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US Customs Actions Target Undervaluation Among Apparel Importers

U.S. Customs & Border Protection (CBP) is keeping its eye on industry activities that run afoul of the law, and the apparel industry is being called out for its indiscretions in a new report.

International Trade Today’s “2017 CBP Ruling and Revocations Summary,” pointed out two apparel related cases that could change transaction values for importers.

In one case, CBP ruled that design concepts and sketches performed in the Netherlands for a U.S. importer of wearing apparel, are assists that must be added to the price paid or payable of the imported sleepwear. So are the costs of sending “technical packages” with the final patterns and specifications derived from the Dutch designs to the Chinese manufacturer, it said.

The U.S. importer, Miss Elaine, entered into consulting agreements whereby Netherlands-based designers design concepts, shapes, create sketches and select trim. The items are then shipped to Miss Elaine in the U.S., where the importer formalizes them into a pattern and technical package with a bill of materials and size specifications that are shipped to a Chinese manufacturer to create samples.

[Read more about CBP: Pure Collection Lawsuit Highlights Apparel’s Customs Fraud Problem]

The samples are then reviewed with the Dutch designers, who provide input before the Miss Elaine gives the go-ahead for the Chinese manufacturer to begin production. Costs incurred by Miss Elaine include consulting fees to the designers, and courier charges for shipping designs and samples to and from the Netherlands. None of the Dutch consultants is related to Miss Elaine, and no materials are shipped directly between the Dutch designers and the Chinese manufacturer.

CBP found that the design consulting performed in the Netherlands is a dutiable assist. CBP has ruled that design work that is devoid of detail and leaves development of the final product to the producer is not “necessary for production” and is not considered an assist. But here, “we find that the design work provided to the vendor/manufacturer is necessary for production of the imported sleepwear,” CBP said.

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“Miss Elaine will incorporate” the designs “into the components of the technical package, and there is nothing to suggest that Miss Elaine will disregard or even modify them in doing so,” CBP said.

In a second case, an apparel importer’s purported buying agent commissions, a cash advance to its supplier and indirect payments for fabric development and inspection fees should all have been included in the transaction value of the apparel for valuation purposes, CBP said.

CBP found Key Apparel’s agent was not bona fide, partly because its payments to the agent were based on the apparel’s resale price rather than the price paid to the apparel supplier. CBP also found Key did not provide enough evidence that the indirect payments to its suppliers were not tied to the sale of the apparel.

The ruling comes in response to a request for internal advice from the area port director of the Port of Savannah that was prompted by a 2014 Office of Regulatory Audit report finding Key guilty of undervaluation. The report said Key improperly excluded from transaction value payments to purported agents that were not bona fide buying commissions, as well as indirect payments for fabric development charges, inspection fees and advance payments.

CBP’s Office of Regulations and Rulings agreed with the audit’s finding that the payments were dutiable. Unlike selling commissions, bona fide buying commissions are not included in transaction value, the ruling said. But Key failed to prove that its agent was actually a bona fide buying agent and that the commissions were tied to its purchases, the ruling said.