HQ H010949 - FTZ; nonprivileged foreign status; total zone value; 19 C.F.R. § 146.65 - United States International Trade Commision Rulings

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HQ H010949

July 31, 2007

OT:RR:CTF:VS H010949 HEF

CATEGORY: VALUATION

Mr. Kenneth G. Weigel
Alston & Bird LLP
The Atlantic Building
950 F Street, NW
Washington, DC 20004

RE: FTZ; nonprivileged foreign status; total zone value; 19 C.F.R. § 146.65

Dear Mr. Weigel:

This is in reply to your letter dated May 4, 2007, requesting a ruling on behalf of your client, regarding the valuation of merchandise entered into the customs territory of the United States from a U.S. foreign trade zone ("FTZ").

FACTS:

Your client currently purchases and imports parts from various foreign vendors, both related and unrelated, for use in the manufacture of merchandise in the United States. Your client is considering changing this strategy. Under the new strategy contemplated by your client, the vendors will export the merchandise to the United States and admit the merchandise into a U.S. FTZ in non-privileged foreign ("NPF") status. The NPF status merchandise will be stored in the FTZ, and the vendors will retain title to it, until your client purchases it for production needs. Therefore, the NPF status merchandise will not be sold prior to its admission into the FTZ.

You state that under the new strategy, the FTZ operator will receive the NPF status merchandise and track it using an appropriate inventory management system. In addition, no manufacturing, processing, or other alteration of the NPF status merchandise will occur in the FTZ. When your client purchases the NPF status merchandise, it will subsequently withdraw it from the FTZ for entry into the customs territory of the United States.

The price that your client will pay for the NPF status merchandise will fluctuate according to a formula set forth in contracts entered into by your client and the vendors. The actual sale price for any particular part will be calculated monthly using a formula that incorporates publicly reported prices of the metals used in the parts. Thus, the price your client pays for a particular part could fluctuate on a monthly basis. Furthermore, the NPF status merchandise may remain in the FTZ for an unknown period of time before it is purchased. You state that your client will pay for all transportation, brokerage, and FTZ costs separately. Moreover, you attest that payments for such services will not be made to the vendors or to any parties related to the vendors.

When your client withdraws the NPF status merchandise from the FTZ, a "pull" invoice will be created based on the sales transaction that occurs while the NPF status merchandise is stored in the FTZ. The invoice will reflect the price your client pays for the NPF status merchandise at the time of its withdrawal from the FTZ, as calculated by the pricing formula agreed to by the parties. Your client will file a weekly entry covering such withdrawals, and the FTZ operator will file weekly entry estimates and produce weekly pro forma invoices for the NPF status merchandise withdrawn from the FTZ.

Since the price actually paid for the NPF status merchandise is unknown at the time of its admission to FTZ, the vendors will prepare pro forma invoices to accompany the shipments of the merchandise for admission to the U.S. FTZ. Your client proposes that these pro forma invoices state a value for the merchandise based on the most recent price paid by your client for the identical or similar article. You state that this price will not include any international shipment charges, other movement charges, FTZ costs, and other non-dutiable charges. Furthermore, you state that upon admission of the NPF status merchandise into the FTZ, the value reflected on the invoice and on Customs Form 214 will be the transaction value of the most recent sale between the vendor and your client involving identical or similar merchandise. You note that in instances where your client has not previously purchased a particular part being admitted into the FTZ, the value on the pro forma invoice will reflect the amount your client would pay for the part, adjusted as appropriate to calculate the dutiable value, at the time of exportation.

ISSUES:

1. What is the proper basis of appraisement for the NPF status merchandise when entered into the customs territory of the United States from a FTZ?

2. How should the value of the NPF status merchandise be determined at the time of its admission to the FTZ?

LAW AND ANALYSIS:

1. Entry of the NPF Status Merchandise into the Customs Territory of the United States

It is a basic principle of customs law that articles are classified and appraised on the basis of their condition at the time of importation into the United States, and not upon the basis of what their condition may become after they enter 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 principle is the Foreign Trade Zone Act of 1934, as amended (19 U.S.C. § 81a et seq.). Under section 3(a) of the Act (19 U.S.C. § 81c(a)), foreign merchandise may be admitted into a FTZ and its classification and dutiability may be delayed until it, or merchandise resulting from its manufacture or manipulation, is entered into the customs territory of the United States.

