CBP Ruling H124476

HQ H124476 May 24, 2011 OT:RR:CTF:ER H124476 WAS David M. Murphy, Esq. Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP 399 Park Avenue 25th Floor New York, NY 10022-4877 Dear Mr. Murphy: This is in response to your request, on behalf of Abercrombie & Fitch Trading Co., Inc. (A&F), for a formal ruling on the question of whether certain operations in a foreign trade zone (FTZ) constitute “retail trade.” United States Customs and Border Protection (CBP) received your request for a ruling letter on September 22, 2010. FACTS: According to your ruling letter, A&F is an importer and retailer of apparel, footwear, and related accessories. A&F operates an FTZ in New Albany, Ohio, which was approved as Subzone 138G on July 1, 2010, pursuant to the Foreign-Trade Zones Act, as amended (19 U.S.C. § 81a-81u), and the regulations of the Foreign-Trade Zones Board (15 CFR Part 400). A&F states that the FTZ is used for the warehousing and distribution of foreign-origin apparel and footwear for A&F’s stores as well as for export to A&F’s stores worldwide. You state that A&F is in the process of seeking activation of the FTZ by CBP under the applicable regulations, and request a ruling on whether internet sales by A&F are considered to be “retail trade.” Based on the ruling request, A&F submits that in addition to its retail stores, it markets and sells its merchandise via the internet in direct-to-consumer or “DTC” sales. Through this process, a customer accesses one of A&F’s websites and selects merchandise for purchase on the website, which places the selected merchandise into a “shopping bag” until the customer selects “check out.” During “check out,” the customer enters the required billing and shipping information and selects the preferred delivery method, e.g., three business days, next business day, or standard. Each DTC sale from the website will generate a merchandise “pick instruction” to the staff in the A&F FTZ. The ordered merchandise will then be collected from the storage racks, packed, and labeled for shipment to the customer. Most of the orders will be fulfilled within one business day. Orders that are ready to be shipped are picked up by a designated third-party carrier on a daily basis. Once the merchandise is shipped, A&F updates its warehouse management system that the items have shipped. A&F charges the credit card designated by the customer who placed the order. A&F remains responsible for lost or damaged orders until the customer has received delivery at the designated delivery address for each order. A customer may cancel or change an order at any time prior to the time that the order is picked up from the warehouse and prepared for shipment. A&F does not have a showroom or otherwise display merchandise for sale in its distribution facilities in connection with DTC sales or for any other purpose. The staff that maintains the A&F websites and is responsible for A&F’s DTC business are not located within A&F’s distribution facilities. In connection with its FTZ operations, A&F will make a weekly entry of imported merchandise. Under this procedure, A&F will request an estimated Application for Permit for Immediate Delivery (CBP Form 3461) before the start of the shipment week to cover all anticipated shipments for the week including, among other shipments, the DTC internet deliveries. A&F is named importer of record. Upon approval, A&F withdraws the DTC merchandise from its FTZ for export. Within ten days of the initial release, the weekly entry summary will be filed and estimated duties and fees paid. At the time the goods are withdrawn from the FTZ, A&F retains title and ownership of all merchandise within its distribution facilities. A&F retains title and risk of loss of all merchandise until receipt by the customer in DTC sales from one of A&F’s websites. ISSUE: Whether the DTC sales by A&F in the FTZ constitute prohibited “retail trade.” LAW AND ANALYSIS: There are only limited exceptions to the general restriction on retail trade in an FTZ. The Foreign-Trade Zones Act, of 1934, as amended (19 U.S.C. § 81o(d)) provides that: No retail trade shall be conducted within the zone except under permits issued by the grantee and approved by the Board. Such permittees shall sell no goods except such domestic or duty-paid or duty-free goods as are brought into the zone from customs territory. The CBP regulation implementing 19 U.S.C. § 81o(d) is set forth in 19 C.F.R. § 146.14 provides that: Retail trade is prohibited within a zone except as provided in 19 U.S.C. § 81o(d). See also the regulations of the Board [the Foreign-Trade Zones Board] as contained in 15 CFR part 400. The Foreign-Trade Zones Board regulations also state the prohibition against retail trade in the zone. These regulations are set forth in 15 C.F.R. § 400.45, which provide as follows: In general. Retail trade is prohibited in zones, except that sales or other commercial activity involving domestic, duty-paid, and duty-free goods may be conducted within an activated zone project under permits issued by the zone grantee and approved by the Board, with the further exception that no permits shall be necessary for sales involving domestic, duty-paid or duty-free food and non-alcoholic beverage products sold within the zone or subzone for consumption on premises by persons working therein. The Port Director will determine whether an activity is retail trade, subject to