March 2021
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Nondutiable Charges
Mark K. Neville, Jr.
Customs valuation planning is a favorite theme for many importers. When faced with a tariff classification that admits of no amendments and when stuck with a country of origin that is also solidly in place, the importer is staring at what appears to be the makings of an inflexible calculation of the duty bill. Leaving aside those cases where the duty rate is not set at an ad valorem level, many think that the importer is left to apply the duty rate assigned by the combination of the tariff classification and origin status and simply make out its check to the government. In their thinking, the price actually paid or payable (the PAPP) for the imported goods is the invoice price for those goods, and that’s an end to it.
But for faithful readers of this column, the invoice price may be the beginning of the inquiry. The invoice price may omit certain elements of value that are properly dutiable or the invoice price may overstate the price for the goods and include other elements that might properly be split off or “unbundled” from the proper PAPP. Put another way, the importer will be thinking about isolating separate charges in the hope of removing them from a dutiable status. The customs authority will be seeking to examine whether any of those separately invoiced charges should be seen as part of the PAPP or as one of the statutory additions.
This is not intended to be an exhaustive analysis of the subject, and it is primarily but not exclusively focused on U.S. sources, but it should be seen as a “thought” starter and one which might apply in other jurisdictions as well.
Customs Value: Legal Basis
The principal basis for assigning a customs value to imported merchandise in the U.S. is transaction value, defined as the price actually paid or payable for the goods when sold for exportation to the United States.1 That rubric corresponds roughly to the invoice price for the goods. As explored in earlier discussions, the invoice price or the PAPP might be adjusted by adding to it certain additional elements of value that are missing. These five categories of permitted adjustments—and no others—are packing, sales commissions, dutiable assists, royalties and license fees and proceeds of subsequent resales.2 Misguided attempts are afoot to broaden this Art. 1 definition of transaction value, focusing on paragraph 7 of Annex III of the CVA, which states: “The price actually paid or payable includes all payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller. ”The PAPP is defined in the U.S. statute at 19 U.S.C. § 1401a (b)(4)(A). You should note the subtle—yet significant— difference:
The term “price actually paid or payable” means 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… Emphasis added.
I will be devoting a separate discussion in a later article to this effort but for the moment it is sufficient to note that this text was appended at the last moment to what was already a late-in-the-day discussion of developing countries ’ special treatment in the Tokyo Round 1979 run up to finalizing the CVA. There is no documentary record of its origins, but we can point to its text as being a reflection of longstanding U.S practice. We can also point to the fact that this expanded view of the PAPP was seemingly blessed by the appellate court in Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), a decision that still causes head shaking at many a desk. But it is crucial to recall that any seeming endorsement of an expanded definition of the PAPP based on para. 7 of Annex III or on CBP’ s administrative practice was decisively limited by the Court of International Trade in Chrysler Corp. v. United States, 17 CIT 1993, to payments being for the imported goods. Notably, CBP elected not to seek appellate review of the Chrysler decision, which stands to this day firmly for the proposition that the PAPP must be shown to be “for the imported goods. ” Another significant point to harbor is the narrow construction applied to a payment as being for the benefit of the seller in another landmark CIT valuation decision, Trimil3 where CBP again declined Federal Circuit review.
At this point you will have grasped the significance of the legal texts and the judicial decisions. Dutiable status should be reserved for those payments that are either:
- an integral part of the PAPP, meaning that they are for the imported goods, or that
- fall within one of the five enumerated statutory additions. FULL STOP.
With this backdrop we may turn our attention to planning.
Customs Planning
For the importer, the crux of the matter is to prove that the payment is for some thing other than for the goods themselves AND it is not falling within the definition of a statutory addition (to use the CVA reference, it is not defined by Art. 8 of the CVA). It may well be that the payment is, on one level, related to the imported goods, but unless it is actually for the goods them selves or falls within the definitions, it should be nondutiable. In this vein, we must recognize that there are certain charges that are never dutiable. These statutory exclusions are the mirror image of the statutory additions, and they include post-import transport and insurance charges,4 as well as post-importation charges for installation, erection and the like and duties and taxes.5
It is important to be realistic here. While there may be some private sector actors who see all things and all matters as nondutiable, we try to play this down the middle. If the facts and the operative statutory or regulations ’ text line up for dutiable status, then so be it, some private sector protestations notwithstanding. If, on the other hand, the facts and the legal texts support a nondutiable status, then some customs authorities will move heaven and earth to avoid acknowledging that nondutiable status. Here are some of the CBP rulings that provide useful administrative guidance and, at the same time, raise the bar for compliance.6
InterestCharges. Following the lead of the Customs Valuation Committee of the WTO in its 1984 Decision 3.1, interest charges may be nondutiable in the U.S. There are three conditions: 1. The charges are distinguished from the PAPP 2. The financing arrangement was made in writing, and, 3. where required, the buyer can demonstrate that such goods are actually sold at the price declared as the PAPP and the claimed rate of interest does not exceed the level for such transactions prevailing in the country where, and at the time when, the financing was provided. Among other precedents, you might refer to ruling nos. 546399 (3/20/97) and H259861 (1/28/15).7
Advertising, Marketing Promotion Services. The customs regulations, 19 CFR §152.103(a)(2), specifically provide that advertising and marketing expenses incurred by the buyer are not added to the price actually paid or payable, even if they indirectly benefit the seller. This follows the CVA treatment.8 Ruling nos. 544482 (8/7/90), 544638 (7/1/91), W548547 (3/7/06) H125118 (9/12/14), H287490 (10/16/17) (marketing, promotion). Copromotion fees paid to licensor, ruling no. 545998 (11/13/96) (though the Co-Promotion fees are made to a party related to the seller, based on the evidence presented, we conclude that they do not constitute payments for the imported merchandise and thus are not part of the PAPP; not a statutory addition).
