When are Payments for Services Provided Abroad a Part of
the Customs Value of Imported Merchandise?

May 15, 2013

Determining the correct customs value of imported merchandise can be challenging, particularly when discussing the subject of assists, which are treated as additions to the price an importer declares to U.S. Customs and Border Protection (“CBP”) at the time of entry for the imported merchandise. When a person travels outside the U.S. to perform services in connection with their employment, either for a short or extended period of time, the question is whether the services provided by that person are a part of the dutiable value of whatever goods are produced as a result of that activity when subsequently imported into the U.S..

Under Section 484 of the Tariff Act of 1930, as amended (19 USC § 1484), the Importer of Record (“IOR”) is the party responsible for using reasonable care when making entry of goods, including providing CBP with the correct classification and value of the imported merchandise, and for providing any other information necessary to enable CBP to properly assess duties, collect accurate statistics, and determine whether any other applicable legal requirement has been met.

Under the customs valuation statute (19 USC § 1401a), the primary or preferred method of valuation is “transaction value.” Other methods of valuation are subordinate and can be applied only if the “transaction value” method is found inapplicable. Transaction value may be found not to apply if:

1. The parties are “related;”
2. There is no sale of the imported merchandise that caused exportation to the U.S.; or,
3. When there is an addition to the price that cannot be determined. 

Transaction value is defined as the “price actually paid or payable for merchandise when sold for exportation to the U.S.,” plus certain statutory additions, such as assists, royalties, and/or the proceeds of a subsequent resale in the U.S. The term “price actually paid or payable” (or “PAPP”) is defined in 19 USC § 1401a(b)(4)(A) to mean:

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, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

Thus, the “price actually paid or payable” is “the total payment . . . made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.”

In addition to the actual price paid, the law requires that certain additions to the value be included. One of these additions is referred to as “assists.” An assist is simply a particular item or service that is supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the U.S. of that merchandise. An assist is defined by the value statute (19 USC § 1401a(h)) as consisting of:

1. Materials, components, parts, and similar items incorporated in the imported merchandise.
2. Tools, dies, molds, and similar items used in the production of the imported merchandise.
3. Merchandise consumed in the production of the imported merchandise.
4. Engineering, development, artwork, design work, and plans and sketches undertaken elsewhere than in the U.S. and are necessary for the production of the imported merchandise.

While most importers are familiar with the first three categories of assists, the contribution of services provided by employees of U.S. companies while aboard that relates to the production of the imported merchandise is frequently overlooked when valuing imported merchandise.

Services Constituting Assists

When considering whether services provided by a buyer to a manufacturer located abroad constitute an assist, one must distinguish between services that are completely unrelated to the production of the imported merchandise and services that are necessary for the production of the imported merchandise. See HQ 548540, dated July 28, 2004, and HQ 546782, dated December 2, 1999.

Generally, managerial and supervisory services performed abroad that relate to the direction and management of overall plant operations are not considered assists when paid for by a buyer of the merchandise because such services are not necessary or integral to the production of the imported merchandise. On the other hand, services performed abroad that involve engineering or development that are necessary for the production of the imported merchandise are considered to be assists when paid for by the buyer of the merchandise. See HQ 545117 (October 30, 1992) (The cost of work performed by employees residing abroad is considered a dutiable assist if the nature of their work involves engineering, development, artwork, and plans and sketches that are necessary for the production of the imported merchandise.). 

When are Payments for Expatriot Services Provided Aboard a Part of the Customs Value of Imported Merchandise?

Under the valuation statute, no work undertaken in a foreign country is to be treated as an assist if the work:

1. Is performed by an individual domiciled (i.e., living in) within the U.S.;
2. Is performed by that individual while acting as an employee or agent of the buyer of the imported merchandise; and
3. Is incidental to other engineering, development, artwork, design work, or plans or sketches that are undertaken within the U.S.  See 19 CFR 152.102(a)(2).

In order for compensation of an employee or agent not to be treated as an assist, all three elements of the statute must be met:

1. The individual must have his or her legal residence in the U.S.;
2. The individual must be an employee or agent of the buyer of the imported merchandise;
3. The activity performed abroad must be incidental to other engineering, development, artwork, design work, or plans or sketches that are undertaken within the U.S.

While all three elements are important, the last element – whether the work preformed abroad is incidental to other engineering, development, artwork, design work, or plans or sketches undertaken within the U.S. – is the one that receives the most attention.

In HQ W563534, May 6, 2009, CBP considered whether certain services provided by the chairman of the company, a resident of the U.S., while in China were assists under 19 U.S.C. 1401a(h)(1)(A)(iv). Based on the information in the file, the chairman conducted market research on textile trends, fabrics, colors and styles with the assistance of foreign personnel. The foreign company, a related party, also provided the chairman with an office, administrative support, and advice on sourcing product and components. CBP said that the information in the record was insufficient to support a finding that the activities of the chairman constituted engineering, development, artwork, design work, and/or plans or sketches that were necessary for the production of the imported merchandise. The ruling did conclude, however, that the work of three foreign domiciled designers was an assist under section 402(h)(1)(A)(iv) and that the value of the assist as reflected by the salaries of the foreign designers should be included in the transaction value as an addition to the price actually paid or payable for the imported merchandise.