Pursuant to section 146.65(b)(2), Customs Regulations (19 C.F.R. § 146.65(b)(2)), the dutiable value of NPF status merchandise entered into the customs territory of the United States from a FTZ is the price actually paid or payable for the merchandise in the transaction that caused the merchandise to be admitted into the zone, plus the statutory additions enumerated in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. § 1401a(b)(1)), less, if included, international shipment and insurance costs and U.S. inland freight costs. In the instant case, the NPF status merchandise is not admitted into the FTZ as a result of a sales transaction. Consequently, there is no price actually paid or payable upon which to base the dutiable value of the NPF status merchandise at issue.

In such instances, the Customs Regulations provide that if there is no such price actually paid or payable, or no reasonable representation of that cost or of the statutory additions, the dutiable value is based on the total zone value, i.e., the price actually paid or payable to the zone seller in the transaction that caused the merchandise to be transferred from the zone less specified costs incurred in the zone which are included in that value. See 19 C.F.R. § 146.65(b)(1) and (2). The following specified costs, if included in the total zone value, are to be excluded: the zone costs of processing or fabrication, general expenses and profit and the international shipment and insurance costs, and U.S. inland freight costs related to the merchandise transferred from the zone. See 19 C.F.R. § 146.65(b)(2).

Under the new strategy, your client will purchase NPF status merchandise stored in the FTZ from foreign vendors, both related and unrelated, and it will subsequently enter the NPF status merchandise into the customs territory of the United States. These sales are the transactions that cause the NPF status merchandise to be transferred from the zone for purposes of 19 C.F.R. § 146.65(b)(1).

"Total zone value" should be determined in accordance with the valuation principles of 19 U.S.C. § 1401a. See 19 C.F.R. § 146.65(b)(1). The preferred method of appraisement under 19 U.S.C. § 1401a 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. See 19 U.S.C. § 1401a(b)(1). The phrase "when sold for exportation to the United States" refers, in this instance, to the transaction, which in accordance with 19 C.F.R. § 146.65(b), caused the merchandise to be transferred from the zone. See Headquarters Ruling Letter ("HRL") 544818, dated April 1, 1993.

Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship does not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values," i.e., previously accepted values of identical or similar merchandise. See 19 U.S.C. § 1401a(b)(2)(B). You state that your client will purchase the NPF status merchandise from both unrelated and related foreign vendors and that the prices paid for the merchandise will fluctuate according to a formula in the contracts between your client and the vendors. This ruling does not address the acceptability of the prices between your client and its related vendors. We will assume, for the purposes of this ruling, that the prices your client pays to its related vendors are not influenced by the relationships between the parties.

Based on these particular facts, we conclude that the proper basis of appraisement for the NPF status merchandise when entered into the customs territory of the United States from the FTZ is the total zone value, which is the price your client pays to the vendors in the transactions that cause the merchandise to be transferred from the zone, less any costs specified in 19 C.F.R. § 146.65(b)(2) that are incurred in the zone and included in that value. You state that no further processing, manufacturing, or other alteration of the NPF status merchandise will occur while it is stored in the FTZ. In addition, your client will pay for all transportation costs associated with the merchandise separately. Based on these facts, there are no adjustments to be made to the zone value.

2. Admission of the NPF Status Merchandise into the FTZ

The second issue concerns the value of the NPF status merchandise at the time of its application for admission into the FTZ. Application for admission of merchandise into a FTZ is made on Customs Form 214 ("Application for Foreign Trade Zone Admission and/or Status Designation"). See 19 C.F.R. § 146.32(a). Item 20 on Customs Form 214 requires the applicant seeking to admit merchandise into the FTZ to submit a "Separate Value" for such merchandise.

In this case, the NPF status merchandise will not be subject to duties upon admission into the FTZ. Instead, as discussed in the preceding section of this ruling letter, the dutiable value of the NPF status merchandise will be determined on the date upon which the merchandise is entered for consumption into the United States. As the price actually paid for the subject merchandise will not be known until your client purchases the NPF status merchandise stored in the FTZ, your client proposes that the separate value for the NPF status merchandise declared by the vendor on Customs Form 214 reflect the value of the most recent sale between a vendor and your client for identical or similar merchandise.

