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HQ 548002

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June 13, 2002

RR:IT:VA 548002 MMC

CATEGORY: VALUATION

Mr. John Imbrogulio
Import Specialist
Nordstrom Inc.,
1617 Sixth Avenue, Suite 1000
Seattle, WA 98101

RE: Buying commissions

Dear Mr. Imbrogulio:

This is in response to your July 23, 2001 letter, requesting a ruling concerning the dutiability of certain commissions paid by Nordstrom to KWS Shoes, for products imported into the United States. You have attached a copy of the proposed buying agency agreement to your letter for our review. We regret our delay in responding.

FACTS:

Nordstrom imports many articles including shoes. The shoes are produced by a variety of manufacturers. Nordstrom proposes to enter into what it identifies as a buying agency agreement with KWS shoes. According to the submission, KWS will have a variety of tasks to perform on behalf of Nordstrom. Those tasks include reporting on market conditions and new products; quoting prices on an ex-factory or FOB port of export, placing orders, inspecting the quality of the merchandise shipped, instructing the manufacturer in the preparation of the commercial invoices, assisting in the return of defective merchandise. Additionally, KWS will assist Nordstrom in preparing its shoe line.

The proposed buying agency agreement includes the following relevant information:

1. Appointment. Nordstrom appoints Representative as a non-exclusive purchasing representative (buying agent) to purchase the productsin the geographic area describedand Representative accepts the appointment. Representative recognized that Nordstrom has appointed or may appoint other buying agents for the Products or
other products in the territory and may also make direct purchases from and undertake direct contracts with manufacturers or suppliers of the Products in the Territory, in which event the business so conducted shall not generate any commission or other compensation to Representative.

2. Representative's (agent) Duties Representative shall:

Visit manufacturers and suppliers in the Territory, collect samples, submit samples to Nordstrom and report on market conditions and new products from time to time or when requested by Nordstrom;

Quote prices to Nordstrom ex-factory or FOB port of export, in the currency of the United States Dollars, which prices shall always include inland freight, packing, hauling, and other expenses, each of which shall be separately stated and identified in the quotation and on any invoice that may follow;

Use best efforts to (i) protect the interests of Nordstrom; and (ii) arrange for the purchase of Products within the policies and guidelines of Nordstrom;

Abide by all laws, rules and regulations governing Representative or the activities to be performed hereunder and use best efforts to ensure that all Products (including packaging and labeling) purchased hereunder conform to all applicable laws and any regulations of the country of origin of the Products and of the United States;

Be solely responsible for the physical exporting of the Products to the United States and for obtaining all necessary documents pertaining to each shipment in accordance with applicable laws and regulations;

Ensure that each visa/export license,is true and correct;

Upon instruction from Nordstrom (i) place orders with manufacturer or suppliers (ii) act as Nordstrom's representative in the settlement of any actual or threatened claims, and (iii) enforce Nordstrom's rights against manufacturers, suppliers or other third parties responsible for any losses incurred by Nordstrom;

Inspect Products for conformity to Nordstrom's order or sample or both, as the case may be, to ensure that all Products conform to the quality set forth in Nordstrom's Product Specification Documents,Representative shall (i) monitor all stages of the manufacturing process to ensure compliance(ii) inspect the finished Products in accordance with ANSI/ASQCZ ,(III) INSPECT THE FINISHED Products and all labeling for compliance with country of origin

Upon instruction from Nordstrom, ensure that sample Products and Product raw material are made available to Nordstrom in adequate quantities for testing
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Not appoint any sub representativewithout Nordstrom's express prior written approval;

Devote such time as may be necessary for performance of Representative's duties and responsibilities; and

Create footwear prototypes and sample lasts based on designs or ideas provided by Nordstrom all designs and lasts are to remain the sole property of Nordstrom and may not be copied or transferred to any other entity.

