Internal Advice Request; Computed Value; Standard v. Actual Costs

HQ H242984 February 19, 2014 OT:RR:CTF:VS H242984 YAG CATEGORY: Valuation Port Director Port of Phoenix 3002 E. Old Tower Road, Suite 400 Phoenix, Arizona 85034 Re: Internal Advice Request; Computed Value; Standard v. Actual Costs Dear Port Director: This is in response to the internal advice request, initiated by the Pike Law Firm, P.C., on behalf of their client, The 17/21 Group, LLC (“17/21”) and transmitted to our office on June 10, 2013, regarding the proper method of appraisement of merchandise imported by 17/21 from its maquiladora in Mexico. This determination is issued pursuant to the additional facts and documentation, provided by the Pike Law Firm, P.C. on November 23, 2013 and January 6, 2014 in response to our requests for supplemental information. FACTS: 17/21 owns a maquiladora facility in Mexico called T-Mex S.A. de C.V. (“T-Mex”). 17/21 opened T-Mex in 2009 as a finishing plant for denim jeans imported, marketed, and distributed by 17/21 in the United States. 17/21 enters the merchandise imported from T-Mex pursuant to the computed value method of appraisement. T-Mex performed a variety of finishing operations for 17/21, such as washing, dyeing, sand blasting, softening, and chemical treatment in addition to trimming, custom packaging, and price ticketing. However, on August 4, 2011, T-Mex ceased finishing operations at its facility when 17/21 decided to shift the production of its apparel products from T-Mex to unrelated contract assemblers during the course of the year. On August 4, 2011, 17/21 imported the last shipment of apparel washed and finished at T-Mex into the United States. 17/21 provided a copy of an invoice, dated August 4, 2011 and corresponding CF 7501 (Entry Summary) for our review, which represents the last shipment of first-quality garments sent by T-Mex to 17/21. After August 4, 2011, T-Mex remained open, but it functioned solely as a distribution center, i.e., it received finished garments from unrelated plants around Mexico and then sent garments to 17/21 in the United States. Thus, during the period from August 5, 2011 to December 31, 2011, T-Mex performed no production at its plant. Even though no formal documents or contracts exist to show that T-Mex halted production on the exact date (August 4, 2011 as claimed by counsel), 17/21 provided an email sent by 17/21’s Chief Financial Officer to T-Mex’s landlord on August 30, 2011, stating that 17/21 had decided to close the plant and that the decision was now final. According to counsel’s submission, the winding down of finishing operations at T-Mex resulted in irregularities in T-Mex’s operating expenses recorded during 2011. Counsel provided the Affidavit of 17/21’s Chief Financial Officer for our review to illustrate in detail the irregularities that resulted in accounting due to this change in the 17/21’s business model. Counsel claims that these costing irregularities resulted in improper recording of T-Mex’s operating expenses on 17/21’s 2011 Cost Submission. For fiscal year 2011, 17/21 included a complete 12-month period of costs in its budget for the T-Mex facility, including production and labor costs, and administrative, general, and overhead expenses. These expenses were incorrectly reported because T-Mex only operated as a production facility for eight out of the twelve months in 2011. Therefore, 17/21 proposes to reduce the amount for direct labor costs, overhead production costs, and general and administrative costs, appearing on the books of T-Mex, by 66.66% to reflect the four months of 2011 during which no garments were produced by T-Mex. Counsel argues that since T-Mex was not operating as a production facility during the last four months of 2011, T-Mex’s labor and processing costs were not recorded in the producer’s books in accordance with Generally Accepted Accounting Principles (“GAAP”). Therefore, these figures should be revised in preparing the cost submission for reconciliation purposes, so that 17/21 can report the actual costs incurred in 2011. 17/21 participates in U.S. Customs and Border Protection’s (“CBP”) reconciliation program and plans to submit the final values for fiscal year 2011 subsequent to this decision. Counsel submitted the 2011 financials for T-Mex, the 2011 financial statements for 17/21, 17/21’s detailed Balance Sheet and Statement of Income (Loss), as well as the worksheet used to calculate the numbers on the company’s cost submission for our review. ISSUE: Whether the subject costs and expenses on the producer's (T-Mex) books may be properly excluded from the computed value of the imported merchandise to reflect the final actual costs incurred by the producer, in accordance with GAAP. LAW AND ANALYSIS: Section 402(e) of the Tariff Act of 1930, as amended by the Trade Agreements Act (“TAA”) of 1979 (19 U.S.C. §1401a(e)) provides: The computed value of imported merchandise is the sum of the cost of value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States any assist, if its value is not included under subparagraph (A) or (B); and the packing costs. The Statement of Administrative Action (“SAA”), adopted by Congress with the passage of the TAA, provides that with respect to computed value: The cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, if such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced. The ‘amount for profit and general expenses’ will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced and unless the figures provided are inconsistent with those usually reflected in sales, or merchandise of the same class or kind as the imported merchandise, that are made by producers in the country of exportation for export to the United States. Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981). Senate Report 96-249 to Public Law 96-39 adds that “determination of an acceptable computed value generally would require the producer to supply all the necessary cost information…[t]he bill also would provide for the use of the producer’s own general expenses and profit unless such amount is inconsistent etc…” Thus, the legislative history of the TAA stresses reliance on the producer’s books to obtain figures from which a computed value can be calculated. It is Customs’ position that companies are free to keep their books in the manner that best suits their need, as long as they are maintained in accordance with GAAP. In this case, as outlined in the FACTS section, 17/21 set its standard cost for the finishing processes in several accounts (including production costs, labor costs, and administrative, general, and overhead expenses) based on a 12-month fiscal year. 17/21 should have adjusted its standard costs for these accounts after T-Mex stopped its finishing operations, but it did not. Thus, the amounts in these accounts were wrong and not recorded in the producer’s books in accordance with GAAP (even after the producer’s books were closed) because 17/21 forgot to make the appropriate accounting adjustments so that the final amounts for the affected accounts reflected the costs that were actually incurred. 17/21 provided the necessary information in order to show that the plant indeed closed on the date claimed by the company, with the last entry made on August 4, 2011. The company also provided documents supporting its allocations (reflected in its cost submission) as well as the detailed explanation of irregularities in accounting, which resulted due to the closing of T-Mex. Accordingly, we find that 17/21 must report to CBP the amounts that should have been recorded as the final actual costs on its books to reflect the closing of T-Mex facility in order to comply with GAAP. HOLDING: In conformity with the foregoing, we find that 17/21 must report its final actual costs to CBP in accordance with GAAP, reducing the amount for the direct labor costs, overhead production costs, and general and administrative costs, to reflect the fact that T-Mex was only opened for eight months in 2011. 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, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.   Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch