HQ 547645 - Dutiability of buying agent commissions - United States International Trade Commision Rulings

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HQ 547645

February 13, 2002

RR:IT:VA 547645 AML

CATEGORY: VALUATION

John M. Peterson, Esq.
Neville, Peterson, & Williams
80 Broad Street, 34th Floor
New York, NY 10004

RE: Dutiability of buying agent commissions

Dear Mr. Peterson:

This is in response to your request for a ruling, dated February 10, 2000, on behalf of your client, Target Corporation (“Target”). You request, pursuant to §177.1(a)(1) Customs Regulations (19 C.F.R. § 177.1(a)(1)), a determination as to whether certain payments to be made separately by Target and several of its subsidiaries to the Associated Merchandising Corporation (“AMC”) will constitute bona fide buying commissions. Target and the named subsidiaries will make the payments pursuant to separate “Buying Agency Agreements” executed by and between the separate entities and AMC. While the contractual relationship between the parties has been established, the transactions you describe are entirely prospective in nature. We regret the delay in reply.

FACTS:

Target Corporation owns and operates major department and retail store chains throughout the United States. The department store operations are comprised of Target and several subsidiaries, including Dayton Hudson and Mervyn’s. Target recently acquired a majority of the outstanding voting shares of AMC, making Target, its subsidiaries and AMC related parties within the meaning of that term in section 402(g) of the tariff Act of 1930, 19 U.S.C. § 1401a(g). On February 1, 1999, Target entered into a “Buying Agency Agreement” with AMC, a New York corporation that was formed to provide marketing and sourcing services as an agent for various retail, department, specialty and mass merchandising organizations. Also on February 1, 1999, The Department Stores Division of Dayton Hudson Corporation and Mervyn’s (described in the agreement as a “wholly owned subsidiary of Dayton Hudson Corporation”) each entered separate and virtually identical agreements with AMC. The respective agreements are attached as exhibits to the ruling request.

The Buying Agency Agreements provide that AMC “shall act as the non-exclusive buying agent of [Target] and its subsidiaries for the sourcing and purchase of merchandise” in twenty-four countries world wide, listed as “full service (merchandising and [quality control] locations),” twenty-three other cities described as “additional quality control centers,” and seven “commissionaires” in seven other cities that are provided in a list appended to the contract. The contract provides that AMC will identify, procure and arrange for shipment of merchandise from manufacturers and suppliers for Target and its subsidiaries. We assume, based on paragraph 2e of the agreement, that Target is going to be the importer of record of the merchandise.

The Buying Agency Agreements provide for two methods of compensation to be made by Target and its subsidiaries to AMC: one is termed a “first cost” buying program and the second is termed a “guaranteed landed cost purchasing program.” Although the “guaranteed landed cost purchasing” program is subject of a separate ruling letter, HQ 547643, we note that pursuant to paragraph 5b of the Agreement, “AMC shall act as principal for the purchase of merchandise for resale to [Target], pursuant to orders placed with AMC by [Target].” We note that there are no specific conditions or situations delineated as to when AMC will assume such a role and resell merchandise to Target.

Pursuant to the “first cost” buying program, AMC will receive compensation from Target in the form of a “global sourcing service charge” or commission. The commission will be a percentage of the selling price of the goods, F.O.B. port of export price or ex-factory price of the goods – depending on the terms AMC negotiates with the vendor. The commission shall be payable when the merchandise is shipped. The percentages vary and are determined by the cumulative dollar value of the goods shipped within specified periods, from 4.54% to 4% and 5.1% to 4%.

The Agreement contains the following provisions concerning the relationship of the parties after Target pays the commissions to AMC. Paragraph 4c states that such payments will be made “promptly and in full to or for the account of AMC and such payment will not be subject to any claim, setoff, counterclaim or defense that [Target] may otherwise have against AMC.” Such amounts are payable in United States currency on the rate of exchange set by AMC (paragraph 4d). Further, while AMC is bound by the Agreement upon written request of Target to use “all reasonable efforts to assist principal in the return of any merchandise deemed to be defective or in seeking compensation from the vendor(s),” Target must submit to AMC’s “Import Vendor Claims Handling Policy” (Paragraph 9a & b). Paragraph 10 provides that although AMC “shall use reasonable efforts to assist [Target]” in recovery of such claims, AMC will not be liable for any damages unless “occasioned by AMC’s gross negligence or willful misconduct.”