review by the Board when the zone grantee requests such a review with a good cause. The statute and the CBP regulations do not define what constitutes “retail trade” within the FTZ. However, the CBP Foreign-Trade Zones Manual Section 11.6(b) describes “retail trade” as follows: Definition of “Retail Trade” – “Retail trade” means, generally, sales or offers to sell goods or services in small quantities directly to consumers or to individuals for personal use. If there is any doubt as to whether a particular transaction, act, or situation constitutes retail trade, Port Directors and interested parties should request an administrative ruling from Customs Headquarters, Office of Regulations and Rulings, under the provisions of 19 CFR Part 177. Consistent with the foregoing definition, the following activities are considered retail trade: (i) Sales or offers to sell goods at retail in a zone; Sales or offers to sell services at retail in a zone (e.g., airline ticket offices, travel agencies, automobile repair shops, household or personal effects storage); or Sales or offers to sell services at retail made outside a zone of goods held in or services rendered in a zone. This restriction applies only to activated areas of the zone and retail trade can be conducted without restriction from anyplace outside an activated zone area. A violation would occur if retail trade was conducted in an activated area of the zone without Board approval. Retail trade can be conducted from an area within the zone grant that has been excluded or removed from activation. In HQ 217330 dated October 5, 1984, CBP stated that what is prohibited in an FTZ is the “transfer of ownership (title) and delivery” to a retail customer in the zone. CBP found in that case that the sale of vehicles to individual customers did not occur within an FTZ where the transfer of ownership of the vehicles and the delivery of the vehicles occurred after proper withdrawal from the FTZ and entry within the customs territory. In contrast, where “transferring the ownership of vehicles stored in a zone and, consequently, the right of withdrawal thereof for consumption to retail purchasers (who would thereafter be responsible for paying the applicable Customs duties thereon and assuring their compliance, as necessary, with EPA and DOT requirements) would assuredly constitute the carrying on of retail trade therein.” Id. In Headquarters Ruling (HQ) 114229 dated February 2, 1998, CBP discussed whether catalog sales in an FTZ constituted prohibited retail trade within an FTZ. In HQ 114229, Coach had an FTZ facility in Jacksonville, Florida, where it stored duty unpaid imported handbags and similar merchandise. The merchandise was withdrawn from the FTZ and either entered for consumption or exported as needed by stores in the United States and abroad. Coach distributes catalogs by mail to retail customers and through authorized dealers and stores. Each catalog has an order form whereby a retail customer could mail order merchandise directly from the Jacksonville facility. The order is filled when Coach withdraws the item from the FTZ, makes entry, and then ships the item to the customer. CBP found that where Coach withdraws the pertinent item from the FTZ, makes entry of the merchandise, and then ships the item to the customer, i.e., title does not pass and delivery is not made to Coach’s customer until the merchandise is within the customs territory of the United States, Coach was not conducting retail trade within an FTZ within the meaning of the prohibition contained in 19 U.S.C. § 81o(d). Therefore, CBP concluded that the retail trade, i.e., the sale of the merchandise occurred outside of the FTZ. CBP relied on the holding in HQ 217330, that dealt with the sale of vehicles stored in a FTZ, in determining that the described activity in HQ 114229 did not constitute “retail trade” within an FTZ. Similar to the facts in HQ 114229 and HQ 217330, in the case at issue, you state that title to the A&F merchandise does not transfer to the internet purchaser until receipt of the merchandise at the designated delivery address and outside of A&F’s FTZ and therefore, the retail trade occurs outside of the FTZ. Further, you explain that A&F would retain responsibility for entering these goods into the United States from the FTZ. You further explain that these sales are governed by the Ohio commercial statutes applicable to the sale of goods, which state that absent specific contractual language between the parties, the definition of a “sale” is governed by the Uniform Commercial Code (U.C.C.), § 2-106(1), which defines a sale as “the passing of title from the seller to the buyer for a price.” Further, you explain that pursuant to the U.C.C. §2-401(2), “[u]nless otherwise explicitly agreed, title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods. . .” However, we will not rule as to how Ohio contract law operates for A&F’s sales. Therefore, assuming that title to A&F’s DTC goods does not pass and delivery is not made to A&F’s customers until after the merchandise is entered within the customs territory of the United States as A&F has claimed, then A&F is not conducting “retail trade” in an FTZ within the prohibition contained in 19 U.S.C. § 81o(d). HOLDING: The internet sales performed by A&F in the FTZ do not constitute prohibited retail trade under 19 U.S.C. § 81o(d). Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division