On the other hand, HQ 548540, dated July 28, 2004, found that the services provided by several U.S. resident designers and employees of the importer working at the foreign manufacturer should be treated as an assist under section 402(h)(1)(A)(iv). In this ruling, CBP said that after the pattern has been created by the foreign company, the U.S. Technical Designer was responsible for examining the pre-production design for fit, and to conduct points of measurement to determine if it met the design specifications. The U.S. Technical Designer was said to receive benefits aside from his/her salary including French lessons, cell phones, relocation costs, school for his/her children, veterinarian costs for his/her cat, and public storage.

As a part of the team, there was also a Technical Design Manager. This individual managed a team of technical designers. His/her job responsibilities was said to include training, hiring, and reviewing the technical staff and formulating and planning workflow to ensure timely delivery of product specifications. The Technical Design Manager was also a U.S. citizen and an employee of the U.S. importer. The Technical Design Manager received benefits aside from his/her salary including French lessons, cell phones, relocation costs, school for his/her children, and public storage.

Upon review of the information submitted, CBP said that it was clear that the various and numerous duties performed by the Technical Designer were part of the development of the merchandise and necessary for the production of that merchandise (e.g., responsible for creation of product specifications and fit execution from concepts through production that accurately reflect design intent and achieve correct construction and fit), and, therefore, the services, and the fringe benefits received constituted an assist. With regard to the Technical Design Manager, CBP said that it was clear that the various and numerous duties performed by the Technical Design Manager are part of the development of the merchandise and necessary for the production of that merchandise (e.g., manage a team of Technical Designers in fit development and execution from concepts through production that accurately reflect and achieve correct fit for Brand and Product Group; plan, establish and monitor workflow to ensure timely delivery of product specifications, fit approvals and communications; create product specifications; work closely with the Planner to deliver products that are reproducible and meet wholesale/retail goals). CBP concluded, therefore, these services also constituted an assist. With regard to the treatment of the fringe benefits, CBP said that these were to be included in the value of the assists, because the fringe benefits, just like the wages, are part of the compensation paid to the employees for their services.

Quality Control Services

With respect to quality control services, CBP said that generally these do not constitute an assist within the meaning of the value law. See HQ 546511 (April 15, 1999). However, CBP did say that quality control that involves production-related design and intimate involvement in the nature of the goods produced could be dutiable either as part of the price actually paid or payable or as an assist. See HQ 547006, April 28, 1998.

Testing Services

With respect to testing, CBP said that testing may constitute one of the enumerated assists if the testing: (1) is supplied directly or indirectly, free of charge or at a reduced cost, by the buyer of the imported merchandise for use in connection with the production or the sale for export to the U.S. of that merchandise and (2) is essential to the production of that merchandise. See generally HQ 544508 (June 19, 1990); HQ 545170 (October 27, 1994); and HQ 545500 (March 24, 1995). On the other hand, the foreign testing of imported goods by a third party and paid for by the importer are generally not treated as assists or a part of the price paid. In HQ W563480, June 9, 2006, CBP discussed whether certain fabric testing fees should be included in the transaction value. In the ruling it was explained that:

As an additional quality assurance measure, AEO would now like to have an unrelated, third-party testing company perform the tests. These tests will be done before the factories acquire the fabrics. Under this new arrangement, AEO's buying agents will source the fabric and arrange for the testing. AEO will pay the testing fees directly to the testing company, regardless of whether or not the fabric is ultimately purchased and used in the manufacture of AEO merchandise. AEO does not own the fabric at the time of testing and does not provide it to the factories as assists.

The issue was phrased as whether the payments AEO would make to the third-party testing company should be included in the price actually paid or payable for the imported merchandise. In answering the question, CBP said:

The issue of testing costs has arisen mainly in the context of testing performed on finished products prior to their shipment to the United States. In situations where independent testers have performed the testing U.S. Customs and Border Protection ("CBP") generally has taken the position that the associated testing costs are not included in the price actually paid or payable for the imported merchandise. See Headquarters Ruling Letter ("HQ") 542946, January 27, 1983; HQ 542774, dated June 14, 1982.

In explaining it’s rationale as to why the testing charges are not a part of the price paid, CBP said:

AEO will make the testing payments to an independent third-party tester, not to the seller of the imported goods. Thus, the payments are not being made by the buyer to, or for the benefit of, the seller. The fabric testing to be performed by AEO's selected testing company also does not appear to amount to production related design or development of the imported apparel and accessories.

