Dutiability of costs incurred for foreign product design and promotion services; Assists

HQ H287490 October 6, 2017 OT:RR:CTF:VS H287490 NCD CATEGORY: Valuation Jerry Epstein President W.N. Epstein & Co., Inc. 4477 Woodson Road St. Louis, MO 63134 RE: Dutiability of costs incurred for foreign product design and promotion services; Assists Dear Mr. Epstein: This is in response to your letter of June 6, 2017, submitted on behalf of Miss Elaine, Inc. (“Miss Elaine”), requesting a binding ruling whether costs incurred for the design and promotion of ladies sleepwear by foreign third-party service providers constitute “assists.” Your ruling request was received by the National Commodity Specialist Division of U.S. Customs and Border Protection (“CBP”) and was forwarded to our office for review. In arriving at the determination set forth below, we have taken into account information provided in your ruling request, as well as in your subsequent electronic communications with our office. FACTS: Miss Elaine plans to develop and ultimately import a new line of ladies sleepwear, commercially designated “Sesoire.” Miss Elaine has entered into consulting agreements with a concept designer and print designer (collectively, “the designers”) for this purpose, both of whom are based in the Netherlands. The concept designer will develop a design concept, design shapes, create sketches, and select trim. The concept and print designers will jointly create a color palette, print concept, and print pattern. These items will be shipped or otherwise conveyed to Miss Elaine in the United States, which will “formalize” them into a pattern and technical package consisting of a bill of materials and size specifications. Miss Elaine will also incorporate the features proposed by the Dutch designers into a “concept sample,” which will be submitted to the designers for review and input as to design. Subsequently, Miss Elaine will modify the technical package components and concept sample as needed, approve them, and ship them to a Chinese vendor/manufacturer for use in creating “market samples.” The market samples produced by the vendor/manufacturer will be reviewed by the Dutch designers, who will provide input as to color, print, and quality to Miss Elaine. Miss Elaine will undertake its own review of the market sample and will additionally solicit feedback from U.S. buyers, and will make adjustments to the market sample and technical packages as needed. Any adjustments to those items will be communicated by Miss Elaine to the vendor/manufacturer, which will then commence production of the garments for import. Lastly, post-production marketing services, including staging of a photoshoot with a model and photographer and development of a branding brochure, will be provided by a Dutch marketing group. According to your ruling request, the costs incurred by Miss Elaine for the Dutch designers’ work throughout the development process include consulting fees payable to the designers, and courier charges for shipment of the initial design package and the concept and market samples to and from the Netherlands. Legal fees are also paid to U.S. and Dutch attorneys for negotiation of the consulting agreements. No materials are shipped directly from the designers in the Netherlands to the vendor/manufacturer in China. Your request also indicates that none of the various Dutch entities are related to Miss Elaine or to the Chinese vendor/manufacturer, and that payments to the Dutch entities are separate from payments to the vendor/manufacturer. You also note that the Dutch concept designer, print designer, and marketing service provider are themselves unrelated entities which receive separate payments from Miss Elaine under their respective agreements. Your communications also clarified that all work undertaken by the designers pursuant to their agreements with Miss Elaine is conducted in the Netherlands. ISSUE: Whether costs incurred by Miss Elaine for services rendered by the Dutch concept designer, print designer, marketing company, model, and photographer constitute assists, the value of which must be added to the price actually paid or payable of the imported sleepwear. 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”), codified at 19 U.S.C. §1401a. Transaction value, the preferred method of appraisement, is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for five statutorily-enumerated additions whose amounts are not already incorporated into the price actually paid or payable and are based on sufficient information. The statutorily-enumerated additions include, inter alia, the value, apportioned as appropriate, of any assist. 19 U.S.C. §1401a(b)(1)(C). An “assist” comprises one of several statutorily-enumerated items that are “supplied directly or indirectly by the buyer, and free of charge or at a reduced cost, for use in connection with the production or sale for export of the imported merchandise.” 19 U.S.C. §1401a(h)(1)(A). The assists enumerated in the TAA include, inter alia, “[e]ngineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.” 19 U.S.C. §1401a(h)(1)(A)(iv). The TAA provides that design work constitutes an assist only where it is “necessary for production.” Per CBP precedent, design work and plans are “necessary for production” of a garment where the garment would not exist in its form as imported but for provision of these services and materials. See Headquarters Ruling Letter (“HQ”) 548566, dated October 19, 2004 (“If a foreign garment manufacturer cannot produce or manufacturer merchandise without an importer’s designs, samples, patterns, etc. that are made abroad, such designs, samples, patterns, etc. should be included in the dutiable value of the imported merchandise.”); see also HQ H253767, dated March 30, 2015 (citing HQ 548566 for this proposition). We have accordingly ruled that design assists encompass, inter alia, size charts, bills of materials, and samples upon which a producer relies for guidance in fabricating an imported garment. See HQ H031244, dated April 10, 2009. The rationale underpinning our decisions is that work of this sort does not merely convey a general concept as to what garment should be created, but instead imparts detailed instructions as to how the garment is to be created (or recreated). See id.; see also HQ 547487, dated June 23, 2000 (“The enumeration of specifications, parts, placement of parts and color of parts conveys precisely the manner in which the buyer wishes the shoes to be constructed.”). In contrast, where the work provided is too devoid of detail to be applied directly in production, and instead leaves development of the final product to the discretion of the producer, it cannot be considered “necessary for production.” See HQ H253767, supra, and HQ 563369, dated January 11, 2006 (determining preliminary sketches to be non-dutiable on the grounds that they were “general in nature and do not show the exact pattern that the manufacture[r] must follow” and/or were used “to inspire or direct the pattern-maker to create a pattern”). Here, the prospective assists about which you inquire include design services and marketing services performed in the Netherlands and the United States. The technical package delivered to the Chinese vendor/manufacturer consists of a bill of materials, size specifications, and a concept sample, all of which have previously been deemed within the ambit of “design work.” See HQ H031244, supra. Per your ruling request and subsequent communications, the materials can and will be applied directly – or in the case of the sample, replicated – by the vendor/manufacturer in production. Therefore, we find that the design work provided to the vendor/manufacturer is necessary for production of the imported sleepwear and will be considered an “assist” under the TAA. The TAA provides that “[i]f the production of an assist occurred in the United States and one or more foreign countries, the value of the assist is the value thereof that is added outside the United States.” 