December 12, 2017
OT:RR:CTF:VS H276403 CMR
Port Director, Port of Champlain
Attn: Rebecca Rabideau, Senior Import Specialist
U.S. Customs and Border Protection
237 West Service Road
Champlain, NY 12919
RE: Application for Further Review and Protest No. 0712-16-100003; Articles exported under a lease or similar use agreement; Subheading 9801.00.20, HTSUS
Dear Port Director:
This is in response to your port’s memorandum referring to this office the Application for Further Review (AFR) and Protest No. 0712-16-100003 involving merchandise that had been previously imported into the United States (U.S.), exported, and then reimported into the U.S. The entries at issue in this protest were entered from April 2014 through the beginning of January 2015. Liquidations occurred between August 14, 2015 and November 27, 2015. We note the protest was timely filed by Neville Peterson LLP, on behalf of SGS Sports Inc. (“SGS”) on January 6, 2016, with an AFR filed on February 9, 2016. The AFR was properly approved as it met the requirements of 19 C.F.R. § 174.24(c). Although the matter appears identical to that which was the subject of Headquarters Ruling Letter (HQ) H216475, dated January 15, 2015, counsel submits that facts are different than those considered in HQ H216475 and counsel presents legal arguments which were not previously considered. Ten additional protests on the same issue have been suspended awaiting the decision on this protest.
Counsel for the importer submitted additional information and arguments to this office via supplemental submissions dated May 30, 2017, June 28, 2017 (resubmitted, dated July 5, 2017), August 2, 2017, and August 29, 2017. In addition, Customs and Border Protection (CBP) personnel met with counsel and his client to discuss this matter on July 21, 2017. CBP has taken into consideration all of the information presented in reaching our decision on this matter.
The protest at issue is against your denial of subheading 9801.00.20, Harmonized Tariff Schedule of the United States (HTSUS), treatment to merchandise in seventy-seven (77) entries made by SGS. The merchandise in these entries consists of various types of apparel, including swimwear, dresses, shorts, hats, and accessories. This office issued HQ H216475 to your port, in response to a previous protest filed by SGS, Protest No. 0712-12-100056 on similar transactions. Familiarity with HQ H216475 will be presumed. Counsel for SGS asserts that some facts differ in this protest from those in the earlier protest.
SGS purchases merchandise from unrelated foreign manufacturers and imports the merchandise into the U.S. as a consumption entry, pays duties based upon the sales transactions between it and the foreign manufacturers, and then exports the merchandise to Canada for warehousing until SGS has a customer in the U.S. who wishes to purchase the merchandise. As noted in HQ H216475, the merchandise is entered into Canada and warehoused under a duty deferral program. SGS obtained a permit from the Canada Customs and Revenue Agency (now known as, the Canada Border Services Agency) to run the warehouse as a duties relief warehouse in accordance with Canada’s Customs Act. According to counsel, SGS “receives the merchandise when it arrives at the company’s duties relief warehouse facility in Montreal, as required by the Customs Bonded Warehouse Regulations, SOR 96-46, before turning the goods over to 147483 Canada Inc., for inventorying.” SGS entered into a “Warehousing Agreement” with 147483 Canada Inc. (hereinafter, “147483 Canada”) on September 1, 2005. 147483 Canada was “formed and engaged to conduct inventory management and fulfillment services for SGS” and works exclusively for SGS.
In HQ H216475, SGS’s prior counsel submitted that SGS and 147483 Canada were related parties for customs purposes. In that matter, SGS informed CBP that SGS and 147483 Canada had one shareholder in common. That shareholder happened to be the president of each company and the sole shareholder of 147483 Canada. In this protest, counsel submits that SGS and 147483 Canada have separate owners. While the ownership of 147483 Canada has remained the same, the ownership of SGS Canada has been changed. However, the owner of 147483 Canada holds non-voting shares in SGS and has joint control, shared with another individual, of the entity holding the greatest number of voting shares, i.e., the controlling shares of the company. Further, this individual is a beneficiary of that entity.