Compensation

Nordstrom will pay Representative ____% on ex-factory or FOB costs up to $______; ____% on ex-factory or FOB costs in excess of said amount. The commission to be paid by Nordstrom represents the entire compensation to be received by Representative and Representative will not accept any other remuneration for services to be rendered hereunder, nor will Representative share the commission in any manner with any other party (including the manufacturer or supplier) without Nordstrom's prior written consent;

The commission will by payable to Representative upon clearance of U.S. Customs of a shipment, but shall be considered only conditionally earned until (i) the shipment or Products for which a commission is claimed have been satisfactorily delivered to Nordstrom and (ii) Representative ahs satisfactorily performed;

No commission shall be payable to Representative with respect to any shipment or Products which are denied entry by the U.S. Customs Service for any reason including improper or inaccurate documentation

Non-Dutiability of Representative's Commission Representative represents and warrants that Representative is familiar with the criteria considered by the U.S. Customs Service in determining whether commission compensation is subject to U.S. Customs duties. Representative agrees that Representative will not function in any manner which would result in Representative being characterized as a selling agent or as an independent contractor to that end;

Representative will not sell merchandise for Representative's own account to Nordstrom or to any manufacturers or suppliers from whom Representative will purchase Products for Nordstrom;

Neither Representative nor any of Representative's owners or employees shall have any financial or ownership interest in or control of, any manufacturer or supplier form whom Representative will purchase Products for Nordstrom without first disclosing the nature of said interest to Nordstrom and obtaining Nordstrom's written approval;

No manufacturer or supplier providing products to be used in the manufacture of Products purchased for Nordstrom will have any controlling ownership interest in Representative;

In the event that the U.S. Customs Service or any of its representative or agents makes a determination that the commissions paid to Representative are dutiable, and as a result, Nordstrom is required to pay additional duties and/or penalties on entries previously filed, then Representative shall reimburse Nordstrom in full for all such duties and penalties.

Payment for Products

Nordstrom is desirous of paying all manufacturers or suppliers of Products directly by checkin favor of the manufacturer or supplier. Payment of Representative's commission as provided in Section 4 above will be accompanied by a remittance advice sufficiently detailing the relevant manufacturer or supplier payment to which the commission applies.

If deemed appropriate, Nordstrom may in its sole discretion elect to channel funds through Representative to facilitate payment of manufacturers or suppliers of Products. In such an event, the funds for payment of manufacturer or supplier invoices will be paid to Representative, accompanied by detailed information regarding the applicable invoices and Nordstrom purchase order numbers to which the funds are to be applied. If such funds are provided by means of letter of credit, the purchase order numbers for which the funds are to be applied will be either included in the letter of credit or provided separately to Representative by Nordstrom. Representative acknowledges and agrees that (i) all funds received by Representative for payment of manufacturers or suppliers of Products shall be deemed held by Representative in trust, (ii) funds so held will not be used for any purpose except remittance to the manufacturers or suppliers of Products and will not be commingled in any way with other funds or accounts of Representatives, and (iii) such arrangements shall be revocable upon notice from Nordstrom to Representative.

Title to Products. Title to Products shall transfer directly from the manufacturer or supplier to and vest in Nordstrom in accordance with the terms of Nordstrom's Purchase Order form. Representative acknowledges Nordstrom's title to Products and hereby waives any claim of title or any other interest in Products so purchased.

Concerning the shoe design, Nordstrom will send KWS footwear designs, or samples of other shoes for use as inspiration to KWS. KWS then create samples in response to Nordstrom's requests. Usually KWS will create a "sample last" and sample pairs depending on Nordstrom's request. KWS will charge Nordstrom for the labor and materials used to create the sample. Additionally, KWS will charge Nordstrom for the sample last which then becomes the property of Nordstrom. The sample last would then be sent to a manufacturer designated by Nordstrom where it could be used to create a production quality last. Production may not be in a country where KWS is the agent. The charges for the sample and last will be included on the sample invoice from KWS when the samples are sent to Nordstrom. They are not billed with the final production order of the shoes.

ISSUE:

Are the commissions paid by Nordstrom to KSW shoes bona fide buying commissions, and thus, not added to the price actually paid or payable for imported merchandise?

LAW AND ANALYSIS:

The preferred method of appraisement for customs purposes is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. That section provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States, plus five enumerated statutory additions. For the purpose of this prospective ruling request, we assume that transaction value is the applicable basis of appraisement.

The five enumerated statutory additions to the price actually paid or payable include: 1) the packing costs incurred by the buyer with respect to the imported merchandise; 2) any selling commission incurred by the buyer with respect to the imported merchandise; 3) the value, apportioned as appropriate, of any assist; 4) any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and 5) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

The question in this case is, whether the commissions payable to KWS are included as additions to the price actually paid or payable. You believe that the commissions payable to KWS on the terms identified above are bona fide buying commissions, and thus, do not fall within any of the statutory provisions for additions to the price actually paid or payable. While selling commissions are included in the price actually paid or payable, as a general matter, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. U.S., 708 F. Supp. 351, 13 CIT 161, 164 (1989) citations omitted.

The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penny Purchasing Corp. v. U.S., 451 F.Supp. 973 (Cust. Ct. 1978) (hereinafter J.C. Penny). As such the importer bears the burden of proving the existence of an agency relationship and that the payments to the agent are bona fide buying commissions. Rosenthal-Netter, Inc. v. U.S., 679 F.Supp. 21, 12 CIT 77 (1988).

The primary consideration in determining whether an agency relationship exists is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. J.C. Penny, supra. As evidence of a buying agency the courts have considered such factors as: the existence of an agency agreement, whether the stated agent's actions were primarily for the benefit of the principal; whether the principal or agent is responsible for the shipping and handling costs; whether the importer could have purchased directly from the manufacturers without the agent; whether the agent operates an independent business primarily for its own benefit; and whether the agent is financially detached from the manufacturer of the merchandise. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971); see also Rosenthal-Netter, supra and New Trends, Inc. v. U.S., 645 F. Supp. 957, 10 CIT 637 (1986).

In the instant case, a proposed written buying agency agreement was provided. It indicates that in its role, KWS will locate suppliers, transmit Nordstrom's desires to the manufacturer or supplier, assist in factory negotiations, and monitor the manufacturing process for quality. The buying agency agreement indicates that Nordstrom has total control over the buying process and may use the services of other agents and that commissions payable to KWS are non-dutiable. The contract indicates that KWS will not be related to any of the suppliers. The payment structure as outlined in Section 4 indicates that KWS will be paid a commission and that commission will not be paid until the goods have cleared United States Customs. Also Section 5 indicates that KWS is to do nothing that would cause the Unites States Customs Service to determine that the payment and/or relationship is other than a buying agency. In the event that such a decision should be made, the agreement hold KWS responsible for all additional duties and penalties. Section 7 indicates that Nordstrom will pay the manufacturer or supplier directly and if it chooses to do otherwise, the funds channeled through the agent must be held in trust and may only be used to pay the identified invoice. Finally, Section 8 indicates that title passes directly from the manufacturer to Nordstrom and that KWS has no claim of title or interest in the goods.

Assuming at the time of entry that Nordstrom is able to substantiate, through a signed and executed buying agency agreement and the necessary accompanying documents (invoices, proof of payment etc.) that it has complete control over the buying process and that it and KWS operate independently from one another and the manufacturers, we find that a bona fide buying agency exists between Nordstrom and KWS. Accordingly, the payments for that purpose need not be included in the transaction value for the imported merchandise.

We note that you indicate that the "line-building" activities described in Article 2 Section (n) of the buying agency agreement are similar to those ruled upon in HRL 545938 dated June 5, 1996. As such you do not believe that they should preclude a finding that the relationship between Nordstrom and KWS is a buying agency. In HRL 545938, the principal's control over the purchasing process was questioned due to its limited involvement in the modification of the agent's designs or styles. The principal often could not obtain the merchandise without the agent's design, style or pattern. Furthermore, the agent (or their foreign subagent) often selected the factory.

Customs held that the agent's ownership and control over the design process, resulting in the principal's diminished involvement in the formation or modification of designs or styles, may indicate that the principal lacked the requisite control over the purchasing process and the agent, in general. However, Customs recognized that when only incidental "design" work (i.e., line-building or market intelligence) is conducted by an agent, such work is part of a collaborative process between the parties. In such a situation where the principal serves as the final authority concerning such matters, the principal may be found to have been exercising an adequate level of control over its agent. We believe that this agreement demonstrates that Nordstrom exercises an adequate level of control over KWS. This is evidenced in Article 2 Section (n) which indicates Nordstrom has control over the design process and owns the subsequent designs and "lasts". Therefore, this activity is not fatal to finding a principle/agent relationship. We note however, that if items that fall within the definition of an "assist" are provided to the manufacturer by Nordstrom, or KWS on behalf of Nordstrom, those items must be declared as part of the transaction value of the shoes.

HOLDING:

Assuming at the time of entry that Nordstrom is able to substantiate, through a signed and executed buying agency agreement and the necessary accompanying documents (invoices, proof of payment etc.), the commissions paid by Nordstrom to KWS shoes will constitute bona fide buying commissions. As such, they are not statutory additions to the price actually paid or payable for the imported merchandise. Accordingly, the payments for that purpose need not be included in the transaction value for the imported merchandise.

Sincerely,

Virginia L. Brown

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