Application for Further Review of Protest No. 0712-12-100056; Valuation; Subheading 9801.00.20, HTSUS

HQ H216475 January 16, 2015 OT:RR:CTF:VS H216475 GaK CATEGORY: Valuation Port Director Port of Champlain 237 West Service Road Champlain, NY 12919 RE: Application for Further Review of Protest No. 0712-12-100056; Valuation; Subheading 9801.00.20, HTSUS Dear Port Director: This is in response to your correspondence, dated April 23, 2012, forwarding the Application for Further Review (“AFR”) of Protest 0712-12-100056, timely filed by Sandler, Travis & Rosenberg, P.A., on behalf of the SGS Sports Inc. (“SGS” or “protestant”), concerning the valuation of merchandise entered on March 29, 2011, and the applicability of subheading 9801.00.20, Harmonized Tariff Schedule of the United States (“HTSUS”). We also considered the supplemental submissions submitted by the protestant on August 22, 2014, September 4, 2014, and during our meeting with the protestant and their counsel on October 28, 2014. We regret the delay in responding. FACTS: Protestant is a non-resident importer based in Montreal. On January 13, 2011, protestant entered several styles of ladies swim tops at the Port of Champlain. At issue in this protest are style numbers SK39807 (“807”) and 3919815 (“815”). The merchandise was shipped from the manufacturer in China, passed in-bond through Montreal, and arrived at the protestant’s address in the U.S. Protestant paid duty on the merchandise based on the sales transaction between protestant’s overseas buying agent and the Chinese manufacturer. After entry was made on January 13, 2011, protestant then immediately exported the merchandise to Montreal on the same day and CBP issued a Certificate of Registration to protestant for “Articles reported for export to Canada for similar use agreement, storage and warehousing and/or re-ticketing. To be re-exported to the USA.” The goods were entered into Canada and warehoused at 147483 Canada Inc. (“Canadian warehouse”) under a duty deferral program. Protestant states that the merchandise was exported to be warehoused in Montreal “until such time as they were needed for distribution in the U.S.” Protestant also states that the warehouse at issue is also located at the same address as the protestant. Protestant states that the Canadian warehouse and the protestant have one shareholder in common, and while they are related parties for purposes of customs valuation, they are two separate corporate entities with distinct corporate structures, employees, and business operations. Protestant states that during the warehouse period, the merchandise never entered the commerce of Canada. Protestant provided a copy of the warehouse agreement between the protestant and the Canadian warehouse and an invoice issued by the Canadian warehouse. The warehouse agreement was signed on behalf of protestant by the President of SGS Sports Inc., and on behalf of the Canadian warehouse by the President of 147483 Canada Inc, who are the same person. According to the warehouse agreement, the Canadian warehouse agrees to perform the following functions: handling; safe keeping of the property; assist SGS in transportation of the merchandise; create and maintain inventory records; assist SGS in issuing samples; take periodic inventory; and provide services such as pick and pack services. The Canadian warehouse invoice, however, includes an itemized list of charges: warehouse salary, warehouse salary hourly, group insurance, wage levies, payroll service charges, and CSST fees. Counsel states that SGS paid the Canadian warehouse’s receivables on the warehouse’s behalf in lieu of the warehouse charges. Counsel also noted at the meeting that a loan identified in the General Ledger was a loan from the warehouse to SGS and that it was unrelated to warehousing services. Counsel also notes that SGS paid the warehouse for storage on the basis of warehouse expenses plus 10 percent and that since the rates were known in advance, SGS paid the warehouse’s third party receivables when they came due rather than waiting to pay the warehouse invoice at the end of the month. According to Canadian Government records, the President of the Canadian warehouse is the primary shareholder, and there are no other Board positions available at the warehouse. The document from the trucking company delivering the goods from Champlain to Canada indicates that the goods were from “SGS Canada” to “SGS Canada” at the same address. Counsel notes that the Canadian warehouse and SGS buildings are physically attached to each other and that the goods were, in fact, delivered to the Canadian warehouse. Counsel also argues that since SGS Canada had ownership to the goods and hired the trucking company to transport the goods it is logical that the goods were delivered to SGS Canada, instead of the Canadian warehouse. The record shows