The warehousing agreement between the parties was signed on behalf of SGS and on behalf of 147483 Canada, by the president of each company, who is the same individual. This individual is the sole officer of SGS , and the owner (100%) of 147483 Canada. Counsel submits that this individual, although president and secretary-treasurer of 147483 Canada, serves merely as a nominal officer of that company, is not an employee of the company, and does not draw a salary from it. According to counsel, the affairs of the company are managed by the general manager, who has also been identified as the warehouse manager.
In the earlier protest, 147483 Canada was identified as the Canadian warehouse occupying a distinct space from that of SGS, though located at the same address. As stated in HQ H216475, their counsel in that matter “note[d] that the Canadian warehouse and SGS buildings are physically attached to each other and that the goods were, in fact, delivered to the Canadian warehouse.” In this matter, counsel submits that although operating in the same building leased by SGS, SGS and 147483 Canada have separate legal addresses. Exhibit C to the protest is the lease for the building in which it indicates in an addendum to the lease, dated August 27, 2007, that the combined premises consist of civic number 6400 Cote de Liesse and civic number 6450 Cote de Liesse. Counsel submits that 6450 Cote de Liesse is the legal address for 147483 Canada, whereas 6400 Cote de Liesse is the legal address for SGS. Counsel states that 147483 Canada uses the 6400 address as a mailing address as the warehouse area of the building does not contain any mail handling or receiving facilities. However, SGS and 147483 Canada use the same address on their forms and taxes. They do have different telephone numbers on their forms, but have the same facsimile number, indicating they share the same facsimile machine.
In this protest, counsel asserts that “it is probably incorrect to refer to [147483 Canada] as ‘the warehouse.’ The warehouse facility is leaded (sic) to SGS Sports,
Inc., . . . .” There is no rental or lease agreement between SGS and 147483 Canada for the warehouse space. SGS holds title to the apparel inventory, along with the warehouse fixtures (furniture, furnishings, etc.). Counsel asserts that 147483 Canada is “an inventory management firm, a third-party logistics (3PL) service provider which manages the inventory for SGS.” As such, 147483 Canada was contracted to perform inventory management services for SGS under the duty deferral program by means of the warehousing agreement, and that such agreement constitutes a bailment of the merchandise to 147483 Canada.
Counsel explains in the May 30, 2017 submission that SGS retains title to the merchandise while it is stored in the warehouse. 147483 Canada’s responsibilities are described as:
includ[ing] unpacking merchandise as it is received, storing the merchandise in the warehouse according to style, color and size, ensuring that the goods remain in good and marketable condition, removing merchandise from inventory as SGS issues “pick slips” for same, packing goods according to SGS’s directions, and delivering the goods back to SGS by placing the goods in the custody of SGS or a carrier nominated by SGS.
As explained at our meeting with counsel and his client’s representatives, the “pick slips” are placed in a basket in the SGS section of the building and manually transferred to employees of 147483 Canada. The warehouse employees enter the SGS section of the building and pick up the “pick slips” from the basket. SGS employees are not allowed in the bin area of the warehouse which is accessed only by 147483 Canada employees.
Pertinent provisions of the warehousing agreement are paragraph 2, which lists the obligations of the warehouseman (147483 Canada); paragraph 3, which provides for the payment of the warehouseman; paragraph 4, which provides that ‘[t]he terms of this Agreement, including the amount of the monthly payment may only be amended by the parties in writing”; and paragraph 6, which indicates the warehousing agreement is subject to arbitration “in accordance with the laws of the Province of Quebec.” With regard to paragraph 3 of the agreement, it specifically provides:
The Depositor [SGS] agrees to pay the Warehouseman [147483 Canada], upon invoices rendered, for the services provided by the Warehouseman at the request of the Depositor in accordance with Paragraph 2 above. Rates will be negotiated on a periodic basis by the parties. The Warehouseman shall invoice the Depositor on a monthly basis and payment shall be made against these statements rendered.
Each month, 147483 Canada invoices SGS warehousing fees which include charges for storage and services rendered. Copies of invoices from 147483 Canada to SGS for the calendar year 2014 were submitted. However, unlike the invoices reviewed in HQ H216475, the descriptions on these invoices are brief. The description only indicates the month, year, and that it is a warehousing fee. An amount for the warehousing fee appears on the invoice to which is added taxes for a total invoice amount. In the May 30, 2017 submission, counsel informed CBP that “[t]he company’s warehouse manager [referring to 147483 Canada] has negotiated with . . ., President of SGS Sports, a payment for services rendered equal to the monthly warehouse payroll, plus a profit markup of 10%.” Further, counsel stated that “[t]he negotiation of the fee basis was done informally, based on information concerning profit levels for similar third-party logistics service providers.”
The supporting documentation submitted with counsel’s letter of July 5, 2017, consists of monthly invoices from 147483 Canada to SGS for the year 2014, with documentation to substantiate the amounts reflected in the invoices. The documentation consists of 147483 Canada payroll worksheets which included bank charges; and pages from payroll register summaries to show that a third party payroll services provider issued and withheld applicable taxes from checks to 147483 Canada employees.
Counsel submits that SGS and 147483 Canada are separate and distinct corporate entities. In support of this contention, counsel submitted evidence that the companies have different tax years, file separate corporate tax returns, and have different employees as documented by payroll record summary lists of employees for each company for the years 2013 through 2015, copies of which were submitted. In addition, copies of the original and current leases for the property at which each party is located were submitted. Photographs depicting the cargo receiving and storage areas of the warehouse were also submitted. We note that the photographs were printed from emails to an individual whose title is shown in an email forwarding these photographs to others. This individual’s title, appearing under his name, is “Warehouse Manager, SGS Sports.” This same individual executed an affidavit, submitted as Exhibit D in counsel’s submission of May 30, 2017, in which he states that he is “the Warehouse Manager for 147483 Canada Inc.”
With regard to insurance on the merchandise while it is in the warehouse, counsel informed CBP that SGS insures the contents of the warehouse against loss as it has the insurable interests in the contents, i.e., the merchandise and the warehouse fixtures (e.g., the furniture, furnishings, etc.). Counsel submits that 147483 Canada does not need to have separate insurance on this property, as it has no insurable interest in the property.
Whether the merchandise was exported from the U.S. pursuant to a lease or similar use agreement after importation and payment of duty, and qualifies for duty-free treatment under subheading 9801.00.20, HTSUS, upon re-importation into the U.S.
LAW AND ANALYSIS:
Subheading 9801.00.20, provides for, in relevant part: “Articles, previously imported, with respect to which the duty was paid upon such previous importation . . ., if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture of other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States.”
CBP has held in previous rulings that a bailment agreement qualifies as a “similar use agreement” for purposes of eligibility of merchandise under subheading 9801.00.20, HTSUS. See HQ 546561, dated March 16, 1998 (bailment agreement for subsidiary to hold and repackage goods until needed by parent’s customers); and, HQ 222863, dated July 1, 1991. In this case, as in HQ H216475, eligibility under subheading 9801.00.20, HTSUS, turns on whether the warehousing agreement is a valid bailment agreement.
In HQ H216475, this office held that the merchandise, which was stored in Canada, was not exported from the U.S. pursuant to a lease or similar use agreement, and therefore, it was not entitled to duty-free entry under subheading 9801.00.20, HTSUS, when re-entered into the U.S. Based on the facts we reviewed, we found “that SGS did not temporarily deliver its property (the goods) or transfer its rights to the property to another party, as is required of a lease or similar use agreement within the meaning of subheading 9801.00.20, HTSUS.” In reaching our decision, we considered evidence that suggested the two related parties, SGS and 147483 Canada, were not two separate entities – (1) the trucking records indicated the merchandise was delivered to SGS; (2) SGS was invoiced and paid for 147483 Canada’s employees’ salaries; (3) the inventory record provided by 147483 Canada was produced by an SGS employee and the records provided to CBP showed that SGS and 147483 Canada systems were easily accessible by both parties; and (4) the transfer of monies between the related parties, i.e., loans, knowledge of costs of the other party, showed the same parties ran both entities.
