Thursday, January 28, 2016

Ruling of the Week 2016.3: Deductive Value

I tend to get focused on classification here on the Customs Law Blog. But, this is not the Tariff Classification Law Blog. Our scope if broader. With that in mind, we should also look at the other side of the duty calculation: value. Most importers understand that value is usually "transaction value" plus statutory additions including assists, royalties, and commissions. Look at 19 USC § 1401a. Most of the time, that will get you through the day. But, it does not work when you don't have a sale for export to the United States or when the price is affected by the relationship between the parties. In those cases, we need to turn to an alternative method of valuation.

When transaction value fails, the statute requires that the goods be appraised based on a hierarchy of methods. The first alternative is the transaction value of identical or similar merchandise. For purposes of today, I am skipping that and going to deductive value. Why? Because its my blog.

The ruling for today is HQ H007667 (May 25, 2007). The merchandise is melons imported from Panama. At the time of entry, the melons were not sold to the importer. Rather, they were entered on consignment. After delivery, the importer took possession of the melons and advanced the grower $2 per box, but did not buy them. Rather, it sold them unrelated third parties, usually within a week of arrival. After the sale (which is the first time a sale in the U.S. occurs) the importer payed the grower the proceeds of the sale, less adjustments for delivered quantity, marketing and distribution expenses, customs duties, and an overhead charge. Essentially, the importer was acting as an agent for the grower by selling goods in the U.S. and being compensated for expenses plus a commission.

Under these facts, there is no sale for export to the United States. Consequently, there is no price paid or payable at the time of entry and no basis on which to apply transaction value. The ruling does not give a particularly cogent reason for skipping from identical or similar merchandise to deductive value. The issue seems to have been price volatility, but that is not important. We are looking at the deductive value analysis.

Deductive value starts with the sale price in the U.S. and deducts out expenses to try and arrive at an FOB foreign port price. The relevant sale price is the unit price at which the merchandise concerned is sold in the greatest aggregate quantity at or about the date of import. If the merchandise is not sold at or about the time of importation, the relevant price is the price at which the merchandise was sold in the greatest aggregate quantity after the date of importation but before the close of the 90th day after importation. That puts a stake in the ground setting the outermost limit for when a deductive value can be found. Here, the melons were to be sold within a week, which is at or about the time of importation.

Now, we have to back expenses out of that price to get to the entered value. According to 19 CFR § 152.105(d), the expenses to be deducted include:
1. Any commission usually paid or agreed to be paid, or the addition usually made for profit and general expenses, in connection with sales in the United States of imported merchandise that is of the same class or kind, regardless of the country of exportation, as the merchandise concerned;
2. The actual costs and associated costs of transportation and insurance incurred with respect to international shipments of the merchandise concerned from the country of exportation to the United States;
3. The usual costs and associated costs of transportation and insurance incurred with respect to shipments of the merchandise concerned from the place of importation to the place of delivery in the United States, if those costs are not included as a general expense under paragraph (d)(1) of this section;
4. The customs duties and other Federal taxes currently payable on the merchandise concerned by reason of its importation, and any Federal excise tax on, or measured by the value of, the merchandise for which vendors in the United States ordinarily are liable; and
5. But only in the case of price determined under paragraph (c)(3) of this section, the value added by the processing of the merchandise after importation to the extent that the value is based on sufficient information relating to the cost of that processing.
In the melon ruling, counsel for the importer proposed several deductions including:

1. Profit and general expenses related to the sale in the U.S. (including the commission)
2. International shipment from Panama to the U.S.
3. Customs duties, MPF and HMT and the cost of phytosanitary certificates
Customs allowed the deduction for marketing and distribution costs as well as the profit. Profit, in this case, was expressed as an "overhead charge." Customs also allowed the deduction for ocean freight. Because the transportation from Panama to the inland point of unloading in the U.S. was shown on a single through bill of lading, Customs permitted the domestic transportation to be deducted. Finally, the customs duties, taxes and fees could be deducted.

After all of those deductions, what remains is the deductive value. Calling it "deductive value" should kind of make sense now.

The interesting thing about deductive value is that it inverts the recordkeeping requirements. The importer is still required to retain documents to support valuation, but the nature of those documents will change. Under deductive value, the there is no price paid or payable to the exporter and there will not be an invoice from the exporter or payment to the exporter that corresponds to the deductive value. Rather, the key documents are evidence of the post-importation sale in the U.S. and, very critically, evidence supporting any deductions from that sale price. An importer relying on deductive value needs records proving the cost of international shipment; the duties, taxes, and fees paid; marketing and distribution expenses; the profit it earned; etc.

This is sometimes a hard concept for compliance personnel who are used to matching a commercial invoice to a 7501 and payment record. It is, however, the way it works.

Some of you are screaming that I skipped over the issue of finding the price at the greatest aggregate quantity. That is an important issue and also impacts recordkeeping. What it means is that your starting price cannot be arbitrarily selected as the lowest price ever attained in the U.S. That would be inappropriate and not representative of true value.

Instead, the price to use as the starting point for your deductions is the single most common price at which the units are sold to an unrelated party. Assume you import 100 melons and make four sales: 15 units for $2 each, 10 units for $1.50 each, 40 units for $1 each, and 35 units for $1.50. Although the single largest sale was of 40 units for $1 each, that is not the price to be used. Rather, the price of the greatest aggregate quantity is $1.50, which was applied to the sale of 45 units (10 + 35). Yes, that is a recordkeeping issue as well.

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