United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 2006 HQ Rulings > HQ 563355 - HQ 965547 > HQ 563522

Previous Ruling Next Ruling
HQ 563522

---

September 11, 2006

RR:CTF:VS 563522 HEF

CATEGORY: VALUATION

Mr. Leonard Violi
Law Offices of Leonard Violi, LLC
910 East Boston Post Road
Mamaroneck, New York 10543

RE: Reimbursement for escrow payments relating to the Tobacco Master Settlement Agreement

Dear Mr. Violi:

This is in response to your letter dated May 30, 2006, in which you request a ruling on whether the conclusions of Headquarters Ruling Letter (“HRL”) 563503 dated May 26, 2006, would differ if either the manufacturer or a wholly owned subsidiary imported the subject cigarettes. In response to requests for further information from Customs and Border Protection (“CBP”), you submitted supplemental information regarding the transaction between the foreign manufacturer and its wholly owned subsidiary. Therefore, this ruling is limited to the specific facts provided regarding the proposed transaction between the foreign manufacturer and its wholly owned subsidiary. In preparing this ruling, consideration was given to your subsequent e-mails sent on May 30, 2006; June 1, 2006; June 15, 2006; and August 31, 2006.

FACTS:

This ruling request relates to certain reimbursement payments to cigarette manufacturers arising from the Tobacco Master Settlement Agreement (“MSA”) entered into by and among the Attorneys General of 46 States (“MSA States”) and major U.S. tobacco companies, in November 1998. You provided the following details regarding the MSA, which were documented previously in HRL 563503.

The Tobacco Master Settlement Agreement (“MSA”)

The MSA is a settlement agreement that resolved over forty lawsuits and claims that the MSA States asserted against the five largest tobacco product manufacturers in the United States beginning in or about 1994. The lawsuits and claims sought reimbursement of expenses that the MSA States had incurred since the 1950s for the treatment of indigent smokers under various Medicaid and public assistance health programs. The claims were premised on inter alia the defendants’ alleged fraudulent concealment of the adverse health consequences of smoking and their targeting of youth smokers. In settlement of those claims, the major manufacturers agreed under the MSA to make annual, pro rata settlement payments to the MSA States, according to formulas and terms set forth in that agreement. Although the MSA States sued and asserted claims only against the five largest U.S. tobacco companies that were accused of the wrongdoing, the MSA was drafted so as to allow other manufacturers to join the MSA at any time.

Escrow Statute

Subsequent to the MSA’s execution, and to implement the settlement’s terms, each MSA State enacted model legislation, commonly known as the “Escrow Statute.”

A copy of the model Escrow Statute, which has been adopted in each of the MSA States, was submitted with your ruling request for HRL 563503. According to the terms of the Escrow Statute, a Tobacco Product Manufacturer whose cigarettes are sold in an MSA State must either (i) join the MSA and make pro rata payments to the MSA States along with the other participating manufacturers under the MSA, or (ii) remain a non-participating manufacturer (“NPM”) and deposit an equivalent sum of money into escrow accounts established for the benefit of the MSA States, which must be held for twenty-five years. During this twenty-five-year period, the escrowed funds may be accessed only for the purpose of satisfying future judgments or settlements that the MSA States might obtain against, or enter into with, the NPM. If not so used, the funds are to be returned to the NPM twenty-five years after their deposit. The amount that an NPM must deposit under an MSA State’s Escrow Statute is based inter alia on the number of the NPM’s cigarettes sold in the MSA State. The escrow deposits must be made by April 15th of the year following the year in which the NPM’s cigarettes are sold in an MSA State. Some MSA States require that the escrow payments be made quarterly.

You explain that under the Escrow Statutes, the term “NPM” means (i) a manufacturer of domestic or foreign-made cigarettes that the manufacturer intends to be sold in the United States, including cigarettes intended to be sold through an importer, (ii) an importer of foreign-made cigarettes that the manufacturer does not intend to be sold in the United States, or (iii) the successor of either of them. We note that this is similar to the definition of “Tobacco Product Manufacturer” in the Model Escrow Statute. There is no definition of “NPM.”

You explain that the escrow requirements are not imposed on the actual sellers of cigarettes within the MSA States. Rather, the escrow requirements are imposed on the NPM, notwithstanding the NPM’s remoteness to the transaction that triggers the escrow obligations. That is, if an NPM sells cigarettes to a U.S. importer in 2004, and the importer then sells the cigarettes to a U.S. wholesaler in 2005, and the U.S. wholesaler sells the cigarettes to a Missouri distributor in 2006, who then sells them to a Missouri retailer in 2006, the cigarettes are considered “Units Sold” in 2006, for which the NPM must make statutorily prescribed escrow deposits by April 15, 2007.

You also state that under the Escrow Statute, the escrow obligation is only incurred when a cigarette-tax stamp of a State is affixed to the manufacturer’s products.

The transaction at issue

Your supplemental submissions provide the following facts. Company A is a Brazilian tobacco product manufacturer that is publicly traded in Brazil. You advise that Company A, at all times prior to the MSA, sold its cigarettes to U.S. importers at a price of $1.50 to $2.00 per carton of cigarettes, F.O.B., Rio de Janeiro. Company A recently incorporated Company B, a wholly owned U.S. subsidiary of Company A. Company B possesses a Bureau of Alcohol, Tobacco and Firearms license to import tobacco. In the proposed transaction, Company A will sell its products to Company B for $1.50 to $2.00 per carton. Then, Company B will sell the cigarettes at a uniform price throughout the United States to various wholesalers and distributors. The price will reflect Company B’s cost of $1.50 to $2.00 per carton plus a reasonable profit of $0.25 to $1.00 per carton. You advise that the latter amounts reflect the typical profit earned by other importers in the U.S. market. The wholesalers and distributors may sell the cigarettes throughout the United States, including one or more MSA States. Under the Escrow Statutes, Company A would be liable for the escrow deposits due for any given sales year for which a wholesaler or distributor sells Company A’s products in an MSA State. Under the contemplated transactions, the wholesalers and distributors who purchase from Company B will reimburse Company A the escrow expense incurred, if they sell the cigarettes in MSA States. You state that the reimbursement will equal the amount incurred and demanded by each MSA State, which will be $4.16 per carton for 2006. If the wholesalers and distributors do not sell in MSA States, there will be no reimbursement. You advise that there is no escrow component in the price charged by Company A to Company B.

You emphasize that there is no ownership relationship or affiliation between the wholesalers and distributors and either Company A or Company B, and that the transactions by and among all of the parties is completely at arms-length. You indicate that no contracts have been drafted between Company A and Company B, nor have any contracts been drafted between Company A and the wholesalers and distributors. However, you advise that the obligation of the wholesalers and distributors to reimburse Company A would be evidenced by a contract between Company A and the particular wholesaler or distributor. Furthermore, you stress that the contractual relationship between Company A and the wholesalers and distributors is completely separate from Company B’s business relationship with the wholesalers and distributors. Thus, Company B will not have any involvement with the reimbursement. Moreover, the transaction between Company A and Company B, under a contract or otherwise, would not involve or refer to the escrow payment or reimbursement. You also indicate that Company B does not control or know where the imported products ultimately will be sold and that it is only when subsequent re-sellers sell the product in MSA States that an escrow obligation will be incurred.

All States require distributors and wholesalers to pay cigarette excise taxes before the cigarettes can be sold to retailers or consumers within the State. The payment of the excise tax is evidenced by a cigarette tax stamp that is affixed to the product. You state that manufacturers generally sell cigarettes on an unstamped basis to importers and that importers generally sell cigarettes on an unstamped basis to wholesalers and distributors. Wholesalers and distributors who sell in individual States, however, sell stamped cigarettes.

For purposes of this ruling, we make the following assumptions: 1) that the imported merchandise is unstamped cigarettes; 2) that transaction value is the proper basis of appraisement; 3) that transaction value is properly determined based on the price actually paid or payable by Company B, the importer, to Company A, the foreign manufacturer, in the sale between these parties; 4) that Company B is under no obligation by contract or otherwise to reimburse Company A for any escrow payments; and 5) that the subsequent wholesalers and distributors involved in the proposed transactions are not related to Company A or Company B pursuant to 19 U.S.C. § 1401a (g). If the actual transactions and the transaction documents indicate otherwise, the conclusions reached in this ruling do not apply.

ISSUE:

Whether, in the circumstances described, the escrow reimbursement payments by the U.S. wholesalers or distributors to the foreign manufacturer of imported cigarettes are included in the transaction value of the imported cigarettes.

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 basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1).

Imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In this situation, Company A and Company B are related pursuant to 19 U.S.C. § 1401a(g)(1). The transaction value between related parties is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the parties does not influence the price actually paid or payable, or the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the United States, or the deductive or computed value for identical or similar merchandise. 19 U.S.C. § 1401a(b)(2)(B). This ruling does not address the acceptability of transaction value. We assume for purposes of this ruling that transaction value is the proper method of appraisement for the imported merchandise.

The term “price actually paid or payable” is defined in 19 U.S.C. § 1401a(b)(4)(A) as:

[t]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for, the benefit of, the seller.

