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HQ 545938

June 5, 1996



Director, Houston Field Office
Regulatory Audit Divsion
U.S. Customs Service
2323 Shepherd - Room 1239
Houston, TX 77019

RE: Internal Advice concerning dutiability of commissions; HRLs 543503, 544958, 544945, 545794, 545550

Dear Director:

This is in response to your memorandum received by our office on March 16, 1995, requesting internal advice on behalf of J.C. Penney Purchasing Company (JCPPC), concerning the dutiability of commissions paid to twenty-eight (28) of its alleged buying agents. This matter emanates not only from an audit conducted by your office, but also from a request for internal advice submitted from JCPPC to the former district director, Dallas/Fort Worth Airport. We regret the delay in responding.


Documentation and evidence concerning twenty-eight (28) of JCPPC's alleged buying agents has been submitted for our review. The merchandise at issue includes footwear, wearing apparel, handbags and similar items. Of particular concern to your office is the agents' ownership and control over the design of the merchandise and JCPPC's apparent lack of control over the purchasing process due to their limited involvement in the modification of such designs or styles. In this regard, you submit that JCPPC often could not obtain the merchandise without the agent's design, style or pattern and that the agent (or their foreign subagent) often selected the factory. Furthermore, your office questions the bona fides of the agents due to the large number of other major retailers/importers they represent and the significant amount of transactions conducted by the agents as importer of record. In sum, when examining the totality of circumstances, you question the level of control exercised by JCPPC over the alleged buying agents. Specific comments in the form of separate narratives accompanied, in some cases, by supporting documents concerning the twenty eight agents was submitted for our review.

On the other hand, JCPPC believes they assert the requisite degree of direction and control over the buying agents at issue. JCPPC describes the agents' design activities as involving style adaption and market intelligence which, through samples obtained from department stores, trade shows, etc., enable them to keep JCPPC current on products and styles available in the marketplace. The design work undertaken by the agents is described as "linebuilding" and normally to represent a collaboration between the agent and JCPPC, with JCPPC as the final arbiter and authority. Furthermore, JCPPC stresses that in accordance with prior Headquarters Ruling Letters (HRLs), the nondutiable status of the agents' buying commissions is not affected by the fact that the agents may act as a seller and importer of record to JCPPC in unrelated transactions. JCPPC submits that the buying agency services provided under the current buying agency agreements reflect those generally provided by buying agents. Along with its responses to each of the individual narratives, JCPPC submitted documentation concerning one of the buying agents, consisting of a purchase contract, letter of credit and seller and agent's invoices, which it claims is representative of all the transactions at issue.


Based on the evidence submitted, whether the payments made by JCPPC to the alleged agents constitute bona fide buying commissions.


The preferred method of appraising merchandise imported into the United States 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. 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 the enumerated statutory additions.

The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA 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."

Bona fide buying commissions are not an addition to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 13 CIT 161, 164, 708 F. Supp. 351, 354 (1989); Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 78, 679 F. Supp. 21, 23 (1988); Jay-Arr Slimwear, Inc. v. United States, 12 CIT 133, 136, 681 F. Supp. 875, 878 (1988).

The existence of a bona fide buying commission depends on the relevant factors in light of the individual case. See J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978). The importer has the burden of proving the existence of a bona fide agency relationship and that the payments to the agent constitute bona fide buying commissions. New Trends, Inc. v. United States, 10 CIT 637, 640, 645 F. Supp. 957, 960 (1986); Rosenthal-Netter, supra, at 78.

In determining whether an agency relationship exists, the primary consideration has been the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. J.C. Penney, supra, at 95. The existence of a buying agency agreement has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971). In addition, the courts have considered such factors as: whether the purported agent's actions were primarily for the benefit of the principal; whether the principal or the agent was responsible for the shipping and handling and the costs thereof; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the intermediary was operating an independent business, primarily for its own benefit; and whether the purported agent was financially detached from the manufacturer of the merchandise. Rosenthal-Netter, supra, at 79; New Trends, supra, at 640-644.

The substantial documentation and information provided concerning agent # 9, E.S. Originals (E.S.), enables us to assess whether a bona fide agency relationship existed between E.S. and JCPPC. Initially, an examination of the buying agency agreement between JCPPC and E.S. reveals that the parties contemplated that E.S. would perform the functions traditionally associated with a buying agent, while JCPPC would perform those associated with a principal controlling such an agent. Specifically, we note that E.S.' services, including investigating buying possibilities, obtaining market information and samples at JCPPC's request, and assisting JCPPC in developing its product specifications is consistent with its role as an agent. Moreover, the conditions of the transactions, to wit, that orders are placed by JCPPC who shall accept or reject any quotations, payments are made directly by JCPPC to the supplier, delivery is made to JCPPC, and E.S. may not vary the conditions of the Purchase Contract nor hold itself out as seller/buyer also are indicative of a principal-agent relationship. However, in all such cases, it still is necessary to ascertain whether the actions of the parties are consistent with that provided in the agreement.

