RR:IT:VA 547134 DWS
Michael S. O’Rourke, Esq.
Rode & Qualey
295 Madison Avenue
New York, N.Y. 10017
RE: Reconsideration of HRLs 546513 and 545194; Price Actually Paid or Payable; Indirect Payments; Royalties
Dear Mr. O’Rourke:
This is in response to your letter dated July 15, 1998, submitted on behalf of Sidney Rich Associates, Inc. (SRA),requesting the revocation of Headquarters Ruling Letter (HRL) 546513, dated February 11, 1998, in which Customs determined that certain license fees to be paid by the importer/buyers relating to certain trademarks on imported footwear are dutiable as part of the price actually paid or payable and, alternatively, as royalties related to the imported merchandise that the importer/buyers are required to pay, directly or indirectly, as a condition of the sale for export to the U.S.
This document has been drafted to avoid specific reference to information deemed confidential. We note that on December 4, 1998, you had the opportunity to discuss your position in this matter in person with me and two attorneys from my staff.
FACTS:
HRL 545194
The history of the instant request for reconsideration begins with HRL 545194, dated September 13, 1995. In that ruling, the importer/buyers purchased merchandise from four companies (the sellers). The sellers purchased the merchandise in their own name from various factories for resale to the importers. In all of the transactions, SRA served as a buying agent.
In addition, SRA collected fees from the importer/buyers on behalf of SRA’s subsidiaries,
Pagoda Trade Company Ltd. (Pagoda) and KidNATION Inc. (KidNATION). Pagoda and KidNATION were licensees for several trademarks and copyrights. SRA, Pagoda, and the sellers are all wholly owned subsidiaries of the same company. Therefore, SRA, Pagoda, and the sellers were considered to be related parties pursuant to 19 U.S.C. 1401a(g). In HRL 545194, we stated that Pagoda and KidNATION entered into the licensing agreements with several companies for the right to market trademarked merchandise in the U.S. The license fee was based on a percentage of the price that the importer paid to the sellers, but was payable upon sale of the imported merchandise in the U.S.
Customs issued HRL 545194, holding that the fees paid by the importer/buyers to Pagoda or KidNATION were dutiable. The decision noted that the so called license fees paid by the importer/buyers were not paid to the Licensor, but were paid either to SRA or to the Licensees, each of whom was a party related to the sellers of the imported merchandise. The decision stated that:
[n]otwithstanding the fact that the payments in question are referred to by the parties as “license fees,” we conclude that they are actually part of the total payment for the imported merchandise. These fees to a party related to the seller constitute indirect payments to the seller.
HRL 545194 at 5.
The decision stated further that:
[h]aving concluded that the license fees at issue are part of the price actually paid or payable for the imported merchandise, we do not address whether they could alternatively be considered royalties or proceeds under the TAA §402(b)(1)(D) and (E).
Id. at 6.
HRL 546513
In HRL 546513, dated February 11, 1998, Customs considered certain changes to the facts in HRL 545194, which you argued would have changed the outcome. More specifically, you proposed a different arrangement whereby the importer/buyers would pay the fees in question to a Trustee (First National Bank of Chicago) instead of to SRA or the Licensees. The Trustee in turn would pay the Licensors the requisite license fees. You argued that under the terms of the Trust Agreement, and legal principles relating to trusts, the Trustee is not related to the seller. Therefore, you believed that the impediment that existed previously for finding the payments to be dutiable has been removed.
With regard to HRL 546513, you provided six sets of transaction documents relating to previous import transactions. You indicated that these documents represented six of the largest purchasers of footwear on a first cost basis who utilize the services of SRA, the purchasers collectively known as importer/buyers. As in HRL 545194, SRA was identified as the buying agent. Each set of documents consisted of the importer/buyer’s purchase order, the seller’s invoice, SRA’s buying commission invoice, and the Licensee’s license fee invoice (in each case, KidNATION is the Licensee). In HRL 546513, the transaction documents essentially were the same; the only difference regarding the issuance and payment of the license fees.
Specifically, the Trust was established by an Agreement entitled “Footwear Trademarks License Fees Trust” dated September 4, 1996 (Trust Agreement). The parties to the Trust Agreement are The First National Bank of Chicago (Trustee); Clayton License, Inc., KidNATION, and Pagoda. Under the terms of the Trust Agreement, KidNATION and Clayton are referred to as the Trademark Licensees and Pagoda, the Data Facilitator. The Trademark Licensees grant the Trustee all the property described (the Trust Estate): all monies paid into the Trust by License Fees Obligors (importer/buyers), Trademark Licensees, and any and all other parties. Section 2.02 of the Trust Agreement provided that the Data Facilitator shall send invoices to the License Fees Obligors (i.e., importer/buyers) requiring that they pay all license fees when due into the Trust Account, and the Data Facilitator shall account for and keep all necessary and desirable records in respect of the same. This section further provides that the Data Facilitator shall be entitled to receive fees for the performance of its duties. Section 1.01 of the Trust Agreement provided that the Trustee shall pay from the Trust Account all Trust Monies due and owing to the License Fees Beneficiaries (i.e., Licensors).
