VAL R:C:V 545035 LR
John M. Peterson, Esq.
Neville, Peterson & Williams
39 Broadway
New York, New York 10006
RE: Dutiability of certain trademark licensing payments; royalties;
proceeds; related parties; section 402(b)(1)(D); section 402(b)(1)(E).
Dear Mr. Peterson:
This is in response to your letter of July 1, 1992, on behalf of
your client, ("the importer" ), requesting a ruling on whether certain
royalty payments are dutiable. An additional submission was made on
June 1, 1995, regarding your request for confidentiality for the
identities of the importer and the licensor of the imported merchandise.
For the reasons set forth in your submission, your request is granted.
We met with you on July 11, 1995 to discuss the substantive issues
presented in your ruling request. We regret the delay in responding.
FACTS:
The importer purchases alcoholic beverages from suppliers located
throughout the world. In this instance, the importer intends to
purchase from its parent company in the United Kingdom ("the seller") an
alcoholic beverage which is marketed worldwide under a well-known
trademarked brand name ("the licensed product"). You indicate that the
importer and the seller are "related" parties within the meaning of
section 402(g)(1) of the Tariff Act of 1930, as amended by the Trade
Agreements Act of 1979 ("TAA"), codified at 19 U.S.C. 1401a(g)(1) and
that the importer purchases the imported liquors from the seller at an
"arms length" freely negotiated price. The United States trademark
rights for this product are owned by a Netherlands company ("the
licensor") which is related to both the importer and the seller. (You
do not indicate the nature of this relationship). The licensor proposes
to license the importer as the sole company authorized to import and
sell alcoholic beverages bearing the licensed trademark in the United
States. The licensor and the importer propose to enter into an
agreement ("the agreement") under which the licensor will grant to the
importer the exclusive right limited to the United States, to use the
licensed trademark solely in connection with the importation,
distribution, promotion and sale of liquor products bearing and sold
under the licensed mark. In exchange for this right, the importer will
pay the licensor a trademark royalty. An unsigned draft copy of the
agreement was submitted.
Under the agreement royalty payments are calculated on the basis
of the "gross margin" realized by importer on the sale in the United
States of the licensed product. The gross margin excludes the cost or
value of the imported liquors. Minimum quarterly and monthly royalty
payments are specified in the agreement, and these payments must be made
without respect to whether any liquors are imported during the period in
question. The royalty is calculated as a percentage of the importer's
net sales. You indicate that trademark royalties paid to the licensor
will remain with the licensor in the Netherlands, and will not be
remitted, directly or indirectly, to the seller.
ISSUE:
Whether the described royalty payments from the importer to the
licensor, a party related to the importer and the seller, are dutiable
as part of the transaction value of the imported licensed products.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in
accordance with section 402 of the Tariff Act of 1930, as amended by the
Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). The preferred
method of appraisement under the TAA is transaction value, defined as
"the price actually paid or payable for the merchandise when sold for
exportation to the United States," plus five enumerated additions.
For purposes of this ruling, we assume that transaction value is
the proper basis of appraisement and that the "related" party status of
the importer and the seller does not influence the price actually paid
or payable, as set forth in section 402(b)(2)(B). Under this
assumption, the transfer price between the importer and the seller is
acceptable for transaction value provided it meets one of the tests set
out in section 402(b)(2)(B). (Counsel's statement that the importer
purchases the imported liquors from the seller at an "arms length"
freely negotiated price, by itself, is not sufficient to establish the
acceptability of the transfer price).
The term "price actually paid or payable" is defined in section
402(b)(4)(A) of the TAA as "the total payment (whether direct or
indirect, ....) made, or to be made, for imported merchandise by the
buyer to, or for the benefit of, the seller." 19 U.S.C. 1401a(b)(4)(A).
Section 402(b)(1) of the TAA provides for five additions to the price
actually paid or payable. Among these are:
(D) any royalty or license fees related to the imported
merchandise that the buyer is required to pay, directly or
indirectly, as a condition of sale of the imported merchandise for
exportation to the United States; and
(E) the proceeds of any subsequent resale, disposal or use of the
imported merchandise that accrue, directly or indirectly, to the
seller.
19 U.S.C. 1401a(b)(1). You contend that the royalty paid by the
importer to the licensor is neither a royalty pursuant to section
402(b)(1)(D) nor proceeds under section 402(b)(1)(E).
For purposes of this ruling, we have assumed that the payment of
the royalty at issue is distinct from the price actually paid or payable
for the imported merchandise. Consequently, we have addressed the issue
of whether the subject payments are included in transaction value solely
from the perspective of whether they constitute additions to the price
actually paid or payable under section 402(b)(1)(D) or (E).
Royalty or License Fees
The Statement of Administration Action (SAA), adopted by Congress
with the passage of the TAA, explains that "[a}dditions for royalties
and license fees will be limited to those that the buyer is required to
pay, directly or indirectly, as a condition of the sale of the imported
merchandise for exportation to the United States." (emphasis added).
The SAA further provides:
In this regard, royalties and license fees for patents covering
processes to manufacture the imported merchandise will generally
be dutiable, whereas royalties and license fees paid to third
parties for use, in the United States, of copyrights and
trademarks related to the imported merchandise, will generally be
considered as selling expenses of the buyer and therefore will not
be dutiable. However, the dutiable status of royalties and
license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i)whether the buyer
was required to pay them as a condition of sale of the imported
merchandise for exportation to the United States; and (ii) to whom
and under what circumstances they were paid. For example, if the
buyer pays a third party for the right to use, in the United
States, a trademark or copyright relating to the imported
merchandise, and such payment was not a condition of the sale of
the merchandise for exportation to the United States, such payment
will not be added to the price actually paid or payable. However,
if such payment was made by the buyer as a condition of sale of
the merchandise for exportation to the United States, an addition
will be made. As a further example, an addition will be made for
any royalty or license fee paid by the buyer to the seller, unless
the buyer can establish that such payment is distinct from the
price actually paid or payable for the imported merchandise, and
was not a condition of the sale of the imported merchandise to the
United States. (emphasis added)
Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st
Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation
under the Trade Agreement Act of 1979 (October 1981) at 48-49.
On February 10, 1993, the Customs Service issued a notice
regarding the dutiability of royalty payments. Vol 27 Cust. B. & Dec.
No.6 ("the General Notice"). After considering the legislative history
of the provisions in question, prior case law and the SAA, the notice
sets forth a three-question test to identify whether a royalty payment
is dutiable:
(1) Was the imported merchandise manufactured under patent?
(2) Was the royalty involved in the production or sale of the imported merchandise?
(3) Could the importer buy the product without paying the fee?
Vol. 27 Cust. B. & Dec. No.6, at 9-11. Negative responses to the first
and second questions, and an affirmative response to the third, point
toward non-dutiability.
The SAA indicates that the dutiable status of royalties ultimately
depends on whether the buyer was required to pay them as a condition of
sale of the imported merchandise for exportation to the United States
and to whom and under what circumstances they are paid. As pointed out
in the General Notice, supra, the answer to question three goes to the
heart of whether a payment is considered to be a condition of sale.
Counsel contends that the royalties at issue are not a condition
of the sale for exportation of the imported licensed products because
liability for payment of the royalties is not triggered by the sale of
the licensed products "for exportation to the United States", but rather
by the resale of the products in the country of importation. It
maintains that the sale of the liquor for exportation to the United
States is an entirely separate transaction from the payment of the
royalty. Counsel also points to the fact that the minimum royalty
payments are due and payable regardless of whether merchandise is
imported (or how much).
Our position, as articulated in the General Notice, supra, at 12,
is that the method of calculating the royalty, i.e, based on the resale
price, is not relevant in determining its dutiable status. Thus, in HRL
545361, July 20, 1995, the fact that liability for the payment of a
trademark royalty was triggered by the resale of the products after
importation did not preclude a finding that the payments are dutiable
under section 402(b)(1(D). See also, HRL 545784, June 6, 1995. In view
of the fact that the royalties are to be paid to a party related to the
seller of the imported liquor, we disagree with counsel's statement that
the sale of the liquor for exportation to the U.S. is entirely separate
from the payment of the royalty. In HRL 545361, supra, the dutiable
status of the trademark royalties depended largely on to whom they were
paid.
In that case, we considered whether royalties paid by the
licensee/buyer to the trademark owner for the right to use the latter's
trademark were dutiable under section 402(b)(1)(D) or (E) as an addition
to the price actually paid or payable of the imported licensed products.
Three scenarios were presented. The underlying facts in each scenario
were the same except with regard to whom the royalties were paid. In
each case, the royalties were based on a percentage of the net sales
price of all products manufactured and sold by the licensee using the
licensed trademark. Liability for payment of the royalty was triggered
by the resale of the trademarked product by the licensee/buyer.
In the first scenario, the licensee/buyer purchases and imports
trademarked merchandise manufactured and sold by a seller unrelated to
either the licensor or the licensee. Customs determined that the
royalty payments were not dutiable as royalties because there was no
indication that such payment was a condition of sale of the imported
merchandise. However, in the second scenario the licensor and the
seller are the same person, and the royalty payment is made to the
licensor/seller. Under these circumstances Customs found that the
royalty was a condition of the sale of the merchandise for exportation
to the U.S. and dutiable under 402(b)(1)(D):
The payment is not optional, but must be made to the licensor in
its capacity as seller of the merchandise. The agreement provides
that the licensee/buyer must pay an amount equal to a percentage
of the net sales price of all products that use the
licensor/seller's trademarks and trade names, and an equal
percentage amount on the net sales price of all products sold to
trademarked retail shops. Draft License Agreement at 5.
Therefore to the extent that the products described by the draft
agreement are imported, the payment of the royalty is a condition
of sale and as such, an addition should be made to the price
actually paid or payable (emphasis in original).
In the third scenario, the licensee/buyer purchases the imported
merchandise from a seller related to the licensor. Customs concluded
that the royalty was a condition of sale and dutiable under section
402(b)(1)(D):
Under section 402(b)(1)(D). . ., royalties payments are included
in transaction value if the buyer is required to pay them directly
or indirectly, as a condition of sale. 19 U.S.C. 1401a(b)(1)(D);
see also, SAA, reprinted in, Dept. Treas., Customs Valuation under
the TAA at 49. In this scenario, it is our position that the
royalty is paid indirectly as a condition of the sale for
exportation to the U.S. CF., HRL 542984, dated April 8, 1983 (a
payment by the buyer to a third party, required as a condition of
sale, was included in transaction value as part of the price
actually paid or payable). The instant payment is not optional.
Under the terms of the agreement it must be made to the licensor.
Although in this particular scenario the payment is made to the
licensor in respect of merchandise purchased from a seller related
to the licensor, we find that it is no less a condition of sale
than in the second scenario since the agreement provides the
licensee/buyer must pay the royalty on all products, to include
the imported merchandise, that use the licensor's trademarks and
trade names, or that are sold to the trademarked retail shops.
The instant case presents the same situation as in scenario three
above. Here, the draft agreement provides that the "Licensor hereby
grants to Licensee...an exclusive license limited to the United
States...to use the Licensed Mark solely in connection with the
importation, distribution, promotion and sale of liquor products bearing
and sold under the Licensed Mark ." Section 1, Agreement. As in
scenario three the royalty here will be due on all licensed trademarked
goods imported and sold by the importer/buyer and such royalties will be
paid to the licensor, a party related to the seller. Based on the
analysis in HRL 545361, we find that to the extent that the licensed
products are imported, the royalties are dutiable under section
402(b)(1)(D) as an addition to the price actually paid or payable of
such imported products. Obviously, if there are no importations of
licensed products, the payment of minimum royalties would have no duty
consequences.
Proceeds
In order for proceeds of a subsequent resale to be dutiable under
section 402(b)(1)(E), they must pertain to the resale of the imported
merchandise and they must accrue directly or indirectly to the benefit
of the seller. In HRL 545361, supra, the imported products were the
licensed products and the trademark royalties in question resulted from
the resale of such products. Thus, Customs concluded that the royalties
could alternatively be considered dutiable under section 402(b)(1)(E)
where the licensor and the seller are the same person or where the
seller is related to the licensor (unless the importer could establish
that no portion of the proceeds accrued directly or indirectly to the
seller). The ruling held that the royalties were not dutiable under
this section where the licensor was neither the seller nor a party
related to the seller because in such case they would not accrue
directly or indirectly to the benefit of the seller.
The same analysis applies here. The royalties pertain to the
resale of the imported licensed products and are to be paid to the
licensor, a party related to the seller. Based on HRL 545361, supra, we
find that the royalty payments may alternatively be considered proceeds
within the meaning of section 402(b)(1)(E) unless the importer can
establish that no portion of the proceeds accrued directly or indirectly
to the seller. No evidence was submitted in this regard.
HOLDING:
The payments by the importer to the licensor under the draft
agreement are included in the transaction value of the imported licensed
products either as royalties under section 402(b)(1)(D) or as proceeds
under section 402(b)(1)(E).
Sincerely,
John Durant, Director
Commercial Rulings Division