United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 2004 HQ Rulings > HQ 548211 - HQ 562821 > HQ 548552

Previous Ruling Next Ruling
HQ 548552





August 19, 2004

RR:IT:VA 548552 RFC

CATEGORY: VALUATION

Ms. Laura Denny
Customs Compliance Manager
Customs Brokers International, Inc.
110 West Ocean Blvd., Suite 728
Long Beach, CA 90802

RE: Royalty Payments; Licensing Agreement; Trademarks

Dear Ms. Denny:

This letter is in reference to your March 25, 2004, letter requesting an advance ruling from the U.S. Customs and Border Protection (CBP) on whether certain royalty payments are dutiable.

FACTS:

The facts are presented as follows: Alltrade Tools, LLC, (licensee) has entered into a trademark license agreement with Holley Performance Products (licensor and a Delaware corporation) to license the use of the trademarks “Holley” and “NOS.” Alltrade Tools will be importing specific products, which are identified in the license agreement. Alltrade Tools will pay a seven-percent royalty fee based on all net sales. You state that Alltrade Tools is not related to Holley.

You contend that the royalties are not a condition of sale of the imported merchandise, and that the right to use Holley’s trademarks is separate from the manufacturing process. Instead, the fees are incurred in connection with the marketing and sale of specific products in the “licensed territory,” which includes the United States, Canada and Mexico.

A copy of a license agreement between Alltrade Tools and Holley was submitted with the ruling request. The agreement is dated May 6, 2003. There is no reference in the agreement with respect to who will manufacture the goods. There is also no reference as to whether the goods will be manufactured domestically or abroad.

The license agreement grants the licensee an exclusive license to use the licensed marks in connection with specific products listed in the agreement within the territory of the fifty states of the United States, Canada and Mexico. The term of the agreement is for one year but the agreement is automatically renewed for successive one-year terms. The agreement contains certain quality control provisions that allow the licensor to monitor the quality of the licensee’s operations, products, services, marketing and advertising. In addition, the licensee’s operations, products, marketing and advertising used in connection with the licensed marks are to be of a consistently high quality. In exchange for the use of the licensed marks, the licensee agrees to pay the licensor a fee of seven percent of the net sales of the licensed products.

The trademarks covered under the agreement are put on the merchandise when manufactured abroad.

A sample purchase order was submitted which is between Alltrade and the foreign vendor. In the item description section, the merchandise is described as a “2 TON TROLLEY JACK - HOLLEY.”

In subsequent communications with representatives of Alltrade Tools and this office, it was indicated that apart from this license agreement, there are no other agreements other than purchase orders between Alltrade Tools and the foreign manufacturer of the imported merchandise. Moreover, in these same communications, it was also indicated that neither Alltrade Tools nor Holley is related to the foreign manufacturer of the imported merchandise.

Although the sample purchase order references the name “Holley” in the items description section, a review of the license agreement and purchase order does not reveal any linkage or connection between the sale of the merchandise for exportation to the United States and the payment of the royalty fees for the right to use Holley’s trademarks in connection with the sale of the merchandise.

ISSUE:

Whether the royalty fees or payments under consideration constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D) and (E).

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in 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)(l) 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 amounts for the enumerated statutory additions. 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.

The enumerated statutory additions include the following items:

(1) 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 amounts equal to--

(A) the packing costs incurred by the buyer with respect to the imported merchandise;
(B) any selling commission incurred by the buyer with respect to the imported merchandise;
(C) the value, apportioned as appropriate, of any assist; (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; and (E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

19 U.S.C. § 1401a(b)(1).

The CBP regulations address additions to the price actually paid or payable:

(b) Additions to price actually paid or payable. (1) 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 amounts equal to:

(i) The packing costs incurred by the buyer with respect to the imported merchandise;
(ii) Any selling commission incurred by the buyer with respect to the imported merchandise;
(iii) The value, apportioned as appropriate, of any assist; (iv) 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; and (v) The proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

19 CFR § 152.103(b)(1).

ROYALTIES

With respect to the dutiability of royalty payments, the Statement of Administrative Action to the Trade Agreements Act of 1979, provides, in pertinent part, that:

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 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 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 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 sale of the merchandise, and such payment was not a condition of 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.

Statement of Administrative Action, 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.

In light of the above, if a buyer pays a third party for the right to use, in the United States, a trademark relating to the sale of the merchandise, and the payment was not a condition of sale of the merchandise for exportation to the United States, the payment will not be added to the price actually paid or payable.

In a general notice published in the Customs Bulletin, the CBP has articulated three factors or questions that are relevant in determining whether royalty payments are related to the imported merchandise under consideration and are a condition of sale such that they are dutiable:

Was the imported merchandise manufactured under patent?

Was the royalty involved in the production or sale of the imported merchandise?

Could the importer buy the product without paying the fee?

The general notice indicates that affirmative answers or responses to the first and second questions, and a negative response to the third, point towards dutiability. The answer to question 3 goes to the heart of whether a payment is considered to be a condition of sale. See General Notice, “Dutiability of Royalty Payments,” Vol. 27, No. 6, Cust. B. & Dec. at 1, (February 10, 1993).

