HQ 547523 - Internal Advice concerning the dutiability of buyer’s commissions - United States International Trade Commision Rulings

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HQ 547523

March 28, 2001

VA:RR:IT:VA 547523 RTR

CATEGORY: VALUATION

Ms. Kathleen M. Haage
Area Director, New York / New Jersey
U.S. Customs Service
1210 Corbin Street
Elizabeth, NJ 07201

RE: Internal Advice concerning the dutiability of buyer’s commissions

Dear Area Director:

This is in response to your memorandum of August 16, 1999, concerning a request for an Internal Advice submitted by DeConcini, McDonald, Yetwin & Lacy, on behalf of Harbor Footware Group, Inc. (Harbor). Harbor disputes your Notice of Action (CF 29), dated December 24, 1998, proposing a value advance based on the addition of commissions.

FACTS:

According to Harbor’s submissions, on December 2, 1985, it entered into a non-exclusive buyer’s agency agreement with Endicott Johnson Corporation (Endicott) whereby it would function as Endicott’s agent for the purchase of foreign-made footwear. On April 17, 1998, Endicott issued two purchase orders to Harbor for the procurement of 300 pairs and 600 pairs of shoes, respectively. On August 31, 1998, Wei Han Shoe Company, Ltd. (Wei Han), a Taiwan company, issued an invoice to Endicott for two orders of merchandise. On September 2, 1998, Harbor invoiced Endicott for its commissions on the two orders from Wei Han. The goods were unladed in Tacoma, Washington on August 28, 1998, and were entered through the Port of Newark on September 28, 1998. The value that Harbor indicated on the entry documents did not include the commission it had received from Endicott for having procured the goods from Wei Han. On November 9, 1998, you issued a Request for Information (CF 28), and on December 24, 1998, you issued a Notice of Action (CF 29) of Value Advance stating that the commissions were to be included in the value of the merchandise.

By letters of March 23 and April 1, 1999, Harbor set out its objections to the Notice of Action, and submitted documentary evidence in support of its position. By a letter of May 24, 1999, Harbor requested internal advice from Customs. On June 11, 1999, you issued a second CF 28 to Harbor, to which
it responded by a letter of July 27, 1999. By a memorandum dated August 16, 1999, you submitted to Headquarters your request for an Internal Advice.

ISSUE:

Whether fees paid to Harbor for transactions related to entries of certain shoes from Taiwan constitute buying agency commissions such that they are not included in the appraised value of the merchandise.

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. 1401(a)). The preferred method of appraisement under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus five enumerated statutory additions in section 402(b)(1), including selling commissions. The "price actually paid or payable" is defined in section 402(b)(4) as "the total payment (whether direct or indirect...) 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).

Buying commissions are fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued. It has been determined that bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 13 CIT 161, 164, 708 F. Supp. 351, 353 (1989); Rosenthal - Netter, Inc. v. United States, 679 F. Supp. 21, 23; 12 CIT 77,78 aff'd., 861 F.2d 261 (Fed. Cir. 1988); Jay - Arr Slimwear, Inc. v. United States, 681 F. Supp. 875, 878, 12 CIT 133,136 (1988). The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Rosenthal - Netter, supra, New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 957, 960, (1986); Pier 1 Imports, Inc., supra.

In deciding whether a bona fide agency relationship exists, all relevant factors must be examined and each case is governed by its own particular facts. J.C. Penney Purchasing Corp v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978). Although no single factor is determinative, the primary consideration is the right of the principal to control the agent's conduct with respect to the matters entrusted to him. See Jay - Arr Slimwear, Pier 1 Imports, Inc., J.C. Penney, and Rosenthal - Netter, supra. In addition, the courts have examined such factors as: whether the purported agent's actions are primarily for the benefit of the principal; whether the principal or the agent is responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices is consistent with a principal-agent relationship; and whether the agent is financially detached from the manufacturer of the merchandise. The degree of discretion granted the agent is a further consideration. See New Trends, supra. The existence of a bona fide buying commission is to be determined by the totality of the circumstances. See HRL 542141, September 29, 1990 (TAA No. 7). Whether a commission is a bona fide buying commission depends on the facts of each particular case.

