RR:IT:VA 547808 KDW
Port Director
U.S. Customs Service
477 Michigan Ave., Rm. 200
Detroit, Michigan 48226
RE: Internal Advice Request # 2000-3801-300374; assists; design work; artwork
Dear Port Director:
This is in response to your memorandum dated August 24, 2000, requesting internal advice as to the dutiability of certain artwork and original digital color separations that Hallmark Cards, Inc. (“Hallmark”) sent to foreign vendors for production of imported merchandise. Our response is based on your memorandum, letters from Hallmark dated December 5, 2000, and July 17, 2001, October 16, 2001, and our meeting with Hallmark representatives and counsel on March 30, 2001. We regret the delay in response.
FACTS:
Hallmark imports a line of products containing certain design work it provides to its foreign vendors free of charge. Hallmark ships the design work to the manufacturers as either a transparency or as a film depending on the item to be produced. The design work is derived in part from artwork created by a Dutch artist that is scanned in the Netherlands by Repro Wes. Repro Wes creates a digital library and catalog of the artist’s work. Hallmark designers in the United States use the catalog to incorporate pieces of the artist’s work into a line of products. The designers cut pieces from the artwork in the catalog and paste them into product designs.
Once the product design is created, the designers make a tight layout of the finished product and send it to Repro Wes. Hallmark pays Repro Wes to combine the culled images, resize, and reposition them as directed by Hallmark designers and place them into a CMYK file (a four color separation file) and proof. The file and proof are then sent to Hallmark who uses them in finalizing its pictorial design for the product, clean up the digital file, and manipulate, add, or delete some design components. Once finalized, the file is adjusted to conform to the ink sets used by Hallmark. The design process separates at this point into two separate processes depending upon whether the finished items will be printed products or specialty products.
For specialty products, Hallmark converts the adjusted CMYK file into a RGB file (a tri-color separation file) and transfers it to a CD using an IRIS system. The CD is used to make a transparency of the RGB file. The transparency is sent to Hallmark’s foreign vendors, who make a color separation to use in the final production process.
For printed products, Hallmark stores the adjusted CMYK file on the digital library. The finishing department then creates a Quark template that enables its system to incorporate all the design elements in one file. Using this file Hallmark creates a film color separation of the completed design, and sends it to its foreign vendors for production of the finished product.
Hallmark states that it does not believe the digital color separation created by Repro Wes constitutes an assist. You state that the adjusted digital color separation that Hallmark ships to its vendors for use in the production of the imported merchandise is not a new item, but simply a modification of the original digital color separation. You conclude that the digital color separations produced by Repro Wes, plus the modifications described above constitute part of the value of the imported merchandise as an assist under 19 U.S.C. 1401a(h)(1)(A)(iv).
In addition to the technical information concerning its design process, Hallmark, at our request, submitted a copy of its licensing agreement with the Dutch artist. Hallmark entered into the licensing agreement with the artist in 1992. The agreement provides that Hallmark has the exclusive right worldwide, except the Netherlands “to utilize and sublicense to third parties all designs and characters … owned by” the artist together with the artist’s name, likeness, biographical information, and trademark(s) in connection with the manufacture, distribution, promotion, and sale of products. Under the terms of the original agreement, Hallmark agreed to pay a royalty to the artist calculated as a percentage of the sale price to Hallmark customers on all sales of all licensed articles sold by it. In addition, Hallmark agreed to furnish the artist with its “rough art” and “final art” for each licensed product for approval before manufacture, distribution or sale. The artist may disapprove the contemplated use or art.
In an April 1996 amendment the terms of payment were changed to provide that Hallmark pay a set guaranteed amount for the time period January 1, 1998 through December 31, 2002. If that amount has not been paid in royalties by the end of the time period, Hallmark is to remit the difference to the artist to meet the guaranteed amount. Hallmark claims that the royalty payments made to the artist are not part of the price actually paid or payable, because they are not linked to individual sales agreements or purchase contracts with the Asian vendors for the imported merchandise.
ISSUES:
Is the art and design work Hallmark supplies to its foreign manufacturers considered an assist?
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). Transaction value, the preferred method of appraisement, is defined in section 402(b) of the TAA as the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions. The enumerated additions include the value, apportioned as appropriate, of any assists. 19 U.S.C. § 1401a(b)(1). Assists are specifically defined in section 402(h)(1)(A) of the TAA as:
any of the following if supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or of the sale for export to the United States of the merchandise:
Materials, components, parts, and similar items incorporated in the imported merchandise;
Tools, dies, molds, and similar items used in the production of the imported merchandise;
Merchandise consumed in the production of the merchandise;
Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and necessary for the production of the imported merchandise.
Hallmark does not dispute that the transparencies and film color separations it ships to its foreign vendors constitute design work. Thus, the only issue before us is whether that design work constitutes an assist.