With regard to JCPPC's control over E.S.' conduct, we agree 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, we do recognize that when only incidental "design" work (i.e., linebuilding or market intelligence) is conducted by an agent, such work is part of a collaborative process between the parties, and 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.

In the case of E.S. it is our understanding that E.S. does not own any of the designs or styles incorporated into the footwear purchased by JCPPC, does not employ any designers nor provide original work, and only enhances the appearance of the merchandise in an attempt to create a lower priced version of the samples they buy. We find such services to exemplify line-building consistent with a finding that JCPPC may exercise appropriate control over the purchasing process and over E.S., generally.

With regard to additional factors which may be indicative of JCPPC's control over E.S. we find as follows. The portion of JCPPC's submission pertaining to E.S. does include some evidence by way of JCPPC's purchase contracts with the foreign supplier indicating that JCPPC substantially may have been involved in choosing the manufacturers, although it has not been shown that JCPPC actually visited the factories and participated in negotiations with the factory.

However, it is unclear whether the agent, as opposed to the principal, absorbs the costs for shipping and handling, which would be a factor against the finding of a principal-agent relationship. On the other hand, JCPPC's control over the manner of payment is made evident through a debit notice sent to JCPPC from its bank referencing its letter of credit as well as by a telex sent from JCPPC to its bank requesting the issuance of its irrevocable letter of credit in favor of the foreign supplier. It is our understanding that the letters of credit are not opened in favor of E.S. from which E.S. would then deduct its commissions, handling charges, and the like.

Moreover, the transaction documents consist of invoices and purchase order contracts between JCPPC and the foreign supplier with consistent unit prices, merchandise amounts, and total contract costs which do not include amounts for E.S.' commissions. Additionally, separate invoices between JCPPC and E.S. reflect amounts owed to the latter for the commission, based on a percentage of the merchandise amounts reflected on the JCPPC-supplier invoices. Supported by proof of payment for the JCPPC-supplier invoice amounts, these documents in their entirety serve as evidence that the price actually paid or payable did not include the commissions and that the agent acted on behalf of the principal and not as an independent seller. Further, this serves as evidence that none of the commissions enured to the benefit of the seller.

We also recognize that the purchase contracts from the foreign supplier to JCPPC, E.S.' questionnaire responses, and their seemingly limited involvement in the designing process provide some evidence that JCPPC could have purchased directly from the suppliers without employing E.S. On the other hand, the fact that in many cases E.S. imports for its own account from such suppliers and considers itself to be a "manufacturer and importer of fashion footwear and apparel," as stated on its invoice, indicates that E.S. likely has substantial ties to, and connections with, the suppliers.

However, evidence does indicate that E.S., when working with JCPPC, does not operate as an independent business primarily for its own benefit. In this regard, based in part on the purchase contracts, invoices, and proof of payment it is our understanding that E.S. does not receive a fixed price for the merchandise but commissions for the services it provides, and does not act in its own name nor receive title to the goods. Although E.S. imports, buys and sells such merchandise independently, it is submitted that such transactions occur in separate and distinct situations apart from those where JCPPC procures E.S.' services. See Rosenthal-Netter, supra, at 81 citing the Restatement (Second) of Agency section 14K comment a (1958).

Finally, it is our position that the dutiability of the buying commissions in general is not affected by the fact that in some instances an agent, such as E.S., does in fact import for its own account and resell the imported merchandise to parties other than its principal. See HRL 543503, issued July 11, 1983, where buying commissions were non-dutiable although a U.S. corporation purchased imported merchandise for its own account and acted as purchasing agent for other major domestic importers of the same type of merchandise. Moreover, the status of a party operating as a bona fide buying agent is not necessarily affected by its role as an importer and domestic seller for the same U.S. customers for which it also acted as buying agent in unrelated transactions. HRL 544958, issued June 8, 1992. In such situations Customs recognizes that a relationship or business ties between the parties to a transaction, although an important consideration, is not dispositive, per se, of the bona fides of an agency relationship. Instead, such questions are to be resolved in light of the totality of the evidence presented. See HRL 544945, issued June 30, 1995 and HRL 545794, issued August 9, 1995. Similarly, it is our position that the fact an agent provides its services to a large number of retailers or importers is not determinative of the status of the agency relationship.