Conversely, when the manufacturers perform the testing services the testing costs usually are considered to be part of the price actually paid or payable, even if invoiced separately from the goods. See, HQ 542187, November 7, 1980 (TAA No. 11.) In a more recent ruling, HQ 545753, dated March 11, 1996, the ultimate purchaser of a welding and transfer line system supplied robots to the manufacturer of the system. Before being incorporated into the system, the manufacturer tested the robots. The ruling cites to Generra Sportswear Company vs. United States, 8 Fed. Cir. 132, 905 F.2d 377 (1990), wherein the CAFC stated that so long as a payment is made "to the seller in exchange for merchandise sold for export to the U.S., the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." Applying Generra, CBP determined that if the importer was billed separately for the cost of testing, the amount of the payment would represent part of the total payment made by the buyer to, or for the benefit of, the seller.

Foreign Services “Necessary” for the Production of Imported Merchandise

Regardless of who provides the services, the first question that must be asked is whether the service provided is “necessary” for the production of the imported merchandise.

Early rulings focus on the question of whether the foreign design work reflected instructions to the manufacturer as to what to produce, but not how to produce, the particular item. See C.S.D. 82-149, dated July 28, 1982. To the extent that the design work ultimately provided to the manufacturers is merely "conceptual" and "inspirational", the design work is not an assist. HQ W548490, August 18, 2004.

What is “necessary” for the production is not always easy to determine, but in HQ 548566, dated October 19, 2004, one of the issues addressed was whether patterns for sample or prototype high-end garments were necessary for the production of the imported merchandise and therefore constituted assists. Citing HQ 542830, CBP stated that "if a foreign manufacturer cannot produce or manufacture merchandise without an importer's designs, samples, patterns, etc. that are made abroad, such designs, samples, patterns, etc. should be included in the dutiable value of the imported merchandise."

In HQ 548097, dated January 28, 2003, CBP held that the payments made by the importer to a foreign company were a dutiable assist. It said that if the foreign design work imparted the essence of the product design to the imported merchandise without which the manufacturers could not produce the imported merchandise, then the work was a design assist under 19 U.S.C. 1401a(h)(1)(A)(iv).

Most recently, in HQ H205579, August 2, 2012, CBP concluded that payments made to a third party for software design services performed outside the U.S. were a part of the dutiable value of the imported products. As the ruling explained, a foreign engineering firm was retained to convert existing technical drawings from Auto-CAD software to Pro/Engineering software drawings. In reaching its conclusion, CBP said that the work was performed by trained engineers in an engineering firm, was not clerical in nature, and was not merely the conveyance of the same information in another format. The decision to delete or retain information was made by an engineer exercising professional discretion and was not analogous to data entry. CBP went on to say that the work performed by the foreign company was a middle step in the production of an assist performed in a foreign country.

In HQ H172356, dated January 9, 2012, CBP addressed the question of whether certain payments made by a U.S. importer to a related French company pursuant to a “Collection Sharing Agreement” were dutiable as a “service assist” under 19 U.S.C. 1401a(h)(1)(A)(iv). In this case, the fee covered the preparation and transmission of (1) ektachromes, (2) the supplier's coordinates and buying terms, (3) technical files, and (4) the product sales descriptions. Additionally, the fee covered quality control retained by the service provider over the merchandise and the promotional material for the merchandise. The service fees were calculated as a percentage of the net cost on products sold under the agreements. After the importer obtained the designs they were reworked for American customers and then provided free of charge to the foreign manufacturer of the merchandise. CBP concluded that the original foreign designs were essential to the production of the clothing contained on the transmitted catalogue pages and purchased from the unrelated sellers. It concluded, therefore, that the designs provided under the CSA are dutiable assists.

Summary

The question of whether fees for services provided aboard should be treated as an assist under 19 U.S.C. § 1401a(h)(1)(A)(iv), and added to the customs value of the imported merchandise can be challenging. In these cases, the import manager becomes the sleuth and reviews the company accounts and interviews employees to understand how such business activities are recorded. Once it is determined that fees for services exist, your next step is to determine whether the service provided was “necessary” for the production of the imported merchandise, or whether the service was preformed by an employee or agent of the company that is domiciled in the U.S., and whether the activity preformed was otherwise incidental to other work on the product undertaken within the U.S. This is often a judgment call and requires an understanding of what was or is being done and the relationship of the activity to the product being imported. But, with this information in-hand, you will be better prepared to respond to questions from CBP as to whether services are provided aboard, and, if so, whether such services constitute an assist under 19 U.S.C. 1401a(h)(1)(A)(iv).

If you have any questions about these or other customs matters, please contact George R. Tuttle, III at george.tuttle.iii@tuttlelaw.com or at (415) 986-8780.

George R. Tuttle, III is an attorney with the Law Offices of George R. Tuttle in San Francisco.

The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.

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