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 > 2003 HQ Rulings > HQ 229963 - HQ 548239 > HQ 548188

Previous Ruling Next Ruling
HQ 548188

---

August 29, 2002

RR:IT:VA 548188 CC

CATEGORY: VALUATION

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

RE: Review of HRL 547645; Dutiability of buying agent commissions

Dear Mr. Peterson:

This is in response to your request of March 29, 2002, on behalf of Target Corporation (“Target”), received in our office on June 25, 2002, for review of Headquarters Ruling Letter (HRL) 547645, dated February 13, 2002. That ruling concerned whether certain payments to be made separately by Target and several of its subsidiaries to the Associated Merchandising Corporation (“AMC”) would constitute bona fide buying commissions. In addition, that ruling concerned whether certain “product development charges” constituted assists. Your request for review concerns only our finding that payments made by Target are not bona fide buying commissions.

We note that the holding and principles set forth in HRL 547645 were correct, based on the facts presented in that ruling. This request for review is being decided based on new information provided in your submission and, therefore, HRL 547645 is not subject to modification or revocation under 19 U.S.C. § 1625(c) and 19 CFR § 177.9. In addition, you have not presented any new facts concerning the “product development charges,” nor have you requested a review of HRL 547645 concerning whether those charges constitute assists. Consequently, as stated above, this review concerns solely the buying commission issue.

Your request followed a meeting you held between you and members of the Value Branch on March 12, 2002. Also, in attendance at that meeting were representatives of AMC and Target.

FACTS:

Facts in HRL 547645

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.

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.”

Revised Facts

Concerning AMC’s discretion to determine whether Target’s goods will be sourced under the First Cost Program or the GLC Program, you state that AMC has no discretion to determine under which program a particular merchandise order received from Target will be handled. From the moment Target engages AMC to assist it in procuring merchandise, the type of service is specified by Target. AMC has no discretion to change the form of service provided. The nature and extent of the services which Target wants may dictate its choice of programs, but the choice is solely Target’s.

You state that Target’s control over AMC is evident from various sources, including the sample agreement you submitted. You cite the following provisions in the agreement as evidence that Target exercises control over AMC: 1) AMC negotiates “at the direction of the Principal”; 2) AMC places orders with vendors “when instructed”, “in Principal’s name, for Principal’s account”; 3) AMC acknowledges “that it does not have the right, power or authority to make any contract or incur any obligation or liability that shall be binding upon Principal unless it has been specifically authorized to do so in advance by Principal”; 4) AMC expedites shipments “as may be requested by principal”; 5) “Principal directs” AMC to bill, prepare invoices, etc.; 6) AMC provides standards information and intellectual property rights assistance to the principal “upon request” and “as principal may require”; 7) AMC may have no undisclosed relationships with the vendors; and 8) AMC may not provide any raw materials to a vendor except at Principal’s direction.

You claim that AMC’s processing procedure is consistent with a bona fide buying agency. Target is not required to submit to AMC’s claim policy to recover losses for damaged or defective merchandise. The Import Vendor Claims Handling Policy, which is incorporated into the Buying Agency Agreement, simply establishes the service levels, including the types of services and information required from Target in order for AMC to render services, which AMC is required to furnish with respect to the agent’s function of negotiating and handling claims. Nothing in the agreement limits Target’s ability to proceed directly against a vendor for claims relating to damaged or defective merchandise, whether or not Target asks AMC to assist in handling the claims. In support, you cite paragraph 9(c) of the Buying Agency Agreement, which states that Target has the right to proceed directly against vendors.

The limitation on liability is a condition of service, establishing the circumstances in which Target may assert a claim against AMC in respect of AMC’s commission for services. AMC does not undertake liability for damaged or defective merchandise. The reason, you state, is because AMC is not the seller of the merchandise and undertaking such liability would be inconsistent with the role of a buying agent.

AMC’s service charge is not the sum of three marginal percentage rates applied on an incremental basis to the total value of the merchandise. The service charge is a single percentage rate. As the total value of the merchandise which AMC assists its principal in sourcing increases during a contract year, the commission rate may decline slightly, which is essentially a volume discount. The buying agent’s commission, however, on any single shipment is never the sum of three rates.

ISSUE:

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)?

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).

The services to be provided by AMC on behalf of the Target are those typically performed by a bona fide buying agent. There will exist a buying agency agreement, and the services to be provided by AMC are detailed in this agreement, a sample copy of which you have submitted. Under the terms of the agreement, the services provided by AMC will be performed under the direction and control of Target. This is evident by numerous provisions in the agreement, which you have identified and which have been listed in the Revised Facts portion of this ruling. For example, the agreement provides that AMC negotiates “at the direction of the Principal” and places order with vendors “when instructed”, “in Principal’s name, for Principal’s account.” An important function of AMC is to find the best price and quality for the principal (the agreement states that “AMC shall, at the direction of the Principal, assist in the negotiation of the most favorable prices for the Principal”), which is consistent with the role of a buying agent. See HRL 545660, dated February 10, 1995.

HRL 548163 addresses a substantially similar buying agency agreement in which we found AMC to be a buying agent. Consequently, based on our analysis in that ruling, we find that commissions paid by Target to AMC constitute bona fide buying commissions.

Based on the totality of the evidence, and provided that the actions of the parties comport to the foregoing, the information submitted supports a finding that commissions paid by Target to AMC constitute bona fide buying commissions. Consequently, the commissions would not be added to the price actually paid or payable.

Please note that the existence of a buying agency relationship is factually specific. The actual determination will be made by the appraising officer at the applicable port of entry and will be based upon the entry documentation submitted. Further, the manufacturer’s/seller’s invoices must be made available upon request.

HOLDING:

Based on the information submitted concerning the “first cost” buying program, we conclude that AMC is a bona fide buying agent with regard to those transactions. Therefore, the commissions paid by Target to AMC for its services constitute bona fide buying commissions.

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
Chief, Value Branch

Previous Ruling Next Ruling