We are writing to let you know about an interesting U.S. Customs ruling that was just recently published on buying agents and the dutiability of commissions. Every company that utilizes buying agents should be familiar with the ruling.
Under U.S. customs law, commissions paid to a bona fide buying agent are not dutiable; whereas commissions paid to a selling agent are. The determination of whether a bona fide agency relationships exists is made on a case-by-case basis, and turns on a variety of factors, the most important of which is whether the principal has the right to control the agent’s conduct with regard to the matters entrusted to it.
In Headquarters Ruling 1561151, a U.S. importer entered into an agreement with an unrelated third-party (“agent”) to supervise the supply of apparel the principal purchased from an unrelated supplier in India (“supplier”). Under the terms of the agreement, the agent was responsible for placing orders, as well as overseeing the production, inspection, and shipment to the importer (among other functions). To that end, the agent spent a significant amount of time at the supplier’s facility, and visited subcontractors to monitor every step of the production process. In return, the importer paid the agent a commission equal to 25% of the FOB price of the merchandise.
U.S. Customs considered the issue and ultimately concluded that the agent was too involved in the production process to be a bona fide buying agent for customs purposes. U.S. Customs noted that the bulk of the services performed by the agent were akin to a quality control check – a function it associated with the production of the merchandise and not with the purchase of the merchandise. (The fact that the agent signed commercial documents on behalf of the seller, used the seller’s e-mail address, and had access to an office on the seller’s premises, did not help the importer’s case.) As a result, U.S. Customs concluded that the relationship between the importer and the seller was not a bona fide buying agency and, thus, the commissions the importer paid the agent were dutiable. In short, the agent was disqualified from being a bona fide buying agent for doing too much for the importer.
All companies that utilize buying agents need to be mindful of this ruling and should revisit their buying agency agreements (you do have written buying agency agreements, right?) to make sure that it is clearly spelled out in the agreement what the agent should/should not do on your behalf. A well-drafted agency agreement can go a long way to establishing non-dutiability of commissions. It also avoids leaving a gap that U.S. Customs will otherwise fill with how they view the relationship (U.S. Customs is generally less inclined to view an agent as a buying agent, etc.).
We have a good deal of experience assisting companies structure acceptable bona fide buying agency agreements. If you have any questions concerning the ruling, or this issue more generally, please let us know.
We hope this is helpful.