Based on the information provided and the assumptions made, the reimbursement payments made by wholesalers and distributors to Company A are not direct or indirect payments made or to be made by the buyer to, or for the benefit of, the seller. In the instant case, Company A is the manufacturer and seller and Company B is the U.S. importer and buyer. Although the payments at issue are to be made to the seller, they are not direct payments to be made by the buyer. Rather, unrelated wholesalers and distributors to whom the buyer will sell the imported cigarettes will make the payments.

An indirect payment by the buyer to the seller includes the settlement by the buyer, in whole or in part, of a debt owed by the seller, or a price reduction received by the buyer on a current importation as a means of settling a debt owed him by the seller. See 19 C.F.R. § 152.103(a)(2). An indirect payment by the buyer also includes a payment made by the ultimate purchaser in the United States, through the importer, to the foreign manufacturer and payments made by the buyer’s related company to the seller. See HRL 554999, dated January 5, 1989 (holding that payments made by the ultimate purchaser in the United States, through the importer, to the foreign manufacturer are part of the price actually paid or payable as indirect payments); see also HRL 545381, dated May 4, 1998 (finding that payments made by the ultimate purchaser in the United States to the foreign manufacturer are presumed to be part of the price actually paid or payable as indirect payments where the U.S. importer and ultimate purchaser are related, and the relationship creates a situation where the buyer is indirectly paying the seller). A payment made by a third party to the seller to satisfy the buyer’s obligation to the seller is another example of an indirect payment.

In the instant case, the escrow reimbursement payments are not a settlement by Company B of a debt owed by Company A, and they are not a settlement of a debt owed by Company B to Company A. The wholesalers and distributors will make the escrow reimbursement payments directly to Company A. Company B will not have any involvement with the reimbursement, and the transaction between Company A and Company B, under a contract or otherwise, will not involve or refer to the reimbursement payments for the escrow fund. Company B is not related to the wholesalers or distributors who will be responsible for reimbursing Company B. Therefore, the proposed reimbursement payments do not constitute indirect payments by the buyer.

Based on the specific facts of this case, the escrow reimbursement payments to be made by the wholesalers and distributors are not direct or indirect payments made by the buyer to or for the benefit of the seller and thus, not part of the price actually paid or payable for the imported cigarettes. If the seller included the expected escrow amounts in its sales price to the buyer, then such amounts would be included in the price actually paid or payable for the imported merchandise. However, according to the facts, there is no escrow component charged by Company A to Company B.

Proceeds of any subsequent resale, disposal, or use of the imported merchandise

Despite having concluded that the payments at issue are not part of the price actually paid or payable, it still remains to be determined whether they should be added to the price actually paid or payable as proceeds. Under 19 U.S.C. § 1401a(b)(1)(E), one of the additions to the price actually paid or payable is for “proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.” With regard to proceeds, the Statement of Administrative Action provides that:

[a]dditions for the value of any part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.

SAA, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 49 (1981). See also 19 C.F.R. § 153.103(g).

CBP has ruled that in order for proceeds of a subsequent resale to be dutiable under this section, they must pertain to the resale of the imported merchandise, and they must accrue directly or indirectly to the benefit of the seller. See HRL 545035, dated August 23, 1995.

In the instant case, Company A may be required to pay the escrow amounts when its cigarettes are sold in an MSA State. The wholesalers and distributors will be required to reimburse Company A for the escrow amounts to the extent of any escrow liability that Company A might incur as a result of the sales of Company A’s cigarettes in an MSA State by the wholesalers and distributors.

Based on the specific facts of this case, we find that the connection between the imported merchandise and the obligation of the wholesalers and distributors to reimburse Company A for the escrow payment is too remote to be considered proceeds of a subsequent resale of the imported merchandise within the context of 19 U.S.C. § 1401a(b)(1)(E). First, neither the importer, Company B, nor a party related to Company B is obligated to reimburse the seller for the escrow payment. Rather, it is a subsequent unrelated wholesaler or distributor that is obligated to reimburse the seller. In addition, it is not the resale of the imported merchandise that directly triggers the reimbursement payment. The imported merchandise covered by this ruling is unstamped cigarettes and it is the sale of stamped cigarettes that triggers the escrow payment by Company A and the reimbursement payment by the wholesaler or distributor. Finally, the escrow obligation can arise long after the importation based on facts unrelated to the importation; namely, possible sale in an MSA State. Taken together, we find that the escrow reimbursement payments by the wholesalers and distributors do not constitute proceeds of a subsequent resale within the meaning of 19 U.S.C. § 1401a(b)(1)(E).

HOLDING:

Assuming that the actual transactions along with the transaction documents are consistent with the facts and assumptions stated above, the described escrow reimbursement payments from the U.S. wholesaler or distributor to the foreign cigarette manufacturer are not included in the transaction value of the imported cigarettes.

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 Customs and Border Protection officer handling the transaction.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch

Previous Ruling Next Ruling