Internal Advice; Sale for Exportation; Transaction Value; Consignment; 19 U.S.C. § 1401a

HQ H275056 July 1, 2016 OT:RR:CTF:VS H275056 RSD CATEGORY: Valuation Port Director U.S. Customs and Border Protection 726 Exchange Street Buffalo, New York 14210 RE: Internal Advice; Sale for Exportation; Transaction Value; Consignment; 19 U.S.C. § 1401a Dear Port Director, This is in response to your memorandum dated February 4, 2016, concerning a request for internal advice submitted by Neville Peterson, LLP on behalf of Midwest- CBK, LLC (Midwest) regarding the valuation of merchandise that Midwest imported into the United States. In your memorandum, you explain that the Office of Regulatory Audit, Office of Trade, Boston Field Office, is in the process of conducting an audit. Midwest and its counsel disagree with the findings of the Audit Report. A copy of counsel’s Internal Advice Request dated August 20, 2015, was forwarded to our office for our consideration. On June 27, 2016, a telephone conference was conducted with counsel to discuss this matter. FACTS: Midwest of Cannon Falls was founded in 1953, as a gift store that featured and sold imported goods such as nutcrackers, wood carvings, music boxes, and nativity decorations from around the world. The company sold its goods to U.S. customers using regional sales representatives, catalogues, and in more recent years, through the internet. Midwest imported goods from foreign destinations directly into the United States, and its goods were appraised for Customs purposes using transaction value. In 2009, Blyth, Inc. acquired Midwest and merged the company with its CBK holdings. The merged company’s inventory and distribution facilities were relocated to Tennessee. In late 2012, Giftware Holdings, LLC, a Delaware Limited Liability Corporation controlled by Canadian investors affiliated with the Ganz Family Trust acquired Midwest-CBK’s assets. After a transition period, during which goods continued to be sold with the terms of sale as “F.O.B. Kingsport TN” to U.S. customers, Midwest-CBK acquired a leased distribution warehouse in Woodbridge Ontario, owned by Ganz Realty Limited. After that time period, there was a change in the domestic delivery point, so that the terms of sale in sales to U.S. customers were modified to “F.O.B. Buffalo, New York”. According to Midwest’s counsel, Midwest-CBK had previously purchased goods from unrelated foreign vendors for export directly to the United States, but because its warehouse location was moved to Canada, Midwest changed its procedures, by purchasing merchandise from foreign vendors for export to Canada rather than to the United States. Following its acquisition, Midwest’s business proceeded much as it had in prior years. The company’s U.S. based sales representatives took orders from customers in person, by catalogue and over the internet. In a typical transaction, it is stated that after Midwest sales representatives conclude the sales agreements in the United States, the “pick and pack” orders are relayed from the United States to Midwest’s sales warehouse, owned by Ganz, in Woodbridge, Ontario, Canada. Midwest employees are responsible for packing the customer orders in customer-specific boxes, which contain a packing slip. Each afternoon, trucks contracted by Midwest pick up the packages at the Canadian facility and transport them to Buffalo, New York. Counsel asserts that throughout this entire process, Midwest is the owner of the goods, with risk of loss, and insures the merchandise for its own account. When the goods arrive in Buffalo, Midwest acts as the importer of record, pays all duties and handles all other government agency requirements. After Customs Border Protection (CBP) releases the goods, the carrier completes the delivery of the merchandise to a United Parcel Service (UPS) facility in Buffalo. Once UPS receives the merchandise, title to the merchandise passes in Buffalo, New York from Midwest to its U.S. customers, with the terms of delivery shown on the invoices as “F.O.B. Buffalo, New York”. Midwest’s various customers are responsible for the payment of the domestic transportation costs to the intended destination. Each invoice is marked with the payment directions “please remit payment to Midwest-CBK, LLC, P.O. Box 529 Buffalo, New York 14240-0529.” Customer payments are in fact mailed to that address. All customer payments, whether by credit card or by check, are received and deposited into Midwest’s account at the M&T bank in Buffalo, New York. The payments are recorded and merchandise credit, extended by Midwest-CBK, is noted. During the course of conducting their audit of Midwest and its facilities, the auditors observed that the sales representatives use an electronic hand-held device (or other electronic devices) to prepare a confirming sales order. The sales order includes an item number, an item description, the quantity of the merchandise ordered, the unit price, and in some cases a picture of the product ordered. The sales order also includes the total value of the order. When the order is prepared and executed, the electronic system selects an order number. The order number will become the pick and packing slip number and the invoice number. The confirmed sales order is electronically transmitted to a third party company, who tracks all of Midwest’s sale representative’s sales transactions made on a daily basis. This third party company transmits the orders to Midwest’s warehouse and administrative offices in Woodbridge, Ontario, Canada. In addition, after a sale is executed, the sales representative emails the order to the customer. In Canada, the order is accepted by the order processing department, which will review the credit application and payment credit terms or the acceptance of payment by a credit card. The order desk will also review the inventory, to identify if the ordered items are on hand, and if the ordered item is not available in the current inventory, the identified item will show up as a back order item. After credit approval, the order is passed to the customer fulfillment office, where the pick and packing slip is printed. After its completion, the pick/packing slip is electronically sent to the warehouse floor personnel, who locate the items and place them into boxes. The pick and packing slip includes the same information as the order. After the items are picked, a two page form, the pick and packing slip, is separated, with one page going with the box and the other form going back to the customer fulfillment office. The boxes are then brought to the shipping dock area, where the order is checked. The packing slip will be attached to the box, identifying the U.S. customer, the customer address, and the items to be shipped. The boxes are then loaded onto a truck destined for Buffalo, New York. Midwest hires the transport company for shipping the goods to Buffalo. While the truck is loaded, Midwest’s customer fulfillment office receives the one page pick/packing slip, finalizes the transaction, and prepares the invoice. All invoice items and quantities are consolidated by Harmonized Tariff Schedule number. A shipping memo that identifies all the consignees by name, address, and the items shipped is also prepared. The goods will first go to either one of two United Parcel Service (UPS) transfer stations located in Buffalo. When the goods reach the U.S. Border, a Customs entry for the merchandise, is made by Midwest’s Customs Broker FedEx, who submits the customer invoice attached to the Customs Entry Form 7501. After importation, the goods are delivered to the UPS facility in Buffalo, New York, where they will be unloaded and the addressed packages are deconsolidated so that they can be delivered to the individual U.S. customers. UPS then delivers the merchandise to the U.S. customers. In a sample transaction, the documents presented to the Office of Regulatory Audit contained a Pro Forma Invoice prepared by Midwest’s Customs Broker, FedEx Trade Networks, which displayed Midwest CBK, LLC with an address in Woodbridge Canada as the Exporter, Seller, or Consignor. The Pro Forma Invoice also showed that the merchandise was shipped to Midwest CBK, LLC at an address in Buffalo, New York. Additionally, a packing slip indicated that the merchandise was eventually shipped to a U.S. buyer at an address located in Crossett, Arkansas. The document specified the unit price for the items listed, and the words “FOB Buffalo, New York” were printed on the bottom of the packing slip in fine print. For the same transaction, Midwest furnished a corresponding customer invoice for the same items to the same purchaser located in Crossett, Arkansas as shown on the packing slip. The customer invoice indicated an item description, quantity of each item purchased, the unit price for each item, extended price, a shipping charge, and the total balance due. Midwest CBK’s address on the invoice is designated as being located in Cannon Falls, Minnesota. In fine print on the bottom of the invoice, the words “FOB Buffalo, New York as DEFINED BY THE NEW YORK STATE UNIFORM COMMERICIAL CODE” are printed. Finally, the transaction documents contain a remittance to Midwest-CBK drawn on M&T Bank for two orders, including the order that was referenced in these prior transaction documents. According to Midwest’s counsel, before commencing importations from Canada to the United States, Midwest representatives met with CBP officials at the Port of Buffalo. Midwest advised CBP that the goods were imported from Canada in a consignment rather than pursuant to a sale for exportation, so it maintained that the transaction value method for appraising the imported merchandise could not be used. Rather, Midwest indicated that it would use the deductive value method of appraisement to make entry of the merchandise, which CBP permitted. However, counsel further indicates that the use of deductive value has been problematic for seasonal merchandise. Instead, Counsel contends that appraisement of the imported merchandise under the “fallback” method of 19 U.S.C. 1401a(f) would be a more appropriate method to appraise the imported merchandise. ISSUE: Whether the imported merchandise may be appraised on the basis of transaction value between Midwest and its customers located in the United States.LAW AND ANALYSIS: Merchandise imported into the United States is appraised for customs purposes 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 primary 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. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and seller. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Several factors may indicate that a bona fide sale exists between the purported buyer and seller. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the purported buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See Headquarters Letter Ruling (“HQ”) 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995. Finally, as explained in CBP’s Informed Compliance Publication entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory. In this case, Midwest states that it purchases goods from foreign unrelated suppliers and stores them in a leased warehouse located in Ontario, Canada owned by a company related to Midwest, Ganz. Midwest regularly ships its merchandise from this distribution center in Canada to a UPS distribution facility in Buffalo, New York. UPS will then deconsolidate the shipments and handle order fulfillments to various Midwest customers, who have purchased goods from Midwest. Midwest claims that before shipping its merchandise from the Canada to the United States, it advised CBP that the goods were imported from Canada in a consignment rather than pursuant to a sale for exportation. It is further maintained that the sales between Midwest and its U.S. customers are purely domestic sales, not sales for exportation. This position is based on the fact that the Incoterm “F.O.B. Buffalo, New York” is written on the invoices and the other transaction documents issued by Midwest to its U.S. customers. Counsel explains that Midwest’s various customers are responsible for payment of the domestic transportation