VAL CO:R:C:V 545370 ER
Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, New York 10016
RE: Dutiability of Certain Royalty Payments.
Dear Ms. Friedman:
This is in response to your letter of June 25, 1993, on
behalf of your client, Junior Gallery Ltd., (hereinafter referred
to as "Gallery", "importer" or "buyer"), requesting a ruling on
whether certain royalty payments are dutiable. We regret the
delay in responding.
FACTS:
According to your submission, Gallery is an importer of
ladies' wearing apparel. Pursuant to written agreement, dated
May 17, 1992, between your client and Echo Design Group, Inc.,
(hereinafter referred to as "Echo"), located in New York, Echo
periodically submits proprietary copyrighted fabric designs to
Gallery for possible use in garments produced by Gallery.
In consideration for the right to use the fabric designs
Gallery will pay Echo a non-refundable sum of $xxx, which amount
will be credited towards a royalty of y percent of Gallery's net
revenues on its sales in the U.S. of ladies' wearing apparel that
incorporate an Echo design. No royalties beyond the non-
refundable initial sum are due unless the imported merchandise is
sold. A copy of that agreement was submitted with your request.
You additionally state that Echo is unrelated to Gallery and
that the design work produced by Echo is undertaken in the United
States. For purposes of this ruling, we will assume that Echo
bears no relationship to the foreign manufacturers (or "sellers")
producing the apparel for Gallery.
ISSUE:
Whether the described royalty payments that Gallery makes to
Echo are dutiable as part of the transaction value of the
imported merchandise.
LAW AND ANALYSIS:
The preferred method of appraising imported merchandise is
transaction value which is defined in section 402(b)(1) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of
1979 (TAA; 19 U.S.C. 1401a(b)). This section provides, in
pertinent part, that the transaction value of the imported
merchandise is the price actually paid or payable for the
merchandise when sold for exportation to the United States plus
amounts for certain items enumerated in section 403(b)(1) of the
TAA.
19 U.S.C. 1401a(b)(1) provides that the transaction value of
imported merchandise includes ... "any royalty or license fee
related to the imported merchandise 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." The
corresponding regulation is found in section 152.103(f), Customs
Regulations.
Both statute and regulation parallel the Statement of
Administrative Action ("SAA"), which was adopted by Congress and
has the force of law. Although there is an absence of precedent
directly addressing dutiability of royalty payments made to third
parties in connection with copyrights and trademarks, the law
states that such payments are generally not dutiable unless they
are a condition of the sale. The relevant portion of the SAA
provides:
Additions 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. 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.
SAA, H.R. Doc No. 153, 96 Cong., 1st Sess., pt 2, reprinted in,
Department of Treasury, Customs Valuation under the TAA of 1979
(October 1981), at 48-49. The royalty in question is paid to a
third party, Echo, for the right to use the copyrighted designs
in the U.S.
In the General Notice concerning the dutiability of royalty
payments, Vol 27 Cust. Bull. No. 6 (February 10, 1993)
(hereinafter referred to as "General Notice"), Customs set 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? General Notice at 9-11.
Negative responses to the first and second questions, and an
affirmative response to the third, point toward non-dutiability.
In the instant case, although the imported garments are not
manufactured under patent, they do incorporate fabric bearing
patterns identical or substantially similar to the proprietary
copyrighted patterns of Echo. However, the royalty paid to Echo
is not involved in the production or sale of the imported
garments. The royalty is paid for the exclusive right of the
importer to utilize the copyrighted patterns. This right is
separate from the purchase price of the garments. Gallery may
import the garments without paying the royalty because the
royalty becomes due only upon the sale in the U.S. of the
imported merchandise.
You additionally inquire whether the payments would be
dutiable as either an "assist" or as "proceeds to the seller"
within the meaning of 19 U.S.C. 1401a(b)(1)(C) and (E).
Engineering, development, artwork, design work, and plans
undertaken elsewhere than in the United States and necessary for
the production of the imported merchandise may constitute an
assist if supplied directly or indirectly, and free of charge or
at reduced cost, by the buyer of imported merchandise for use in
connection with the production or the sale for export to the
United States of the merchandise. (See, 19 U.S.C
1401a(h)(1)(A)(iv)). Inasmuch as the copyrighted design work to
be provided by Echo to Gallery will be undertaken in the United
States, such work is outside the statutory definition of an
"assist" and is not dutiable. Nor does the fabric on which the
copyrighted designs are printed constitute an assist so long as
Gallery does not provide it to the manufacturer, directly or
indirectly, and free of charge or at reduced cost.
Section 1401a(b)(1)(E) provides that the proceeds of any
subsequent resale, disposal, or use of the imported merchandise
that accrue, directly or indirectly, to the seller are dutiable
as part of the price actually paid or payable. Under this
section, the "seller" of the merchandise is the foreign
manufacturer. The royalty payments are made by the buyer,
Gallery, to an unrelated third party in the United States, Echo.
Assuming Echo is also unrelated to the foreign manufacturers, the
royalty payments do not constitute "proceeds to the seller" since
these payments in no way accrue to the benefit of the foreign
manufacturer. Accordingly, the royalty payments are not dutiable
as proceeds.
HOLDING:
For the reasons discussed above and on the basis of the
written agreement between Gallery and Echo and the additional
information submitted in connection with this ruling request, we
find that the subject payments made by Gallery to Echo are not
dutiable royalties, nor are they dutiable as proceeds of a
subsequent resale. Moreover, because the copyrighted design work
to be provided by Echo to Gallery will be undertaken in the
United States, such work is outside the statutory definition of
an "assist" and is not dutiable. We additionally find that the
fabric on which the copyrighted designs are printed does not
constitute an assist so long as Gallery does not provide it to
the manufacturer, directly or indirectly, and free of charge or
at reduced cost.
Sincerely,
John Durant, Director
Commercial Rulings Division