The Buyer Agency Agreement

The agreement under consideration authorizes Harbor to represent itself as Endicott’s buying agent with respect to the purchase of foreign-made footwear, but expressly denies Harbor the authority to enter into any agreement without written instructions from Endicott directing Harbor to act on its behalf with respect to a specific transaction. It establishes Harbor’s commission at nine percent, but, ultimately, Harbor and Endicott lowered the amount of the commission to eight percent. The agreement also directs Harbor to invoice Endicott separately for commissions it earns, and obligates Harbor to perform a variety of functions on its behalf. Those functions are: apprise Endicott regarding styles, trends, prices, availability and quality of merchandise; procure samples; obtain price quotes; pursue claims against manufacturers or vendors; maintain contact with manufacturers with which Harbor has placed orders on Endicott’s behalf; and monitor the quantity, quality and condition of merchandise on order.

Additionally, under the agreement, Harbor covenants that it: will not act as a seller of the merchandise; will not warehouse the merchandise except on Endicott’s account; will not provide raw materials to manufacturers of goods it orders on Endicott’s behalf; has no interest in the business of any manufacturer or vendor with which it does business on Endicott’s behalf; will not receive any remuneration other than the commission paid by Endicott; and will not share its commissions with any of Endicott’s suppliers.

Positions of Harbor and Customs

Harbor’s position is that its buyer agency agreement and subsequent dealings with and on behalf of Endicott related to entries of certain shoes from Taiwan evidence its status as a bona fide buyer agent. Therefore, the commission it received for its role in procuring the goods for Endicott should not be included in the price actually paid or payable for the goods.

Your view is that Harbor has not satisfied the burden of proving a bona fide buying agency between itself and Endicott and, therefore, the commissions from Endicott to Harbor are dutiable. In support, you indicate that (1) Harbor has failed to provide a purchase order between Endicott and Wei Han Inc., and that the only purchase order in the record is that between Endicott and Harbor; (2) Endicott has made separate payments to Wei Han and to Harbor; (3) the eight percent commission from Endicott to Harbor is excessive for transactions of this type; and (4) Harbor is itself an importer of goods manufactured by Wei Han on unrelated transactions.

Whether Harbor Adhered to the Requirements of its Agreement with Endicott

As indicated above, the primary consideration in determining whether or not a bona fide agency relationship exists is whether or not the principal retains the right to control the agent's conduct with respect to the matters entrusted to him. Here, the buyer’s agency agreement at issue sets out in detail the rights and responsibilities of Endicott and Harbor for their collaboration. Most notably, it provides for comprehensive control of the purported agent (Harbor) by the principal (Endicott), and expressly denies Harbor the authority to enter into any agreement, or to obligate Endicott, without written instructions from Endicott. Additionally, the agreement proscribes Harbor from acting as a seller of the merchandise, warehousing merchandise except on Endicott’s account, providing raw materials to manufacturers of goods it orders on Endicott’s behalf, from having any interest in the business of any manufacturer or vendor with which it does business on Endicott’s behalf, from receiving any remuneration other than the commission paid by Endicott, and from sharing its commissions with any of Endicott’s suppliers.

While it appears that agreement created a buyer’s agency, Customs has held that it is necessary to ascertain whether or not the actions of the parties are within the parameters of the agreement. See HQ 545938 (June 5, 1996). Therefore, the question arises whether or not Harbor and Endicott have conducted themselves in a manner consistent with the buyer’s agency agreement. If they have not, the fees paid to Harbor will be included in the appraised value of the merchandise.

