VAL:RR:IT:VA 545841 RSD
Port Director
United States Customs Service
John F. Kennedy Airport
Jamaica, New York 11430
RE: Internal Advice Request number 57/94 concerning the
dutiability of certain royalty payments
Dear Director:
This is in response to your memorandum dated October 5,
1994, forwarding the internal advice request 57/94 submitted by
the law firm of Bryan Cave on August 3, 1994, on behalf of their
client [xxxxxxxxxxxxxxxxxxx] (hereinafter "importer") concerning
the dutiability of royalty payments made to a related party.
Your memorandum was in turn forwarded by Chief, Food and Chemical
Branch, New York Seaport, who also prepared a memorandum dated
November 15, 1995, regarding this internal advice request. On
March 15, 1995, a meeting was held at our offices with counsel to
discuss this matter. Subsequently, counsel made a supplemental
submission dated April 14, 1995. Counsel has requested that
certain information regarding the relationship of the parties,
how merchandise is purchased, and payments are made be kept
confidential. To comply with counsel's request, the names of
parties and other information regarding the transactions are
bracketed and will not be disclosed in copies of this decision
made available to the public. In addition, documents from the
transactions such as the licensing agreement and submissions
describing the transactions will be kept confidential. We regret
the delay in responding.
FACTS:
The importer is based in New York City and imports
cosmetics, fragrances, skin care, and make-up products. It is a
wholly owned subsidiary of a U.S. corporation, [xxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxx]. Both of these companies, as well as
approximately [xxx] foreign and domestic corporations, are under
the control of [xxxxxxxxxxxxxxxxxxxxxx], a [xxxxxx] limited
liability company.
The importer purchases fragrances and cosmetics from several
different foreign suppliers which are also under the control of
[xxxxxxxxxxxxxxxxx, including xxxxxxxxxxxxxxxxxxx.,
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
(hereinafter "product suppliers"). Counsel recognizes the
importer and the product suppliers are affiliated, but claims
they are not related because they are separate profit centers.
Orders are placed with the product suppliers based on the
suppliers' price lists. The purchase price of the goods
allegedly includes all of the costs to produce the goods, plus a
reasonable profit to the product suppliers. For purchases from
the product suppliers, the importer develops its purchasing
requirements and sends its requests to the product suppliers.
The payment terms are quoted in the price lists and the importer
is notified of production plans and shipment dates. In addition,
the importer purchases certain production related components
(e.g., blotters, compact cases, caps, and lipstick containers)
from other non-affiliated foreign companies. Despite the
relationship between the importer and the product suppliers, your
office accepted transaction value as the appropriate method of
appraisement for the imported merchandise.
In 1991, the importer entered into a licensing agreement
with [xxxxxxxxxxxxxxxxxx] (hereinafter "licensor"), a company
also controlled by [xxxxxxxxxxxxx], in which the importer
received a license for the use of certain trademarks owned by the
licensor and a sublicense to the use trademarks licensed to the
licensor by unrelated third parties. Among the third party
trademarks the importer received a sublicense for are
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxx]. Pursuant to the
license agreement between the importer and the licensor, the
importer is obligated to pay on a quarterly basis to the
licensor: 1) a license fee equal to [xxx] percent of the net
sales on all product lines, whether of U.S. or foreign
origination bearing the [xxxxxxxxx and xxxxxxxxxxx] trademarks,
and (2) an amount equal to [xxx] percent of the net U.S. sales of
the product line sold using trademarks owned by the third party
licensors.
Apparently, in order to obtain the rights to sublicense
trademarks owned by the above-mentioned unrelated third parties,
the licensor entered into other licensing agreements on the
disposition of royalties it receives for sublicensing the use of
such trademarks. Counsel makes reference to master licensing
agreements between the licensor and third party licensors, but
does not elaborate on the content of such agreements. It does
claim that up to [xxx] of the receipts from the collection of the
royalties for use of the third party owned trademarks are
forwarded to the third party licensors, while the licensor
retains [xxx] of these receipts from the trademarks in question.
The actual percentage supposedly varies with each trademark and
is based on these master license agreements with the licensor.
For 1993, sales in the U.S. comprised approximately [xxx] of the
total net sales value used to determine the license fees.