Product Liability Insurance. Ruling nos. 542984 (4/8/83) (premium payments made by importer to seller and subsequently remitted to insurance company are indirect payments to the seller and may not be deducted from invoice price) and 546584 (9/10/97) (Chrysler distinguished).
Exclusivity Fee for Distributor. Ruling no. H242894 (12/4/13) is a perfect example of the maxim “facts matter.” Indeed they do, since a change in the facts—or even one fact if it be material—can result in a different outcome. In this ruling, the importer was able to show that the payment of a fee was a separate property right— the grant of an exclusive right to distribute the product within the territory—and not for the imported goods. A major factor was the point that the fee was not measured by or tied to any level of purchases, imports or resales of the product; the fee would be due regardless of purchase volume or even if no purchases were made.9 Importantly, the agreement had noted that a failure to make the fee payment would not extinguish the right to buy or import the goods but only the exclusivity of those rights.
An entirely different result followed in a 2019 European court case on exclusivity fees,10 where the facts were decidedly different. We are left wondering if the European Court of Justice would have reached the same result if the facts more closely aligned with the U.S. ruling, i.e., there was a clear dichotomy between the exclusivity right as a stand-alone property right and the purchase and importation of products under the distribution agreement.
Reservation of Plant Capacity. Ruling no. 546638 (10/4/99), payment of an “advance royalty” or an interest-free loan—no evidence it was an interest-free loan; CBP found that the payment was not “ completely unrelated” to the imported goods. This issue might be revisited, with a stronger argument based upon the Chrysler rationale.
Incidental Charges. In the U.S., as noted, customs valuation is based upon an FOB basis, meaning the PAPP for the goods packed ready for shipment at the foreign port.11 What if that FOB price contains charges that are related to the goods but are not for the goods? What if there are various “accessorial”charges subsumed within that FOB price, fees charged to the seller by the freight forwarder or others concerned with moving the freight to the foreign port and incidental to their international shipment? A strict application of Chrysler would have those charges as nondutiable. There are perhaps a dozen rulings issued by CBP that take that view. Examples of specified charges that have been previously assigned a nondutiable status when found to have been incident to international shipment and embedded within the invoice price include the following, inter alia:>
- Terminal handling charge (e.g., ruling nos. H092560, 4/7/10 and H219516, 7/30/12, H235776, 4/16/13)
- Seal fee (e.g., ruling nos. H237182, 4/16/13 and H219516, 7/30/12)
- Booking charge (e.g., H237182, 4/16/13)
- Handling charges (for handling the cargo and processing the shipment or for the freight forwarder to process the shipment) (e.g., ruling no. H092560, 4/7/10 and H237182, 4/16/13) • Documentation charges (e.g., ruling nos. H092560, 4/7/10 and H237182, 4/16/13)
Foreign Inland Freight (FIF) Charges. Related to the incidental charges breakout, these FIF charges are similarly eligible for nondutiable treatment if the purchase terms are ex works (EXW) or the bill of lading is a through bill of lading. 19 CFR §152. 103 (a) (5). In All Channel Products v. United States, 16 C.I.T. 169, 787 F. Supp. 1457, 1460 (1992), aff’d 982 F.2d 513 (Fed. Cir. 1992), where the deductibility of foreign inland freight charges was at issue, the CIT stated: without belaboring what is obvious from a reading of §152.103(a)(5)(ii) and (iii), the amended regulations were intended to provide a tightly circumscribed exception to the “general rule” (i.e., that inland freight charges included in a CIF or other non-ex-factory sales price are dutiable) where the importer can satisfactorily document that the FIF [foreign inland freight] charges were incident to the international shipment of the merchandise. 16 CIT at 173. (emphasis added). Ruling no. H189076 (6/26/13) (Since there is no evidence of through shipment from the factory to the U.S., no deduction may be made for foreign inland freight charges).
