RR:IT:VA 547226 DWS
Mr. M. Barry Levy
Sharretts, Paley, Carter & Blauvelt, P.C.
Sixty-seven Broad Street
New York, NY 10004
RE: Dutiability of License Fees; Royalties
Dear Mr. Levy:
This is in response to your letters dated November 9 and December 3, 1998, on behalf of S. Goldberg & Co. (S. Goldberg), requesting a binding ruling concerning the dutiability of certain license fees. We regret the delay in responding.
FACTS:
Pursuant to a License Agreement (Agreement), a copy of which you provided, between S. Goldberg and Warner Bros., a Division of Time Warner Entertainment Company L.P. (Warner Bros.), S. Goldberg agreed to pay Warner Bros. license fees for the non-exclusive right to manufacture and sell Licensed Products in the U.S. Licensed Products are described as the following: children’s footwear, slippers, and branded canvas sneakers which bear the likenesses of Baby Looney Tunes characters (the Licensed Property). According to the Agreement, S. Goldberg may arrange production of Licensed Products in the U.S., in which case it will pay Warner Bros. 10% of its sales price. S. Goldberg may also arrange for production outside the U.S. for sale within the U.S., in which case it will pay Warner Bros. 12 % of its F.O.B. purchase price. Payments are to be made at these rates only to the extent that payments due based on U.S. sales and/or imports exceed Guaranteed Consideration as stated in the Agreement.
Counsel states that S. Goldberg has no ownership interest in any foreign
manufacturers; nor does Warner Bros. have any ownership interest in any of S. Goldberg’s foreign manufacturers. It is our understanding that none of the parties involved are related within the meaning of 19 U.S.C. 1401a(g). Counsel states that Warner Bros. is in no way involved in the commercial transactions between S. Goldberg and any manufacturer. However, counsel has provided us with a copy of a standard letter a manufacturer must provide to Warner Bros., requiring the approval signature of a Warner Bros. executive, stating in part that the manufacturer understands that its engagement by S. Goldberg (Licensee) is subject to Warner Bros. written approval. In addition, the Licensee must furnish samples for the Licensor’s approval.
Counsel and S. Goldberg have both indicated that there are no formal sales contracts between S. Goldberg and any manufacturer, and purchases are made through the use of purchase orders, copies of which have been submitted. These documents give a description of the goods being purchased, the price of the goods, the quantity purchased, and the terms of sale. Included in the description of the goods is the instruction that the particular Baby Looney Tunes character (e.g., Tweety) be embroidered on the merchandise, but there is no mention in any of the purchase orders of the payment of license fees from S. Goldberg to Warner Bros.
ISSUE:
Whether the license fees paid by S. Goldberg to Warner Bros. constitute additions to the price actually paid or payable for the imported merchandise as royalties under section 402(b)(1)(D) of the TAA.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the U.S. is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus enumerated statutory additions. Accordingly, for the purposes of this ruling, we have assumed 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. One of the statutory additions to the price actually paid or payable is found in section 402(b)(1)(D) of the TAA which provides 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.
Counsel contends that the license fees paid by S. Goldberg to Warner Bros. do not constitute additions to the price actually paid or payable for the imported merchandise as royalties under section 402(b)(1)(D) of the TAA.
With regard to the dutiability of royalties and license fees, the Statement of Administrative Action (SAA) provides in relevant part:
[a]dditions 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.
SAA, 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 stated above, the SAA explains that royalties and license fees paid to third parties for use in the U.S. 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 or license fees are paid to the seller or to a party related to the
seller rather than to an unrelated third party. In this case, S. Goldberg pays the license fees to Warner Bros., an unrelated party. Warner Bros. is neither the seller of the imported merchandise nor a party related to the seller.
The question of whether the royalty and license fee 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 to determine whether a royalty or license fee is related to the 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 or license fee 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. Although the answers to these questions are merely factors in determining whether a royalty or license fee is dutiable, negative responses to the first and second questions, and an affirmative response to the third, suggest that a royalty or license fee 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 by counsel 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. Therefore, we assume that, for the purposes of this ruling, the imported merchandise was not manufactured under patent.
The second question indicated in the notice is whether the royalty or license fee is involved in the production or sale of the imported merchandise. This question expands the analysis of question one. In this case, the license fee payments are made for the right to use the licensor’s trademark in connection with the manufacture and sale of the merchandise sold in the U.S. In Hasbro II, in response to this second question, it was noted that there was no precedent under the prior law on the dutiability of payments for trademarks and copyrights. Therefore, in determining whether the royalty or license fee is involved in the production or sale of the imported merchandise, i.e., whether the royalty or license fee is “related to the imported merchandise,”we cited the previously quoted language from the SAA.
In this case, we conclude that the payments for the use of the licensed characters are related to the imported goods and are involved in the production and sale of the goods. This is based on the fact that the manufacturer must provide Warner Bros. a letter stating in part that the manufacturer understands that its engagement by S. Goldberg is subject to Warner Bros. approval. Although it is the Licensee (S.
Goldberg) who may choose the manufacturer, the Licensor (Warner Bros.), who receives the license payments, must approve that manufacturer. In addition, the submitted purchase orders instruct the manufacturer that particular Baby Looney Tunes characters be embroidered on the merchandise.
A mixed answer to question two does not necessarily indicate that the license fees are dutiable under section 402(b)(1)(D) of the TAA. As indicated in the SAA, we must consider whether the licence fees are a condition of sale of the imported goods. Customs makes this determination through the third question, whether the importer could buy the product without paying the fees. This question goes to the heart of whether a payment is considered to be a condition of sale. Here, all indications are that S. Goldberg can buy the merchandise from the seller and import it without having to pay the license fees to Warner Bros. Under the Agreement, S. Goldberg is not obligated to pay any license fees for merely purchasing the licensed products abroad and importing them into the U.S.
Furthermore, as noted above, based upon a review of the submitted documents, there is no evidence to suggest that the license fees are linked to sales agreements or purchase contracts for the imported merchandise (e.g., a requirement by the seller that S. Goldberg pay the license fees to Warner Bros). See HQ 545379, July 7, 1995.
It has been suggested that because, as stated in the Agreement, Warner Bros. must approve of any manufacturer and be involved in the quality control of any merchandise produced bearing its trademark, such control is evidence that the license fees are required as a condition of sale of the imported merchandise. However, we note that quality control clauses are standard in trademark license agreements, and, as we stated previously, license fees paid to third parties for use in the U.S. of trademarks are generally not dutiable. See West’s Legal Forms, Vol.25, 2nd Ed. Also, in the letter provided by the manufacturer, in no way does it acknowledge or require the payment of license fees from S. Goldberg to Warner Bros., or threaten to disrupt its business with S. Goldberg until the license fees are made to Warner Bros.
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 license fees are not a condition of sale of the imported merchandise for exportation to the U.S., and are not additions to the price actually paid or payable for the merchandise under section 402(b)(1)(D) of the TAA. See HQ 546229, dated May 31, 1996.
We note that Section 8 of the Agreement concerns the use of artwork by the Licensee with regard to the Licensed Products. If the Licensee provides any artwork to
the manufacturer of any of the products covered in the Agreement, and if the artwork is produced outside of the U.S., it could constitute an assist under section 402(b)(1)(C) of the TAA and as defined in section 402(h)(1)(A)(iv) of the TAA.
HOLDING:
The license fees paid by S. Goldberg to Warner Bros. do not constitute additions to the price actually paid or payable for the imported merchandise as royalties under section 402(b)(1)(D) of the TAA.
Sincerely,
Thomas L. Lobred
Chief, Value Branch