Counsel claims that no products are sold directly to the
importer by either the licensor or the third party licensors. In
addition, counsel maintains that the product suppliers do not
receive any portion of the royalties. However, an affidavit,
dated July 24, 1994, from [xxxxx xxxxxxx] identified as the
"Procurist" of the licensor, states that in a limited number of
occasions in 1993, the licensor sold fragrances and cosmetic
products from its inventory on hand to the importer.
Additionally, in 1993 the licensor sold to the importer posters
and banners for advertising in the United States.
Furthermore, section 12.1 of the licensing agreement between
the importer and the licensor stipulates that the licensor is to
supply the products to the licensee. In a letter to our office
dated September 19, 1995, counsel claims in actual practice the
licensor does not supply products to the importer. Counsel
further contends that this clause was put in a draft version of
the license agreement and should have been deleted, but was
included in the final version of the agreement as an oversight.
However, counsel did not present a different version of the
license agreement with section 12.1 deleted or furnish any
evidence to show that the clause was included as an oversight.
Your office has conducted research on the corporate
relationships of importer. According to this research, some of
the same individuals hold positions as officers with several of
the related organizations under the control of [xxx xxxxxxxxx].
ISSUE:
Whether the royalty payments made to related parties are
included in the transaction value of the imported merchandise as
royalties under section 402(b)(1)(D) of the TAA?
Whether the royalty payments would be included in
transaction value of the imported merchandise as proceeds under
402(b)(1)(E) of the TAA?
LAW AND ANALYSIS:
As you know, 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 is
transaction value, which is defined as the "price actually paid
or payable for merchandise when sold for exportation to the
United States," plus certain enumerated additions. In this
instance the buyer of the merchandise, the importer and the
product sellers are related. Section 402(b)(2)(B) of the TAA
sets forth two conditions under which a transaction value between
related parties will be deemed acceptable. The first is where an
examination of the circumstances of sale indicates that the
relationship between the parties did not influence the price
actually paid or payable. The second is where the transaction
value closely approximates certain "test" values. 19 U.S.C.
1401a(b)(2)(B). In your memorandum you state that you have
accepted that transaction value as the means of appraisement
based on the circumstances of the sales. Accordingly, we have
assumed for purposes of this ruling that transaction value is the
appropriate basis of appraisement.
Section 402(b)(1) of the TAA provides for five additions to
the price actually paid or payable. Two of the statutory
additions to the price actually paid or payable are found in
sections 402(b)(1)(D) and (E) which provide for additions to the
price actually paid or payable for:
(D) 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; and
(E) the proceeds of any subsequent resale, disposal or
use of the imported merchandise that
accrue, directly or indirectly to the seller.
In regard to the dutiability of royalties and license fees,
the Statement of Administrative Action provides in relevant part:
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 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, where as 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 for export
to the United States.
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 Agreements Act of 1979 (October 1981)
at 48-49.
The question of whether the royalty payments are dutiable or
not was analyzed in our notice on the dutiability of royalty
payments, which was published in the Customs Bulletin on February
10, 1993 commonly referred to as "Hasbro II". In that notice we
indicated that several questions must be answered in order to
determine whether a royalty payment is related to imported
merchandise and thus required as a condition of sale. As set
forth in the notice the questions are: (1) was the imported
merchandise manufactured under the patent? (2) was the royalty
involved in the production or sale of the imported merchandise?
and (3) could the importer buy the product without paying the
fee? 27:6 Cust. B. & Dec. 1 at 9-11. Negative responses to the
first and second questions, and an affirmative response to the
third, suggest that a royalty payment is non-dutiable under
section 402 a(b)(1)(D) of the TAA.
The first question posed by the notice is whether the
imported merchandise was manufactured under patent. It appears
that the imported merchandise was not manufactured under patent.
The second question indicated in the notice that of whether the
royalty is involved in the production or sale of the imported
merchandise can be determined on information contained in the
licensing agreement furnished with the ruling request. As
already noted, the royalty was paid for the right to use certain
trademarks on the imported merchandise sold in a designated
territory. The royalty was not involved in the production of the
merchandise and was not paid for the production of the
merchandise.
The third question posed by the notice is whether the
importer could buy the imported merchandise without paying the
royalty fee i.e., whether the payments are a condition of sale.