When analyzing the factors identified in the above-noted general notice, the CBP has taken into account certain considerations, which flow from the language set forth in the Statement of Administrative Action. These include, but are not limited to, the following:

(i) the type of intellectual property rights at issue (e.g., patents covering processes to manufacture the imported merchandise generally will be dutiable);

(ii) to whom the royalty was paid (e.g., payments to the seller or a party related to the seller are more likely to be dutiable than are payments to an unrelated third party);

(iii) whether the purchase of the imported merchandise and the payment of the royalties are inextricably intertwined (e.g., provisions in the same agreement for the purchase of the imported merchandise and the payment of the royalties; license agreements which refer to or provide for the sale of the imported merchandise, or require the buyer’s purchase of the merchandise from the seller/licensor; termination of either the purchase or license agreement upon termination of the other, or termination of the purchase agreement due to the failure to pay the royalties); and

(iv) payment of the royalties on each and every importation.

See, e.g., HQ 547148 (September 12, 2002).

In order to obtain a ruling with respect to the dutiability of royalty or license fees, copies of any royalty agreements relating to the payment of the royalty or license fees in question and any purchase or supply agreements relating to the sale of the imported merchandise for exportation to the United States must be submitted to the CBP with the request. If there are no such written agreements, this must be indicated in the ruling request. See General Notice, “Notice to Require Submission of Royalty and Purchase/Supply Agreements in Ruling Request Regarding Dutiability of Royalty or License Fees,” Vol. 29, No. 36, Cust. B. & Dec. at 10 (September 6, 1995). See also 19 CFR § 177.2(b). In the instant case, as discussed above, a license agreement and a sample purchase order were submitted for review.

In the instant case, based on the information provided, the responses to each of the three above-listed questions are as follows:

Imported merchandise manufactured under patent?

With respect to the first question, the license agreement gives the importer/licensee the right to use licensed trademarks in connection with the manufacture and sale in the United States, Canada and Mexico of the imported merchandise. The royalty fees or payments relate to trademarks and not patents. Accordingly, the imported merchandise is not manufactured under patent.

Royalty involved in the production or sale of the imported merchandise?

The second question expands on the analysis of the first question. With respect to this second question, in the instant case, the royalty is not involved in the production or sale of the imported merchandise. The buyer of the imported merchandise is paying a royalty to a third party (who is not related either to the importer or to the seller of the imported merchandise) for the right to use certain trademarks in the United States and elsewhere in connection with the sale of specific types of merchandise (e.g., stools and roller seats). With respect to the license agreement that creates the obligation for the buyer to make the royalty payments to this third party (the licensor in the agreement), there is nothing that obligates or requires the buyer (who is the licensee and importer) to purchase merchandise from any particular or specified seller or manufacturer. Moreover, the royalty payments are not made to the seller of the imported merchandise (or a party related to the seller). Finally, there is nothing in the record to indicate that the royalty payments are involved in the production of the imported merchandise or are a condition of the sale of the merchandise for exportation to the United States. See General Notice, “Dutiability of Royalty Payments,” at 10-11, supra. Consequently, the royalty is not involved in the production or sale of the imported merchandise.

Could the importer buy the product without paying the fee?

The answer to question three goes to the heart of whether a payment is considered to be a condition of sale. See General Notice, “Dutiability of Royalty Payments,” at 11, supra. 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 (June 23, 1999).

The CBP has 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. Therefore, the payment
is not an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(D). See HQ 545361 (July 20, 1995).

In the instant case, the importer can purchase the merchandise without paying the fee. Although the payment is not optional, in that it must be paid to the extent that the licensee earns revenue by reselling the products, the payment is not paid to the seller. It appears that the importer can purchase the imported merchandise from the seller of the goods without having to pay the royalty to the licensor. This is a case where a licensee is importing trademarked merchandise that is manufactured and sold by a company that is unrelated to the licensor. In light of the above, the importer can purchase the merchandise without paying the fee. Therefore, the payment to the licensor is not an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(D).

The facts in the instant case are similar to those described in the example in the above-mentioned Statement of Administrative Action: A buyer pays a third party for the right to use, in the United States, a trademark relating to the sale of the merchandise, and the payment does not constitute an addition to the price actually paid or payable because it is not a condition of sale of the merchandise for exportation to the United States. In the instant case, the royalty payments are a selling expense of the buyer rather than an addition to the price actually paid or payable.

Finally, with respect to the submission with the instant ruling request of any purchase or supply agreements, as indicated above, apart from the license agreement between Holley and Alltrade Tools, no other agreements exist other than purchase orders between Alltrade Tools and the foreign manufacturer of the imported merchandise. Although the sample purchase order references the name “Holley” in the items description section, a review of the license agreement and purchase order does not reveal any linkage or connection between the sale of the merchandise for exportation to the United States and the payment of the royalty fees for the right to use Holley’s trademarks in connection with the sale of the merchandise.

PROCEEDS

As indicated above, under 19 U.S.C. § 1401a(b)(1)(E), the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller will be an addition to the price paid or payable. In the instant case, the proceeds do not accrue directly or indirectly to the seller. Therefore, the proceeds are not an addition to the price paid or payable under 19 U.S.C. § 1401a(b)(1)(E). See also 19 CFR § 152.103(b)(1)(v).

In light of the above, the royalty fees or payments made by Alltrade Tools to Holley pursuant to the above-referenced license agreement do not constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D) and (E).

Please note that for purposes of this ruling we have assumed that transaction value is the proper basis of appraisement. We do not have enough information in the file to determine whether that is the proper basis of appraisement. Therefore, this ruling does not address whether transaction value is the proper basis of appraisement in the instant case.

HOLDING:

The royalty fees or payments made by Alltrade Tools to Holley pursuant to the above-referenced license agreement do not constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D) and (E).

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Virginia Brown, Chief
Value Branch

Previous Ruling Next Ruling