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HQ 547936

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August 3, 2001

RR:IT:VA 547936 DCC

CATEGORY: VALUATION

Rick Mueller
A.H. Carter & Associates
801 SW 16th Street, Suite 107
Renton, Washington 98055

RE: Ruling Request; Foreign Trade Zone; Transaction Value; Deterioration

Dear Mr. Mueller:

This is in response to your letter dated January 31, 2001, in which you request an advance ruling regarding an allowance in value for the deterioration of merchandise stored in a Foreign Trade Zone (“FTZ”). According to your letter, the importer was unable to sell merchandise after it was imported. The goods consequently remained in storage for several years during which time they became outdated and depreciated in value. You claim that the depreciation in the value of the merchandise is the result of deterioration in the merchandise for which Customs should grant an allowance in the dutiable value.

FACTS:

The subject merchandise consists of shirts from Hong Kong imported between June and November 1997, by Logo Direct (“Logo”) of Koloa, Hawaii. Because Logo did not have buyers at the time the merchandise was imported, Logo’s customs broker, A.H. Carter, admitted the merchandise into a U.S. FTZ as nonprivileged foreign merchandise for storage until the merchandise could be sold.

After it imported the merchandise, Logo went out of business. According to your submission, one of Logo’s remaining partners has been unable to find a buyer for the merchandise. Although some of the merchandise was removed from the FTZ and sold, 4,941 shirts remain. The importer last removed some of the merchandise from the FTZ in February 2000, and entered it at the commercial value. The commercial value of the remaining merchandise as admitted to the FTZ is $50,986 according to the invoice. According to the invoices, the commercial value of individual shirts ranges from $6.60 to $12.05.

As of the date of your ruling request, Logo owed A.H. Carter $5,721.16. A.H. Carter owes some portion of this amount to the FTZ for storage fees. Because the merchandise is no longer popular, however, Logo is unable to find a buyer willing to pay the full commercial price.

You propose to purchase the unsold shirts from Logo for $5,721.16—the amount of Logo’s outstanding debt to A.H. Carter—approximately $1.15 per shirt. A.H. Carter would then become the importer of record for the remaining shirts and sell the merchandise to a third party to satisfy Logo’s debt.

ISSUES:

Whether, pursuant to 19 C.F.R. § 146.65(b)(3), imported merchandise that depreciates while stored in an FTZ qualifies for an allowance for deterioration; and

Whether, pursuant to 19. C.F.R. § 111.31, a conflict of interest precludes A.H. Carter from acting as an importer or record for the imported merchandise.

LAW & ANALYSIS:

Allowance for Deterioration

It is a basic concept of Customs law that articles that are imported into the United States are classified and appraised on the basis of their condition at the time of importation into the United States, not on the basis of what their condition may become after being imported into the United States. See, e.g., United States v. Citroen, 223 U.S. 407 (1911), Simod America Corp. v. United States, 872 F. 2d 1572 (Fed. Cir. 1989). An exception to this general rule is the Foreign Trade Zone Act of 1934, as amended (19 U.S.C. 81a et seq.) Under section 3(a) of the FTZ Act (19 U.S.C. 81c(a)), merchandise may be brought into a FTZ and its classification and dutiability may be delayed until it, or merchandise resulting from its manufacture or manipulation, is brought into the Customs territory of the United States. Such merchandise is called non-privileged foreign (“NPF”) status merchandise.

You state in your ruling request that the shirts are admitted into the zone in non-privileged foreign status. The regulations concerning the classification, valuation, and liquidation of merchandise transferred from a FTZ into the Customs territory are contained in 19 C.F.R. § 146.65. This section provides that non-privileged foreign status merchandise is subject to tariff classification in accordance with its character, condition and quantity as constructively transferred to the Customs territory at the time the entry or entry summary is filed. Furthermore, the dutiable value of non-privileged foreign status merchandise is the price actually paid or payable for the merchandise in the transaction that caused the merchandise to be admitted into the FTZ, plus certain additions and less certain subtractions, and if there is no such price the dutiable value is based on an alternative determination provided for in section 146.65 (see recent amendments to 19 C.F.R. § 146.65(b)(2), effected by Treasury Decision 91-79).

You claim that the merchandise has deteriorated because it has depreciated in value as a result of age and changing fashions. Under the FTZ regulations, codified at 19 C.F.R. § 146.65(b)(3), Customs may adjust the dutiable value of the merchandise to allow for deterioration of merchandise while in an FTZ. According to section 146.65(b)(3), “[a]n allowance in the dutiable value of zone merchandise may be made by the port director in accordance with the provisions of subparts B and C of part 158 of this chapter, for damage, deterioration, or casualty while the merchandise is in the zone.” Adjustments to dutiable value under the FTZ regulations are therefore governed by subparts B and C of 19 C.F.R. § 158.

Pursuant to subpart B, Customs may make an allowance to the entered value for: 1) merchandise that is damaged or deteriorated at the time of importation; 2) moisture and other impurities; and 3) fruit or other perishable merchandise that has been condemned within 10 days after landing. Because the time of importation is “the date on which the vessel arrives within the limits of a port in the United States” (19 C.F.R. § 101.1), the first allowance does not apply to merchandise that deteriorates after admission to an FTZ. Because the claimed deterioration of the shirts occurred after the date of importation, and because this case does not involve moisture, impurities, or perishable merchandise, the provisions of subpart B are inapplicable to the present case.

Under section 563(a) of the Tariff Act of 1930, as amended (19 U.S.C. § 1563(a) (codified at 19 C.F.R. part 158, subpart C, section 158.21), Customs may also make an allowance in duties upon satisfactory proof of the casualty, loss, or theft of any merchandise while in the custody of Customs. In the present case, the imported shirts depreciated in value as a result of becoming outdated. There is no indication that the subject merchandise suffered a casualty, loss or theft. Consequently, no allowance to the entered value is available under subpart C.

For the reasons above, we determine that the imported shirts do not qualify for an allowance under 19 C.F.R. § 146.65(b)(3). Therefore, the shirts are subject to duty based on the transaction that caused the merchandise to be admitted to the FTZ.

Conflict of Interest

Under 19 C.F.R. § 111.31(c), a broker who is an importer may not act as broker and an importer of the same type of merchandise unless the broker’s client is fully aware of the facts. Section 111.31(c) states:

Importations by broker or employee. A broker who is an importer himself shall not act as broker for an importer who imports merchandise of the same general character as that imported by the broker unless the client has full knowledge of the facts. The same restriction shall apply if a broker's employee is an importer.

According to your letter, you propose to purchase the unsold shirts in the FTZ from Logo and enter the merchandise as the importer of record. Clearly, under this scenario, Logo would have full knowledge that A.H. Carter is acting as the broker and importer of the subject merchandise. Consequently, we determine that there is no conflict of interest with regard to the proposed transaction with Logo. Of course, this determination would not apply to A.H. Carter’s other clients who import merchandise of the same general character unless they too had full knowledge of the facts.

HOLDING

Based on the information provided, we determine that the imported shirts do not qualify for an allowance for deterioration under 19 C.F.R. 146.65(b)(3). The merchandise, therefore, is subject to appraisement based on the transaction that caused the merchandise to be admitted to the FTZ. Furthermore, under 19 C.F.R. 111.31(c), we determine that there is no conflict of interest with regard to the proposed purchase of merchandise from Logo.

Sincerely,

Virginia L. Brown
Chief, Value Branch

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