In HRL 546513, we upheld the decision in HRL 545194 that the license fees paid by the importer/buyers are included in the transaction value of the imported merchandise as an indirect payment and part of the price actually paid or payable. We also held that, because the license fees are related to the imported merchandise and must be paid by the importer/buyers as a condition of sale of the imported merchandise for exportation to the U.S., the fees could also be included in the transaction value as an addition to the price actually paid or payable under section 402(b)(1)(D) of the TAA as royalties. Among the factors determining that the fees are related to the production and sale of the imported merchandise, we stated that the Licensors exercised strict control over the quality of the imported goods through the approval of manufacturers and submission of samples.
ISSUE:
Whether the creation of the Trust changes the result in HRL 545194 and requires revocation of HRL 546513.
Whether the standard clauses in the License Agreements establishing the Licensor’s right to control the quality of the product affects the dutiability of the license fees.
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 certain enumerated additions.
You claim that under its proposed arrangement, the fees paid by the importer/buyers to the Trust are not dutiable as part of the price actually paid or payable because they are being paid to a party who is not related to the seller. In addition, you claim that the fees are not dutiable as an addition to the price actually paid or payable as royalties because they are not related to the imported merchandise and are not a condition of the sale of the imported footwear. Further you are concerned that Customs reliance in HRL 546513 on the fact that the Licensor retained the right to control the quality of the goods will result in making all trademark royalties dutiable.
As we stated previously, in HRL 545194, we ruled that the fees in question which were paid to the Licensee, a party related to the seller, were part of the price actually paid or payable. The question to be addressed here is whether a different result is warranted if the importer/buyers pay the fees in question to the Trustee instead of the Licensee. You contend that the payment to the Trust changes the duty consequence as the importer/buyers and the Trustee cannot be considered related parties. As such, you argue that the fees are being paid to unrelated third parties and must be considered to be non dutiable.
The price actually paid or payable is defined as the total payment, whether directly or indirectly made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. Title II of the SAA, provides that one example of an indirect payment to a seller would be “the settlement by the buyer, whether in whole or in part, of a debt owed by the seller.” In HRL 546513, Customs referred to HRL 542984, dated April 8, 1993, where Customs ruled that payments for product liability insurance made by the buyer to a third party insurer were part of the price actually paid or payable for the imported merchandise as indirect payments, where a condition of the sale required the seller to obtain suitable insurance and bear the cost thereof. In HRL 544764, January 6, 1994, Customs stated that where the payments are for the settlement of a debt of a party related to the seller, such payments are also part of the price actually paid or payable for the imported merchandise. In that case, the payments by the buyer were to an unrelated third party supplier for an expense incurred by the assembler, a party related to the seller.
Under the terms of the License Agreements, the Licensee is obligated to pay the license fees upon sale of the licensed products to the importer/buyers. There is an implied obligation that the importer/buyers will pay the fees covered by the license agreements. The fees to be paid by the importer/buyers through the Trust to the Licensors have the effect of settling a debt owed by the Licensee, a party related to the seller. It continues to be Customs position that as the Licensee and seller are related parties, the payments to the Trust are analogous to the settlement of a debt owed by a party related to the seller and considered an indirect payment to the seller. Even though there is a change in the format of settling the payment obligation (the creation of the Trust), the obligation of the parties itself does not change.
Notwithstanding the fact that the license fees paid into the Trust are part of the price actually paid or payable, and it is therefore unnecessary for us to reexamine whether the license fee payments into the Trust should be added to the price actually paid or payable under section 402(b)(1)(D) of the TAA, you claim that the Customs Service’s application of HRL 546513 will likely result in making all trademark royalties dutiable. You surmise that the Statement of Administrative Action (SAA), H.R. Doc. No. 153, 96 Cong., St. 1st Sess., reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48 49 clearly sets forth the policy that “in the main royalties for trademarks and copyrights are not dutiable.” Specifically, you are concerned that, under our analysis in HRL 546513, the standard clauses in the License Agreements establishing the Licensor’s right to control the quality of the product in and of themselves make the license fees dutiable.
We acknowledge that quality control clauses are standard in trademark license agreements, and license fees paid to third parties for use in the U.S. of trademarks are generally not dutiable. See HRL 547226, of this date. Therefore, the fact that a trademark license agreement contains clauses allowing the licensor to retain control over the quality of the product on which the trademark is placed does not in itself render the license fees stemming from that agreement to be dutiable under section 402(b)(1)(D) of the TAA as royalties. We also reiterate that, if the license fees are paid to a unrelated third party licensor, then the license fees are generally not dutiable. Therefore, we disagree with your assertion that our application of HRL 546513 will make all trademark royalties dutiable.
HOLDING:
In conformity with the foregoing, the license fees paid by the importer/buyers are included in the transaction value of the imported merchandise as part of the price actually paid or payable. Therefore, the creation of the Trust in the instant situation does not change the result in HRL 545194 and does not require revocation of HRL 546513.
The standard clauses in the License Agreements establishing the Licensor’s right to control the quality of the product do not, standing alone, result in license fees becoming dutiable under section 402(b)(1)(D) of the TAA as royalties.
EFFECT ON OTHER RULINGS:
HRL 546513 is affirmed.
Sincerely,
Thomas L. Lobred
Chief, Value Branch