CBP Rules Importer, Middleman and Related Seller Provided Insufficient Evidence to Support First Sale

The June 5 ruling, HQ H332358, involved importer Dreamwear, which purchased clothing made in China from a middleman vendor, Lucky Zone Development. While Lucky Zone doesn't manufacture clothing items, it places orders with a related seller, DongGuan Lucky Zone Garments and Accessories.

"Dreamwear has not demonstrated [that] the merchandise at issue was purchased via bona fide sales," the ruling said. "We also find that Dreamwear failed to meet its burden in demonstrating that the transactions between the two related parties, Lucky Zone and DongGuan Lucky Zone, were negotiated at arm’s length."

CBP continued, "because Dreamwear has failed to demonstrate that the sales between Lucky Zone and DongGuan Lucky Zone were bona fide sales negotiated at arm’s length, we will not address whether the costs declared to CBP at the time of entry included all dutiable assists provided by Lucky Zone to DongGuan Lucky Zone."

The lead protest concerns two entries of clothing that Dreamwear entered on Aug.21, 2020, and Sept. 25, 2020, that were subsequently liquidated on Sept. 2, 2022.

Dreamwear asserted that the first sale valuation of the entries, which uses the sales price between Dreamwear’s middleman vendor, Lucky Zone, and DongGuan Lucky Zone, should have been used. CBP had found the entries don't qualify.

To support Dreamwear's claims for the August and September 2020 entries, the importer provided documents from 2020 showing Lucky Zone as the middleman vendor and DongGuan Lucky Zone as the related factory seller. These documents included an organizational chart identifying Lucky Zone as the middleman vendor and DongGuan Lucky Zone as the related factory seller. They also included documents reflecting that the protested entries included two bona fide sales for export to the United States, such as Dreamwear’s purchase orders to Lucky Zone under “FOB Shenzen” sales terms and Lucky Zone’s purchase orders to DongGuan Lucky Zone on an ex-factory basis.

Other submitted documents were meant to confirm the accuracy of assist costs declared at the time of entry, such as Lucky Zone's ledger recordings for the underlying sales to support its claim of a bona fide sale between Lucky Zone and DongGuan Lucky Zone.

All the documentation that Dreamwear provided was submitted to show "the legitimacy of its first sale claims because it confirms that: 1) the goods were purchased via bona fide sales between the factory and middleman vendor and the middleman vendor and Dreamwear, respectively; 2) the underlying goods were clearly destined for the United States; 3) all transactions were at an arm’s length; and 4) there is no evidence that the first sale transactions were subject to any non-market influences," CBP said.

But the agency ultimately determined that Dreamwear's evidence and documentation were insufficient.

In explaining its rationale, CBP looked at the proceeding using the 1992 court ruling Nissho Iwai American Corp. v. United States and the 1993 court ruling Synergy Sport International, Ltd. v. United States as guides. These rulings found that appraisement of imported merchandise based on a bona fide sale of goods for export to the United States, prior to the last sale for export to the United States, is a legitimate basis of appraisal. CBP will appraise merchandise for which a “first sale” claim is made when it meets the requirements for such appraisement.

"In Nissho Iwai, the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States," CBP's June 5 ruling said, summarizing the court proceeding. "The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. The parties must also demonstrate that a purported buyer and seller engaged in a bona fide sale where a potential buyer has assumed the risk of loss and acquired title to the imported merchandise."

While the submitted documentation showed that the merchandise manufactured at DongGuan Lucky Zone's factory was destined for the U.S., CBP still had to determine whether the transactions between Lucky Zone as the middleman vendor and its related party factory seller, DongGuan Lucky Zone, "were bona fide sales, i.e., whether the middleman was an actual buyer/seller of the merchandise, and if so, whether the related parties conducted their transactions at an arm’s length."

This is where the parties failed to "meet its burden" and provide "a complete paper trail as required by" Treasury Decision 96-87 on first sale treatment, "even after being accorded multiple opportunities to do so," CBP said.

While the purchase orders from Dreamwear to Lucky Zone are FOB Shenzen, implying a risk of loss passed from Lucky Zone to Dreamwear when the goods are loaded onto the ship in Shenzen, there is no indication from any of the documents that Lucky Zone ever assumed the risk of loss and title to the goods from the factory door until the goods were loaded onto the ship.

Because of this, CBP can't determine whether the transactions between the middleman vendor, Lucky Zone, and the factory seller, DongGuan Lucky Zone, may constitute bona fide sales for exportation upon which transaction value may be based.

As for the arm's length transactions, CBP said that Dreamwear failed to meet its burden in demonstrating via documentary evidence that the transactions between Lucky Zone and DongGuan Lucky Zone were negotiated at arm’s length.

Although Dreamwear provided an organizational chart describing the functions of the middleman vendor and the factory seller, "this chart falls far short of setting forth detailed descriptions of the roles of each of the parties involved in the multi-tiered transactions," CBP said. The common family ownership between Lucky Zone and DongGuan Lucky also raises further concerns about arm's length transactions, CBP continued.

While Dreamwear provided CBP with an “all costs plus a profit” methodology, as set forth in 19 C.F.R. 152.103(l)(1)(iii), to prove that the sales between the Lucky Zone and DongGuan Lucky Zone qualify as arm’s length sales, CBP ultimately ruled that the profit and loss statements identify revenue generated from all sales to Dreamwear, versus sales of merchandise of the same class as imported merchandise.

"The documentation submitted by Dreamwear does not substantiate that the price was adequate to ensure the recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time," CBP said. "We further note that under the circumstances of the sales approach, Dreamwear did not provide any other evidence indicating that the relationship between Lucky Zone and DongGuan Lucky Zone did not affect the price paid or payable."

As a result of these considerations, CBP found that Dreamwear failed to meet its burden in demonstrating that the transactions between Lucky Zone and DongGuan Lucky Zone were negotiated at arm’s length.