The Customs Modernization Act of 1993, more commonly known as the “Mod Act,” established the requirement that importers use “reasonable care” in making entry of merchandise into the United States. The Mod Act is the largest amendment to the Tariff Act of 1930 and placed the onus of importing compliance on the Importer of Record, where previously, that had been the role of Customs and Border Protection.
With the introduction of the concept of reasonable care came the expectation that the trade community understand their legal obligations clearly and completely. In turn, Customs would also work to assist importers in their responsibility by providing more guidance to the trade community. But what is reasonable care and what does it mean to use reasonable care in the context of valuation of merchandise and international trade?
Why Does Valuation Matter?
If your merchandise isn’t valued correctly, Customs could argue that you, as the importer, are not exercising reasonable care for imports. Failure to exercise reasonable care can result in your merchandise being held for inspection, delays in release from Customs custody, or even merchandise seizure and/or fines and penalties for negligence and fraud.
What is Reasonable Care?
Reasonable care is a legal term which is defined as “the level of care that a reasonable person would exercise in such circumstances.”
In the context of merchandise valuation, this means that Customs requires importers to take steps to ensure that the information provided in a merchandise entry is accurate and sufficient to permit Customs to determine the final classification, appraisement, and valuation of the merchandise.
Four Items to Include in Determining Transaction Value
Valuation is a common issue many importers face. All merchandise imported into the United States is subject to appraisement, and there are six different methods Customs uses to appraise the value of imported merchandise. Generally, the appraised value is the transaction value of the merchandise, but in the event the merchandise can’t be appraised based on transaction value, other bases will be considered in the following order: Transaction value of identical merchandise, transaction value of similar merchandise, deductive value, computed value, and then finally, the value per 19 CFR § 152.107 if other values can’t be determined or used. As noted, the preferred method of appraisement is to simply use the transaction value, or the price actually paid or payable, of the merchandise, but there are four critical areas that can affect the transaction value that need to be included that may not be on the invoice between buyer and seller.
Assists are additions on to the transaction value of imported goods. If a buyer provides items to a manufacturer free of charge or at a reduced cost to be used in the development or production of merchandise, the cost of those items needs to be added to the imported value of the merchandise when it is imported into the US.
The types of items included as assists include molds, materials, tools, or even artwork or design work, if the work took place outside the United States.
2. Commissions, Royalties, Packing Costs, Assembly, and Indirect Payments
Similarly, any commissions paid to a seller’s agent or royalties paid as part of the terms of sale of the merchandise also need to be factored into the dutiable value of the merchandise. This also includes indirect payments, such as when there is a price reduction on a transaction to settle a debt owed by the seller to the buyer.
The transaction value should also include the costs of packing and assembly, including both the cost of boxes or coverings, materials, and labor, if they are not already included in the transaction value.
3. Term of Sale
Terms of sale, like Incoterms, can affect the way merchandise is valued. Merchandise sold DDP can have a different dutiable value than merchandise sold FOB, or EXW, and may not be able to simply use transaction value as a method of appraisement due to the need to deduct the cost of duty from the value.
4. Related Parties
Related Parties must also take care in valuation. A common issue is that a seller will discount imported merchandise to a related buyer, however, if this transaction does not meet a related party test, the merchandise could be undervalued on the entry, and the buyer could be liable for increased duties as well as fines and penalties.
If the transaction does not meet these tests, then the transaction value cannot be used and one of the other methods of appraisement must be.
Protect Your Business & Imported Goods
As you can see, there are many areas of consideration that need to be considered when determining the value of merchandise. Taking care to check for these areas of concern will help keep you safe from hefty fines and penalties.
Do you need help with determining the value of your merchandise or using reasonable care in your importing or export compliance program? We are the experts!
Schedule a no-charge consultation today and let’s discuss how we can help.
Kali Kaufman is a Classification Specialist for Export Solutions -- a full-service consulting firm specializing in U.S. import and export regulations.