VAL OT:RR:CTF:VS H174030 RSD
Field Director
U.S. Customs and Border Protection
Regulatory Audit
Office of International Trade
2220 Grandview Drive Fort Mitchell, Kentucky 41017
RE: Dutability of Royalty Payments for the Use of Trademarks; Royalty
Payments made to Third Parties and Calculated Based on the Purchase Order Costs of the Imported Goods
Dear Field Director:
This is in response to your memorandum dated January 23, 2009, requesting internal advice as to whether certain royalty payments made by the importer, Bass Pro, as part of the licensing agreement are included in the transaction value of the imported merchandise. In a letter dated August 7, 2008, counsel for Bass Pro challenged the dutiability of the royalty payments that Bass Pro paid to a third party. A copy of the licensing agreement was included in the materials that your office forwarded for our consideration. Your memorandum also raised a buying commission question. In Headquarters Ruling (HQ) H050895 dated December 6, 2010, that issue was addressed. In this decision letter, we will address the issue of whether the royalties Bass Pro paid to a licensor for use of trademarks are dutiable.
FACTS:
The importer is Bass Pro, a retailer of fishing and hunting gear, clothing, optics, footwear, home furnishings, camping equipment, jewelry and other types of sporting goods. The Office of Regulatory Audit conducted a Focused Assessment (FA) Audit of Bass Pro’s import operation for the period of January 1, 2006 through December 30, 2006. It was determined that transaction value was the basis of appraisement for the import transactions under review and Bass Pro was not related to any of its foreign suppliers.
The audit disclosed that Bass Pro entered into a licensing agreement with Bob Timberlake Collection, Inc. (Timberlake). Pursuant to the licensing agreement with Timberlake, Bass Pro made royalty payments to that company pertaining to imported merchandise. The license agreement became effective on December 31, 2002. It identifies Bass Pro as the licensee and Timberlake as the licensor. The Office of Regulatory Audit notes that Bass Pro was not related to the licensor, nor did they find any evidence that the licensor was related to any of the foreign suppliers. The licensing agreement indicates that Timberlake is the owner of certain designs and trademarks for which it desires to grant a license to Bass Pro in connection with the manufacture, marketing, distribution, sale and/or the sublicensing of apparel products and other branded products. During the term of the licensing agreement, Timberlake grants to Bass Pro an exclusive perpetual license to manufacture and sell, or the exclusive right to sublicense to other persons the right to manufacture and sell licensed products which are based on the collection design and/or additional designs bearing the referenced trademarks.
As compensation for the use of the trademarks and designs, the licensing agreement specifies that the “Licensee shall pay the Licensor Royalties in an amount equal to … percent … of ‘Net Cost’ of Licensed Products (which includes apparel and other Branded Products only) which shall mean the actual invoice price of the Licensed Products shipped to and/or purchased by the licensee”.
In the licensing agreement, the licensor acknowledged the receipt of a certain payment as partial consideration from the licensee at the initiation of the agreement. This payment applied to each and every import licensed product to be made under the agreement. The agreement also requires that Bass Pro make an annual amount of minimum royalty payments. In separate transactions, the licensed goods are produced by unrelated third parties, who in turn sell them to Bass Pro. The Office of Regulatory Audit determined that Bass Pro’s royalty report identified the amount of Timberlake royalties as a specified percentage of the purchase order cost of the received goods with payments being sent to Timberlake each quarter based on the receipt of the goods. Thus, the calculation of the royalty payments owed to Timberlake is based on sales of the imported goods that Bass Pro buys from its foreign suppliers and not on their resale in the United States.
ISSUE: Whether the royalties paid by Bass Pro to the Licensor, Timberlake, under the Licensing Agreement are required to be added to 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) codified at 19 U.S.C. § 1401a. The preferred method of appraisement under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain 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 only apply if they are not already included in the price actually paid or payable. For purposes of this decision we assume that transaction value is the appropriate method of appraisement. 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). 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).
Based on the information provided, the royalty payments are not part of the price actually paid or payable for the merchandise since they are not part of the total payment made for the imported merchandise by the buyer to, or for the benefit of, the seller. See 19 U.S.C. § 1401a(b)(4)(A). In the present matter, since the evidence does not indicate that the royalty payments are not part of the price actually paid or payable, we must consider whether the payments constitute an addition to the price as royalties under 19 U.S.C. 1401a(b)(1)(D).
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. 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 were they 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 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.
CBP has established a three-part test for determining the dutiability of royalty payments. This test appears in the General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993) ("Hasbro II ruling"). The test consists of the following questions: 1) was the imported merchandise manufactured under patent; 2) was the royalty involved in the production or sale of the imported merchandise; and 3) could the importer 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.
In this instance, the answer to the first question is no, because the royalty payment was made for use of the Timberlake trademark, and although the licensing agreement refers to design patents, there is no indication that any of the merchandise was manufactured under a patent. With respect to the second question, because the royalty is paid to a third party who is unrelated to the seller of the merchandise, the royalty is not involved in the production or sale of the imported merchandise. The answer to the third question goes to the heart of whether a payment is considered a condition of sale. See General Notice “Dutiability of Royalty Payments.” Supra at 11. 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).
In HQ H047360 dated July 31, 2009, it was noted that 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. CBP concluded that because the royalty payment was based on the quantity of footwear exported from the factory to licensee/buyer, even though the seller of footwear was unrelated to the license holder, the payment of the royalties conveyed the right to export the merchandise to the United States.
In its submission of September 24, 2009, Bass Pro’s counsel argues that HQ H047360 did not apply the proper test to determine whether a royalty payment was a condition of sale because the issue is not the method of calculating the royalty, but whether the payment of the fee is inextricably intertwined with sale for exportation to the United States of the imported merchandise. Counsel further argues that it is irrelevant whether the royalty is based on the purchase price, and it does not justify the conclusion that the royalty payments at issue are dutiable. The proper question counsel further contends is whether the royalty payment and the purchase of the goods are related and whether the royalty payment impacts the importer’s right to purchase, own and import the merchandise. No licensing agreement was submitted in connection with H047360, and the decision was based on a vendor agreement letter.
In HQ H077419 dated April 6, 2011, a license agreement was submitted for the payment of a royalty by the U.S importer to an unrelated U.S. licensee of the trademark owner for the right to sell footwear in the U.S. bearing a trademark owned by the licensor. The royalty fee was calculated as a percentage of the importer’s right to design, manufacture, advertise, promote, distribute and sell through its affiliates, the merchandise bearing the trademark in the U.S. The importer could select third party vendors and factories to manufacture the merchandise. The royalty was billed separately from any factory invoice. The trademark owner was not related to the importer, seller or manufacturer of the imported merchandise.
In HQ H077419, we determined there was nothing in the license agreement that obligated the importer to pay license fees for merely purchasing the licensed products abroad and importing them into the United States. Moreover, we stressed that there was no evidence to suggest that the royalty was linked to the purchase order, the invoice, or the shipping documents for the imported merchandise. Also, the license agreement did not provide for the sale of the imported merchandise. Further, we pointed out that the importer clearly had the right to select its own suppliers without the licensor’s or licensee’s approval. Accordingly, we held that in the situation presented, regardless of the method of calculating royalty payments, the royalty fees were paid for the use of the trademark in the United States and were not a condition of sale of the imported merchandise, and thus did not constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D).
HQ 546513, dated February 11, 1998, was a case in which CBP ruled that payment of the license fees was inextricably intertwined with the sale for exportation of imported footwear. In that decision, we noted that the imported footwear was the licensed product and the license fees were paid so that these products could be manufactured, distributed for sale and sold to the importer/buyer. In exchange for this right, the license fees had to be paid to the licensors. Each of the license agreements contained provisions regarding the manufacture and sale of the licensed products. In other words, the royalties were related to the production and sale of the imported licensed products. Second, it was the sale for exportation between the seller and the importer/buyers which triggered the obligation to pay the license fees. In fact, the amount of the license fees owed was determined based on the price paid by the importer/buyers. Furthermore, the license agreements linked the payment of license fees with the manufacture and sale of the licensed products. In addition to granting the licensee the right to use the licensed products in connection with the manufacture, distribution for sale and sale of the licensed products in the specified territory, the licensors exercised strict control over the manufacture and sale of the licensed product. For example, the license agreements provided that the licensee must obtain prior approval from the licensor to use third party manufacturers and that the licensee must sign an approval of manufacturer's agreement whereby the manufacturer agrees, inter alia, to accept all relevant provisions of the license agreements. The licensor had the right to approve the licensed products, including the initial concepts, design documents, prototypes and manufacturing samples prior to manufacturing. Without such agreements, along with the licensors' approval of the manufacturers, the imported products could not be sold. Finally, one of the license agreements provided that the licensee shall not sell any licensed products at a price ten percent or more below the price generally charged the trade by the licensee for the licensed products except under the conditions specified.
