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HQ W563503

May 26, 2006

RR:CTF:VS 563503 LR

CATEGORY: VALUATION

Mr. Leonard Violi
Law Offices of Leonard Violi, LLC
910 East Boston 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 ruling request submitted on behalf of cigarette manufacturers concerning the customs value of certain imported cigarettes. We have considered the information in your October 28, 2005 letter and subsequent e-mails sent on March 16, 2006 and April 28, 2006.

FACTS:

The 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 the major U.S. tobacco companies, in November 1998. You have provided the following details:

The Tobacco Master Settlement Agreement (“MSA”)

The MSA is a settlement agreement that resolved over forty lawsuits and claims that the MSA 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 1950’s 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 an “Escrow Statute.”

A copy of the model Escrow Statute which has been adopted in each of the MSA States was submitted with the ruling request. According to the Escrow Statutes’ terms, 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. For example, deposits for units sold in Missouri during 2005, must be made by April 15, 2006. 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, but, rather, on an 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 state tax stamp is affixed to the manufacturer’s products.

The transactions at issue

A foreign NPM sells cigarettes to one or more U.S. importers on an F.O.B. basis. The U.S. importer(s) then sells these products to wholesalers or distributors throughout the United States. Some or all of these wholesalers or distributors might then resell the products in one or more MSA States. Under the Escrow Statutes, the NPM is liable for the escrow deposits due for any given sales year in which a wholesaler or distributor sells its products in an MSA State.

The foreign NPM would like to require U.S. wholesalers or distributors to reimburse the NPM to the extent of any escrow liability that the NPM might incur as a result of the wholesaler’s or distributor’s sale of the NPM’s cigarettes in an MSA State. Reimbursement would only be required if, and to the extent the subsequent wholesalers and distributors sell the NPM’s cigarettes in an MSA State. You advise that there is no escrow component in the price charged by the NPM to the U.S. importer.

In response to our question about where the wholesaler’s or distributor’s reimbursement obligation would be stated, you advised that there are no contracts yet, but that you are exploring drafting such an agreement between the manufacturer and subsequent wholesalers and distributors. You emphasize, however, that the importer will not have any involvement with the reimbursement and note that the transaction between the manufacturer and importer, under a contract or otherwise, would not involve or refer to the escrow payment or reimbursement. You also note that the importers do not control or know where the imported products ultimately are sold and that it is only when subsequent re-sellers sell the product in MSA States that an escrow obligation is incurred. No contracts have been drafted yet.

You state that importers generally sell cigarettes on an unstamped basis, which means they don’t have a tax stamp of any particular state. Wholesalers and distributors who sell in individual states, however, sell stamped cigarettes.

You state that the relationship of the parties involved in these transactions is completely at arm’s length and that they are independent corporations.

Other than the model escrow statute, you have not provided any contracts or other documentation pertaining to the described transactions.

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 the U.S. importer to the manufacturer in the sale between these parties; 4) that the U.S. importer is under no obligation by contract or otherwise to reimburse the manufacturer for any escrow payments; and 5) that none of the parties involved in the transaction described (i.e., the manufacturer, the importer and the U.S. wholesalers and distributors) are related 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:

The preferred method of appraising merchandise imported into the U.S. 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. 19 U.S.C. §1401a(b)(1) 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.

In determining whether the escrow reimbursement payments should be included in the transaction value of the imported cigarettes, two issues are presented: 1) whether the payments are part of the price actually paid or payable; and 2) if not, whether the payments are an addition to the price actually paid or payable as proceeds of a subsequent resale, disposal or use under 19 U.S.C. §1401a(b)(1)(E).

Price Actually Paid or Payable

The term "price actually paid or payable" is defined in 19 U.S.C. §1401a(b)(4)(A) as the "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...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

Based on the information provided and the assumptions made, the payments at issue are not direct or indirect payments made or to be made by the buyer to, or for the benefit of, the seller. As stated, the sale upon which transaction value is based is the sale between the manufacturer and the U.S. importer. As such, the seller is the manufacturer and the buyer is the U.S. importer. Although the payments are made or to be made to the seller, they are clearly not direct payments made or to be made by the buyer. As explained, the payments are to be made by unrelated wholesalers or distributors to whom the buyer will sell the imported cigarettes.

Nor do the reimbursement escrow payments constitute indirect payments by the buyer. 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, Headquarters Ruling Letters (HRL’s) 546007, September 21, 1995, and rulings cited therein, 554999, January 5, 1989, and 545381, May 4, 1998. A payment made by a third party to the seller to satisfy the buyer’s obligation to the seller would be another example of an indirect payment.

In this case, the escrow reimbursement payments do not constitute indirect payments by the buyer to the seller. They are not a settlement by the buyer of a debt owed by the seller, and they are not a settlement of a debt owed by the buyer to the seller. The buyer is under no obligation to make these payments to the seller by contract or otherwise. Moreover, the buyer has no relationship to the wholesaler or distributor, the parties that are obligated to and will make these payments to the seller. Finally, the payments are not made through the buyer.

In the circumstances described, we find that 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 the NPM to the U.S. importer.

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

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 Administration 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, August 23, 1995.

In this case, as noted above, the NPM is required to pay the escrow amounts when its cigarettes are sold in a MSA State. Under the described transaction, the U.S. wholesalers or distributors will be required to reimburse the NPM for the escrow amounts to the extent of any escrow liability that the NPM might incur as a result of the wholesaler’s or distributor’s sale of the NPM’s cigarettes in an MSA state. Thus, when a wholesaler or distributor sells the NPM’s cigarettes in an MSA state, this triggers a reimbursement obligation. The question arises as to whether these reimbursements constitute proceeds of a subsequent resale of the imported cigarettes.

We conclude they are not. Based on the facts presented, we find that the connection between the imported merchandise and the distributor’s or wholesaler’s obligation to reimburse the manufacturer for the escrow payment is too remote to be considered proceeds of a subsequent resale of the imported within the context of 19 U.S.C. §1401a(b)(1)(E). First, neither the importer/buyer nor a party related to the importer/buyer is obligated to reimburse the seller for the escrow payment. Rather, it is a subsequent unrelated buyer, i.e., an unrelated wholesaler or distributor that is obligated to reimburse the seller. Second, 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 the NPM and the reimbursement payment by the wholesaler or distributor. Finally, the escrow obligation can arise long after 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 Brenner, Chief
Valuation and Special Programs Branch


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