Opportunity for Importers of Designer Merchandise to Reduce Duty Exposure
Kelley Drye Client Advisory
We have recently received a positive ruling from U.S. Customs and Border Protection (“Customs”) in response to a protest filed on behalf of one of our clients, which is a U.S. subsidiary of a European parent company and importing designer merchandise into the U.S. As a result of the ruling, the U.S. importer will be able to reduce the value of its merchandise, thus lowering its duty exposure. At issue were design and management fees, and the importer prevailed on both.
Merchandise imported into the U.S. is typically appraised in accordance with the transaction value defined as the “price actually paid or payable for the merchandise when sold for exportation to the U.S.” plus certain additions, such as assists. Assists are supplied directly or indirectly, free of charge or at a reduced cost by the buyer for use in connection with the production of the merchandise. Assists can include design work if done outside the U.S. and are necessary for the production of the imported merchandise. We argued that the designs were specifications advising the manufacturer “what to make” but not “how to make” the garments. Customs agreed with our argument and held that the sketches were not “essential to the production” of the apparel and therefore not included in the dutiable value of the garments.
Furthermore, management fees paid to the parent company outside the U.S. can also be dutiable and included in the value of imported merchandise. We argued that the specific services provided by the European parent were not to be included on the basis that the fees were not for the benefit of the seller of the merchandise, i.e. the manufacturer. Those services included quality control, marketing, financing, and negotiating with vendors. Again, Customs agreed with our arguments and held that the management fee paid by the U.S. company to its European parent was not dutiable.
We recommend that U.S. importers of designer merchandise, particularly those with a parent company outside of the U.S., review their valuation to see if downward adjustments can be made thereby reducing duty payments to Customs.