As previously noted, the preferred method of appraising merchandise imported into the United States is the transaction value method. See 19 U.S.C. § 1401a(b)(1). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and the sale must be for exportation to the United States. In the instant case, the vendors will export the subject merchandise to the United States, where it will be stored for an indefinite period of time in a FTZ. The vendors will retain title to the NPF status merchandise stored in the FTZ until your client makes the decision to purchase the NPF status merchandise and withdraw it from the FTZ. Under this scenario, there is no bona fide sale for exportation to the United States. Therefore, the transaction value method cannot be used to determine the value of the NPF status merchandise at the time of its admission into the FTZ.

When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. See 19 U.S.C. § 1401a(a)(1).

The second method of appraisement in order of statutory preference is the transaction value of identical or similar merchandise as set forth in 19 U.S.C. § 1401a(c). This method refers to a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the merchandise being valued. Treasury Decision ("T.D.") 91-15 (March 29, 1991). As noted above, no transaction value exists where a vendor exports merchandise to the United States and retains title to the merchandise while it is stored in an FTZ. Accordingly, the prices paid by your client for the NPF status merchandise stored in and sold from the FTZ cannot serve as a transaction value of identical or similar merchandise under 19 U.S.C. § 1401a(c) for the valuation of subsequent transactions. However, there may be other sales for export to the United States of identical and similar merchandise that may be used to determine the value of the NPF status merchandise pursuant to 19 U.S.C. § 1401a(c). If such sales exist, the values declared on Customs Form 214 should be based on the transaction values of these sales in accordance with 19 U.S.C. § 1401a(c). On the basis of the information provided, we cannot determine whether such sales exist.

If there are no sales of identical or similar merchandise, the next method of appraisement in order of statutory preference is the deductive value method as set forth in 19 U.S.C. § 1401a(d). Under the deductive value method, merchandise is appraised on the basis of the unit price at which the merchandise concerned is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation of the merchandise being appraised, or before the close of the 90th day after the date of importation. See 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. See 19 U.S.C. § 1401a(d)(3). For purposes of deductive value, the valuation statute defines the term "merchandise concerned" as the merchandise being appraised, identical merchandise, or similar merchandise. See 19 U.S.C. § 1401a(d)(1). The unit price at which merchandise is sold in the greatest aggregate quantity is the unit price at which such merchandise is sold to unrelated persons at the first commercial level after importation. See 19 U.S.C. § 1401a(d)(2)(B). Therefore, where it is possible to determine that the merchandise concerned has been sold to unrelated parties within 90 days of importation of the merchandise being appraised, the NPF status merchandise should be appraised using deductive value in accordance with 19 U.S.C. § 1401a(d). In this regard, the unit prices of the merchandise stored in the FTZ and sold to your client by unrelated vendors, less the specified deductions, could serve as the basis to value the merchandise admitted into the FTZ. However, where it cannot be determined that the merchandise concerned was sold within the applicable time constraints, deductive value is not appropriate. In such instances, other means of appraisement must be considered.

The computed value method is the next method of appraisement. Under this method, merchandise is appraised on the basis of the material and processing costs incurred in the production of the imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in the sales of merchandise of the same class or kind, and the value of any assists and packing costs. See 19 U.S.C. § 1401a(e)(1).

If a value for the merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), its value is determined in accordance with the "fallback" method pursuant to 19 U.S.C. § 1401a(f). The "fallback" method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. See 19 U.S.C. § 1401a(f)(1) and section 152.107, Customs Regulations (19 C.F.R. § 152.107).

At the time of application for admission of the NPF status merchandise into the FTZ, the value of the NPF status merchandise should be determined in accordance with the valuation hierarchy prescribed by 19 U.S.C. § 1401a(a)(1).

HOLDING:

Pursuant to 19 C.F.R. § 146.65(b)(2), the dutiable value of the NPF status merchandise is the zone value, i.e., the price that your client pays to the vendors for the merchandise in the transaction that causes the NPF status merchandise to be transferred from the FTZ, less any included zone costs of processing or fabrication, general expenses and profit and any costs related to international shipment and insurance costs and U.S. inland freight costs. In the instant case, there are no adjustments to be made to the zone value.

Upon application for admission of the NPF status merchandise into the FTZ, the value of the NPF status merchandise should be determined in accordance with the valuation hierarchy prescribed by 19 U.S.C. § 1401a(a)(1).

A copy of this ruling letter should be attached to the entry documents filed at the time the subject goods are entered. If the documents have been filed without a copy, this ruling letter should be brought to the attention of the Customs official handling the transaction.

Sincerely,

Monika R. Brenner, Chief

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