VAL OT:RR:CTF:VS H047360 FP
George R. Tuttle, III
One Embarcadero Center
Suite 730
San Francisco, CA 94111-4044
RE: Dutiability of royalty payments; buying agency fees;
19 U.S.C. § 1401a(b)(1)
Dear Mr. Tuttle:
This is in response to your letter requesting a ruling on behalf of The Sports Authority Corporate Services, Inc. (“TSA”) as to the dutiability of certain payments for the use of a licensed trademark, and for buying agency services.
FACTS:
TSA, of Denver, Colorado, is a U.S. importer and retailer of fitness, outdoor, and sporting goods, including equipment, apparel and footwear.
[Licensor], owns [XYZ] trademark in the U.S. It has licensed the [XYZ] brand for certain footwear product lines to [Licensee], of St. Louis, Missouri.
Further, [Licensee] authorized TSA and its agents to import into the U.S. footwear that contains the [XYZ] brand as licensed by [Licensee], according to [Licensee]’s authorization letter dated May 30, 2007, a copy of which you have provided. In consideration of the rights granted to TSA by [Licensee], TSA pays [Licensee] a royalty for the [XYZ] goods.
Under this arrangement, TSA pays [Licensee] a royalty fee of 7% of the F.O.B./commercial invoice value of the footwear exported from the factory to TSA that bear the subject trademark. [Licensee], in turn, pays the true license holder of the mark, [Licensor].
We asked you to provide this office with documentation that evidences Licensee’s right to use the mark. You furnished a letter from [Licensor] that confirms the existence of a license agreement granted whereby [Licensor] authorizes [Licensee] to manufacture, design and sell pre-approved [XYZ] footear in the U.S.
[Licensee] also acts as a buying agent for TSA under a separate agreement.
You provided a copy of a buying agency agreement between TSA and [Licensee] dated March 22, 2005. The agreement identifies the general duties, services, and activities that [Licensee] agrees to provide, including, but not limited to: informing TSA of styles and fashions, current prices and trends, availability of materials, shipping conditions and availability of production of merchandise; presenting samples, proposed specifications and pricing; placing of orders solely at the direction and upon issuance of a written purchase order from TSA; advising the manufacturer that it will be selling directly to TSA; arranging for, and assisting in, the administration of independent quality testing of the merchandise by certified laboratories selected by TSA; and issuing advance shipping notices and furnishing logistics information as necessary.
For these services, TSA pays [Licensee] an 8% commission on purchases.
According to the information submitted with your request, [Licensee] advises TSA of the various styles and fashions that are available, current prices and trends, materials, and availability of production sources for the merchandise. TSA selects the style of footwear it desires to purchase from a representative selection offered by [Licensee]. TSA may request changes or variations to the design, subject to approval by [Licensor], the owner of the [XYZ] trademark. TSA advises [Licensee] on its price point for the footwear, [Licensee] identifies a vendor for the footwear and relays this information to TSA. TSA may choose to accept or reject the identified vendor. If TSA accepts the vendor, Licensee sends the footwear designs to the selected supplier. However, from this point on, TSA enters into a vendor agreement with the supplier and issues purchase orders directly to the selected vendor(s).
You have presented an example where TSA purchases the footwear articles that bear the licensed trademark from Betafac Industries Ltd. (“Betafac”), a Hong Kong company unrelated to TSA, [Licensee], or [Licensor]. You claim that the actual purchase orders are written by TSA to Betafac and that TSA pays Betafac directly.
Betafac selects the factory that actually makes the footwear. In your example, the actual factory that fulfilled the order is Fujian Putian Hualun Footwear in China. According to the copy of a commercial invoice from Betafac to TSA that was provided, the articles are shipped directly from the Chinese factory to the U.S., the terms of sale indicate that TSA takes ownership and possession of the goods in China, and TSA acts as the importer of record of the footwear into the U.S.
ISSUE:
Are the license fees and commissions paid by TSA to its Agent 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 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,” plus five statutorily enumerated additions, including "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." 19 U.S.C. § 1401a(b)(1)(D). These additions apply only if they are not already included in the price actually paid or payable.
In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. For purposes of this decision we assume that transaction value is the appropriate method of appraisement.
Royalty payments
In general, royalty payments may be included in transaction value as part of the price actually paid or payable, or as an addition thereto under 19 U.S.C. § 1401a(b)(1)(D)-(E). General Notice, "Dutiability of Royalty Payments," Vol. 27, No. 6, Cust. B. & Dec. 1, at 13 (February 10, 1993) ("Hasbro II ruling") (quoting H.R. Rep. No. 317, 96th Cong., 1st Sess. (1979) at 80 and S. Rep. No. 249, 96th Cong., 1st Sess., at 120 (1979).
In this case, it is clear that the royalty payments are not already included in the price actually paid or payable to the seller, Betafac Industries, as they are separately invoiced by and paid to [Licensee] by TSA.
With regard to royalties, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, 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 the sale of the imported merchandise for exportation to the United States. (Statute) 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 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 the 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 for exportation to the United States. (Regulation)
Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., Pt II, at 443 – 444 (1979).
In the General Notice, “Dutiability of Royalty Payments”, previously cited, Customs articulated three factors, based on prior court decisions, for determining whether a royalty was dutiable. These factors were whether: 1) the imported merchandise was manufactured under patent; 2) the royalty was involved in the production or sale of the imported merchandise and; 3) the importer could buy the product without paying the fee. Affirmative responses to factors one and two and a negative response to factor three would indicate that the payments were a condition of sale and, therefore, dutiable as royalty payments. The answer to the third question goes is essential to determine whether a payment is considered to be a condition of the sale.
In the situation at issue, the answer to the first question is no. The license arrangement does not involve a patent related to the process or the method by which the footwear is manufactured. Further, there is no evidence that indicates that the footwear is manufactured under patent.