19 U.S.C. §1401a(h)(1)(C)(ii). The next question is, therefore, identifying the extent to which activities undertaken abroad constitute dutiable steps in the “production of [the] assist” and valuing those activities accordingly. See HQ 548097, dated January 28, 2003 (“The issue with which we need to be concerned is whether the work performed by each party is part of the production process of the assist, and if so, where each stage of the assist production was performed, such that the value of the finished assist is determined based on its production elsewhere than in the U.S.”); see also HQ W548490, dated August 18, 2004 (reaffirming interpretation of TAA set forth in HQ 548097). CBP has determined this to be the case where the activity in question was undertaken with the knowledge or intent that it be used in further production of the assist, and where it does in fact play a significant and/or crucial role in the assist’s production. Particularly germane is HQ W548490, where we ruled that consulting services provided in Milan were dutiable as they were performed with the objective of assisting in the creation and production of the garment lines, and the consultant’s input as to materials, styles, and designs was undoubtedly incorporated into the production instructions provided to the manufacturer. See also HQ 548368, dated December 24, 2003 (providing additional context concerning the transaction at issue in HQ W548490). We reached this conclusion based upon our review of the consulting services agreement, under which the consultant was responsible for researching, selecting, and approving raw materials, styles, and designs, as well as for reviewing and approving samples and modifications to the original style/design/material selections. We reasoned that the very nature of these services, which included right of review and approval, all but guaranteed that the consultant was cognizant of their end-use and that its material, design, and style choices would be reflected in the production instructions delivered to the manufacturer. See also HQ 548566, dated October 19, 2004 (concluding that arrangement in which patterns developed abroad were “used” in making a sample was sufficiently indicative that the patterns constituted dutiable design work). In this case, it is evident that the design-related activities undertaken in the Netherlands contribute significantly, and with the full awareness of the designers, to this work. As in HQ W548490, Miss Elaine’s arrangements with the designers provide for the conception of numerous aspects of the Sesoire-line garments – including their overall design, shape, color scheme, print patterning, and material make-up – in the Netherlands. Miss Elaine will incorporate these features into the components of the technical package, and there is nothing to suggest that Miss Elaine will disregard or even modify them in doing so. Moreover, as in HQ W548490, the designers will remain involved in the product development process by providing feedback on the concept and market samples prior to their finalization. While this review and approval may not rise to the level of the discretion retained by the consultants in HQ W548490, it is, in conjunction with the initial design work, sufficiently indicative that the designers’ contributions will influence the designs, patterns, color schema, etc. reflected in the materials and directions provided to the Chinese vendor/manufacturer. See HQ 548566, supra. That the designers are fully cognizant of this is, as in HQ W548490, evident in their anticipated review of the concept and market samples for the specific purpose of providing feedback on them. We are therefore of the view that all design-related work undertaken in the Netherlands is a dutiable portion of the assist provided to the vendor/manufacturer. Lastly, as to how this work should be valued for purposes of determining transaction value, the TAA provides that “the value of the assist” falling under 19 U.S.C. §1401a(h)(1)(A)(iv) is “the value thereof that is added outside the United States.” CBP has previously equated the value of the foreign work with the value of any payments remitted for this work. See HQ W548490 and HQ 548097, supra. Consistent with our prior treatment of similar transactions, therefore, we conclude that the value of the assist is the value of any payments made to the Dutch designers. CBP has also ruled that costs of shipping technical packages and similar physical materials to the producer of the imported merchandise should be included in the value of the assist. See HQ H031244, dated April 10, 2009 (“USPC would add the courier charges for transporting the artwork and technical specification packages to Asian producers to determine the total value of any assist…and we so approve.”). Regarding the legal fees and the activities or materials related to the promotion of the imported merchandise, we find that these are not included in the statutory definition of “assist” set forth in the TAA. See HQ H248853, dated February 7, 2014 (ruling that advertisement flyers “merely included alongside the merchandise in its package” did not fall with the scope of “assist”). These activities include the staging of a photoshoot and development of a branding brochure to promote the Sesoire-line garments for sale in the U.S. They are not considered assists insofar as they do not fall within any of the statutorily-enumerated definitions of assist and are not used in connection with the “production or sale for export to the United States.” See HQ H248853, supra. HOLDING: The various services provided by the Dutch concept and print designers constitute dutiable assists, the value of which must be added to the price paid or payable of the imported sleepwear. However, the services provided by the marketing group, model, and photographer do not constitute an assist within the meaning of the TAA. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch