Treatment of Bona Fide Buying Commissions and Selling Commissions for United States Customs Duty Purpose
This Memorandum briefly describes the treatment of bona fide buying commissions, and selling commissions, for purposes of determining the dutiable “transaction value” of merchandise imported into the United States.
A. Bona Fide Buying Commissions
The general rule is that bona fide buying commissions are not included in the dutiable “transaction value” of merchandise imported into the United States.
1. Establishment Of Bona Fide Buying Agency Agreement
Importers frequently purchase merchandise from buying agents headquartered abroad. The agents do not manufacture these items, but essentially acts as agent for one or more importers in reviewing samples, consulting with respect to design work, selecting vendors, and dealing with the various foreign firms that do manufacture the products.
In some cases, the foreign buying agent will list itself as the “seller” of merchandise on export invoices. However, importers can lawfully reduce the dutiable value of imported merchandise by restructuring their relationships with foreign agents so that, instead of being treated as the seller of the goods, the foreign firm functions as the importer’s bona fide buying agent. Where a relationship is properly structured, commissions paid by the importer to the foreign buying agent are not included in the dutiable transaction value of the imported merchandise.
Before discussing the specifics of a proposed buying agency agreement, it is helpful to review generally the legal principles governing the tariff treatment of buying commissions.
Merchandise imported into the United States is typically appraised, for Customs purposes, on the basis of its “transaction value”, which is defined under 19 U.S.C. Section 1401a(b)(1) as follows:
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 amounts equal to –
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(B) Any selling commission incurred by the buyer with respect to the imported merchandise;
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The term “price actually paid or payable” is defined to include “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 from the country of exportation to the place of importation in the United States) made… by the buyer to, or for the benefit of, the seller.” Id., Section 1401a(b)(4)(A). Nothing in the statute authorizes the inclusion of bona fide buying commissions in transaction value.
The transaction value statute seeks to assess duty on all sums which are paid to, or inure to the benefit of, the foreign seller of the imported merchandise. Thus, where an agent is owned or controlled by a foreign seller, or the seller requires the United States buyer to make a payment to an agent as a condition of purchasing merchandise, the law presumes that these are “selling commissions,” inextricably linked to the payment for the merchandise. However, where an agent acts for, and is controlled by, the United States buyer of the merchandise, payments by the buyer to the agent are not dutiable, provided certain conditions are met.
We discuss below the various factors which Customs examines in determining the dutiability of agents’ commissions.
A. Actions Performed By Agent
Services characteristic of those rendered by a bona fide buying agent include: compiling market information, gathering samples, translating, placing orders based on the buyer’s instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing the goods, and arranging for shipment and payment. See, e.g., Jay-Arr Slimwear v. United States, 10 CIT ___ (1988). Buying agents also assist buyers at trade shows, sales meetings, and negotiations.
However, where an agent renders services in connection with the actual production of the merchandise, such activities have been held inconsistent with buying agency relationships. See, e.g., International Fashions v. United States, 64 CCPA 35, C.A.D. 1, 545 F. 2d 138 (1976). Further, to the extent such services are “incidental to placing the merchandise in condition, packed ready for shipment to the United States”, they are considered dutiable. In short, Customs distinguishes dutiable payments which affect the nature of the foreign merchandise purchased for exportation to the United States, from non-dutiable buying commissions, which affect the manner in which foreign merchandise is purchased for exportation.
B. Control Of Agent By United States Buyer
A second — and most important — factor which Customs examines is the precise relationship between the buyer and the agent, and the extent to which the buyer has control over the actions and responsibilities of the agent. In other words, “the primary consideration in ascertaining whether the relationship is that of principal-agent, rather than of buyer-seller, is the right of the principal to control the conduct of the agent with respect to the matters entrusted to him.” See Jay-Arr Slimwear, supra, citing Dorf International, Inc. v. United States, 61 Cust. Ct. 604 (1968).
The fact that the agent may possess a stock interest in the company which manufactures the merchandise is of no consequence, provided the agent and the manufacturing facility are not “in privity”, and no commissions paid to the agent inure to the manufacturer’s benefit. Thus, it is possible for a company to act as a bona fide buying agent, while being related by stock ownership to the foreign manufacturer. Relationship alone would not negate the existence of a bona fide buying agency, unless it could be shown (1) that the agent’s actions were controlled by the foreign manufacturer or seller, or (2) that the benefit of commissions paid to the agent ultimately inured to the manufacturer or seller.
