Dutiability of buying commissions

HQ H098419 October 26, 2010 VAL OT:RR:CTF:VS H098419 EE CATEGORY: Valuation Toni Dembski-Brandl Target Corporation 1000 Nicollet Mall TPS 3155 Minneapolis, MN 55403 RE: Dutiability of buying commissions Dear Ms. Dembski-Brandl: This is in reply to your letter, dated March 2, 2010, on behalf of Target Corporation (“Target”), concerning the dutiability of certain payments made by Target to its affiliate, Target Sourcing Services Limited (“TSSL”), pursuant to the Sourcing Agreement. FACTS: Target is a large retailer in the U.S., operating over 1600 stores in 49 states. Target sells a wide range of products including clothing and accessories, footwear, home décor, furniture, electronics, health and beauty products, food, movies, video, toys and sporting goods. You state that in late 2006, Target began restructuring its global sourcing process to consolidate the sourcing of non-U.S. manufactured goods under a new entity known as TSSL. Accordingly, Target and TSSL entered into a Sourcing Agreement (“Agreement”) on September 16, 2009 which specifies the activities to be performed by TSSL for Target. The Agreement provides that TSSL “shall act as the non-exclusive buying representative of Target for the sourcing and purchase of merchandise worldwide excluding the United States and Canada as requested by Target.” According to paragraph 2 of the Agreement, TSSL is responsible for activities including: vendor selection, vendor review, vendor management, price negotiation, order processing, payment processing, quality control, logistics, monitoring local laws, and market research. You state that for the transactions at issue, Target will act as the importer of record into the U.S. To initiate the purchase of the goods, Target will issue a purchase order to TSSL, who in turn will issue a purchase order to the foreign vendor. You state that when the order is fulfilled, title to the goods and risk of loss passes from the vendor to TSSL when products are delivered to the carrier at the port of export designated by Target and that TSSL will transfer title to the merchandise to Target at the U.S. continental shelf. The foreign vendor will invoice TSSL for the goods and TSSL, in turn, will invoice Target for the goods, including compensating TSSL for performing the activities in accordance with the Agreement. Target will pay TSSL a predetermined percentage of TSSL’s price from the foreign vendors which will depend on the extent of activities performed by TSSL as directed by Target. You provided three scenarios detailing different levels of TSSL involvement. It is stated that since the activities will be performed by TSSL at Target’s direction, Target may require some rather than all TSSL activities to be performed under each scenario depending on Target’s needs. However, for purposes of this ruling, we are assuming that each activity under the proposed three different scenarios will be performed, as the performance or non-performance of certain activities may affect the outcome. Under the first scenario, which applies to approximately 40% of Target’s imports, Target will direct TSSL to perform the following activities: market research, foreign vendor identification, review and management, price negotiations, purchase order and payment processing, inspections and quality assurance (factory audits, pre-production meetings, working with vendors to solve quality and production problems, and final random inspections prior to shipping), assumption of title and risk of loss, and assisting with Target claims against foreign vendors. Under the second scenario, which applies to approximately 20% of Target’s imports, it is stated that Target maintains a longstanding relationship with the foreign vendors. Therefore, TSSL will not participate in the foreign vendor selection process. Target will direct TSSL to perform the following activities: purchase order and payment processing, inspections for quality assurance (factory audits, pre-production meetings, working with vendors to solve quality and production problems), and assumption of title and risk of loss. Under the third scenario, which applies to the remaining 40% of the imported merchandise, Target will direct TSSL to perform the following activities: place a purchase order with the foreign vendor, take title to the goods, assume risk of loss, and make payment to the vendor. Under all three scenarios, TSSL may also be instructed by Target to perform certain transportation functions such as field consolidation, scheduling and other administrative functions. TSSL will receive a predetermined percentage of the vendor’s price as compensation for these services. You submitted a copy of the Agreement, a chart which details the global and local structure of TSSL, and sample documents such as purchase orders and invoices which represent documents under the first scenario that Target and TSSL intend to use upon completion of the restructuring. ISSUE: Whether certain payments made by Target to TSSL under the Agreement are dutiable. 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 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 amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). Selling commissions incurred by the buyer with respect to the imported merchandise are statutory additions to transaction value. See 19 U.S.C. § 1401a(b)(1)(B). Bona fide buying commissions, however, are not identified as additions to the price actually paid or payable, and the courts have construed that they are not an element to be included in transaction value. See Pier 1 Imports, Inc. v. United States¸13 Ct. Int’l Trade 161, 164, 708 F. Supp. 351, 354 (1989); Rosenthal-Netter, Inc. v. United States, 12 Ct. Int’l Trade 77, 78, 679 F. Supp. 21, 23 (1988), aff’d, 861 F.2d 261 (Fed. Cir. 1988); and Jay-Arr Slimwear, Inc. v. United States, 12 Ct. Int’l Trade 133, 136, 681 F. Supp. 875, 878 (1988). The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 78; and New Trends, Inc. v. United States, 10 Ct. Int’l Trade 637, 640, 645 F. Supp. 957, 960 (1986). The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978). Although no single factor is determinative, the primary consideration is the right of the principal to control the agent’s conduct with respect to those matters entrusted to the agent. Id.; Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 79; and Jay-Arr Slimwear, 12 Ct. Int’l Trade at 138. 