Cost of acquisition of jewelry assists; 19 C.F.R. § 152.103(d)(1)

HQ H307697 February 25, 2020 OT:RR:CTF:VS H307697 AP CATEGORY: Valuation Cecelia Rothrock, LCB, CCS Crane Worldwide Logistics LLC 1500 Rankin Road Houston, TX 77073 RE: Cost of acquisition of jewelry assists; 19 C.F.R. § 152.103(d)(1) Dear Ms. Rothrock: This is in response to your December 12, 2019 request for a ruling on behalf of Western Stone and Metal Corporation d.b.a. Shane Company (“Shane Co.”). Specifically, you ask whether the cost of acquisition of assists consisting of jewelry components acquired from unrelated sellers, which were placed into Shane Co.’s inventory and commingled with existing components of the same articles, may be determined based on a Moving Average Inventory valuation methodology. FACTS: Shane Co. is a family-owned jewelry retailer based in Colorado operating retail stores in multiple states. The company procures finished jewelry from unrelated domestic and foreign suppliers. Sometimes Shane Co. provides its own jewelry components to suppliers as assists. Shane Co. sources its jewelry components from domestic and foreign suppliers. Upon receipt of the components, Shane Co. determines which ones to purchase and place into its inventory. The components that meet Shane Co.’s standards are entered into inventory and commingled for inventory purposes with existing components of articles of the same class or kind. The components are then exported from Shane Co.’s inventory to the suppliers who incorporate them into the finished articles of jewelry. The components are shipped to the suppliers free of charge and the cost is not included in the supplier invoice for payment. Shane Co. instructs the foreign suppliers to itemize the commercial invoices with the furnished component value to declare and report proper assists. Shane Co. proposes to determine the cost of acquisition of its jewelry assists under 19 C.F.R. § 152.103(d)(1) on the basis of a Moving Average Inventory valuation methodology, which you claim conforms to Generally Accepted Accounting Principles (“GAAP”). Under the Moving Average Inventory method, Shane Co. calculates the moving average each time new components of the same class or kind are added to the inventory based on the invoice price paid for the components. When components are designated as assists to a foreign supplier, Shane Co. values these components based on the moving average assigned to the article number associated with the component. Under the Moving Average Inventory Method, the average cost of each inventory item is recalculated after every inventory purchase. The calculation is the total cost of the articles purchased divided by the number of articles in stock. ISSUE: Whether the cost of acquisition of Shane Co.’s jewelry assists may be determined based on the Moving Average Inventory valuation methodology proposed by Shane Co. 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 primary method of appraisement is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States” plus the value of certain statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). Section 402(h) of the Tariff Act of 1930, as amended by the TAA, codified at 19 U.S.C. § 1401a(h), provides, in relevant part: (1)(A) The term “assist” means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: Materials, components, parts, and similar items incorporated in the imported merchandise. The jewelry components provided by Shane Co. to its suppliers are assists and their value should be included in the price actually paid or payable. Title 19 C.F.R. § 152.103(d)(1) states: If the value of an assist is to be added to the price actually paid or payable, or to be used as a component of computed value, the Center director shall determine the value of the assist and apportion that value to the price of the imported merchandise in the following manner: If the assist consist of materials, components, parts, or similar items incorporated in the imported merchandise, or items consumed in the production of the imported merchandise, acquired by the buyer from an unrelated seller, the value of the assist is the cost of its acquisition. If the assist were produced by the buyer or a person related to the buyer, its value would be the cost of its production. In either case, the value of the assist would include transportation costs to the place of production. Thus, the value of Shane Co.’s assists, consisting of jewelry components used in the production of finished articles of jewelry acquired from unrelated sellers, is the cost of acquisition. Shane Co. proposes to calculate the cost of acquisition based on the Moving Average Inventory valuation methodology because the jewelry components are placed into Shane Co.’s inventory and commingled with existing components of articles of the same class or kind. U.S. Customs and Border Protection (“CBP”) has allowed importers to use a moving average methodology for inventory tracking purposes in the past. In Headquarters Ruling Letter (“HQ”) H170395, dated June 15, 2011, CBP explained that under the Moving Average Inventory method, the varying costs of the components were averaged together meaning “for identical products produced … at different times that are eventually commingled, costs of the inventory in the warehouse will be determined by averaging the costs to make the products.” In HQ W548164, dated Sept. 20, 2002, the importer was unable to determine the actual research and development costs pertaining to any single imported research active pharmaceutical ingredient (“API”). The importer could “establish the actual costs that pertain[ed] to all of its API’s produced worldwide in a given fiscal year.” As these research APIs were not imported as the result of a sale or resold in the U.S., CBP accepted the importer’s proposal to use a weighted average inventory valuation. As in the rulings above, Shane Co. provides its assists to jewelry suppliers “sporadically” and is unable to determine the actual cost of each jewelry component because it is commingled with other components of the same class or kind in Shane Co.’s inventory. The Moving Average Inventory method allows Shane Co. to determine the average cost of each inventory item after every inventory purchase by dividing the total cost of the articles purchased by the number of articles in stock. Accordingly, we find that Shane Co.’s proposed method of valuing its jewelry assists is reasonable and consistent with the requirements of 19 C.F.R. § 152.103(d)(1), provided that it meets GAAP. HOLDING: We find that the Moving Average Inventory method proposed by Shane Co. in this case is an acceptable valuation methodology to determine the cost of acquisition of Shane Co.’s jewelry assists under 19 C.F.R. § 152.103(d)(1), provided that it meets GAAP. 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, Monika R. Brenner, Chief Valuation and Special Programs Branch