Valuation of software; invoice requirements

HQ 547946 November 30, 2001 RR:IT:VA 547946 KDW CATEGORY: VALUATION Frederick P. Waite Kimberly R. Young Holland & Knight, LLP 2099 Pennsylvania Ave. NW, Suite 100 Washington, D.C. 20006-6801 RE: Valuation of software; invoice requirements Dear Mr. Waite and Ms. Young: This is in response to your letter dated April 2, 2001, on behalf of your client McKesson HBOC, Inc. (McKesson), requesting a prospective ruling regarding the classification, valuation, and invoice requirements of imported software on compact laser discs (CD’s). The classification portion of your request was addressed by the National Commodity Specialist (NCS) in New York Ruling number G89653. In that ruling, the National Commodity Specialist held that the software applications on CD-Roms fall under the Harmonized Tariff Schedule provision of 8524.31.0030 and 8524.39.8000. Accordingly, we address only the valuation and invoice requirements question here. FACTS: McKesson is a large health-care services company that sells standardized application software to health-care industry clients. McKesson’s Application Division in the United States develops new software which it places on a single “gold master” containing the code for a software program. The gold master is shipped to an affiliate in Cork, Ireland, McKesson HBOC (“HBOC”) which uses it as a template or mold in the production equipment to write or “burn” the software program onto blank CDs. The blank CDs onto which the software will be burned, will be purchased from unrelated vendors. In addition to burning the code onto the CDs, HBOC will also silkscreen the CDs with varying styles of its logos and package them in jewel cases, clam shells, or cardboard sleeves. You include a sample CD with your submission silk-screened with the McKesson logo and packaged in a clamshell. In addition, you submit a copy of a sample invoice. The packaging and accompanying printed materials, other than in-house produced technical manuals included with the purchase of the software, will be purchased from unrelated vendors. Generally, McKesson affiliates in the United States will purchase and import the CDs from HBOC. However, in some instances, HBOC will package and ship the CDs directly to affiliates’ customers in the United States or deliver the software electronically to customers over the Internet. You request a ruling as to how the software products should be valued and invoiced for Customs purposes. ISSUE: What is the basis for valuing the imported CDs? 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). As stated above, the NCS held that the CDs fall under the HTSUS provisions for records, tapes and other recorded media for sound or other similarly recorded phenomena. The valuation of software was addressed in T.D. 85-124, published in the Customs Bulletin, Vol. 19, No. 32 (August 7, 1985). T.D. 85-124 was the U.S. implementation of a 1984 decision by the Committee on Customs Valuation of the General Agreement on Tariffs and Trade (“GATT Committee Decision”). In T.D. 85-124 Customs stated that consistent with the GATT Committee Decision, it would continue to value imported carrier medium bearing data or instructions for use in data processing equipment exclusive of a value element for the data, instructions, or information component contained on such software. Therefore, “software” is to be valued only on the basis of the value of the carrier medium. For valuation purposes: carrier medium bearing data or instructions (i.e., software) does not include data or instructions recorded or encoded by means of integrated circuits, semiconductors and similar devices, or articles incorporating such circuits or devices. Duty is to be assessed on the value of the carrier medium only and not the value of the software. However, although duty is to be assessed on the value of the carrier medium only, this does not relieve the importer of its obligations under 19 CFR §141.86(a) to set forth the purchase price of each item imported on the invoice, which includes the software or data as well as the CDs, cases, etc. You have submitted two sample invoices for our review. On the first invoice, you list a value for blank CDs at $1.00 each and a value for clamshells at $0.25 each. On the second invoice you list a $0.00 value for blank CDs, $0.30 for jewel cases, and $0.25 for clamshells. We note that the value of the software program or data is not listed on either sample invoice. This does not conform to 19 CFR § 141.86. Rather, the invoice should contain a breakout on the invoice for the value of the carrier medium to meet the regulatory requirements. The carrier medium, in this case CDs, should be valued in accordance with the methods described in section 402 of the TAA. Transaction value is the preferred method of appraisement. Section 402(b) of the TAA defines transaction value as the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions. Assuming that the relationship between the parties does not influence the price and none of the other prohibitions in 19 CFR 152.103(j) exist, then transaction value would be the appropriate method of valuation for the CDs. HOLDING: The CDs imported containing data or instructions (i.e. software) are subject to duty on the basis of the value of the carrier medium. The price of the data and/or instructions and the value of the carrier medium should be distinguished on the invoice for entry purposes. Sincerely, Virginia L. Brown Chief, Value Branch