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). In addition, the courts have examined such factors as the existence of a buying agency agreement; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the agent was financially detached from the manufacturer of the merchandise; and the transaction documents. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 95-98. The courts have also examined whether the purported agent's actions were primarily for the benefit of the principal; whether the agent bore the risk of loss for damaged, lost or defective merchandise; whether the agent was responsible for the shipping and handling and the costs thereof; and whether the intermediary was operating an independent business, primarily for its own benefit. See New Trends, Inc., 10 Ct. Int’l Trade 640-643. You state that prior to the restructuring, Target utilized the services of a buying agent, the Associated Merchandising Corp. (“AMC”) to source goods on its behalf. You advise that AMC was the subject of Headquarters Ruling Letter (“HQ”) 548188, dated August 29, 2002, where U.S. Customs and Border Protection (“CBP”) held that AMC was a bona fide buying agent and that the commissions paid by Target to AMC were non-dutiable buying commissions. In that case, AMC performed a number of activities on behalf of Target such as locating new sources of supply, negotiating prices, placing orders with vendors, arranging for shipment, and preparing invoices. You state that the activities to be performed by TSSL under the first and second scenarios are almost identical to those previously performed by AMC and ruled to be activities carried out by a bona fide buying agent in HQ 548188. Additionally, however, at the direction of Target, as noted above, you state that TSSL will take title and risk of loss for such merchandise. You submitted a copy of the buying agency agreement signed by Target and TSSL on September 16, 2009. The Agreement provides that TSSL will contract with vendors for the purchase of products in its own name “based upon orders placed by and at prices approved by Target.” (Agreement, section 2.1). The Agreement requires that TSSL’s procurement activities will be “subject always to Target’s specific directions and requirements.” Id. Under the agreement, the services provided by TSSL include: market research, vendor selection, vendor review and management, price negotiation, purchase order and payment processing, quality control, and logistics. These services, in totality, are typical of those rendered by a bona fide buying agent. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 96-97; and HQ 548163, dated August 29, 2002. The fact that an importer has an opportunity to purchase merchandise directly, without being required to seek assistance of an intervening party, has been held to support the existence of an agency relationship. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 96. You state that as part of the price negotiation and purchasing process, TSSL will always inform the foreign vendor that TSSL is acting on behalf of Target. Moreover, Target, at its own discretion, may conduct independent price negotiations and reject TSSL's selection of a foreign vendor and the price negotiated by TSSL. You state that Target always retains the option to source the merchandise from a vendor other than the one identified by TSSL. Accordingly, Target could purchase directly from the vendors without employing TSSL. When an intermediary "can only place an order with a factory after * * * [receiving] such instructions from an importer [it] is further evidence of the existence of a buying agency." See J.C. Penney, 80 Cust. Ct. at 96. You state that Target will initiate all individual purchase orders with foreign vendors by placing a purchase order with TSSL. These purchase orders will contain the product detail, vendor information, quantity, price, and timing of delivery for the merchandise. A TSSL purchase order to the foreign vendor will be automatically generated upon TSSL’s receipt of the Target-to-TSSL purchase order. Accordingly, the TSSL purchase order to the foreign vendor will reflect Target’s specific instructions. The quantity and unit price stated on the sample Target-to-TSSL purchase order you submitted illustrating a transaction under the first scenario match those on the TSSL-to-vendor purchase order, which demonstrates that TSSL will order the merchandise at the direction of and for the benefit of Target. Further, we note that the price shown on the sample invoice issued from the vendor to TSSL under the first scenario is identical to the price shown on the invoice TSSL issued to Target for the merchandise. This demonstrates that TSSL is acting on behalf of Target and not for its own benefit. Additionally, the charge for the commission is separately indicated from the purchase price of the merchandise on the purchase order and the invoice between TSSL and Target. This indicates that TSSL is financially detached from the vendors and is not receiving any benefit from the vendors, as the sole source of compensation is the commissions that it earns from Target. It is uncharacteristic of an agency relationship to allow the agent to bear the risk for damaged, lost, or defective merchandise. See Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 83; New Trends, 10 Ct. Int’l Trade at 640. You state that in the event that a claim for defective or non-conforming product against a vendor is not successful, Target will hold TSSL liable for the loss only if such loss is caused by TSSL’s failure to carry out its responsibilities as defined by