We believe that the facts in the present case are distinguishable from the facts involved in HQ 546513. In the case at hand, Timberlake does not exercise the same degree of control over the production and sale of the merchandise that the licensor did in HQ 546513. Although the amount of the royalties due are calculated based on a specified percentage of the purchase order cost of the received goods with payments sent to Timberlake each quarter based on the receipt of the goods, there is no indication that Timberlake directs how the licensed merchandise is manufactured and sold. While there are some quality control provisions contained in the licensing agreement, they clearly do not rise to the level of control of approval of the manufacturing and distribution described in HQ 546513. Although the amount of the royalty payments due is calculated based on the invoice price of the licensed products, the licensing agreement does not specify that the sale for exportation between the seller and the importer/buyer triggers the obligation to pay the license fees. Finally, as we noted in Hasbro II, CBP has determined that the method of calculating the royalty is not relevant to determining the dutiability of the royalty payments. Thus, in this case, the fact that the royalty is based on a percentage of the purchase order cost of the goods that Bass Pro pays to its foreign suppliers is not the determining factor in deciding whether royalties are dutiable.
We also note as in HQ H077419, that the royalties are paid to an unrelated third party licensor and are separate from the payments made to foreign manufacturers for producing the merchandise. Additionally, all of the parties to the transactions are unrelated. As we have previously indicated in prior decisions, while the fact that royalty payments are made to an unrelated third party is not entirely determinative because the SAA provides that a royalty payment made by a buyer as a condition of the sale of the merchandise for exportation to the United States will be added to the price actually paid or payable, in numerous decisions, we have indicated that the relationship of the parties is an important factor to consider in analyzing the transactions. In addition, Bass Pro has the right to choose its own manufacturers to make the licensed merchandise. Although your office indicated that the purchase contracts with certain factories producing the Timberlake merchandise were identified with the letters “TIM” in the contracting numbering and the contract remarks listed “Main Label: Bob Timberlake”, these references only appear to be identifiers to indicate that these factories are producing goods with the Bob Timberlake trademark for Bass Pro. They do not indicate that the licensor has any control over the choice of the factories and any other input over the production of the licensed merchandise other than normal quality control and trademark protection concerns. There is also no evidence to indicate that payment of the royalty is linked to a specific purchase order. In addition, although the licensing agreement requires that Bass Pro make minimum annual royalty payments to the licensor, these minimum payments are incurred regardless whether or not the licensed products are purchased from unrelated manufacturers and imported into the United States.
In essence, we note that the licensing agreements are directed to the protection of the trademark and any other intellectual property subject to the agreement and the protection of the reputation of the trademark and the trademark holder. In other words, the focus of these agreements is on the protection of the trademarks and not on the purchase and importation of merchandise by the buyer. Additionally, as the royalty payments go to a third party unrelated to the seller of the imported merchandise, the royalty payments do not benefit the seller, directly or indirectly. Accordingly, we find that the royalties paid for use of the trademark in the United States are not a condition of the sale of the imported merchandise Therefore, despite the method of calculating the amount of royalty payments due to the licensor, we hold that the royalty payments at issue are not part of the price actually paid or payable or an addition thereto under 19 U.S.C. § 1401a(b)(1)(D).
HOLDING:
Based upon the information provided, we find that the license fees paid by the importers to a third party licensor pursuant to the Trademark Licensing Agreement are not a condition of sale of the imported merchandise for export to the U.S. and do not constitute a dutiable addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D).
Sixty days from the date of this letter, Regulations and Rulings of the Office of International Trade will take steps to make this decision available to
Customs and Border Protection ("CBP") personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch