide in § 152.107(c) that the “90 days” requirement for the sale of merchandise referred to in 19 CFR 152.105(c) may be administered flexibly. Therefore, we find that the proposed method of the appraising the imported merchandise using a modified version of deductive value under the fallback method of valuation provided for in 19 U.S.C. § 1401a(f) would be acceptable even though a significant amount of the imported merchandise may not have been sold in the United States within 90 days of its importation. The proposed modified deductive value calculations start with the resale price of the articles sold to customers at the performances of the entertainment company’s local U.S. subsidiary’s shows. From that resale price, amounts for profits, general selling expenses, transportation and insurance costs, taxes and duties are deducted to arrive at a final modified deductive value for the merchandise. The amount of profit made on the imported merchandise was determined by deducting the cost of obtaining the goods from the supplier, from the price of the goods at which they were sold in the United States. As stated above, 19 CFR 152.105(d)(1) allows for a deduction for any commission usually paid or agreed to be paid or the addition usually made for profit and general expenses in connection with sales in the U.S. of imported merchandise that is of the same class or kind regardless of the country of exportation, as the merchandise concerned. In this case, the entertainment company’s representative is proposing to deduct certain expenses that it contends are general expenses incurred in connection with selling the imported merchandise at the entertainment company’s U.S. shows. The rules for deducting profits and general expenses are set forth in 19 CFR 152.105(e), which state that the deduction will be based on the importer’s profit and general expenses unless those costs are inconsistent with those reflected in other sales in the U.S. of imported merchandise of the same class or kind….  The entertainment company’s representative has provided a chart breaking down the expenses that it incurred for the years 2009-2011, in connection with selling the merchandise in the United States after importation. Most of the expenses are segmented so that they reflect only the costs of distribution and selling the merchandise at the shows performed in the United States. These expenses include labor costs, such as the salaries and benefits of employees who worked at the shows in selling the merchandise. Other general expenses listed include various costs related to running various aspects of the shows, such as set up, security costs, utility expenses, and maintenance costs. We note that a number of the expenses listed are costs that go beyond the scope of just selling the merchandise; however we believe some of these costs are necessary activities that must be undertaken in order to be able to sell merchandise at a show. Therefore, the entertainment company has devised a formula to pro-rate the expenses so that they are limited only to the costs attributable to selling products at shows. According to the formula, the listed general selling expenses are pro-rated based on a ratio of the revenue that the entertainment company derived from its merchandising activity as compared to its total revenue, including ticket sales, made for the period under review. By following this formula, the listed expenses have been limited to amounts that relate only to activities necessary for selling merchandise and not to the total costs involved in setting up and running the shows in general or with other aspects of the entertainment company’s business. Thus, for example under the formula, the utility expenses are limited only to the proportion of the utility costs that are attributable to selling merchandise at the shows not the utility costs for the entire show. After reviewing the deductions proposed by the entertainment company, we find that these proposed deductions for the profits, general expenses, and other costs are acceptable and in accordance with 19 CFR 152.105(d). Accordingly, we find that the proposed method of allocation of costs and expenses involved for selling and distributing the imported merchandise at the shows constitute acceptable deductions from the resale price of the merchandise as provided for in 19 CFR 152.105(d)(1). We note that we have not reviewed the entertainment company’s actual financial books and records. However, the entertainment company indicates that it has taken the reported financial information from their accounts and records, and therefore we are assuming for the purposes of this decision that the various expenses in selling the merchandise at the shows contained in the information presented to our office are an accurate depiction of the actual expenses and costs incurred in the selling of the articles at the U.S. shows. Therefore, we find that the entertainment company’s valuation of the imported merchandise utilizing a modified deductive value approach under the fallback provision of 19 U.S.C. § 1401a(f) of the valuation law is a satisfactory method of appraisement for the imported merchandise under consideration. HOLDING: In accordance with the analysis cited above, we find that appraising the imported merchandise under the fallback method, using a modified deductive value, as proposed by the importer would be acceptable. This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, Regulations and Rulings, Office of International Trade, will make the decision available to CBP personnel and the public on the CBP Home Page at www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution. Sincerely, Monika R. Brenner Chief, Valuation and Special Programs Branch