OT:RR:CTF:VS H078555 YAG
Mr. Richard C. King
Fitch, King, LLC
Attorneys and Counselors at Law
250 Moonachie Road, 5th Floor
Moonachie, NJ 07074
RE: Deposit of Duty on Royalty or License Fees; Reconciliation
Dear Mr. King:
This is in response to your ruling request, dated September 18, 2009, on behalf of your client, American Shipping Co., a licensed customhouse broker, concerning proper procedures for a deposit of duty with respect to royalty or license fees paid by various importers to unrelated third party licensors, upon the resale of certain imported merchandise within the United States.
FACTS:
In this case, the importers purchase certain electronic devices from the unrelated foreign manufacturers. The term of sale is FOB. The imported merchandise is entered for consumption into the United States, and the duty deposited is based on transaction value, determined under section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. §1401a).
You state that following the importation of the electronic devices, the merchandise is stored in the warehouses at various locations in the United States, and, consequently, sold to individual customers, retailers, or wholesalers in the United States. You state that the importers maintain extensive stocks of the imported merchandise, and since a number of different models of various electronic devices are not produced on a continuing basis by foreign manufacturers, the merchandise may remain in inventory for a very considerable amount of time after entry.
The royalty fees are payable for the use of software, developed by third parties, which is loaded on or packed with the imported electronic devices prior to their importation. The royalty fees are paid by the importers only after the resale of the merchandise in the United States. You state that the importers post a liability for the royalty fees on their books and account to the third party licensors for such sales within 15-30 days after the close of the agreed accounting period (monthly or quarterly) during which the sale of the imported merchandise by the importers took place. According to your submission, prior to that time, the value of the electronic devices carried on the books of the importers includes only the price paid to the manufacturer(s) plus costs of transportation (freight, insurance, etc.) and entry (duties, brokerage fees, etc.). This accounting is done on a cumulative basis, net of any returns of the subject merchandise. Based on the sale reports from the importers, the licensor(s) issue(s) invoices to the importers for royalty fees, payable within thirty (30) to sixty (60) days.
ISSUE:
What is the appropriate method for accounting for and depositing of royalty fees paid by importers to third party licensors?
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”), codified at 19 U.S.C. §1401a. The preferred basis of appraisement under the TAA is transaction value, defined in Section 1401a(b)(1), as the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for enumerated statutory additions to the extent not otherwise included in the price actually paid or payable. The additions include “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). For purposes of this ruling, we assume that transaction value is the appropriate method of appraisement of the imported merchandise and that the applicable royalty fees made by various importers to third party licensors are additions to the value of the imported merchandise.
You claim that the royalty payments in this case are accounted for as a cost of goods sold, net of adjustments, only during the accounting period (monthly or quarterly) during which the imported goods are sold in the United States. You also state that such treatment is in accordance with Generally Accepted Accounting Principles (“GAAP”). We note that the Customs Regulations do not provide guidelines specifically for the apportionment of royalty payments; however, as long as the royalty payments are booked in accordance with GAAP, we are satisfied with your explanation and would not disturb your assessment.
Nevertheless, we disagree with you that the Automated Commercial System Reconciliation prototype test (“Reconciliation”) is not an appropriate vehicle for accounting for and depositing duty with respect to royalty fees in this case. Reconciliation is the process that allows an importer, at the time an entry summary is filed, to identify undeterminable information (other than that affecting admissibility) to CBP and to provide that outstanding information at a later date. The importer identifies the outstanding information by means of an electronic “flag,” which is placed on the entry summary at the time the entry summary is filed and payment (applicable duty, taxes, and fees) is made. Numerous Federal Register notices have set forth that an entry summary may be “flagged” (for the purpose of later reconciliation) for value issues other than claims based on latent manufacturing defects. The flagging is done electronically at the time of filing the entry summary. See Federal Register notice on Modification of National Customs Automation Program Test Regarding Reconciliation, dated August 18, 1998 (63 FR 44303), explaining the two methods of flagging entry summaries: individual entry flag and blanket flag. The flagged entry summary (the underlying entry summary) is liquidated for all aspects of the entry except those issues that were flagged. The means of providing the outstanding information at a later date relative to the flagged issues is through the filing of a Reconciliation entry. The flagged issues are liquidated at the time the Reconciliation entry is liquidated. Any adjustments in duties, taxes, and/or fees owed will be made at that time. See Federal Register notice on Revised National Customs Automation Program Test Regarding Reconciliation, dated February 6, 1998 (63 FR 6257) for a more detailed presentation of the basic Reconciliation process. Further, on November 8, 2002, CBP reminded importers that the filing of a Reconciliation entry, like the filing of a regular consumption entry, is governed by 19 U.S.C. §1484 and can be done only by the importer of record as defined in that statute. See Federal Register Notice on Modification and Clarification of Procedures of the National Customs Automation Program Test Regarding Reconciliation; Correction, dated November 8, 2002 (67 FR 68238).
On September 13, 2000, CBP extended the Reconciliation prototype program, originally limited to consumption entries flied through September, 2000, until further notice. See Federal Register Notice on Extension of the ACS Reconciliation Prototype, dated September 13, 2000 (65 FR 55326). Also, please note that the Federal Register notice on Modification of National Customs Automation Program Test Regarding Reconciliation, dated January 10, 2005 (70 FR 1730), modified the Reconciliation prototype test by changing the requirement for filing the Reconciliation entry from no later than 15 months to no later than 21 months after the date the importer declares its intent to file the reconciliation. Further, since Reconciliation is identical to a consumption entry for legal purposes, its liquidation may be withheld or extended pursuant to 19 CFR §159.12. Thus, the liquidation of a Reconciliation entry may be extended for value if the importer can substantiate why the outstanding information is not available at the time of the Reconciliation filing deadline. See Automated Commercial System Reconciliation Prototype, a Guide to Compliance, dated September 2004. When such extension is requested, it should be done via a written request provided with the filing of the Reconciliation, and such request should describe the situation in order to show good cause. See id.
In this case, we believe that the importers’ accounting practices show a good cause for a possible extension of the Reconciliation liquidation period. Therefore, taken together with the 21 month period allowed for filing of the Reconciliation entry, and the availability of an extension of the Reconciliation period for an additional 3 years, we find that Reconciliation is an appropriate vehicle for the importers in this case to account for their royalty payments to third party licensors. By reconciling entries on the entry by entry basis, importers can still account to CBP on the same periodic basis for which they adjust their own books to account for the royalty payments to third party licensors on a monthly or quarterly basis. Finally, please note that under Reconciliation, the importer is not disclosing a violation, but is identifying information that is indeterminable and is providing that information at a later time.
HOLDING:
Based on our review of the facts presented, we find that Reconciliation is the appropriate method for accounting for and depositing duty with respect to royalty fees paid by the importers to third party licensors in this case.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents are filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch