Discounts; Price Actually Paid or Payable

HQ H302110 February 19, 2019 OT:RR:CTF:VS H302110 RMC CATEGORY: Valuation Maytee Pereira Managing Director Customs and International Trade Practice PricewaterhouseCoopers LLC 300 Madison Avenue New York, NY 10017 RE: Discounts; Price Actually Paid or Payable Dear Ms. Pereira: This is in response to your letter, dated November 29, 2018, on behalf of [ ] (“Company A”). In your letter, you request a binding ruling pursuant to 19 C.F.R. Part 177 on whether certain discounts should be taken into account when determining the price actually paid or payable for merchandise imported by Company A. 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: Company A, a U.S. entity, is involved in the retail sale of automotive replacement parts and accessories in the United States. You state that many of Company A’s products are purchased from unrelated suppliers overseas and imported into the United States for resale. This ruling request concerns a supply chain structure in which Company A will offer certain price allowances or discounts to foreign suppliers. You state that each vendor will be able to agree to one or more of the following discounts, which will generally take the form of a fixed percentage reduction: Defective Allowance – negotiated to fund future end-customer warranty claims on the products purchased from the particular vendor. Obsolescence Allowance – agreed by new vendors to support Company A’s shift away from a previous vendor of a like product and Company A’s disposition of obsolete or excess inventory. Advertising and Promotional Allowance – negotiated for vendors to support Company A’s advertising, promotional pricing, retail display costs, etc. of their products. VendorNet Fee Allowance – negotiated to allow vendors to access Company A’s computer system containing data such as sales, inventory, billing, and accounts payable. You state that any allowance agreed on between Company A and a vendor will be unconditional and recorded in an allowance agreement, which will be finalized before importation. You also state that all agreed allowances will be itemized on the commercial invoices to be presented at the time of entry and deducted from the total cost to derive a net final cost. Accordingly, the total amount that Company A will pay each vendor will be the vendor’s price minus the specific discount. For illustrative purposes, you submitted sample documentation for four previous import transactions between Company A and a vendor. The documentation includes a vendor agreement, entry summaries (U.S. Customs and Border Protection (“CBP”) Form 7501), commercial invoices, and payment confirmations. The vendor agreement contains the terms by which the vendor supplies Company A with its product. Under “Advertising/Promotions/Allowances,” the vendor agreement notes two allowances: Defective merchandise and VendorNet fees. The defective merchandise allowance of [ ]% is to be deducted from the invoice and paid on each invoice. The VendorNet fees of [ ]%, by contrast, are to be paid by “credit memo” quarterly. Because the VendorNet were not deducted from the invoice, Company A states that it did not seek to account for them in customs value. However, in the four sets of sample documentation provided, the deduction of [ ]% for defective merchandise is reflected in the entry summaries, commercial invoices, and payment confirmations. The dollar amount of the discount is noted in the “description of the merchandise” field on the entry form, and the total entered value reflects this deduction. This figure also matches the information listed on the commercial invoice issued by the seller, which notes the amount of the defective merchandise discount as well as descriptions of the merchandise, quantities, and unit prices. Finally, the amount listed on Company A’s payment confirmation matches the discounted amount listed on the entry form and invoice. ISSUE: Whether certain discounts, as reflected on the invoices between Company A and its foreign suppliers, should be taken into account in determining the price actually paid or payable for the merchandise. 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. 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). CBP Regulations provide that in determining transaction value, the price actually paid or payable “will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula . . .” 19 C.F.R. § 152.103(a)(1). The CBP Regulations further cite the following example: A seller offers merchandise at $100, less a two percent discount for cash. A buyer remits $98 cash, taking advantage of the cash discount. The transaction value is $98, the price actually paid or payable. 19 C.F.R. § 152.103(a)(1), Example 5. Furthermore, the word “payable” refers to a situation in which the price has been agreed, but actual payment has not been made at the time of importation. CBP has consistently enumerated three criteria in determining whether a discount or price adjustment should be considered part of the transaction value of imported merchandise. See Headquarters Ruling Letter (“HQ”) H133044, dated March 9, 2011. First, the discount or price adjustment must be agreed on prior to the importation of the merchandise. See Allied International v. United States, 795 F. Supp. 449 (CIT 1992) (importer required to affirmatively show that there was a pre-importation agreement for the claimed discount). See also HQ H048152, dated April 30, 2009 (discount should be included in determining the price actually paid or payable for the imported merchandise since it was agreed to before the merchandise was imported into the United States); and HQ W563462, dated October 11, 2006 (discounted prices, which were agreed to prior to importation and applied unconditionally, constitute the price actually paid or payable for the imported merchandise). The second criterion is that the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. See HQ 547144, dated November 20, 1998 (appraised value may reflect discount when supplier’s invoice indicated total price, 5% reduction and the discounted price). The third criterion requires that the discount or price adjustment be unconditional, or if conditional all the conditions must be met prior to importation. This criterion was discussed in HQ 545659, dated October 25, 1995, in which CBP determined that a discount is unconditional when there were no specified purchasing obligations placed on the customer. In that case, CBP held that unconditional discounts, which were reflected on the invoices and entry documentation presented to CBP, could be factored into the declared value of the merchandise. CBP also concluded that, if a conditional discount is agreed to before entry at the time of order placement, the specified purchasing obligation was fulfilled at the time of entry, and the discount is reflected both on the entry documentation presented to CBP and the invoices presented to CBP, the conditional discount may be used to determine transaction value. Here, the sample documentation demonstrates a clear pre-importation agreement for the seller to discount the price of the merchandise. The Vendor Agreement, which is signed by representatives from Company A and the foreign seller, specifies the types of discounts that will apply, the amount of the discounts, how the discounts will be paid, and when the discounts will be paid. The sample documentation from previous importations also supports the existence of the discount and establishes that it will be agreed to before the time of entry. The dollar amount of the discount is noted in the “description of the merchandise” field on the entry form, and the total entered value reflects this deduction. This figure also matches the information listed on the commercial invoice issued by the seller, which notes the amount of the defective merchandise discount as well as descriptions of the merchandise, quantities, and unit prices. The copies of the wire transfer statements further show that the payment that Company A made to the foreign vendors included the discounts. Lastly, the Vendor Agreement containing the terms of the discounts pre-dates the entry of the merchandise, which demonstrates that the discounts were agreed to before the time of entry. Taken together, these documents are sufficient to support the existence of the discounts. As for the third and final factor, you state in your submission that the discounts are unconditional. Based on the documentation provided, there is no evidence of any purchasing obligations or other requirements that Company A must fulfill in order to receive the discounts. Therefore, we also find that the discounts are unconditional. Based on the information submitted, we find that the specified discounts may be taken into account in determining the price actually paid or payable for the imported merchandise. HOLDING: The specified discounts, which Company A and the foreign seller will agree to before the merchandise is imported, may be taken into account in determining the price actually paid or payable for the imported merchandise. 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 CBP 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 the goods are entered. If the documents have been filed without a copy of this ruling, it should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch