Appraisement of certain cedar lumber imported into the United States from Canada

HQ H284374 June 7, 2017 OT:RR:CTF:VS H284374 EE CATEGORY: Valuation John Landry DLA Piper (Canada) LLP Suite 2800, Park Place 666 Burrard Street Vancouver BC V6C 2Z7 RE: Appraisement of certain cedar lumber imported into the United States from Canada Dear Mr. Landry: This is in response to your letter, dated March 13, 2017, on behalf of your client, [X] (“the importer”), concerning the appraisement of certain cedar lumber imported into the United States from Canada. You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling. FACTS: The importer, a Canadian company, operates a manufacturing facility in [X] (“Canada”) that processes western red cedar (“WRC”) logs into dimensional cedar lumber products. A significant portion of the WRC lumber produced in the importer’s Canadian mill is shipped in rough cut form to [X] (“Company A”) a related company in the United States. Prior to shipment, the rough cut WRC lumber is cut into three dimensions: one-inch board, 5/4th-inch, and two-inch decking products. The importer maintains ownership of the lumber throughout the processing in the United States. The majority of the lumber is green (rough cut green WRC lumber); however, some lumber is kiln dried (rough cut dry WRC lumber). The importer pays Company A a fee for the services it provides such as kiln drying, finishing and remanufacturing services. You state that the rough cut WRC lumber is processed in the United States, as follows: • If the rough cut WRC lumber is green, it is first kiln dried. • Once kiln dried, the lumber is then processed through a molder to generate a smooth and consistent sizing and to remove material defects. • The lumber is graded to align with customer requirements, fiber, and finishing defects. • A portion of the graded lumber is upgraded to pattern products by reprocessing the lumber through another molder for specific end use application (e.g. tongue and groove lumber). • Trim-end cuts from the molders are collected, defects are removed, the pieces are finger-jointed and sometimes edge glued into long length lumber. • The lumber is packaged to align with various markets and customers' demands. • The lumber is then shipped to the importer’s U.S. customers via rail or truck or shipped back to Canada to meet demand in Canada. The total time period from the Company A’s receipt of rough cut WRC lumber from Canada, to shipment of the finished lumber products to U.S. customers, may range from a maximum of two to three months in the winter, to a minimum of one week in the warmer months. The importer does not purchase similar grade WRC lumber (either rough cut green or kiln dried) from unrelated parties in Canada. The importer states that although the final products produced by Company A have a developed market and price, the rough cut WRC lumber shipped to the United States by the importer to produce the final products does not have an established market or price in Canada. Moreover, the production of rough cut WRC lumber does not follow standard grading rules like structural dimensional lumber (used to build homes) since WRC is sold into appearance (non-structural) applications. Each major WRC producer has its own brand and related grading rules. Thus, even if the importer was able to acquire rough cut WRC lumber from other cedar mills, the grades would not be similar to the subject WRC products. ISSUE: What is the correct method of appraisement of the rough cut WRC lumber imported into the United States? 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). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1). The term “price actually paid or payable” is defined as: [T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. § 1401a(b)(4)(A). In the instant case, the imported rough cut WRC lumber is not the subject of a sale and, therefore, cannot be appraised under the transaction value method set forth in 19 U.S.C. § 1401a(b). When imported merchandise cannot be appraised on the basis of transaction value, it is to be appraised in accordance with the remaining methods of valuation, applied in the following sequential order: the transaction value of identical merchandise; the transaction value of similar merchandise; deductive value; and computed value. If the value of imported merchandise cannot be determined under these methods, it is to be determined in accordance with the “fallback method.” 19 U.S.C. § 1401a(f). The importer is not aware of any other sources of rough cut WRC lumber being sold for exportation to the United States. Therefore, to the extent that such information is not available, the imported rough cut WRC lumber cannot be appraised using transaction value of identical merchandise or similar merchandise. Pursuant to 19 U.S.C. § 1401a(a)(2), if the value cannot be determined on the basis of the transaction value of identical or similar merchandise, the merchandise shall be appraised on the basis of the computed value, rather than the deductive value, if the importer makes a request to that effect to the customs officer concerned. See also 19 C.F.R § 152.101(c). In this case, the importer argues that the merchandise should be appraised under the computed value method of appraisement. 19 U.S.C. § 1401a(e) provides that: (1) The computed value of imported merchandise is the sum of— (A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; (B) 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 the producers in the country of exportation for export to the United States; (C) any assist, if its value is not included under subparagraph (A) or (B); and (D) the packing costs. (2) For purposes of paragraph (1)— (A) the cost or value of materials under paragraph (1)(A) shall not include the amount of any internal tax imposed by the country of exportation that is directly applicable to the materials or their disposition if the tax is remitted or refunded upon the exportation of the merchandise in the production of which the materials were used; and (B) the amount for profit and general expenses under paragraph (1)(B) shall be based upon the producer’s profits and expenses, unless the producer’s profits and expenses are inconsistent with those 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, in which case the amount under paragraph (1)(B) shall be based on the usual profit and general expenses of such producers in such sales, as determined from sufficient information. 19 U.S.C. § 1401a(e). 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, 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. In the instant case, the importer proposes to calculate the computed value of the rough cut WRC by taking the sum of the following elements which the importer claims can be supported by its production and accounting records. Fiber (log) Costs: The importer states that the most significant component of the computed value calculation for the rough cut WRC lumber shipped to the U.S. is the cost or value of the cedar logs (i.e., the fiber component). The importer purchases cedar logs from unrelated companies based on a [X] price and uses a rolling six month average to determine the cost or value of the materials used in the production of the imported rough cut lumber for the purposes of computed value method of appraisement. This cost is reflected in the importer’s log accounting system (3Log), which is integrated in the importer’s general accounting system and records. Sawmill and Yard Costs: The importer states that the second largest cost element is sawing the logs into rough WRC lumber, which includes the log yard cost and cost to deliver the logs to the sawmill. Sawmill operations are typically constrained by the volume of fiber that is fed into the mill during a specific time period. As a result, different levels of production are attainable depending upon the thickness of the rough cut WRC lumber being produced. For example, since one-inch boards require approximately 5% more [X] of fiber per thousand board feet of rough cut WRC lumber ([X]) than two-inch decking, the production levels per eight hour will be [X]% less than when producing two-inch decking. To determine the cost per [X] for its sawmill and yard costs, the importer starts with the average cost per [X] from its general ledger, which is then adjusted (higher or lower) based on the variance from the average using the log consumption measurement for the particular type of lumber. As a result, the yard and sawmill cost is [X]% higher for one-inch boards than it is for two-inch decking. Depreciation, Mobile Equipment, Shipping, Administrative Costs: The importer also proposes to include the cost for depreciation, which is separately shown in its ledger and accounting system. In addition, other administrative expenses such as fuel and maintenance costs relating to the importer’s mobile equipment fleet and shipping expenses would be included and recorded in the importer’s accounting system with the use of separate general ledger codes. For the purposes of calculating the computed value, the importer would allocate [X]% of the total of these costs (on a prior fiscal year [X] basis) to rough cut WRC lumber which represents the actual percentage of the costs that is attributable to the manufacture of rough cut WRC lumber products at the Canadian facility. Kiln Drying Costs: Although the majority of the rough cut WRC lumber shipped to Company A is not kiln dried, in instances where the lumber is kiln dried prior to shipment, the average cost of kiln drying the lumber at the Canadian facility is added as a cost element. This cost is captured in the importer’s accounting system by using the general ledger codes established for kiln drying costs (on a prior fiscal year [X] basis). Transportations Costs to the U.S. border: The importer also proposes to include the costs to transport the rough WRC lumber to the U.S. border by incorporating a transportation cost based on the average cost per [X] over the past year for shipping to the U.S. border. Profit Margin: Finally, the importer proposes to add a profit margin for each imported lumber product (1" board, 5/4" decking and 2" decking), which is calculated by using the average pre-tax profit margin based on the past three fiscal years financial statements of the importer (i.e. currently [X]%). The importer will update the rolling average profit margin once per year. Pursuant to 19 U.S.C. § 1401a(e), the computed value of the imported merchandise is based on the actual costs related to the imported merchandise. Since the importer proposes to use the averaged costs from the previous fiscal year rather than the actual costs related to the production of the imported merchandise, the importer may not use the computed value method. When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. However, there are certain prohibited bases of appraisement under 19 U.S.C. § 1401a(f). For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f). Nevertheless, under section 500 of the Tariff Act of 1930, as amended, which sets forth U.S. Customs and Border Protection (“CBP”) general appraisement authority, the appraising officer may: Fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, or other document to the contrary notwithstanding. . .. 19 U.S.C. § 1500(a). In this regard, the SAA, which forms part of the legislative history of the TAA, provides in pertinent part: Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations…. Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract. In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402. Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. Section 152.107 of the CBP regulations (19 C.F.R. § 152.107) provides:(a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used.(b) Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs values of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used. (c) Deductive value. The “90 days” requirement for the sale of merchandise referred to in § 152.105(c) may be administered flexibly. In this case, we find that the imported rough green cut and rough dry cut WRC lumber may be appraised using a modified version of computed value under the fallback method set forth in 19 U.S.C. § 1401a(f) based on the importer’s proposal, provided the importer is prepared to present CBP with documentation based on its commercial accounts of the producer, which is the importer in this case, in accordance with the generally accepted accounting principles applied in Canada. HOLDING: Based on the information provided, the imported rough green cut and rough dry cut WRC lumber may be appraised under the fallback method pursuant to 19 U.S.C. § 1401a(f) based on modified computed value, provided the importer is prepared to present CBP with documentation to support appraisement under this method. The documentation is also subject to any verification deemed necessary in accordance with 19 C.F.R. § 141.88 and 19 C.F.R. § 177.9(b)(1). Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely, Yuliya A. Gulis, Acting Chief Valuation & Special Programs Branch