Control of the agent by the buyer is paramount. If the agent is free to act without taking direct instructions from the buyer, (e.g., can select the product which will be purchased), such fact strongly suggests that there is no buying agency arrangement. Furthermore, agents frequently appear on invoices as the buyer and reseller of the merchandise being imported. If the price charged by the agent to the United States buyer differs from that charged to the agent by the foreign manufacturer or seller, the inference is that the “agent” is acting for his own account, and not on the buyer’s behalf.
In some instances, an agent may act on behalf of several foreign principals who are interested in purchasing the same merchandise. However, where an agent places an order with a factory for a quantity of merchandise far in excess of that ordered by the particular United States buyer under consideration, the inference is that the foreign seller/manufacturer could not know that a particular quantity of the merchandise was destined for the particular buyer. In such cases, Customs holds that no bona fide buying agency exists.
The manner and amount of payment for the “agent”‘s services is also a significant factor. Where the agent’s commissions are regularly expressed entirely as a percentage of the purchase price, an inference may arise that the payments are related to the sale and purchase of the merchandise, rather than to the services which the agent performs on the buyer’s behalf. We recommend that, in such cases, the commissions be paid on a periodic (e.q., monthly) basis, rather than on a shipment-by-shipment basis.
In considering whether a bona fide buying agency exists, Customs examines two documentary factors: (1) the existence of a written buying agency agreement; and (2) the commercial documentation generated during the transaction.
First, the buying agency agreement is significant, since it is evidence of the fact and terms of the agency. While Customs or a court could conceivably infer an agency from the facts of a situation, they will not do so. The importer at all times bears the burden of proving the agency.
A second documentary factor to be considered is the content of the invoices and other sales documents. Customs typically examines: (1) the parties named as “purchaser” and “seller” on invoices generated by the foreign seller and by the “agent”, (2) the prices paid or payable for the merchandise, and (3) the methods by which the sales price and agent’s commission are paid. Buying agency commissions must be shown separately from the price paid or payable for the merchandise. If the entry papers and invoices submitted therewith only reflect the agent as the “seller”, Customs has no alternative but to appraise the shipment on the assumption that the agent is in fact the seller.
Documentation showing the identity of the actual seller, and the amount charged by the seller, must be provided. There is no provision of law which allows Customs to “deduct” an agent’s commission from an amount shown on the invoice as the price for the merchandise. The actual price charged by the true foreign seller and/or manufacturer must be established. See, e.g., Customs Ruling 542141 of September 29, 1980.
B. Selling Commissions
As noted above, the definition of dutiable “transaction value” includes any selling commissions related to the merchandise which are paid by the buyer. Whether a party is a “selling agent”, or is buying and reselling merchandise for its own account, is a determination which Customs makes on a case by case basis.
As in the case of buying agents, the question of whether a party is a selling agent turns on the question of control. Control of the agent by the foreign manufacturer or seller of the merchandise is paramount. Where a party is not acting on its own behalf, but rather at the behest and under the control of a foreign principal, it will be deemed a selling agent.
Factors which Customs takes into account in determining whether a party is a selling agent include the following:
- Whether a written selling agency agreement exists. In distinction the buying agency situation, Customs will readily infer the existence of a selling agency in the absence of a written agreement;
- Whether a party has the right to set prices for the merchandise on its own, or must have the prices approved by a foreign principal;
- Whether the party earns a variable profit (or loss) on the sale of the imported merchandise, or earns a regular commission (usually measured as a percentage of the sales price of the merchandise;
- Terms of sale. If a party purchases goods F.O.B. foreign port of export, and resells them on a delivered or C.I.F. port of import basis, then the party bears risk of loss during transit, and might be considered to be acting for its own account, rather than as an agent;
- Whether the party maintains its own inventory of the merchandise in the United States;
- Whether the party orders merchandise from a foreign seller on its own initiative, or only after receiving an order or offer from a United States customer;
- Whether the invoice and other commercial papers generated by the foreign seller designate as the “buyer” the party in question, or the party’s United States customer for the goods.
Where an importer of record is buying and selling merchandise for its own account, then the price from the foreign seller to the importer is the price which determines dutiable “transaction value”. However, where the importer acts as a commission agent on behalf of the foreign seller, then the price paid by the importer’s customer in the United States generally forms the basis for dutiable value, with no deduction for selling commissions earned by the importer.
Note: The information contained in this memorandum is for general information only, and is not intended as advice or counsel regarding any specific situation. If you have an issue relating to the subject matter discussed in this memorandum, you should consult with counsel or your customs advisers concerning the proper course of action to be followed in your case.
Entire contents copyright 1998 by Neville Peterson LLP.
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