that the protestant received a purchase order from a U.S. customer dated March 23, 2011, and the protestant issued an invoice to the U.S. customer on March 25, 2011. The price of the “815” style swim tops was invoiced to the final U.S. customer at $17.25. The merchandise was then packaged for shipment to the U.S. customer. On March 29, 2011, protestant re-imported the merchandise and claimed duty-free treatment under subheading 9801.00.20, HTSUS, on the basis that the merchandise had been previously imported into the U.S. with duty paid, and been exported by protestant under a “similar use agreement” as required by the provision. On May 11, 2011, CBP issued a Request for Information (CF 28) on the entry of March 29, 2011, seeking documentation supporting the declared value, samples, and asked a series of questions relating to the warehouse agreement and sales to U.S. customers. On May 27, 2011, protestant supplied CBP with documents supporting the initial U.S. import transaction between the supplier, as well as documentation regarding the two corporate structures and their separate identities under Canadian law. CBP issued a Notice of Proposed Action (CF 29) on August 17, 2011, finding that the merchandise subject to the initial entry was not sold for exportation to the United States, and that the port intended to appraise the re-imported merchandise based on the transaction value of identical or similar merchandise. CBP stated that “circumstances of the original delivery to the U.S. and immediate return to Canada of the merchandise demonstrates that the goods were not initially ‘imported’ (or ‘exported’) and thus not ‘re-imported,’” and concluded that the merchandise did not qualify for duty-free treatment under 9801.00.20, HTSUS. Protestant’s September 20, 2011 response to the Notice of Proposed Action included a clarification that the protestant and the warehouse are related but distinct entities that have a valid bailment agreement. On September 27, 2011, CBP issued a Notice of Action Taken (CF 29) on the entry of March 29, 2011, rejecting these claims, on the basis that the merchandise “was not sold or consigned to a U.S. party at the time of initial entry or release” and because CBP believed that the protestant and the warehouse are not distinct entities, and thus no bailment occurred. However, on November 18, 2011, after the issuance of the Notice of Action Taken, the initial entry of January 13, 2011, was liquidated without change. On April 9, 2012, protestant timely protested the port’s actions regarding the March 29, 2011 entry. The protestant provided the following documentation regarding the importation of the merchandise: Protestant’s purchase order to Magic Fashion issued August 19, 2010, specifying a “ship to” address of SGS USA, 156 Lawrence Paquette, Champlain, NY, 12919. Invoice from Bestmate Trading, the buying agent for SGS Sports, dated December 5, 2010, indicating the “Port of Destination” as Champlain, NY. The invoice is also issued “By Order and for Account of SGS Sports Inc., 6400 Ch Cote de Liesse St. Laurent, Quebec, H4T IE3.” Bill of lading (“BOL”), dated December 11, 2010, listing the place of delivery as Montreal, and the “Final Destination (for the Merchant’s reference)” as Champlain, NY. Invoice issued by freight company, dated December 24, 2010, listing SGS Inc., 6400 Cote de Liesse, Montreal, QC as the consignee. Hanjin Shipping Advice Note depicting the in-bond movement of the merchandise from Yantian, Guangdon to Montreal. The consignee is listed as Wellstar Freight Systems in Montreal, Quebec. The place of delivery is also listed as Montreal, QC. Fastex’s Pro Bill, stamped as released on January 4, 2011 and listing the “From” and “To” as “SGS Sports, 6400 Cote De Liesse, St-Laurent QC CDA H9P 2A9.” Proof of payment from SGS to Bestmate Trading in the form of a wire transfer on January 5, 2011. Certificates of incorporation, employee lists, payroll records, and corporate structures for SGS and the Canadian warehouse. Invoice issued by the Canadian warehouse to SGS, dated November 30, 2010. General Ledger Reports for SGS and the Canadian warehouse from November 1, 2010 to April 30, 2011, which show that the Canadian warehouse loaned a lump sum of money to SGS Canada prior to issuing the invoice and the monies are paid to the Canadian warehouse in the form of credit at the end of every month. Inventory records for the Canadian warehouse from January 5, 2011 to April 21, 2011, printed by the user name “Sue,” which does not resemble the names on the list of the Canadian warehouse employees, but rather on the SGS employee list. ISSUE: Whether the merchandise qualified for duty-free treatment under subheading 9801.00.20, HTSUS. LAW AND ANALYSIS: Section 141.2 of the Customs Regulations (19 CFR § 141.2) states that “Dutiable merchandise imported and afterwards exported even though duty thereon may have been paid on the first importation, is liable to duty on every subsequent importation into the Customs territory of the United States” unless specifically exempted therefrom under the HTSUS. Subheading 9801.00.20, HTSUS, provides duty-free treatment for: [a]rticles, previously imported, with respect to which the duty was paid upon such previous importation or which were previously free of duty pursuant to the Caribbean Basin Economic Recovery Act or Title V of the Trade Act of 1974, if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States. Similarly, Section 10.108, Customs Regulations (19 CFR 10.108), provides, in relevant part, that free entry shall be accorded under subheading 9801.00.20, HTSUS, whenever it is established to the satisfaction of the port director that the article for which free entry is claimed was duty paid on a previous importation, is being reimported by or for the account of the person who previously imported it into, and exported it from the United States without having been advanced in value or improved in condition by any process of manufacture or other means, and was exported from the U.S. under a lease or similar use agreement. It should be noted that CBP has denied treatment under subheading 9801.00.20, HTSUS, in situations where such evidence was not provided. See, e.g., HQ 556538, dated May 27, 1992 (duty-free status under subheading 9801.00.20, HTSUS, denied because documentary requirements were not satisfied and no evidence was provided to indicate that the subject merchandise was exported under a lease or similar use agreement). Protestant cites NY N006857, dated February 14, 2007, as support for its claims, in which CBP considered whether a bailment existed between three related Canadian entities for purposes of 9801.00.20, HTSUS. However, we note that the issue addressed by that ruling was whether pick-and-pack services performed by the related warehouse in Canada constituted “an advancement in value or improvement in condition” for purposes of the subheading. CBP found that the repacking operations performed in Canada did not advance the value of the goods or improve their condition within the meaning of the subheading. Based on the importer’s assertions that warehousing agreements would be executed by the parties to reflect a bailor/bailee relationship, CBP stated that the apparel would be eligible for duty-free treatment when returned to the United States, provided the Port Director was satisfied that the importer previously imported the apparel and paid duty on them, the goods were exported pursuant to a lease or similar use agreement, the goods were reimported by or for the account of the original importer, and the documentary requirements of 19 C.F.R. § 10.108 were satisfied. In contrast, we are addressing whether the merchandise was actually exported pursuant to a valid bailment agreement. The protestant also cites HQ H016586, dated October 15, 2007, in support of its position. We note that the issue addressed by that ruling was whether batteries, exported to a related Canadian entity for retail packaging, would be eligible for treatment under 9801.00.20, HTSUS, provided that Energizer was the original importer, exporter, and “reimporter” of the batteries and the factual requirements of this provision were established to the satisfaction of the port director where entry was made. The issue was whether the batteries owned by Energizer and packaged for retail sale were exported under a “similar use agreement.” The port is of the opinion that the warehouse agreement between the Canadian warehouse and SGS is not a lease or similar agreement because the same person is president of both companies, and when the goods were imported into Canada, they were delivered to SGS and not to the Canadian warehouse. The port also states that the invoice from the Canadian warehouse to SGS for the “warehousing fee” is broken down to include the warehouse salary for the employees, group insurance, wage levies, payroll service charges, and CSST fees instead of the services rendered which might include pick-and-pack services and inventory. In addition, the inventory records submitted by the Canadian warehouse is printed by “User Name: Sue” which does not resemble any of the Canadian warehouse employees’ names, but resembles SGS employees’ names. A lease or similar use agreement of subheading 9801.00.20, HTSUS, requires a temporary transfer of rights to property or a delivery of property from one party to another for a specified reason for the benefit of one or both parties. See generally, HQ 546561 dated March 16, 1998, where a bailment agreement was considered to be a similar use agreement for purposes of subheading 9801.00.20, HTSUS; and HQ W563474, dated December 13, 2007, in which CBP found that, because the same entity both imported the merchandise into the U.S. and stored and repackaged the merchandise in Canada, the merchandise had not been exported pursuant to a lease or similar use agreement and the merchandise did not qualify for duty-free entry under subheading 9801.00.20, HTSUS, when re-imported into the U.S. Protestant claims that the agreement under which protestant exported the apparel to Canada was a bailment, and that a bailment is a “similar use agreement” for purposes of subheading 9801.00.20, HTSUS. According to Black’s Law Dictionary (6th ed. 1990), the definition of a bailment is a delivery of goods of personal property, by one person (bailor) to another (bailee), in trust for the execution of a special object upon or in relation to such goods, beneficial to either the bailor or bailee or both, and upon a contract, express or implied, to perform the trust and carry out such object, and thereupon either to redeliver the goods to the bailor or otherwise dispose of the same in conformity with the purpose of the trust. The relationship of bailor-bailee arises when the owner, while retaining general title, delivers personal property to another for some particular purpose on an express or implied contract to redeliver the goods when the purpose has been fulfilled, or otherwise deal with the goods according to the bailor's directions. Maulding v. United States, 257 F.2d 56 (9th Cir. 1958). In this case, although the warehouse agreement was purportedly executed between the Canadian warehouse and SGS, there is evidence which suggests that they are not two separate entities for purposes of subheading 9801.00.20, HTSUS. First, we note that when the goods were imported into Canada, they were delivered to SGS and not to the Canadian warehouse. Counsel states that the goods were, in fact, delivered to the Canadian warehouse and that SGS and the Canadian warehouse buildings are physically attached to each other, and since SGS owned the goods and hired the trucking company it is not unreasonable that the trucking records show delivery to SGS. We do not find this argument persuasive and rely on the records of the trucking company, which state that the goods were delivered to SGS. Second, the invoice issued by the Canadian warehouse charges SGS for their employees’ wages rather than pick-and-pack services or warehousing. Despite counsel’s explanation that since SGS and the Canadian warehouse are related companies, SGS paid the Canadian warehouse’s receivable on its behalf in lieu of the warehouse charges, we find that SGS is invoiced and pays for employees’ wages rather than for its services. Third, the inventory record provided by the Canadian warehouse is produced by Sue, on the SGS employee list. Other inventory records provided at the meeting showed that SGS and the warehouse systems are easily accessible by both parties, if not just by SGS. Lastly, a review of the General Ledger Reports from SGS and the Canadian warehouse show that the monies which are to be invoiced by the warehouse are loaned to SGS from the warehouse prior to the invoice being issued by the warehouse to SGS. Then the monies are paid back to the warehouse via a company transfer in the form of credit at the end of every month. Counsel explained that the loan is unrelated to the monthly invoices and that the bank prohibited reimbursement of the loan, but these actions only emphasize the close corporate relationship between SGS and the Canadian warehouse which would not occur in a true bailment situation. It is also not within a true bailment relationship to know the costs of the other party. The transfer of monies between SGS and the Canadian warehouse essentially shows that the same parties run both enterprises. Based on these facts, we find that SGS did not temporarily deliver its property (the goods) or transfer its rights to the property to another party as is required of a lease or similar agreement within the meaning of subheading 9801.00.20, HTSUS. See HRL 546561 and HRL W563474 supra. Given these circumstances, we find that the merchandise was not entitled to duty-free entry under subheading 9801.00.20, HTSUS, when reimported into the U.S. As the goods were sold to a U.S. customer per the invoice of March 25, 2011, the goods should be entered and appraised under the price paid by the U.S. customer. HOLDING: The merchandise stored in Canada was not exported pursuant to a lease or similar use agreement and is not entitled to duty-free entry under subheading 9801.00.20, HTSUS, when re-entered into the U.S. The protest should be denied. In accordance with the Protest/Petition Processing Handbook (CIS HB, December 2007), you are to mail decision together with the Customs Form 19 to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel and to the public at www.cbp.gov by means of the Freedom of Information Act and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division