Paragraph 4a of the agreement describes services and provides for “product development charges.” At page 15 of your submission you describe a separate charge that will be paid on certain import shipments for merchandise ordered by Target. The merchandise will be “developed” by AMC. You state that the development services provided by AMC will be in the nature of conducting market research and promulgating standards for the production of imported goods, i.e., AMC will research in the United States styles that appeal to consumers in the United States. Footnote 9 on page 15 of your submission describes the services provided in order to invoke the payment of this charge as follows:

AMC’s marketing brochures describe the company’s “product development” services as being intended to help “Build[] private label programs into recognizable brands.” AMC “Product Managers” help principals to analyze current retail performance, identify future merchandise opportunities, research new developments in fabrics, silhouettes and countries of origin, and create a strategy which “outlines the program by category, style, fabric, vendor, price, delivery, ads, target sale events, retail and profitability goals.” AMC also analyzes fashion trends and develops a core of fashion trends and color palettes. After arranging for the production of samples, AMC may develop computerized “objective sheets” for each item to be developed, providing specifications such as targeted fabric, style, flat sketches, sizing, price, delivery dates and other items pertinent to the program, and forwards these to its overseas offices, which then determine the best offshore factories to produce the goods.

This ruling is limited to prospective import transactions involving these same parties which are conducted in the same manner as those described above.

ISSUES:

Whether certain payments made by Target and it subsidiaries to AMC constitute bona fide buying commissions such that they are not added to the price actually paid or payable under 19 U.S.C. §1401a(b)?

Whether the product development charge levied by AMC for conducting market research and promulgating design standards for imported goods constitutes an “assist”?

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with the provisions of Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. §1401a; TAA). The preferred basis of appraisement is transaction value, defined as "the price actually paid or payable for merchandise when sold for exportation to the United States." 19 U.S.C. §1401a(b)(1). Accordingly, we have assumed for the purposes of this ruling as it regards the “first cost buying” program that transaction value is the appropriate basis of appraisement.

The term "price actually paid or payable" is defined 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. §402(b)(4). 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); Rosenthal-Netter, Inc. v. U.S., 679 F. Supp. 21, 12 CIT 77 (1988); Jay-Arr Slimwear, Inc. v. U.S., 681 F. Supp. 875, 12 CIT 133 (1988).

The existence of a bona fide buying commission depends upon the relevant factors of each particular case. J.C. Penney Purchasing Corp. v. U.S., 451 F. Supp. 973 (Cust. Ct. 1978); Nelson Bead Co., 42 CCPA at 183. In this regard the importer has the burden of proving the existence of a bona fide agency relationship and that payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, 679 F.Supp.21, 23; New Trends, Inc. v. U.S., 645 F. Supp. 957, 10 CIT 637 (1986); B.W. Wholesale Co., Inc. v. U.S., 462 F. Supp. 1399, 1403, 58 CCPA 92, C.A.D. 1010, (1971). The alleged agent performs duties on behalf of its principal, the buyer. It may not act as an independent seller, nor as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969). A relevant factor in determining the relationship is the fact that none of the commission paid by the buyer inures to the benefit of the seller. As stated in Reliance International Corp. v. United States, 62 Cust. Ct. 845, at 849, 305 F.Supp. 20, at 24 (1969):

Commissions paid by the purchaser to agents for services rendered in procuring the merchandise, inspecting and packing goods, arranging for shipment and acting as a paymaster for account of the buyer, no part of which commissions inure to the benefit of the seller, are buying commissions.

In determining whether an agency relationship exists, the primary consideration is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. Jay-Arr Slimwear, 681 F. Supp. 875, 879. The degree of discretion granted the agent is a further consideration. New Trends Inc. v. U.S., 645 F. Supp. 957 (1986). The existence of a buying agency agreement, moreover, has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. U.S., 67 Cust. Ct. 503, 512, R.D. 11753 (1971). In addition, the courts have examined such factors as whether the purported agent's actions were primarily for the benefit of the principal; whether the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principal-agent relationship; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise. New Trends, 645 F. Supp. 957. It is the position of Customs that "having legal authority to act as buying agent and acting as buying agent [are] two different matters" and Customs is entitled to examine evidence that proves the latter. U.S. Customs Service General Notice, 11 Cus. Bull. & Dec. 15 (March 15, 1989).

Under the First Cost Program, AMC will receive a commission based on a percentage of the selling price, either FOB port of export or ex-factory price of the goods. The commission will be payable at the time the goods are shipped. The percentage varies depending on the total dollar value of the merchandise during a twelve-month period. In addition, in the event that the value of the merchandise purchased does not exceed a certain amount during a twelve month period, Target is required to pay AMC a minimum service charge, which is a flat fee regardless of the volume of merchandise shipped.

You state that the Target will control the actions of AMC. Although the Agreements state that AMC will act as a buying agent for Target, the Agreements contain no provisions detailing how the Target will exercise such control.

Furthermore, according to your letter, Target will pay a “Service Charge as outlined in Exhibit B.” According to Exhibit B, however, the Service Charge is the sum of three marginal percentage rates applied on an incremental basis to the total value of the merchandise.

AMC will act, apparently in its discretion, as principal in some transactions and resell merchandise to Target. Further, once Target pays the invoices upon shipment, Target must submit to AMC’s claims policy in order to recover losses for damaged or defective merchandise. By the terms of the Agreement, AMC must use reasonable efforts to assist in such recovery, but (again by the express terms of the Agreement), AMC is liable only for acts of gross negligence or willful misconduct. In sum, as we stated in HQ 547643 (which addresses a substantially similar agreement), the Buying Agency Program is not consistent with a bona fide principal-agent relationship and payments made pursuant to the Agreement will not be treated as buying commissions.

You also raise the issue as to whether certain “product development charges” constitute “assists” as contemplated by the TAA. AMC arranges for the production of samples and may develop computerized “objective sheets” for each item to be developed, providing specifications such as targeted fabric, style, flat sketches, sizing, price, delivery dates and other items pertinent to the program. AMC then forwards these to its overseas offices, which then determine the best offshore factories to produce the goods.

As stated above, Section 402(b)(1) of the TAA 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 enumerated statutory additions. Assists constitute one of these additions. See section 402(b)(1)(C) of the TAA.

The term "assist" is defined in section 402(h)(1)(A) of the TAA, in pertinent part, as follows:
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: (iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.

You suggest that no engineering, development, artwork or design work is dutiable if performed by an individual domiciled in the United States, is performed by an employee or agent of the buyer of the imported merchandise and is incidental to other engineering, development, artwork, design work and plans to sketches that are undertaken within the United States. Further, you contend that the product development services consist primarily of research that is performed prior to the product definition stage.

Only activities necessary for the production of imported merchandise will be considered assists. See HRL 544621, dated April 22, 1991 (artist’s renditions of various tone and color combinations necessary for the production of imported merchandise and therefore an assist). According to the Agreements and your description of AMC’s marketing brochure, AMC’s product development services include designing, developing fashion trends and color palettes, arranging for the production of samples, providing specifications regarding fabric, style, flat sketches and sizing, and determining the best manufacturer for production. Given the extensive nature of AMC’s product development services, we determine that these services are necessary for the production of the subject merchandise. However, such services are only dutiable if performed outside the United States. Based on your representation that AMC’s product development services are performed in the United States, we determine that such services do not constitute an assist under section 402(h)(1)(A)(iv) of the TAA. So long as AMC’s activities are performed in the United States, services provided under the Product Development Program will not be considered to be assists, and payments for those services will therefore not be included in transaction value. HOLDING:

Based on the information submitted concerning the “first cost” buying program, we conclude that AMC is not a bona fide buying agent with regard to those transactions. Therefore, the commissions paid by Target to AMC for its services do not constitute bona fide buying commissions.

Further, we find that the services provided under the product development program do not constitute assists under the TAA.

As provided above, these findings remain subject to any determinations that may be made by the appraising port officer based on documentation provided at the time of entry.

Sincerely,

Virginia L. Brown

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