U.S. Customs and Border Protection (“CBP”) recently issued a ruling on a common customs valuation issue for the consumer goods/retail industry that we wanted to make sure you saw. The ruling, Headquarters Ruling H287490, involved foreign product design services and whether such costs are to be included in the dutiable value of the goods those design services were indirectly used to produce.
In the ruling, the prospective importer, a U.S. apparel company, entered into agreements with unrelated designers in the Netherlands for services related to the creation of a new line of sleepwear. Pursuant to these agreements, the designers would create an initial design package (concepts, patterns, color palettes, sketches, trims) and provide input on concept and marketing samples. The importer will use the initial design package to create a technical package (“tech pack”) of garment patterns, bills of materials, size specifications and concept samples that it will then provide free of charge to an unrelated manufacturer in China for use in the production of market samples. Using input from the designers, the importer will modify the market samples and send the modifications to the Chinese manufacturer for final production of the sleepwear garments.
In analyzing whether the foreign design fees are assists that should be added to the price actually paid or payable , CBP examined whether the design work is “necessary for production of the imported merchandise.” CBP explained that design work necessary to production “does not merely convey a general concept as to what [ ] should be created, but instead imparts detailed instructions as to how [it] is to be created ….” Citing its own precedent, CBP contrasted design work lacking in detail necessary for production (e.g., preliminary sketches) with more detailed plans, such as bills of materials and samples that a producer relies on for guidance when manufacturing.
Since the tech packs provided by the importer to the Chinese manufacturer include detailed plans, CBP concluded it is an assist within the meaning of 19 U.S.C. § 1401a(1)(A). CBP then examined whether the foreign design work is a “dutiable step” in the production of that assist. In its analysis, CBP focused on two factors: (1) whether the design activity was undertaken with the knowledge or intent that it would be used to produce the assist, and (2) whether the design activity plays a significant or crucial role in the production of the assist. Applying these factors, CBP noted that the design activities performed in the Netherlands contribute significantly to the creation of the tech pack provided to Chinese manufacturer by the importer. The designers generate the overall garment design and specify details such as their color, shape, pattern and material—features that are directly incorporated into the detailed production instructions provided to the manufacturer in the tech pack. Moreover, CBP concluded that the designers are fully aware of the fact that their contributions will influence the instructions provided to the manufacturers since they will expect to review, and provide input on, both the concept samples and market samples. For these reasons, CBP ruled that the designers’ fees must be included in the value of the assist.
This is an important reminder for all companies that provide U.S.-developed tech packs to foreign manufacturers for use in the production of articles imported into the United States. If you do so, you should be asking whether the tech packs are based (in whole or in part) on design services provided by anyone outside of the United States – whether a design services company or a buying agent (since it Is common for buying agents to provide some level of design input/services). If so, the extent of those services should be reviewed in light of the guidance provided in Headquarters Ruling H287490.
We hope this is helpful. If you have any questions about this ruling, or its impact on your business, please let us know.