costs. Midwest alleges that the bill of lading and other documents accompanying the goods from Canada to the United States confirm that the shipment is a mere consignment from one Midwest location to another Midwest location. Because there is no sale for exportation to the United States, Midwest contends that the imported merchandise cannot be appraised using transaction value, and thus another method of appraisement must be used. It is contended that there is no identical or similar merchandise that can be used to base appraisement. Instead, CBP has permitted the imported merchandise to be appraised using deductive value in accordance with 19 U.S.C. §1401a(d). Because it is difficult to appraise under deductive value, Midwest seeks to have the merchandise appraised using the fallback method under 19 U.S.C. § 1401a(f). Accordingly, we must consider whether the imported merchandise cannot be appraised under transaction value because there are no sales for exportation to the United States. Midwest claims the movement of the merchandise from Canada to the United States is a consignment and not a sale. CBP has consistently stated that transactions involving goods shipped on consignment do not constitute bona fide sales. See, HQ 546602 dated January 29, 1997. Therefore, we must determine if the movement of goods from Canada from the United States is as a result of a consignment, rather than a sale for exportation to the United States. According to the website Law.com, to consign means, “to deliver goods to a merchant to sell on behalf of the party delivering the items as distinguished from transferring to a retailer at a wholesale price for re-sale.” Under a typical consignment arrangement, the goods are entrusted by consignor to the consignee, who then sells them after they are already in their possession. Often if the goods are not sold to a subsequent buyer within a designated time period, the goods are returned to the consignor. If this type of situation involves imported merchandise, the sale is considered a domestic sale and not a sale for exportation to the United States, ruling out the use of transaction value. See e.g., HQ 548574, dated March 17, 2005; HQ 546602, dated January 29, 1997; and HQ 545755, dated May 18, 1995. In other words, a consignment sale usually involves three parties: a consignor, who furnishes the merchandise; the consignee, who takes custody and holds the merchandise without actual title to it until it is sold at a future time; and a buyer who purchases the merchandise and takes title to it upon completion of the sale by making payment to the consignor. Thus, the merchandise is not sold to the buyer until after it is imported into the United States and can be returned to the consignor if the merchandise is not sold within a designated time period. In the case at hand, the transaction documents presented and the description of the transactions indicate that there are only two parties involved: the seller, Midwest; and the buyers, Midwest’s various customers located in the United States. There is no consignee who takes possession of the merchandise without title pending the completion of a sale to a buyer in the United States. In contrast, the information presented indicates that Midwest’s U.S. customers place orders which are relayed through sales representatives or through the internet to Midwest’s facility in Ontario, Canada. As a result of these orders, the merchandise is processed, packed, labeled and shipped to the United States. Midwest employees are responsible for packing the customer orders in customer specific boxes, which contain a packing slip. When the merchandise crosses the U.S. border, it is imported into the United States and a customs entry for the merchandise must be filed. Midwest acts as the importer of record, pays all duties and handles all other government agency requirements. In other words, the movement of the merchandise to the U.S. border constitutes an exportation of the merchandise to the United States from Canada. There is no indication that merchandise is delivered to another Midwest facility in the United States. Rather, the evidence indicates that the merchandise is shipped to a UPS facility in Buffalo where it is organized for distribution to individual customers, but no actual repacking takes place. The shipment of merchandise to the UPS processing center is only done to facilitate the delivery of the merchandise to the ultimate U.S. buyers. Significantly, unlike a sale on consignment, the identity of the final buyer of the merchandise in the United States is clearly identified prior to the exportation of the merchandise from Canada. Based on all information presented, we find that there are sales for exportation between Midwest and it various customers in the United States. The prices for the merchandise are set at the time the U.S. customer places the order with Midwest. The orders from U.S. customers are relayed to Midwest’s Canadian warehouse where they are processed. As result of a U.S. customer’s order with Midwest, the merchandise is shipped from Canada to the United States and the customer becomes obligated to make payment to Midwest for the merchandise in accordance with terms agreed to by the parties. Thus, there is an exchange of title to the imported merchandise between Midwest and the U.S. customers for consideration. Since a sale takes place between Midwest and its U.S. customers prior to importation, there is no indication that there is a consignment involving a third party pending a sale of the merchandise to a final buyer in the United States. The movement of the merchandise from Midwest to the UPS facility in Buffalo, New York does not constitute a consignment, but movement of previously sold merchandise to an independent carrier who provides certain services and transports the merchandise to Midwest’s U.S. customers. Consequently, we find that these transactions are not "true consignments" that would prohibit the use of the transaction value method to appraise the imported merchandise. See HQ H012659, dated November 14, 2007. Moreover, the