In sum, the totality of the evidence presented with regard to E.S., without information or documentation to the contrary, adequately demonstrates that JCPPC exercised the requisite control over E.S., supporting the finding of a bona fide agency relationship. See HRL 545550, issued September 13, 1995, also employing such an analysis. However, due to the insufficient evidence available regarding the other agents at issue, we are unable to conclude whether a bona fide agency relationship existed between those parties and JCPPC.

First, in many cases the submitted buying agency agreements merely consist of three paragraphs generally explaining the services which the alleged agent is to provide and how orders will be placed. See Yes Clothing Co.; Sam & Libby, Inc.; Markon Footwear; Warson Group; and BBC Imports. In some cases the imported commodity is not even disclosed within the agreement. See Wolfpax, Inc.; Bag Bazaar; Elan-Polo, Inc.; Double K Footwear; Bright Star Products, Inc.; Kimko International, Inc.; and B\W\A International.

Next, evidence concerning the alleged agents' roles with regard to the designing of the merchandise is inconclusive. In some cases it is our understanding that the alleged agents may actually own the designs and/or the trademark incorporated into the imported merchandise and, thus, may control certain aspects of the purchasing process. See York East Merchandise, Inc.; Yes Clothing Co.; Bag Bazaar; Bright Star Products; Europe Crafts Imports, Inc.; M. Julian Division of Firenze Design; Mia Shoes, Inc; Samuel Brilliant Co.; and Tandem Imports Corp. Although the alleged agents may not own the designs, in several instances it appears, based on the evidence submitted, that the alleged agents may exercise substantial control over the design and style of the merchandise, in some cases employing designers, possibly resulting in limited involvement and control on the part of JCCPC. See Tristar International Footwear Ltd.; Wolfpax, Inc.; Sam & Libby, Inc.; Ipanema Shoe; Double K Footwear; Kimko International, Inc.; Pelle Leather, Ltd.; Tandem Imports Corp.; B\W\A International; and LJ Simone, Inc.

Furthermore, no transaction documents such as purchase orders, invoices or proof of payment have been made available concerning any of the alleged agents other than E.S. Without such documents, we are unable to determine whether JCPPC was substantially involved in choosing the manufacturers, participated in negotiations with the factory, could have purchased directly from the suppliers, absorbed the shipping and handling costs or controlled the manner of payment. Likewise, we are unable to determine whether the alleged agents operated as independent businesses primarily for their own benefit.

In light of these concerns, the fact that nearly all the alleged agents import on their own account and resell the imported merchandise further obfuscates the issue. In many cases we understand the merchandise sold is identical, or at least similar, to that purchased by JCPPC. See York East Merchandise, Inc.; Yes Clothing Co.; Kowa American Corp.; M Julian Division of Firenze Design; Mia Shoes; Samuel Brilliant Co.; and Tandem Imports Corp. Some of the alleged agents likewise act as an importer/domestic seller for JCPPC, often selling from their inventory. See Sam & Libby, Inc.; Bag Bazaar; Markon Footwear Inc.; Bright Star Products, Inc.; Samuel Brilliant Co.; Warson Group Inc.; and BBC Imports. In addition, several agents have indicated that they are related to the suppliers or that the majority of all the suppliers' sales are conducted through the agent. See Tristar International Footwear Ltd.; Wolfpax, Inc.; Bag Bazaar; and Double K Footwear.

For these reasons, the totality of evidence presented with regard to the alleged agents other than E.S. does not enable us to reach a finding regarding the bona fides of the agency relationships. To reach a determination it is necessary, in conjunction with the importer, to obtain all relevant purchase, supply, and agency agreements between the parties as well as other transaction documents including invoices, purchase orders, and proof of payment (for the merchandise and shipping/ handling). Further evidence regarding the roles of the parties throughout the design process likewise may be warranted. We suggest that, at your discretion, JCPPC have the opportunity to submit samples of the products initially made available for JCPPC's consideration for comparison with samples of the finalized merchandise as modified and eventually purchased by JCPPC and that both samples be compared to the merchandise sold by the alleged agents in other transactions. In reaching a final determination, it would be appropriate for your office to analyze all such evidence and documentation in a manner consistent with that employed above for E.S.


Based on the evidence submitted, we only are able to conclude that the payments made by JCPPC to E.S. constitute bona fide buying commissions. Therefore, the payments made to E.S. are not to be included in the transaction value of the imported merchandise. However, further evidence, analyzed as set forth above, is warranted in order to reach a determination concerning the other alleged agents.

This decision should be mailed by your office to the internal advice requester no later than sixty days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.


Acting Director,
International Trade Compliance Division

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