RR:IT:VA 546229 RSD
Port Director
United States Customs Service
4735 Oakland Street
Denver, Colorado 80239
RE: Internal Advice on the dutiability of royalty payments for
the use of a trademark
Dear Director:
This is in response to your letter dated December 27, 1995,
forwarding the internal advice request submitted by counsel on
behalf of Arena North America, Inc. (hereinafter "Arena")
regarding the dutiability of royalties. Counsel made a
supplemental submission by fax on March 15, 1996.
FACTS:
Arena is a company based in Englewood, Colorado and a
subsidiary of a Japanese company, Descente, Ltd. (hereinafter
"Descente"). It imports and distributes men's and women's
bathing suits and accessories in the United States. These
products bear the "ARENA" trademark, which is owned by Descente.
Several factories unrelated either to Arena or Descente
manufactured the imported swimwear in Hong Kong.
On February 1, 1993, Arena and Descente entered into a
License Agreement for the period, February 1, 1993 through
January 31, 1995. A copy of the License Agreement was submitted.
Under the agreement, Descente, granted to Arena an exclusive
license to use the "ARENA" trademark in connection with the
manufacture, promotion, sale, distribution, or any other
disposition of licensed products for the territory of the United
States. The agreement further provides that Arena may source the
licensed products outside the territory of the United States,
with Descente's prior written consent. In exchange for the
license, Arena agreed to pay Descente royalties equal to 2% of
the net sales of the licenced products. The term "net sales" is
defined by the agreement as gross sales of all licensed products
sold by licensee to the independent dealers, less returns, trade
discounts, and indirect sales taxes actually imposed by the
United States Government.
At the end of each annual period covered by the agreement,
Arena computed its net sales of the licensed products in the
United States and paid the appropriate royalty to Descente.
Under the Licensing Agreement, the licensee cannot commence the
production without the licensor's prior consent, and the licensor
reserves the right to disapprove any licensed product or its
material which does not fully comply with the specifications or
which are not in licensor's opinion compatible with the
reputation of the products of the licensor. However, there is no
indication that Descente had any control over what factories were
chosen to make the merchandise, or that any portion of the
royalties were given to the manufacturers.
Counsel submitted a series of documents labeled as "Sales
Contracts" pertaining to the imported swimwear. These documents
give a description of the goods being purchased, the price of the
goods, the quantity purchased, and the terms of the sale.
Included in the description of the goods is the instruction that
the "ARENA" logo was to be embroidered on the garments, but there
is no mention of royalties on these documents. Counsel has also
indicated that there are no formal sales contracts between Arena
and the manufacturers, and purchases are made through the use of
purchase orders. Two sample purchase orders were submitted.
The only issue you raised in the internal advice request and
the only issue decided here concerns the dutiability of the
license fees Arena paid Descente. We note, however, that the
submitted "Sales Contracts" relating to the import transactions
do not originate from the factories, but from the company, Win
Hanverky, Inc. According to counsel, Win Hanverky acted as
Arena's agent in the purchase of the imported merchandise and
Arena paid Win Hanverky a 5% commission for its services.
However, these "Sales Contracts" state that "we hereby confirm
having accepted your order as per terms and conditions printed
below". This language suggests that Win Hanverky may have been
acting in some capacity other than as Arena's buying agent. This
evidence should be considered along with the other available
evidence in determining Win Hanverky's role in the subject
transactions. For purposes of this decision, we assume that the
sellers to the import transactions are the factories, with Win
Hanverky acting either as a buying or selling agent.
ISSUE:
Whether the license fees Arena paid to its related parent
who is neither the seller of the imported merchandise nor related
to the seller for use of a trademark, as described above,
constitute additions to the price actually paid or payable for
imported merchandise either as royalties or proceeds under
sections 402(b)(1)(D) or (E) of the TAA?
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 is transaction value, which
is defined as the "price actually paid or payable for merchandise
when sold for exportation to the United States."
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 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, whereas royalties and license fees
paid to third parties for use, in the United States, of
copyrights and trademarks related 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.
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.
As quoted above, the Statement of Administrative Action
explains that royalties and license fees paid to third parties
for use in the United States, of copyrights and trademarks
related to the imported merchandise are generally not dutiable,
but the final determination depends on to whom and under what
circumstances they were paid. An important consideration is
whether the royalties are paid to the seller or to a party
related to the seller to an unrelated third party. In this case,
Arena pays the license fees to Descente, its parent company.
Descente is neither the seller of the imported swimwear nor a
party related to the seller.
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 Custom 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 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(b)(1)(D) of
the TAA.
The first question posed by the notice is whether the
imported merchandise was manufactured under patent. Although the
information submitted with the internal advice request does not
specifically indicate whether or not the imported merchandise was
manufactured under patent, counsel claims that the imported
products were not manufactured under patent, and therefore we
assume the imported merchandise was not manufactured under
patent.