CBP has reviewed the additional information presented with regard to this protest and we affirm our earlier finding in HQ H216475. We do not believe that SGS delivers its merchandise into the custody of another party as is required for a valid bailment.
The written warehousing agreement is signed by the same individual on behalf of both companies, in his capacity as president of each company. The contract fails in Paragraph 3 of the agreement to state the consideration to be paid by SGS to 147483 Canada with any specificity or the manner by which it is to be determined. It merely state that the “rates will be negotiated.” It appears that at the time of the formation of the agreement, the rates were undetermined. Yet, the agreement requires any modification of the monthly payment to be made by the parties in writing. See Paragraph 4 of the agreement which requires any amendment of the agreement by the parties to be in writing and specifically references the amount of the monthly payment as a term of the agreement which may only be amended by the parties in writing.
Counsel submits that a valid bailment does not require consideration. However, in this case, the warehousing contract clearly contemplates the element of consider- ation; it just appears to have left it to be determined at some future time. There is no amendment to the warehousing agreement memorializing in writing the amount of the monthly payment or its method of calculation. At the meeting held with counsel and his client’s representatives, we were informed that the payment has always been based on the same formula and has never been amended. However, as noted in the FACTS portion of this decision, the fee to be paid 147483 Canada was negotiated “informally” between the parties. This “informal” negotiation occurred between the warehouse manager for 147483 Canada and the president of SGS. As the president of SGS is also the president and owner of 147483 Canada, it would appear that the warehouse manager, an employee, negotiated with his boss, although in his boss’ capacity as the owner of SGS. We note that counsel submits that the warehouse manager, identified as the General Manager of 147483 Canada, is not employed by the owner of 147483 Canada, but by 147483 Canada Inc. CBP fails to see the distinction. Further, as noted earlier in the FACTS, this employee has identified himself as the “Warehouse Manager, SGS Sports” in his email signature block.
Counsel provided CBP with documentation to support the warehousing invoices from 147483 Canada. However, the supporting documentation reveals that, included in the warehousing fees, were charges beyond payroll costs. The warehousing fees included bank charges and fees paid to a subcontractor for packing of the goods. While one might argue that fees paid to a subcontractor to perform packing may fall within the scope of labor costs, banking charges do not. It appears that SGS paid all expenses for 147483 Canada, with the exception of the goods and services taxes and the sales taxes.
SGS maintains insurance on the merchandise and other property in the warehouse as it has title to the merchandise and property. The warehousing agreement is between two corporate entities domiciled in Quebec, and so we looked to the Civil Code of Quebec in considering the agreement. The agreement is an onerous contract as SGS receives a service and 147483 Canada receives payment for providing that service. Under the Quebec Civil Code, 147483 Canada is liable for any loss of the property, unless it is the result of an Act of God. Yet, 147483 Canada has no insurance on the merchandise because it has no insurable interest in the merchandise. While not determinative, the failure of the 147483 Canada to carry insurance when legally liable for a loss, should one occur, is an additional element in considering whether SGS and 147483 Canada operate as separate entities.
As counsel for the importer stated in his submission of May 30, 2017, “a ‘bailment’ is considered to be the ‘act of placing property in the custody and control of another, usually by agreement in which the holder (bailee) is responsible for the safekeeping and return of the property.’” Citing Law.com online Law Dictionary, http://dictionary.law.com/Default.aspx?selected=27. Counsel cited Zuppa v. Hertz, 286 S2d. 364 (N.J. 1970) for a judicial definition of bailment as:
Rightful possession of a good by one who is not the owners. It is the element of lawful possession, however created, and the duty to account for the thing as the property of the other, that creates the bailment, regardless of whether such possession is based upon a contract in the ordinary course or not.
