H296075

H296075 March 6, 2025 OT:RR:CTF VS H296075 RMC CATEGORY: Valuation Mitchel Landau Assistant Center Director Apparel, Footwear, & Textile Center of Excellence and Expertise Office of Field Operations Re: Internal Advice Request; Dutiability of E-Tailing Franchise Fees; Related Parties; Test Values; Circumstances of the Sale Dear Mr. Landau: This is in response to your undated request seeking internal advice to determine whether any part of “e-tailing franchise fee” payments that [ ] (the Buyer) makes to its parent seller company should be included in the transaction value of imported goods purchased from its parent company, and whether, in fact, transaction value is the appropriate method of appraisement for those import transactions. We determined that certain information submitted in connection with this internal advice request should be treated as confidential. Therefore, pursuant to the requirements of 19 C.F.R. §177.2(b)(7), the information contained within brackets and all attachments to this internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: 1. Background The Buyer is an online retailer of high-end apparel products to customers in the North American market; specifically, women’s and men’s clothing, handbags, shoes, accessories, lingerie, and beauty products. The Buyer is the U.S. subsidiary of [ ] (the Seller). The Seller initially launched in an overseas market and developed the know-how, procedures, and operating expertise to successfully run the business. This know-how and expertise includes creating a website and ordering system; establishing supplier relationships and a customer base; and acquiring management, pricing, and marketing knowledge. With the rapid expansion of the online retailing market and recognition of the international customer base, the Buyer was established to serve the North American market as a warehousing and resale operation. The Buyer purchases goods from both U.S. and foreign vendors, relying primarily upon supplier relationships developed by the Seller. These goods are then resold to retail customers who place orders on the Buyer’s website, after which the goods are dispatched to the customer from its US warehouse. Although the Buyer purchases goods from both unrelated foreign vendors and from the Seller, this internal advice request concerns only merchandise that it purchased directly from the Seller, rather than from unrelated foreign vendors. 2. Trade and Regulatory Audit Review of the Buyer’s Import Activity In 2016, the Trade Regulatory Audit Directorate (“Regulatory Audit”) within U.S. Customs and Border Protection (“CBP”) completed a review of the Buyer’s import activity for its fiscal year ending March 31, 2014. As part of that review, Regulatory Audit examined the level of risk presented by the Buyer in the areas of customs valuation, entry of merchandise, and tariff classification. With regard to customs valuation, in its report dated January 19, 2016, Regulatory Audit concluded that the Buyer’s activities related to the use of the transaction value method presented an unacceptable risk to CBP. Specifically, Regulatory Audit raised concerns about the dutiability of so-called “e-tailing franchise fees” identified on the general ledger and not included in the customs value of imported goods. According to the finding sheet attached to Regulatory Audit’s report, the Buyer did not document what the e-tailing franchise fee was for, who received it, or how it was calculated. Regulatory Audit also stated its future intention to perform a follow-up audit focused on transaction value to determine whether the Buyer had improved its practices and reduced the risk to a level acceptable to CBP. The methodology and procedures for the follow-up report included, among others, conducting interviews with the Buyer and the Seller’s staff, analyzing the terms of an “e-tailing franchise agreement” between the Buyer and the Seller, and sampling and testing a series of the Buyer’s import transactions to determine compliance with CBP laws and regulations for customs valuation. In its report of February 12, 2018, Regulatory Audit concluded that its review of the “etailing franchise agreement” revealed that the franchise fee that the Buyer paid included both dutiable and nondutiable costs that had been commingled. Regulatory Audit’s view was therefore that transaction value was inapplicable for the transaction under review. Because the importer disagreed with these findings, Regulatory Audit indicated that it would refer the matter to the Regulations and Rulings Directorate for internal advice pursuant to 19 C.F.R. § 177.11. 3. The Buyer’s Submissions and Documentation During our review of this matter, the Buyer provided extensive documentation and numerous follow-up submissions in support of its argument that the e-tailing franchise fee payments should not be included in the transaction value of the imported goods, including: (1) the E-tailing Franchise Agreement between the Buyer and the Seller; (2) a transfer pricing analysis conducted by Deloitte LLP (“Deloitte”) examining the arm’s length nature of the e-tailing franchise fee; (3) a memorandum from Deloitte outlining the purpose and calculation the e-tailing franchise fee; and (4) 2 for the period from 2014 to 2016, information on the total value of merchandise purchased by the Buyer from all suppliers, and separately, the total value of merchandise that the Buyer purchased from the Seller. In addition, because the transactions in question occurred between related parties, we also requested information to confirm that the relationship between the Buyer and the Seller had not influenced the price, and that transaction value remained an acceptable method of appraisement for the imported goods. The Buyer also provided extensive documentation on this issue, including: (1) for fiscal years 2016 and 2017, financial statements for the Seller and trial balances for the Buyer; (2) invoices, purchase orders, proof of payment, shipping documents and other relevant entry documentation for 10 sample entries selected for testing by Regulatory Audit; and (3) invoices, purchase orders, and entry documents for a list of 19 Product Identification codes (PIDs) that involved purchases by the Buyer from unrelated suppliers. a. E-Tailing Franchise Fee Documentation Under the terms of the E-Tailing Agreement, the Seller agreed to grant the following rights to the Buyer: Subject to and in accordance with the terms and conditions of this Agreement, the Franchisor hereby grants to the Franchisee for the Term the exclusive right to operate the Business in the Territory and the following additional rights relating thereto: A non-exclusive right to access and use the Website and Ordering System; A non-exclusive right to use and benefit from the Franchisor’s commercial management, strategic management, accounting, information technology, pricing, and marketing knowledge and experience; and A non-exclusive right to use the Intellectual Property Rights including the Trade Marks and Trade Name in connection with the Business in the Territory subject to the provisions of this Agreement. Provided that the Franchisee shall be entitled to sell (but not to actively market) the Products to customers in any countries outside the Territory. According to the Agreement, the e-tailing franchise fee is calculated primarily by applying a benchmarked Berry Ratio (i.e., the ratio of gross profit to operating expenses) to the Buyer’s budgeted financial results at the start of each accounting period. If the e-tailing franchise fee calculated in this manner does not cause the Buyer’s budgeted operating margin to fall within a benchmark arm’s-length range, an upfront adjustment to the e-tailing franchise fee is made in order to bring the budgeted operating margin to the nearest edge of this range. The Deloitte memorandum pr

Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions—such as certain royalty or license fees—to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). 1. Dutiability of the E-Tailing Franchise Fee The first issue in this case is whether the e-tailing franchise fee that the Buyer pays to the Seller should be included in the transaction value of the goods that it purchases from the Seller. The franchise fee could be dutiable in three ways, each of which is examined below: (1) as part of the price actually paid or payable for the imported merchandise; (2) as an addition to the price actually paid or payable for certain royalties or license fees; or (3) as an addition to the price actually paid or payable for certain proceeds of subsequent resale, disposal, or use of the imported merchandise. a. Price Actually Paid or Payable As stated above, transaction value is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily 6 

enumerated additions. 19 U.S.C. § 1401a(b)(1). Under 19 U.S.C. § 1401a(b)(4)(A), the term “price actually paid or payable” means: the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation and related services incident to the international shipment of the merchandise from the country of exportation to