Acme Corporation negotiates with a non-US supplier to manufacture products that will be imported into the US. Acme gives the supplier detailed specifications for the products. The supplier says that it can make the products but will need to either modify its existing tooling or purchase new tooling in order to make the product to Acme’s specifications.
The resulting purchase order calls for the supplier to make a quantity of 10,000 products at a price of $100 each. There is an additional line item on the purchase order labeled “tooling charge” with a value of $50,000. When the products are delivered to the US they are invoiced and entered at $100 each.
Is there a problem with this scenario? Yes – the tooling charge is what is known as a non-recurring charge and is part of the dutiable Customs value of the products.
A non-recurring charge is just that – a one-time charge by the supplier for some specific cost. It may be called by different names, including engineering charge, set-up charge, management fee, expedite fee, special set-up charge, long-lead materials acquisition charge, etc. The idea is the same – a one-time amount charged by the supplier in addition to the cost of the articles on the purchase order.
A non-recurring charge is not an assist, although some people may refer to it as such. An assist is something of value provided by the importer to the supplier at no charge or artificially reduced price. A non-recurring charge represents an amount paid to the supplier for a special cost they have incurred to produce the articles. Under the Customs regulations the value of imported products is the total price paid or payable – the total amount received by the supplier from the importer. That amount would include the non-recurring charge.
The Customs valuation encyclopedia has a number of rulings to support this position. The most important factor is that the payments are made to the non-US supplier. Payments to a third party may or may not be part of the value – depending on circumstances.
We bring all this up because non-recurring charges are frequently overlooked by importers when declaring the value of imported merchandise. Unless the charge appears on the commercial invoice it may not be known or noticed. Customs auditors are aware of non-recurring charges. A comparison of Accounts Payable records of the amount paid to a supplier to the declared value of merchandise imported from the supplier will turn up the discrepancy.
What is an importer to do? Importer compliance personnel need to have access to purchase orders. The best time to catch a non-recurring charge is before anything under the purchase order is imported. That way they can instruct the customs broker to add the non-recurring charge to the entered value. In doing so both the importer and broker need to keep good records of what was declared and when it was declared. This is in case the non-recurring charge is questioned by Regulatory Audit or anyone else in Customs & Border Protection.
What if the importer lacks sufficient information about the non-recurring charge? The importer should sign up for Reconciliation and flag the applicable entries so they can be corrected later when the information becomes known.
What if the importer neglects to declare a non-recurring charge? The importer should check with their customs broker to determine whether the entry can be amended to add it. If not, a prior disclosure may be the only remedy
Non-recurring charges are a commonly misunderstood and overlooked area of Customs valuation. Check the purchase orders and payment records and get it right!
By Bruce Leeds, Attorney