In order to have a valid bailment, SGS must have delivered the imported goods to the custody and control of someone else. In this case, they claim they did and that 147483 Canada is that other entity.
As claimed above, 147483 Canada and SGS are separate legal entities and have presented certain elements to demonstrate their separate legal status, such as, the lists of employees for 147483 Canada, the lists of employees for SGS, the Duty Relief Ledger listing (with a user name of Michael at the bottom), invoices from 147483 Canada to SGS, copies of checks from SGS to 147483 Canada, evidence of a payroll service paying employees on behalf of 147483 Canada, copies of tax returns for SGS and 147483 Canada , and the affirmation of the warehouse manager for 147483 Canada. However, other elements support our prior determination in HQ H216475 that SGS did not temporarily deliver its property (the goods) or transfer its rights to the property to another party as is required of a lease or similar use agreement within the meaning of subheading 9801.00.20, HTSUS.
Counsel states the requirements for subheading 9801.00.20, HTSUS, are straightforward and easy to satisfy. One of those requirements is that the merchandise needs to have been exported under a lease or similar use agreement. While CBP has recognized bailments to be “similar use agreements” for purposes of subheading 9801.00.20, HTSUS, a fundamental requirement of a bailment is to place the merchandise within the custody of another. We cannot ignore the factual elements before us that point to these companies being one and the same. As noted in HQ H216475, and acknowledged in this matter, when the goods are imported into Canada, they are delivered to SGS; and, the invoices from 147483 Canada are based upon 147483 Canada employees’ wages. While the duty relief ledger was printed by someone other than “Sue” in this case, the individual whose name appears on the bottom, “Michael,” is listed on the 147483 Canada payroll list of employees. However, as there is only one Michael on the lists of employees for 147483 Canada and SGS, we must presume this individual is the warehouse manager for 147483 Canada whose first name is Michael and who identifies himself as an employee of SGS in his email signature block.
Counsel’s urges CBP to interpret the language of subheading 9801.00.20, HTSUS, broadly and find that a bailment exists here in order to avoid double taxation of the merchandise at issue. However, we cannot ignore the facts which reveal the substance of the transaction. The same individual controls both companies, i.e., the president of each company is the same individual and this individual is the sole owner of 147483 Canada; the companies are located in the same building, have the same mailing address, and, while their telephone numbers differ, they have the same facsimile number; they have the same officer in the same roles; and, based on “Michael’s” representations, it is apparent that at least one employee, and not an insignificant one, i.e., the warehouse manager, must view SGS and 147483 Canada as the same entity as, while he submitted an affidavit that he worked for 147483 Canada, he identifies himself in his email as working for SGS. SGS provides all of the furnishings in the warehouse for the use of 147483 Canada, including the computers and the software necessary to create the inventory records that 147483 Canada manages. Further, the president of 147483 Canada, who is also its secretary-treasurer, does not draw a salary from 147483 Canada, which was formed exclusively for SGS’s purpose; and, this same individual in his capacity as president of SGS negotiated payment for services from 147483 Canada “informally” with his employee, the warehouse manager, who manages the affairs of 147483 Canada. Additionally, 147483 Canada has no insurance to cover possible loss of the merchandise in the warehouse, although liable for such loss under the Quebec Civil Code, should it occur. The totality of these facts cannot be ignored. We do not believe that SGS has a valid bailment agreement as it does not entrust the merchandise into the custody of another party.
For the reasons stated in HQ H216475 and the additional reasons stated herein, we find that the merchandise exported from the United States to be warehoused in Canada was not exported pursuant to a lease or similar use agreement. Therefore, the merchandise at issue in Protest No. 0712-16-100003 is not entitled to duty-free entry under subheading 9801.00.20, HTSUS, when re-entered into the United States.
In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, Regulations and
Rulings of the Office of Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Myles B. Harmon, Director
Commercial and Trade Facilitation Division