With respect to the second question, you argue that TSA pays a license fee to [Licensee] for the rights to import footwear that bears the [XYZ] brand into the U.S. The imported merchandise is manufactured in China by factories that are unrelated to either TSA, [Licensee] or [Licensor]. The royalty fee is based on the quantity of footwear exported from the factory to TSA. It is not paid for the rights associated with the process to manufacture the imported merchandise.
We have not been made aware of any restrictions regarding TSA’s selection of the manufacturer of the footwear or the location where the production can take place. Consequently, because the royalty is paid to a third party, who is unrelated to the seller of the merchandise, we conclude that the royalty is not involved in the production or sale of the imported merchandise.
As previously explained, the answer to the third question is crucial to determine whether a payment is considered a condition of sale. Royalty payments and license fees are a condition of sale when they are paid on each and every importation and are inextricably intertwined with the imported merchandise. If the payments are optional and not inextricably intertwined with the imported merchandise, or are paid solely for the exclusive right to manufacture and sell in a designated area, they do not constitute additions to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(D). See HQ 546675 dated June 23, 1999.
Customs held that when a licensee imports trademarked merchandise manufactured and sold by a company unrelated to the licensor, the royalty payment to the licensor for the right to use the trademark in connection with the merchandise is not a condition of the sale of the imported merchandise for exportation to the United States, if the royalty payments are triggered only upon resale of the trademarked merchandise in the U.S. See HQ H034062, dated March 7, 2007.
In the instant case, however, the royalty payment is based on the quantity of footwear exported from the factory to TSA. Even though the seller is unrelated to the license holder, payment of the royalty conveys the right to export the merchandise to the U.S. Therefore, we find that payment of the royalty is made by the buyer as a condition of the sale of the merchandise for exportation to the United States.
Accordingly, we find that the royalty payments at issue are a condition of sale of the imported merchandise and, therefore, constitute an addition to the price actually paid or payable for the imported merchandise pursuant to §1401a(b)(1)(D).
Buying agency
Bona fide buying commissions are not a proper element of transaction value. Pier 1 Imports, Inc. v. United States, 708 F.Supp. 351, 13 CIT 161 (1989); Rosenthal-Netter, Inc. v. United States, 679 F.Supp. 21, 12 CIT 77 (1988); Jay-Arr Slimwear, Inc. v. United States, 681 F.Supp. 875, 12 CIT 133 (1988).
The existence of a bona fide buying commission depends upon the relevant factors of each individual case, and the importer has the burden of proving the existence of a bona fide agency relationship and that the payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, supra. New Trends, Inc. v. United States, 645 F.Supp. 957 (CIT 1986).
Various factors are taken into account in determining whether an agency relationship exists. However, the primary consideration is the right of the principal to control the agent's conduct with the matters entrusted to him. In addition, the courts have examined the following factors: whether the purported agent's actions are primarily for the benefit of the principal; whether the principal or the agent is responsible for shipping and handling; whether the importer may purchase directly from the manufacturers without utilizing the services of the agent; whether the purported agent is financially detached from the manufacturer of the merchandise; and whether the intermediary is operating an independent business, primarily for its own benefit. Rosenthal-Netter, New Trends, supra.
An agent must be financially detached from the manufacturers of the merchandise, and must show that none of the commission inures to the benefit of the manufacturer. New Trends, supra. The buying agency agreement states that the buying agent does not share his commission with the manufacturer and does not receive any remuneration from the manufacturer for the services on importer's behalf.
The fact that the importer and the purported buying agent are related does not negate an otherwise legitimate buying agency relationship. From the information provided, it appears as if TSA, the buyer, exercises sufficient control over the actions of the agent, [Licensee]. The buying agent performs the services described for the account of the importer and at the importer's instructions. [Licensee] only orders merchandise on behalf of TSA when it is so instructed and upon the conditions specified by the importer. No factory is accepted as a supplier without the approval of the importer. The buying agent is not buying or selling for its own account and the goods are clearly marked and packaged as the goods of the importer by the manufacturer.
Finally, Customs has consistently held that an invoice or other documentation from the actual foreign seller to the agent is required in order to establish that the agent is not the seller, as well as to determine the price actually paid or payable to the seller. See Headquarters Ruling No. 542141 dated September 29, 1980 (TAA No. 7). In this regard, the buying agency commissions should be shown separately from the price actually paid or payable for the imported merchandise. Documentation showing the identity of, and the price charged by the seller, is required.
Accordingly, based upon the buying agency agreement dated between the parties, and counsel's representations, it is our position that the commissions paid by the buyer to the agent constitute bona fide buying commissions and do not form part of the price actually paid or payable. However, please note that the existence of a buying agency relationship is factually specific. The actual determination is made by the appraising officer at the port of entry and is based on the entry documentation submitted. The totality of the evidence must demonstrate that the purported agent is a bona fide buying agent and not a selling agent nor an independent seller. 23:11 Cust. B. & Dec. 9, General Notice dated March 15, 1989.
Please note, that the approval of these buying arrangements in no way constitutes acceptability of an 8% buying agency fee. The appraising officer will determine whether the percentage exceeds the percent commission that is normal in the trade for bona fide buying agents. Documentary evidence detailing the extent of additional services provided beyond those normally performed by such agents would need to be presented to the appraising officer.
HOLDING:
In view of the foregoing, we find that:
(a) the royalties are to be included in the transaction value as an addition within the meaning of 19 U.S.C. § 1401a(b)(1)(D); and
(b) the commissions paid to the agent constitute bona fide buying commissions; and therefore, do not form part of the price actually paid or payable.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs official handling the transaction.
Sincerely,
Monika R. Brenner
Chief, Valuation & Special Programs Branch