VAL CO:R:C:V 545504 LPF
District Director
U.S. Customs Service
10 Causeway Street - Room 603
Boston, MA 02222-1059
RE: Internal Advice 94/93; Dutiability of proceeds paid to seller; C.S.D. 91-6; HRLs
542701, 542746, 543281
Dear Sir:
This is in response to your request for Internal Advice 94/93, submitted by Ross &
Hardies, on October 22, 1993, on behalf of their client, Schmid Inc. (Schmid) of Randolph, MA.
The request was received by this office on December 22, 1993, and a report submitted by the
concerned NIS was received on May 12, 1994. The request concerns the dutiability of proceeds
paid by Schmid to Goebel Prozellan-Fabrik (Goebel) for exclusive U.S. distributorship of Goebel
products. The issue evolved through an audit of Schmid by the Northeast Region's Regulatory
Audit Division (RAD).
FACTS:
Schmid is the exclusive distributor in the United States of figurines, collectors' plates,
bells, dolls, and similar products which depict, are derived from, and/or inspired by the artwork of
Sister M.I. Hummel. This right is granted in an exclusive distributorship agreement (Agreement),
dated as of November 8, 1988, between Schmid and Goebel, the seller of the merchandise.
Counsel submitted a copy of the Agreement for our review. Pursuant to the Agreement, Schmid
pays Goebel a royalty computed on the basis of its sales of the merchandise at wholesale, adjusted
for returns. Presently, no minimum royalty and no minimum purchase is required. Schmid is
required to account for sales on a quarterly basis, with an accounting and payment due 30 days
after the end of a quarter. It is our understanding that Schmid purchases the merchandise directly
from Goebel.
It is counsel's position, in part, that since Goebel does not have a vested right, or a claim
to any of Schmid's sales receipts, the payment does not constitute proceeds which accrue to
Goebel. Furthermore, even if such amounts are deemed dutiable, counsel avers that the proceeds
cannot be quantified in a reasonable period of time, indicating that there is a lack of sufficient
information to establish transaction value. In particular, counsel notes the difficulty in allocating a
royalty, based on total sales of the merchandise, to the individual purchase price of each of the
products.
ISSUE:
Based on the facts provided, whether the royalties or fees at issue, paid by the buyer,
Schmid, to the seller, Goebel, constitute dutiable proceeds to be included within the transaction
value and whether sufficient information is available in order to make an appropriate adjustment
with respect to the amount of the proceeds.
LAW AND ANALYSIS:
As you are aware, the preferred method of appraising merchandise imported into the
United States 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, including any royalty or license fee
related to the imported merchandise that the buyer is required to pay as a condition of the sale for
export to the U.S. (section 402(b)(1)(D)) and the proceeds of any subsequent resale, disposal or
use of the imported merchandise that accrue to the seller (section 402(b)(1)(E)).
The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as the
"total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses
incurred for transportation, insurance, and related services incident to the international shipment
of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for
the benefit of, the seller."
Dutiability of Royalties and Proceeds
It is our understanding that the concerned parties agree that the amounts at issue are not
dutiable as royalties. Based on the information provided, we concur with this position, noting
that: 1) the imported merchandise is not manufactured under patent; 2) the royalty is not involved
in the production or sale of the imported merchandise and; 3) the importer could buy the product
without paying the fee. See General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6
Cust. B. & Dec. at 1 (February 10, 1993).
Nevertheless, the payments still may be added to the price actually paid or payable as
proceeds pursuant to section 402(b)(1)(E). General Notice, supra, at 6-7. With regard to
proceeds, the SAA provides that:
[a]dditions for the value of any part of the proceeds of
any subsequent resale, disposal or use of the imported merchandise that accrues
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, Pt. II, 96th Cong., 1st Sess. (1979),
reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of
1979 at 49 (1981).
In C.S.D. 91-6, 25 Cust. Bull. 270 (1991), Headquarters
Ruling Letter (HRL) 544436, issued February 4, 1991, a seller agreed to make certain toy
products available for exclusive sale within a specified territory, and the importer agreed to buy
the products that were manufactured by the seller. The buyer/ importer agreed to pay a royalty
based on the invoice price of the merchandise, which accrued upon the sale of the products
regardless of the time of collection by the importer, for the exclusive right to sell the merchandise
within that territory and to manufacture or subcontract the manufacturing of the products.
Customs found the payments to constitute proceeds of subsequent resale.
The instant case is analogous to C.S.D. 91-6. Schmid similarly has entered into a
distributorship agreement with the seller of the imported merchandise, Goebel. In consideration
for this right, Schmid pays a royalty which accrues upon the sale of the merchandise. We find
counsel's assertions that Goebel does not have a vested right to a portion of the proceeds of
Schmid's sales and, therefore, that the payments do not constitute royalties, to be unpersuasive
and in conflict with the terms of the Agreement between the parties. In sum, we believe the
proceed payments made in the instant case exemplify the types of payments that section
402(b)(1)(E) was designed to cover and, hence, to include within transaction value.
Sufficiency of Information
Section 402(b)(1) provides that the price actually paid or payable for imported
merchandise shall be increased by the amounts attributable to, among other things, proceeds of
any subsequent resale, only to the extent that such amount is, "based on sufficient information."
It further provides that, "if sufficient information is not available, for any reason, with respect to
any [such] amount . . . , the transaction value of the imported merchandise concerned shall be
treated, for purposes of this section, as one that cannot be determined." Furthermore, section
402(b)(2)(A)(iii) states that transaction value will be an appropriate method of appraisement only
if an "appropriate adjustment" can be made for the proceeds of any subsequent resale.
Although Schmid is required to account for sales on a quarterly basis, with an accounting
and payment due 30 days after the end of a quarter, we do not find that such a payment
arrangement indicates, prima facie, that the proceeds cannot be quantified in a reasonable period
of time and, hence, that there is a lack of sufficient information. It is our position that the term
"subsequent resale," by its very nature, implies that proceeds may not be paid, or even
quantifiable, for some time after importation of the merchandise. Furthermore, we do not believe
the payment structure agreed to by the parties is uncommon in such transactions. To hold
otherwise could render transaction value unacceptable in numerous cases in which proceeds
subsequently accrue to the seller. Cf. HRL 542701, TAA No. 47, issued April 28, 1982, and
HRL 542746, issued March 30, 1982.
Finally, it is our position that counsel has not substantiated his concerns concerning the
allocation of the payments based on total sales of the merchandise. We emphasize that section
402(b)(1) particularly concerns situations when "sufficient information is not available." It is not
our understanding that the necessary information, which would enable Customs to properly assess
duty on the proceed payments, is "unavailable". On the contrary, we believe appropriate entry
documentation, invoices, purchase orders, proof of payment, and the like would enable Customs
to accurately and appropriately allocate the proceed payments to the individual purchase price of
the individual products. See HRL 543281, issued August 9, 1984.
HOLDING:
Based on the facts provided, the royalties at issue, paid by Schmid to Goebel, constitute
dutiable proceeds to be included within the transaction value of the imported merchandise.
Furthermore, it has not been demonstrated that sufficient information is unavailable, precluding an
appropriate adjustment with respect to the amount of the proceeds.
This decision should be mailed by your office to the internal advice requester no later than
sixty days from the date of this letter. On that date the Office of Regulations and 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,
John Durant, Director
Commercial Rulings Division