VAL R:C:V 545930 CRS
John B. Pellegrini, Esq.
Ross & Hardies
65 East 55th Street
New York, NY 10022-3219
RE: Dutiability of royalty payments; condition of sale; trademarked merchandise
Dear Mr. Pellegrini:
This is in reply to your letter, dated February 28, 1995, on behalf of **************, in which you requested a ruling concerning the dutiability of certain royalty payments. An additional submission was made on March 8, 1995, under cover of which you enclosed a copy of a draft license agreement similar to that which will be used in the proposed transaction. Pursuant to your request, the name of your client will be deleted from all published versions of this ruling.
FACTS:
******* (the "licensee"), sells wearing apparel, shoes and related merchandise throughout the world under its own trademarks and trademarks owned by its subsidiaries. You have advised that the licensee is considering transferring certain of these trademarks to a wholly-owned, foreign subsidiary (the "licensor"). Under the terms of Article II, paragraph 2.1, of the draft agreement, the licensor will grant the licensee the sole and exclusive right and license to use the trademarks in connection with the manufacture, advertising, merchandising, promotion, use, distribution and sale of the licensed products in the United States. In return, the licensee will pay the licensor a royalty equal to a fixed percentage of the "net sale price" of all trademarked merchandise sold by the licensee in the United States. The trademarked merchandise covered by the agreement will be purchased by the licensee from various sellers in a number of different countries and imported into the United States. None of the sellers of the imported, trademarked merchandise will be related to the licensee or the licensor. Furthermore, none of the imported merchandise will be manufactured under patent.
ISSUE:
The issue presented is whether the royalty payments to the licensor are included in the transaction value of the imported merchandise.
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 basis 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 certain enumerated additions. The additions to the price actually paid or payable include "any royalty or license fee 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." 19 U.S.C. § 1401a(b)(1)(D). However, pursuant to section 402(b)(2)(A) of the TAA, transaction value is acceptable only in certain circumstances, e.g., where the buyer and seller are not related, or where related, the relationship does not influence the price actually paid or payable. Since you have advised that the licensee/buyer and sellers are unrelated, we have assumed, for purposes of this ruling, that transaction value is the appropriate basis of appraisement.
In regard to the dutiability of royalties and license fees, the Statement of Administrative Action (SAA) 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, 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.
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. See also, 19 C.F.R. § 152.103(f).
In the instant case the royalty is paid by the licensee to its wholly-owned subsidiary, the licensor, for the right to use the licensor's trademark(s) in connection with the manufacture, use and sale of imported, trademarked merchandise. Generally, royalties paid to a third party for use, in the United States, of trademarks related to the imported merchandise are considered to be selling expenses of the buyer and, therefore, not dutiable. SAA at 48. However, this determination is dependent on a finding that the payments are not a condition of the sale of the merchandise for exportation to the United States.
The question of the dutiability of royalty payments was the subject of a general notice published in the Customs Bulletin which set forth a three-part analysis for determining whether such payments are dutiable. 27:6 Cust. B. & Dec. 1 (February 10, 1993). The analysis is founded on the following questions: (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? 27:6 Cust. B. & Dec. at 9-11. Negative responses to the first and second questions, and an affirmative response to the third, point toward non-dutiability.
The imported merchandise will not be manufactured under patent; thus, the first question yields a negative response. The second question, whether the royalty is involved in the production or sale of the imported merchandise, expands the analysis of question one. 27:6 Cust. B. & Dec. at 10. Under the terms of the draft agreement, the royalty will be paid in consideration for the right to use the licensor's trademarks in connection with the manufacture, advertising, merchandising, promotion, use, distribution and sale of the trademarked merchandise in the U.S. Thus, based on the information presented, it is our position that the royalty will not be paid for rights associated with processes to manufacture the imported merchandise.
Moreover, there is no indication that the royalty payment will be subject to the terms of the sale for exportation to the U.S. Cf., Imperial Products, Inc. v. United States, 425 F. Supp. 852, 77 Cust Ct. 66 (1976) (holding that a royalty paid on imported brush heads for the exclusive right to manufacture and sell a product using the imported brush heads in the U.S. was a right separate from the purchase price of the merchandise and therefore not dutiable), aff'd, 570 F.2d 337, 65 CCPA 38 (1978). In Headquarters Ruling Letter (HRL) 544436, dated February 4, 1991, we held that a royalty was involved in the sale of imported merchandise because the individual sales agreements and purchase contracts were subject to the terms of the royalty agreement. In this instance, the right to use the licensor's trademarks is not only separate from the production process, but also, given that the licensor and seller are unrelated, from the sale for exportation to the U.S. of the imported merchandise. Accordingly, while we have not examined any sales agreements or purchase contracts, it does not appear that the royalty will be involved in the sale of the imported merchandise. Consequently, based on the information presented, the second question also yields a negative response.
The third question, i.e., whether the importer could buy the merchandise without paying the fee, is at the heart of whether a royalty payment is a condition of sale. Payments that must be made for each imported item are a condition of sale. In a pre-TAA case, BBR Prestressed Tanks, Inc., Frank P. Dow Co., Inc., of L.A. v. United States, 60 Cust. Ct. 885, R.D. 11536 (1968), aff'd, 64 Cust. Ct. 787, A.R.D. 265 (1970), the buyer of imported merchandise was required to pay a lump-sum royalty in addition to the f.o.b. price. The court held that such a mandatory payment was dutiable, based primarily on the fact that the payment went to the seller. 27:6 Cust. B. & Dec. at 11. Under the TAA, such payments may be dutiable as royalties, as part of the price actually paid or payable, or as proceeds. Id. at 11. Royalty payments are also a condition of sale when they are paid on each and every importation and are inextricably intertwined with the imported merchandise; but if the payment is optional and not inextricably intertwined with the imported merchandise, or is paid solely for the exclusive right to manufacture and sell in a designated area, it is not dutiable. Imperial Products, 425 F. Supp. at 854.
In the instant case, the royalty payment is not optional, that is, it must be paid to the extent that the licensee earns revenue by reselling the products. On the other hand, the royalty is not paid to the seller, nor has any evidence been presented which would suggest that the royalty is linked to individual sales agreements or purchase contracts for the imported merchandise, e.g., a requirement by the seller that the buyer pay the royalty to the licensor. Thus, it appears that the buyer can purchase the imported merchandise from the seller without having to pay the royalty. 27:6 Cust. B. & Dec. at 11. Accordingly, based on the analysis set forth in the notice, Customs does not consider the royalty to be a condition of the sale for exportation to the U.S. of the imported merchandise. Consequently, the royalty payment is not an addition to the price actually paid or payable under section 402(b)(1)(D) of the TAA.
HOLDING:
In conformity with the foregoing, the royalty payments at issue are not included in the transaction value of the imported merchandise under section 402(b)(1)(D) of the TAA.
Sincerely,
John Durant, Director
Commercial Rulings Division