Per Customs Informed Compliance publication, Buying and Selling Commissions, June, 1996, a buying agent usually does not choose the manufacturer or the goods to be purchased. In this connection, we note that the record does not document that Endicott determined either the manufacturer or the specific goods that were purchased. Lack of documentation calls into question the degree of control that Endicott actually exerted over Harbor. However, Harbor has submitted a variety of documents that support its position including:

1. Buying agency agreement (December 2, 1985) 2. Endicott purchase order to Harbor for 300 pair shoes (April 17, 1998) 3. Endicott purchase order to Harbor for 600 pair shoes (April 17, 1998) 4. Harbor letter of credit purchase order (April 22, 1998) 5. Bank of America letter notifying Endicott that letter of credit has been prepared (May 6, 1998) 6. Commercial invoice from Wei Han to Endicott for 300 pair shoes (August 31, 1998) 7. Commercial invoice from Wei Han to Endicott for 600 pair shoes (August 31, 1998) 8. Invoice from Harbor to Endicott (September 2, 1998) 9. Forwarder’s cargo receipt indicating Endicott as consignee and notify party (September 3, 1998) 10. Bank of America Payment Advice notifying Endicott that payment to Wei Han has been consummated (September 23, 1998)

Items 2 and 3 above authorize Harbor to purchase a defined quantity of shoes, of specified description, from an identified vendor (“004143” on the purchase order). Item 4 above confirms the details of Endicott’s order. Item 5 advises Endicott that a letter of credit had been prepared for its payment to Wei Han. Items 6 and 7 establish a seller – buyer relationship between Wei Han and Endicott, respectively. Item 8 is Harbor’s demand for payment to Endicott for commissions based on the purchase transactions. Item 9 confirms Endicott’s control over freight forwarding of the merchandise. Item 10 advises Endicott that monies have been debited from its account and credited to Wei Han. Based upon this evidence, it appears that the transactions among Endicott, Harbor and Wei Han are consistent with the buyer’s agency agreement.

You have indicated the following four specific concerns about Harbor’s status as a bona fide buyer’s agent.

The record does not include a purchase order from Endicott to Wei Han. However, the lack of this item is not fatal to a finding that a buyer’s agency existed because the standard for determining the existence of a bona fide buying commission is the totality of the circumstances. See HQ 542141, September 29, 1990 (TAA No. 7). As indicated above, the documentary evidence supports a finding that the parties adhered to the buyer’s agency agreement.

Endicott has made separate payments to Wei Han and to Harbor. We find that these payments are consistent with the buyer’s agency agreement, and with the concept that agency fees should be paid separately from remittances for purchase of the goods.

The eight percent commission from Endicott to Harbor is excessive for transactions of this type. Our research into buyer’s purchase agreements indicates that an agent’s commission would depend on the level of service to be provided to the principal. Here, Harbor was obligated to apprise Endicott regarding styles, trends, prices, availability and quality of merchandise; procure samples; obtain price quotes; pursue claims against manufacturers or vendors; maintain contact with manufacturers; and monitor the quantity, quality and condition of merchandise on order. A commission of eight percent for substantial duties such as these does not appear excessive for buyer’s commissions in the shoe industry.

Harbor is an importer of goods manufactured by Wei Han on unrelated transactions. Customs has held that the fact that a purported agent is an importer of like goods for his own benefit is not a bar to a finding that a buyer’s agency existed when the purported agent has imported such goods in unrelated transactions. See HQ 544958 (June 8, 1992) and HQ 544945 (June 30, 1995). Here, although Harbor has imported shoes manufactured by Wei Han, those transactions are unrelated to the entry under consideration. Therefore, we find that the unrelated transactions are not fatal to Harbor’s claim of a bona fide buyer’s agency.

As indicated above, a decision on whether a commission is a bona fide buying commission depends on the facts of each particular case. We conclude that the totality of the evidence in the record supports Harbor’s claim that it was a bona fide buyer’s agent for the transactions under consideration. Therefore, the commissions paid to Harbor are not to be included in the transaction value of the imported merchandise.

HOLDING:

We conclude that the payments from Endicott to Harbor constitute bona fide buyer’s commissions. Therefore, these payments are not to be included in the transaction value of the imported merchandise.

Please advise the internal advice applicant of this decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia L. Brown, Chief
Value Branch

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