The second question indicated in the notice is whether the
royalty is involved in the production or sale of the imported
merchandise. This question expands the analysis of question one.
In this case, the royalty payment was made for the right to use
the licensor's trademark in connection with the manufacture,
promotion, sale, distribution or any other disposition of the
various garments sold in the United States. The rights bear no
relation to the actual production process by which the imported
merchandise is manufactured. Thus, based on the information
presented, it is our position that the royalty will not be paid
for rights associated with processes to manufacture or produce
the imported merchandise. See HRL 54536, July 20, 1995.
Similarly, the royalty is not involved in the sale of the
imported merchandise. In the Hasbro II ruling, we held that a
royalty was involved in the sale of imported merchandise where
the sales agreements and purchase contracts were subject to the
terms of the license agreement. In HRL 544991, September 13,
1995, we held that a royalty was involved in the sale of the
imported merchandise where the payment of the royalty was closely
tied to the purchase of the imported product. Here, there is no
indication that the royalty payment was subject to the terms of
the sale for exportation to the United States or closely tied to
such sale. As indicated previously, the documents pertaining to
the sale of the imported merchandise make no reference to the
payment of royalties. Similarly, even though the agreement
provides that Descente must approve of a sample before production
commences, it does not specify the terms and conditions related
to the purchase of the imported product. Based on a review of
the submitted documents, the royalty payment to Descente was paid
to use the trademark in the United States and appears to be
unrelated to the sale for exportation of the imported merchandise
to the United States. Accordingly, based on the information
presented the second question also yields a negative response.
The third question asks whether the importer could buy the
product without paying the fee. This question goes to the heart
of whether a payment is considered to be a condition of sale.
27:6 Cust. B. & Dec. at ll. Here, all indications are that the
importer can buy the merchandise
from the seller and import it without having to pay royalties to
the licensor. Under the license agreement, Arena is not
obligated to pay any royalties for merely purchasing the licensed
products abroad and importing them into the United States.
Furthermore, as noted above, based on a review of the
submitted documents, there is no evidence to suggest that the
royalty is linked to sales agreements or purchase contracts for
the imported merchandise e.g., a requirement by the seller that
Arena pay the royalty to the licensor. See HRL 545379, July 7,
1995. Based on counsel's representation that all the relevant
documents were submitted and that there are no formal contracts
covering the subject transactions, we conclude that the payment
of the royalties is not a condition of sale of the imported
merchandise for exportation to the United States, and is not an
addition to the price actually paid or payable for the
merchandise under section 402(b)(1)(D) of the TAA.
Although the royalty payments are not dutiable as royalties,
we must also determine whether they would be considered proceeds
of a subsequent, resale, disposal, or use of the imported
merchandise under section 402(b)(1)(E). In HRL 544436 (C.S.D.
91-6; Vol 25 Cust. Bull. No. 18 dated February 4, 1991), commonly
know as the "Hasbro ruling", the importer was required to pay a
percentage of the "resale price" to the seller, for the imported
merchandise, in addition to the price originally paid. The
importer had been paying duties on these additional payments as
"royalties' under section 402(b)(1)(D). Customs held that the
payments were not dutiable under this royalty provision, but were
dutiable under section 402(b)(1)(E) as "proceeds of subsequent
resales" of the imported merchandise that accrued to the seller.
Customs subsequently reviewed the Hasbro ruling, by
soliciting public comments thereon and published the General
Notice on the Dutiability of "Royalty" Payment, referred to above
and commonly known as the "Hasbro II" decision. Customs
incorporated the analysis of the comments received. Hasbro II
upheld the first Hasbro ruling and modified it to the extent the
subject payment were found to be dutiable as either royalties
under section 402(b)(1)(D) or as proceeds under section
402(b)(1)(E).
Regarding proceeds, SAA provides the following:
Additions for the value of any part of the proceeds of any
subsequent resale, disposal or
use of the imported merchandise that accrue directly or
indirectly to the seller, do not
extend to the flow of dividends or other payments from the
buyer to the seller that do not directly relate to the
imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of
each individual transaction.
Statement of Administrative Action, H.R. Doc No. 153 96 Cong. 1st
Sess., Pt. 2. reprinted in, Department of Treasury, Customs
valuation under the Trade Agreement Act of 1979 (October 1981),
at 49.
In this case, Arena pays the license fees to a party who is
neither the seller of the imported merchandise nor a party
related to the seller. Descente owns and licenses the trademark
used by Arena, but does not produce or sell the imported
merchandise. Accordingly, based on the facts presented, we find
that the license fee payments that Arena made to Descente are not
dutiable as proceeds under section 402(b)(1)(E) of the TAA
because they do not accrue directly or indirectly to the seller
of the imported merchandise.
HOLDING:
The royalty payments made by Arena to Descente are not
includable in transaction value as royalties or proceeds under
either section 402(b)(1)(D) or 402(b)(1)(E).
The Office of Regulations and Rulings will take steps to
make this decision available to Customs personnel 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