the Agreement. (Agreement, section 9.3). We find that such liability does not negate the existence of a buying agency relationship between Target and TSSL. The fact that the agent absorbs the cost of shipping and handling out of its commission is evidence that the agency relationship does not exist. See New Trends, 10 Ct. Int’l Trade at 641. In the instant case, you state in your supplementary submission, dated June 10, 2010, that Target pays the shipping costs for the goods directly. In order to establish that the purported buying agent is not, in fact, an independent seller, the subject transactions must be evaluated for indications that the agent is selling on its own account to the importer of the merchandise. The assumption of title by a purported agent is one indication that it is performing as an independent buyer and seller, but does not in itself preclude a finding that a bona fide buying agency exists. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 100. With respect to passage of title and risk of loss, you state that in all three scenarios the term of sale for the factory to TSSL transactions will be “F.O.B. Port of Export”, “FCA Shippers Door or other named place”, or other term of sale as designated by Target. Under the FOB term, TSSL will take possession and title of the goods at ship’s rail at the port of export. Under the FCA term, TSSL will take possession of the cargo at the factory door and title of the goods at ship’s rail. Title will then be transferred from TSSL to Target under the INCOTERM DAF U.S. continental shelf. Therefore, TSSL will assume title and bear the risk of loss at the direction of Target for a brief period of time incidental to the shipment of the merchandise according to the term of sale. In very limited circumstances, CBP has found a bona fide agency to exist although the agent held title to and bore the risk of loss for the imported merchandise for a brief period of time. See HQ 545624, dated October 25, 1994; and HQ 544669, dated August 15, 1991. In HQ 545624, the buyer initiated all purchasing activity, specified the product, quantity and shipping methods. The agent’s role was to find a supplier, target prices, obtain quotations, and make sure that the products conformed to the buyer’s specifications. The buyer argued that although the form of the transactions suggest that the agent is a seller, the substance of the relationship is clearly in the nature of an agency relationship. CBP agreed and held that despite the apparent sale between the foreign supplier and the purported agent, the totality of the circumstances indicated that the agent was not an independent seller. From the time the buyer specified the items to be purchased to the time the goods were ultimately shipped to the buyer, the buyer acted under the direction and control of the buyer. In HQ 544669, CBP ruled that a buying agency relationship was not negated merely by the fact that the intermediary took title to the merchandise for a brief time and bore the risk of loss for the imported merchandise. CBP determined that the intermediary was performing these and other functions such as finding foreign vendors and arranging delivery terms on behalf of the principal and that the principal maintained control over the disposition of the imported goods. Similar to HQ 545624 and HQ 544669, the totality of the circumstances in this case indicates that under scenarios one and two, a bona fide agency relationship exists between Target and TSSL. The services to be provided by TSSL on behalf of Target under the first and the second scenarios are typical of those performed by a bona fide buying agent. For example, TSSL will identify sources for product, request samples, place orders for goods, negotiate prices, inspect the goods and manufacturing facilities, and provide logistic support. The Agreement indicates that TSSL's procurement activities are always subject to Target's specific directions and requirements. Target could purchase the merchandise directly from the vendors without assistance from TSSL. TSSL acts on behalf of Target and not for its own benefit. TSSL is financially detached from the vendors and is not receiving any benefit from the vendors. TSSL bears the risk of loss for damaged, lost, or defective merchandise only if it is caused by TSSL’s failure to carry out its responsibilities, and Target is responsible for its own shipping costs. Accordingly, the payments made by Target to TSSL under the first and second scenarios are not dutiable. However, the services TSSL will perform under the third scenario merely involve placing a purchase order with the foreign vendor, taking title to the goods, assuming risk of loss, and making payment to the vendor. Even though TSSL will be performing these services under the direction and control of Target, without more, they are not typical services provided by a buying agent. Instead, they indicate that the parties are performing as buyer and seller. The facts of scenario three are readily distinguishable from the transactions described in HQ 545624 and HQ 544669 where the agent was performing functions in addition to assuming title and risk of loss such as finding foreign vendors and arranging delivery terms. Accordingly, the payments made by Target to TSSL under the third scenario are dutiable. HOLDING: Based on the information presented, the payments made by Target to TSSL under the first and the second scenarios under the Agreement are not dutiable. However, the payments made by Target to TSSL under the third scenario are dutiable. Reference to this ruling letter should be made in the entry documents filed at the time the subject goods are entered. See CBP Form 7501 - Instructions, Additional Data Elements (available online at: www.cbp.gov). If the entry summary has been filed without reference to this ruling letter, the ruling letter should be brought to the attention of the appraising officer at the port of entry. Sincerely, Monika R. Brenner Chief Valuation & Special Programs Branch