To be included in the transaction value, design work must be undertaken elsewhere than in the United States and it must be necessary for the production of the imported items. Id. Accordingly, any design work undertaken in the United States by Hallmark would not be considered an assist. However, the work undertaken by the artist and Repro Wes in the Netherlands does not occur in the United States, and thus we turn our analysis to whether those portions of the work are dutiable as an assist in accordance with section 402(h)(1)(A)(iv) of the TAA.
Although the transparencies and film that comprise the final design work are completed in the United States, they are not wholly undertaken in the United States. In a similar case we have found that portions of design work undertaken in another country and provided to the seller free of charge or at reduced cost are considered assists, and part of the transaction value. See HRL 545341, dated August 3, 1994.
The work undertaken by Repro Wes is similar to that in Headquarters Ruling Letter (HRL) 546720, dated June 21, 1999. In HRL 546720, we found that certain CAD-generated prints supplied by the buyer to the overseas manufacturer did not constitute design work due to the level of skill involved in creating the prints. In that case, we found that the person producing the prints merely input data provided by the buyers and did not have any discretion in creating or arranging color schemes. We concluded that the computer generated printing had no artistic value, and therefore was not an assist.
Similarly, Repro Wes scans the artist’s work and provides Hallmark with a digital library of the artwork. From the digital library, Hallmark artists create new layouts and patterns, and designs for products. Hallmark then directs Repro Wes to cull the digital images from various files in the library to match the layout composed by the Hallmark artists. Repro Wes submits a proof to Hallmark in the United States, who uses it to create the final design scheme sent to the manufacturers. Based on this description, it does not appear that Repro Wes participates in the creative process or has any discretion in choosing images or color. The coloring and images are the same in the final product as designated by Hallmark and the artist. Also, it does not appear that Repro Wes performs any work in the development, engineering, planning or sketching of the product to be manufactured. Accordingly, we find that the digital reproductions and design proofs provided by Repro Wes do not constitute assists within the meaning of 19 U.S.C. §1401a(h)(1)(A)(iv).
In contrast, however, the original artwork that is created in Denmark and supplied to Hallmark pursuant to the licensing agreement is part of the creative process. The artist has discretion in creating the images, including their shape and color. The coloring and images are the same in the final product shipped to the manufacturers as in the original artwork. As explained by the Hallmark representatives, the artist is very particular about the colors used for her work. In some cases an image from the artist’s sketchbook may be inverted or separated from its original companion images, but the lines, shapes, and colors of the images remain the same. Further, the artwork plays a key role in the design product. While the artwork constitutes only a portion of the whole design, it is not “incidental” to the other design work performed by Hallmark in the United States. Without the work by the artist, Hallmark cannot perfect its transparencies or films to send to its foreign vendors. Hallmark disputes this conclusion by stating that the file produced by Repro Wes of the artist’s work is in a different format than that used by Hallmark and that it doesn’t contain all of the elements of the design. These facts are immaterial to the determination that the original artwork is in fact used in and necessary for the creation of the transparencies and films Hallmark produces for use by its foreign vendors. Without the original artwork, Hallmark has no design.
Further, we distinguish this case from HRL 547578, dated January 18, 2000. In that case, the fabric purchased by the importer was strictly used for inspiration as demonstrated by the samples submitted. The patterns and colors of the original fabric were significantly changed and were not clearly evident in the final design work. Customs determined that the original design work was transformed into new U.S. designed work and therefore, was not an assist. In contrast, the original artwork at issue here is not significantly changed and the final product clearly embodies the artist’s well-known work. Thus, we find that the artwork performed by the original artist and furnished by Hallmark free of charge to its foreign manufacturers as part of the final design is necessary for the production of the imported merchandise. It is, therefore, an assist within the meaning of 19 U.S.C. §1401a(h)(1)(A)(iv).
In valuing the artwork, we note that section 152.103(d)(1) of the Customs Regulations (19 CFR §152.103(d)(1)), provides that the value of the assist acquired by the buyer from an unrelated seller is the cost of its acquisition including transportation costs to the place of production. Further, section 152.103(e)(1) of the Customs Regulations provides that the value of the assist is to be apportioned to the imported merchandise in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles.
The only information we have concerning the valuation of the artwork is contained in the licensing agreement between Hallmark and the artist. It is our position that a value for the artwork may be based on royalty payments made in exchange for that artwork which is incorporated into the final design for the products imported. In HRL 544459, dated May 30, 1991, Customs determined that royalty payments could be used to value the design and development assist acquired by the buyer from a third party, and supplied free of charge to the seller for use in the production of the imported merchandise.
HOLDING:
The portion of the design work performed by Hallmark in the United States is not considered an assist. Also, the work performed by Repro Wes although undertaken abroad, does not constitute an assist, because it is not design work. However, the artwork performed by the artist in Denmark is part of the design work necessary for the production of the imported merchandise. Accordingly, that portion of the design work supplied by Hallmark free of charge to the manufacturer, therefore, constitutes an assist. The value of the artwork must be added to the PAPP for the imported merchandise.
This decision should be mailed by your office to the party requesting internal advice no later than sixty days from the date of this letter. On that date the Office of Regulations & Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels.
Sincerely,
Virginia L. Brown
Chief, Value Branch