VAL R:C:V 545194 IOR
Area Director of Customs
Kennedy Airport Area, Jamaica, New York
RE: Internal Advice Request; agency commissions; license fee payments
This is in response to an internal advice request initiated by your December 2, 1992 memorandum to this office. Your request concerns the appraisement of footwear imported by xxxxxxxxx xxxxxxxx xx xxxxxxxx xxxxxxxxxxx (hereinafter referred to as the "importer"). We are also in receipt of the importer's submissions dated June 24, 1992 ("first submission"), November 17, 1994 ("second submission"), February 21, 1995 ("third submission") and April 25, 1995 ("fourth submission"). This decision follows a September 19, 1994 meeting between members of my staff and counsel for the importer. We regret the delay in responding.
The merchandise at issue consists of footwear imported from the Far East and Brazil. The merchandise is purchased from one of four companies: xxxxxx xxxxxxxxxxxxx xxxxxxxx xxxx, xxxxxx xxxxxxxxxxxxxxxxxx, xxxxxxxxxxxx. (all located in Hong Kong) or xxxxxxxxxxxxxxxxx xxx. (located in the Cayman Islands). The foregoing companies are hereinafter collectively referred to as the "sellers." The sellers purchase the merchandise in their own name from various factories and sell it to the importer. In all of the transactions between the importer and the sellers, the importer pays Sidney Rich Associates, Inc. ("SRA"), located in St. Louis, an agency commission. For many of these entries SRA collects license fees for its subsidiaries, Pagoda Trading Co. Ltd. ("Pagoda") and Kid Nation, which are licensees for several different trademarks and copyrights. SRA, Pagoda, Kid Nation and the sellers are wholly owned subsidiaries of Brown Group International Inc. ("Brown Group"), also of St. Louis.
1. Agency Commissions
The importer and SRA have entered into a buying agency agreement dated January 1, 1991. The entered value of the imported merchandise is the price paid by the importer to the sellers, and does not include the agency commission. The merchandise is appraised on the basis of transaction value. You take the position that SRA acts as a selling agent for its related sellers. Your opinion is based on the conclusion that the importer does not have control over the transactions made through SRA, since the importer cannot control which sellers are used by SRA. In addition you found that the importer refers to representatives of SRA as "salesmen" and the actions of SRA are inconsistent with the agency agreement.
The New York Seaport has issued three letters to counsel for SRA which state that the commissions paid to SRA in relation to sales from Pagoda International and Whitenox are non-dutiable buying commissions. The letters, dated October 13, 1976, December 16, 1977 and March 29, 1978, were issued in response to SRA's requests for determinations on the dutiability of commissions in connection with ongoing transactions.
2. License Fee Payments
In some transactions SRA collects license fees from the importer on behalf of Pagoda and Kid Nation (hereinafter collectively referred to as the "Licensee") for trademarks owned by Hasbro, Levi Strauss, Mattel Toys Inc. and Walt Disney ("Disney"). In other cases, it appears that the importer pays certain "license fees" to the Licensee. The importer apparently does not pay any license fees to Disney or the other licensors. According to the importer, when it pays the license fee to SRA, the money is forwarded to the Licensee by SRA, and the Licensee pays the licensor. According to the importer, the licenses are for the right to sell the trademarked footwear in the U.S.
As an example of the license agreements entered into by Pagoda, we have been provided with a copy of a license agreement between Disney and Pagoda, dated September 4, 1990. The right to market the trademarked merchandise is derived from the licensors pursuant to agreements reached with the licensee, as opposed to the sellers. The Disney agreement gives Pagoda the right, limited to the "Territory," to reproduce the licensed material, to use the trademarks, and to manufacture, distribute for sale and sell the footwear bearing the licensed material and trademarks. The "Territory" means the U.S., U.S. PX's and U.S. territories and possessions, excluding Puerto Rico. In exchange for these rights, Pagoda is to pay royalties to Disney.
With its third submission, the importer has provided two license fee agreements between Pagoda and the importer, dated October 28, 1992. According to the importer these are the only written documents between Pagoda and the importer regarding the payment of license fees on imported merchandise bearing trademarks. The agreements provide that the importer will pay Pagoda a specified percentage of the cost of each pair of footwear sold in the U.S. by the importer which bears the licensed marks. For imported footwear, the fee is based on the importer's F.O.B. point of consolidation price for imported merchandise. Our understanding is that this is the price the importer pays to the sellers. The fee is payable upon sale of the imported merchandise in the U.S. The importer's fourth submission includes two license fee invoices from Kid Nation, relating to two entries. The importer's check to Kid Nation includes payment of the two invoices, as well as additional amounts, apparently relating to other entries.
According to an affidavit of the Controller of Pagoda, none of the license fees accrue directly or indirectly to the sellers. With respect to the trademarks owned by Disney, the importer has provided a copy of a royalty report which shows that all payments collected by Pagoda are to be forwarded to Disney. One of the trademarks, "Airstep," is owned by the Brown Group, in which case the license fees are ultimately paid to the Brown Group. No agreements between the importer and Pagoda, Kid Nation or SRA requiring payment of these license fees to the licensor were provided.
You take the position that payment of the license fee is a condition of the sale of the imported merchandise, and that the license fee is a dutiable royalty. The importer takes the position that the license fees are paid for the right to sell the trademarked footwear in the U.S., and as such, they are not dutiable.
1. Whether the payments made by the importer to SRA are bona fide buying agency commissions.
2. Whether the license fees paid by the importer to Pagoda are included in the transaction value of the imported merchandise.
LAW AND ANALYSIS:
1. Agency Commissions
Inasmuch as Customs has, by letters of October 13, 1976, December 16, 1977 and March 29, 1978, considered SRA to be a buying agent, the buying agency commissions paid by the importer to SRA are not included in the transaction value of the imported merchandise and you may therefore proceed to liquidate the subject entries accordingly. In the event Headquarters determines that these letters no longer represent Customs position, the revocation procedures of section 625, Tariff Act of 1930 (19 U.S.C. 1625), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act (Pub.L. 103-182, 107 Stat. 2057) will be followed.
2. License Fee Payments
Transaction value is the preferred method of appraisement and is defined in §402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." plus certain additions specified in §402(b)(1)(A) through (E). The term "price actually paid or payable" is defined in TAA §402(b)(4)(A) 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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.
Two court cases have addressed the meaning of this term. In Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), the issue before the court was whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appeals court held that the term "total payment" is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also stated:
Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. V. United States, 896 F.2d 535, 539 (Fed. Cir.1990), the "straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs' appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].
Id. At 380.
In Chrysler Corporation v. United States, Slip Op. 93-186 (Ct. Int'l Trade September 22, 1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines.
Based on Generra, there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are totally unrelated to the imported merchandise. We are assuming, for the purposes of this ruling, that transaction value is the appropriate basis of appraisement for the imported merchandise.
In the present case, the so-called license fees paid by the importer are not paid to the licensor. Instead, they are paid either to SRA or to the Licensees (Pagoda and Kid Nation) each of whom is a party related to the sellers of the imported merchandise. The sellers' invoices refer specifically to the fact that license fees were to be paid by the importer. A copy of a representative seller's invoice includes a preprinted statement (preceded by an "x") stating that the fees are to be paid to SRA. The fact that a reference to the payment of these fees is included on the seller's invoice is evidence that the payment of such fees is related to the imported merchandise. We also note that the only agreements entered into by the importer involving these so-called license fees make no mention of the fact that such fees were to be paid to the licensor of the imported merchandise. The submitted agreements are between the importer and Pagoda and they merely indicate that certain license fees are to be paid to Pagoda. No agreements between the importer and Kid Nation or between the importer and SRA regarding these fees were provided. We also note that the "license fees" paid by the importer are based on the importer's purchase price for the imported merchandise.
Notwithstanding the fact that the payments in question are referred to by the parties as "license fees," we conclude that they are actually part of the total payment for the imported merchandise. These fees to a party related to the seller constitute indirect payments to the seller.
As stated in Headquarters Ruling Letter (HRL) 545663 dated July 14, 1995, it is Customs position that the Generra standard applies regardless whether payments are made directly to the seller or to a party related to the seller. This position is consistent with the definition of the "price actually paid or payable" as the total payment made directly or indirectly by the buyer to, or for the benefit of, the seller. In our opinion, payments to a party related to the seller represent indirect payments made to, or, at the very least, for the benefit of, the seller. We note that the same rebuttable presumption discussed above, that is, that such payments are part of the price actually paid or payable, would equally apply in such instances. For these reasons, numerous Customs decisions have recognized that payments made from the buyer to a party other than the seller, particularly to a party related to the seller, also may be included as part of the price actually paid or payable. See HRLs 542169 (TAA No.6), dated September 18, 1980; 542150 (TAA No.14), dated January 6, 1981; 544388, dated July 13, 1990; 544221, dated June 3, 1991; 544684, dated July 31, 1992; 557331, dated September 9, 1993; 544971, dated October 20, 1993; 544972, dated October 20, 1993; 544764, dated January 6, 1994; 545490, dated August 31, 1994; and 544694, dated February 14, 1995.
Consequently, we find that, whether the payment is to SRA, or directly to the Licensee, such indirect payment is part of the total payment made by the buyer to or for the benefit of the seller, and is therefore part of the price actually paid or payable for the imported merchandise. Similar decisions were made in HRLs 545071, dated June 28, 1995, 545321, dated June 30, 1995 and 545418, dated June 30, 1995. In those rulings, the importer had purchased merchandise from a related seller, and was reimbursing a parent company related to both the importer and the seller for license fees which the parent company paid to a licensor. Customs determined that the payments were part of the total payment made by the buyer to or for the benefit of the seller, or dutiable royalties under TAA §402(b)(1)(D). In HRL 544978, dated April 27, 1995 we ruled that a payment related to the imported merchandise made by the importer to its related seller, although called a royalty, was part of the price actually paid or payable for the imported merchandise. In HRL 545380, dated March 30, 1995, we found that a license fee paid by an importer to its related seller was part of the "total payment for the imported merchandise" within the meaning of §402(b)(4)(A) of the TAA.
Having concluded that the license fees at issue are part of the price actually paid or payable for the imported merchandise, we do not address whether they could alternatively be considered royalties or proceeds under TAA §402(b)(1)(D) and (E). The subject entries should be liquidated based on a transaction value which includes the license fee payments made by the importer to Pagoda or Kid Nation, whether directly or through SRA.
1. The subject commissions paid by the importer to SRA are not to be included in the transaction value of the imported merchandise, consistent with the letters issued previously.
2. The license fees paid by the importer to Pagoda, Kid Nation and SRA are included in the transaction value of the imported merchandise under TAA §402(b).
The Office of Regulations and Rulings will take steps to make this 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 60 days from the date of this decision.
John Durant, Director
Commercial Rulings Division