Management Fees. Often a limited risk distributor will rely upon its parent company or a sister company to provide various management services and the question of the status of the fees paid for those services will arise.12 Ruling nos. 545420 (5/31/95) (procurement fees as part of management services provided by a buying agent), W548547 (3/7/06), modifying 548316 (7/16/03), H253767 (3/3/15). As a final point to consider, be mindful that some customs authorities will endeavor to review the amount of the fees charged with the level of services being provided to ensure that they are commensurate and, thus, “justified. ” Note: this is an across-the-board concern and not limited to management services.13
Buying Commission The reflexive approach to buying agency commissions is to treat them as nondutiable. But to reinforce the continued vitality of Generra, even a buying commission that would otherwise be nondutiable will attract duty when the commission is embedded within the PAPP. Ruling no. 548258 (10/9/03). To the same effect, see ruling no. H239496 (3//13/15) (fees for marketing, sales support, IT, admin, etc. that would be nondutiable are embedded within the PAPP and thus they are dutiable—CBP has no authority to unbundle the charges).
Technical Services and Retail Consulting. Ruling no. W648464 (5/25/04), aff’ g W548014 (9/13/02) on reconsideration. This 2% fee was considered dutiable on Generra grounds. Again, one wonders whether a vigorous resort to Chrysler—the fact that the payment is related to the imported goods is not enough to render the fee dutiable—it must be seen as either (i) being “for the goods ” to come within the PAPP or (ii) fit within one of the statutory additions.
Software Unlocking Fee. Ruling no. H2396771 (6/7/13) (software is not operating software but optional; separate transaction between the buyer/user and the manufacturer of the machine).
Conclusion
This is just a brief survey of some payments that have created revenue streams apart from the PAPP and which may or may not fall outside the statutory additions. The rulings are intensely fact-specific and, as stated at the outset, a change of even one fact could lead to a different outcome. To achieve success, it is necessary for the importer to look to the statute and to be guided by the Chrysler decision, which affirms the primacy of an Art. 1 definition of the PAPP as being “for the imported goods. ”
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2. Recent, unfortunate developments in the treatment of assists and royalties and license fees were covered extensively in the January 2021 article, Neville, “The Road Not Taken: Diverging Views on Royalties,” 32 JOIT 27 (Jan. 2021).
3. Trimil SA v. United States, 419 F. Supp. 3d 1307 (CIT 2019). For a discussion of this important decision, see, Neville,“Customs Valuation Status of Royalties and Advertising Fees,” 31 JOIT 27 (July 2020).
4. Art. 8.2 of the CVA leaves it up to each jurisdiction to decide whether transport and insurance charges form part of the customs value. In the U.S. and Canada international transport and insurance charges are excluded from customs value.
5. 19 U.S.C. 1401a (b)(3), Interpretative Note to Art. 1, Price Actually Paid or Payable, point 3. 6. Unless and until other jurisdictions similarly provide for published customs valuation rulings the CROSS system of rulings is the “only game in town” as a con- sistent resource for the private sector and, perhaps not surprisingly, for other customs authorities.
7. For a longer discussion, see Neville, “Customs Valuation Status of Interest Payments, ” 31 JOIT 24 (Apr. 2020). Note that the WTO decided in 1984 not to pursue a formal amendment to the CVA on this point but to manage it via a Decision.
8. CVA, Interpretative Note to Art. 1, Price Actually Paid or Payable, point 2 and CVA, Interpretative Note to Art. 1, Para. 1(b), point 2. See Neville, “Some Observations on Customs Valuation Law Status of AMP Payments,” 27 JOIT 24 (Apr. 2016).
9. See, Neville, “Customs Valuation Status of Exclusivity and Franchise Fees,” 28 JOIT 29 (Oct. 2017). 10. ECJ 19 November 2020, C-775/19 (5th AVENUE Products Trading GmbH), ECLI:EU:C:2020:948.
11. To be sure, the nondeductible transport and insurance charges are those actually paid to the service providers, not the amounts paid by the importer. There could be a difference in those amounts, as where the vendor pre-pays the service providers but enjoys a discount and retains the difference. See Neville (ed.), International Trade Laws of the United States: Statutes and Strategies, ¶5.19 [1].
12. A more fundamental question will often arise in such circumstances, i.e., does the importer qualify as a buyer of the imported goods or is it a mere selling agent for the foreign seller. You will recognize this is the “Purchaser in the U.S.” issue, the U.S. administrative ver- sion of the Canadian statutory “Purchaser in Canada” prescription which I addressed in Neville, “Sales for Export from China: Customs Valuation Plays, ” 30 JOIT 32 (Sept. 2019).
13. Canada is a leading proponent of this approach, which can view the fee as an integral part of the PAPP or as a dutiable subsequent proceed. See Neville (ed.), International Trade Laws of the United States: Statutes and Strategies, ¶6.05[2][b], discussing Memorandum D13-14-13 (Mar. 31, 2015).