While royalties paid to third parties for use in the U.S., of
trademark related to the imported merchandise are generally not
dutiable, the SAA provides that the such payment will
nevertheless be treated as dutiable if they represent a condition
of the sale for exportation. SAA reprinted in, Dept. of Treas.,
Customs Valuation under the TAA at 49. Royalty payments are a
condition of sale when they are paid on each and every
importation and are inextricably intertwined with the imported
merchandise; but if the payments are optional and not
inextricably intertwined with the imported merchandise, or are
paid solely for the exclusive right to manufacture and sell in a
designated area, they are not a condition of sale. See Imperial
Products, Inc. v. United States, 425 F.Supp. 852, 77 Cust. Ct 66
(1976).
Counsel for the importer argues that the royalty payments in
this case should not be held to be dutiable because the royalties
are paid in a separate transaction to an entity that is separate
from the seller. Counsel further claims that no royalties go to
the seller. It further contends royalties do not relate to the
imported merchandise, but are paid for separate rights to use
trademarks.
Although the SAA provides that the determination about the
dutiability of royalty payment are to be made on a case-by-case
basis, it is more likely that the royalty will be dutiable when
the seller is the licensor and the royalty is paid to the seller.
Under these circumstances, payment of the royalty is more likely
to be a condition of the sale for exportation of the imported
merchandise than when the royalty is paid to an unrelated third
party. The same analysis would also hold true if the seller and
licensor are related to each other. In HRL 545361, dated July
14, 1995, we ruled that certain trademark royalties were dutiable
when paid to the seller or a party related to seller, but not
where they were paid to a third party unrelated to the seller.
We noted that where the licensor and the seller are the same
person, and the royalty payment is made to the licensor/seller,
we consider the royalty to be a condition of the sale of the
merchandise for exportation to the U.S. The payment is not
optional, but must be made to the licensor in its capacity as
seller of the merchandise.
In this instance, counsel argues that the payments were not
made to the sellers; and therefore the payments are not dutiable.
However, the sellers of the merchandise and licensor of the
trademarks, are under the common control of [xxx xxxxxxxxx] and
thus are treated as related persons by the TAA. See 19 U.S.C.
1401a(g)(G). Accordingly, we must conclude that the analysis
used in HRL 545361 should apply in this case since the payment of
the royalties to the party related to the sellers cannot be
considered optional. Because the licensor and the sellers are
under the control of the [xxxxxxxxxxxxx], it is doubtful that the
buyer could obtain the trademarked goods from the sellers unless
it also agreed to pay royalties on the sale of the products by
entering into licensing agreement with the licensor.
We also note that section 12 of the licensing agreement
states that "Licensor shall supply the Products to the Licensee
at its prime cost, plus an appropriate charge for warehousing,
distribution and profits on these costs." Based on this clause,
it appears that the parties intended that the licensor also have
some control over the supply of the imported merchandise, and
that the licensor had an obligation to supply products to the
importer. Although counsel believes that the inclusion of this
clause was merely an oversight, no evidence has been presented to
support this claim. Without evidence to the contrary, we assume
that the licensor satisfied its obligation to supply the products
to the importer by having its related product suppliers sell the
articles to the importer. This determination is supported by the
statement of was in the license agreement as an oversight [xxxxxx
xxxxxxx] an official with the licensor, who concedes that on some
occasions, the licensor did sell products directly to importer.
Therefore, because the sellers and licensor are related, we must
conclude that in order to obtain the products from the sellers,
the importer had to also agree to pay the royalty and license fee
to the related party. The fact that the licensor eventually pays
some of the royalty payments to third parties, is not relevant as
long as royalties must be paid to the licensor in order to
purchase the merchandise.
Accordingly, we reject the importer's contention that the
royalty payments are automatically not dutiable when they are
paid to a party other than the seller. Instead, the test for
determining whether royalties are dutiable depends upon whether
payment of the royalties are a condition of sale for export to
the United States. In this case, the licensor is related to the
sellers, and consequently the royalty payments would be added to
the price actually paid or payable under section 402(b)(1)(D) of
the TAA. Because we have determined that the license fee
payments are dutiable under 402(b)(1)(D), we do not need to
address whether they would be dutiable as proceeds under
402(b)(1)(E) of the TAA.
HOLDING:
Based on the information provided, the royalty payments made
by the importer to a related party, the licensor are to be added
to the price actually paid or payable of the imported merchandise
as royalties under section 402(b)(1)(D).
The Office of Regulations and Rulings will take steps to
make a version of this decision, with the confidential
information deleted, available to Customs personnel and via the
Customs Ruling Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels 60 days from the date of this decision.
Sincerely,
Acting Director
International Trade Compliance
Division