March 14, 2000
RR:IT:VA 547381 KCC
Mr. Joel K. Simon
Serko & Simon
One World Trade Center, Suite 3371
New York, NY 10048
RE: Merchandise Imported for Sale at Auction; reserve price; ?402(f); fallback
Dear Mr. Simon:
This is in response to your letter dated May 14, 1999, on behalf of Sotheby’s Inc. (“Sotheby’s”), requesting a ruling concerning the proper method of appraisement for valuing merchandise imported into the U.S. for sale at auction. We note that you and a colleague met with me and a member of my staff on November 30, 1999, to discuss the issues involved in your request. We regret the delay in responding.
Sotheby’s is principally an auctioneer and marketing agent offering for sale at auction works of fine and decorative art. Many of Sotheby’s sales contain property imported from clients in foreign countries.
The first time a value is attributed to the merchandise, resulting from arm’s length negotiation, is when, prior to sale at auction, Sotheby’s negotiates a “reserve
price” with the consignor. You state that this price is commonly referred to as “the reserve.” The reserve is the confidential threshold price below which the consignor will not sell. You claim that the reserve price is the only mutually accepted value which reflects both the seller’s and Sotheby’s assessment of the item’s current market value, and is the only price at which the seller is obligated to sell the merchandise. You have also stated that the reserve price is known in at least 90 percent of the transactions by the entry date of each item.
If Sotheby’s and the consignor agree upon a reserve price, then the property will be scheduled for auction. You state that, usually, there is a 3 to 6 month gap between the time the property is imported and the date of the sale. However, it is not unusual for an item to be sold 9 to 12 months after its import. Sotheby’s will not know at the time of import when, or if, an item will be sold. Once the auction is scheduled, the
property will be included in a catalogue. The catalogue, which generally contains the pre-sale price range estimates, is prepared approximately 8 weeks prior to the sale and available to the public approximately 2 weeks prior to the sale date.
The property is then offered for sale and, if the bidding reaches the reserve price , the property is sold at what is referred to as the “hammer price,” announced by the auctioneer (i.e., the final auction price at or above the reserve price). The buyer pays Sotheby’s a commission, known as the “buyer’s premium,” which is added to hammer price. The seller pays Sotheby’s a commission that is deducted from the hammer price. Generally, certain expenses are also deducted from the hammer price such as transportation costs, insurance, customs duties, restoration, illustration charges, etc.
If the bidding fails to reach the reserve price, the property may be returned to the consignor, or it may be held for inclusion in a subsequent auction. You state that, even if the property fails to sell, the consignor will nevertheless be obligated to pay Sotheby’s a separate commission based upon a percentage of the reserve price. This commission is collected to compensate Sotheby’s for auction expenses (e.g.,
appraisals, listing in the catalogue, other marketing costs, etc.).
Whether, in accordance with ?402(f) of the TAA, the reserve price constitutes an acceptable appraised value of the subject items imported into the U.S. for sale at auction.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the U.S. is transaction value pursuant to ?402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. ?1401a. ?402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus enumerated statutory additions.
The "price actually paid or payable" is defined in ?402(b)(4)(A) of the TAA as the "total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."
We first note that this ruling does not cover merchandise that may be valued based upon one of the methods of appraisement such as deductive value (i.e.,
merchandise sold at or about the date of importation, or after but before the close of
ththe 90 day after the date of importation), and is limited to those items for which a reserve price has been declared upon each item’s date of entry into the U.S.
With regard to the instant situation where the items are imported for future sale at auction in the U.S., transaction value may not be used as the method of appraisement for valuing the items, as there has not been a sale for exportation to the U.S. and therefore no price actually paid or payable for the imported merchandise. When imported merchandise cannot be appraised upon the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. The alternative methods of appraisement, in order of precedence, are as follows: the transaction value of identical or similar merchandise; deductive value; computed value; and the "fallback" method of appraisement.
As it is our understanding that the subject items consist mostly of fine art and antiques and are therefore unique in character, the transaction value of identical or similar merchandise as set forth in ?402(c) of the TAA is therefore not to be used as the method of appraisement. Deductive value is therefore the next method of appraisement to consider. However, even though deductive value involves the sale of merchandise once imported into the U.S., that method of appraisement is inapplicable in the instant case as it is our understanding that the items covered by this ruling are not sold until after the 90-day time requirement. Consequently, computed value must next be considered. Because the items consist mostly of fine art and antiques, it would be very difficult to determine the value of the materials, fabrication, and other processing of any kind used in producing each item, and computed value therefore would not be used as the method of appraisement.
As computed value is inapplicable, we must resort to the fallback method of appraisement as set forth in ?402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the previous methods described above, reasonably adjusted to the extent necessary to arrive at a value.
HQ 951876,dated March 23, 1993, involved the valuation of a used 1952 Ferrari automobile. As the Ferrari was used, not sold for export to the U.S., and not intended for sale once entered into the U.S., the only applicable method of appraisement was the fallback method. In that case, as the Ferrari was appraised at $500,000 at reliquidation, we determined that, using the fallback method, that figure should be used as the value of the Ferrari.
In the instant situation, you state that the first time a value is attributed to the merchandise imported for sale at auction, resulting from arm’s length negotiation, is when, prior to sale, Sotheby’s negotiates a reserve price with the consignor. You also claim that the reserve price is the only mutually accepted value that reflects both the seller’s and Sotheby’s assessment of the item’s current market value, and is the only price at which the seller is obligated to sell the merchandise. Therefore, similar to the holding in HQ 951876, because the negotiated reserve price of each item reflects
judgements from both a professional appraiser (either an independent appraiser or one employed by Sotheby’s) and the seller, we find that the reserve price is acceptable, using the fallback method of appraisement set forth in ?402(f) of the TAA, as an acceptable appraised value of the item imported into the U.S. for auction.
You have proposed using a modified deductive value under the fallback method for valuing the merchandise. However, because we have found that the reserve price itself is acceptable, there is no need to resort to a modified deductive value.
In accordance with ?402(f) of the TAA, the reserve price constitutes an acceptable appraised value of the subject items imported into the U.S. for sale at auction.
Thomas L. Lobred
Chief, Value Branch