VAL RR:IT:VA 546513 LR
Michael S. O'Rourke, Esq.
Rode & Qualey
295 Madison Avenue
New York, N.Y. 10017
RE: Price Actually Paid or Payable; Indirect payments; Royalties;
Dear Mr. O'Rourke:
This is in response to your letter dated September 24, 1996,
submitted on behalf of Sidney Rich Associates (SRA), Inc.
requesting a ruling regarding the dutiability of certain license
fees paid by the importer/buyers relating to certain trademarks
on imported footwear. The dutiability of these fees was the
subject of Headquarters Ruling Letter (HRL) 545194, September 13,
1995. Although Customs determined that such fees were dutiable,
you have proposed certain procedural changes which you believe
change the outcome. You filed three additional submissions
dated April 18, July 25 and August 27, 1997, which contained six
sets of transaction documents, three license agreements and a
Trust Agreement. This ruling is based on the transaction
documents along with the additional facts presented.
In HRL 545194, Customs determined that certain fees paid by
the importer/buyers to Pagoda Trade Company (Pagoda) or KidNATION
Inc., denominated collectively in the ruling as the "Licensee"
were dutiable. The decision notes that the so-called license
fees paid by the importer are not paid to the Licensor, but are
paid either to SRA or to the Licensee, each of whom is a party
related to the sellers of the imported merchandise". The
decision states that "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 and part of the
total payment made by the buyer to or for the benefit of the
seller." The decision states further that "[h]aving 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).
In order to address the above findings, you have proposed a
different arrangement. whereby the importer/buyers would pay the
fees in question to a Trustee (First National Bank of Chicago)
instead of to SRA or the Licensee. The Trustee in turn would pay
the Licensors the requisite license fees. You argue that under
the terms of the Trust Agreement, and legal principles relating
to Trusts, the Trustee is not related to the seller. Therefore,
you believe that the impediment that existed previously for
finding the payments to be dutiable has been removed.
You have provided six sets of transaction documents relating
to previous import transactions. You indicate that these
documents represent six of the largest purchasers of footwear on
a first cost basis who utilize the services of SRA (including
(These purchasers are the importers and will be referred to
collectively as the "importer/buyers"). In each case, the seller
is xxxxxx xxxxxxxxxxxxx xxxxxxx and SRA is the buying agent.
Each set consists of the importer/buyer's purchase order, the
seller's invoice, SRA's buying commission invoice and the
Licensee's license fee invoice (in each case, KidNATION is the
Licensee). Under your proposal, the transaction documents will
essentially be the same. The only difference will be regarding
the issuance and payment of the license fees.
As reflected in these documents, the importer/buyer issues
its own purchase order to the seller. The purchase order sets
forth all the information necessary for ordering footwear,
including a unit price per pair. The seller's invoice refers to
the buyer's purchase order number. The buyer pays the seller the
invoiced unit price for the imported merchandise directly by wire
transfer or letter of credit. The price paid by the
importer/buyer to the seller does not include a charge for
license fees or buying commissions. Except with regard to
xxxxxxxxxx transactions, the seller's commercial invoice includes
the following section entitled "Information related to
A buying agent commission is payable to Sidney Rich Assoc
Inc. By (buyer) and is not included in the value indicated
on this commercial invoice
A License fee will be paid to a third party company in the
This is a non-related transaction.
No assists were provided.
Sellers code: xxxxxxxxxxxx
You indicate that this information appears on the seller's
invoice for the purpose of alerting the importer/buyer or his
broker to make appropriate statements at the time the entry is
made. You state that if the importer/buyer instructs otherwise,
the seller does not make such statements. In this regard, you
point to the xxxxxxxx documents which make no reference to the
payments of commissions or license fees. You also state that the
seller will immediately cease including such statements on all
future invoices if we determine that the removal of this
information would more accurately reflect the nature of the
license fee payment. Some of the submitted purchase orders also
make reference to the fact that commissions and license fees will
be paid. You advise that there are no written contracts
pertaining to the sale of the imported merchandise between the
importer/buyers and the seller and no license agreements between
the importer/buyers and the Licensee or the Licensors.
In addition to the seller's commercial invoice, the
importer/buyer receives a separate commission invoice from SRA
and the importer/buyer directly pays SRA its commission. Under
your proposal, the importer/buyers will also receive a license
fee invoice from the Data Facilitator (see below) on behalf of
the Trust. The importer/buyers (referred to in the Trust
Agreement as the License Fees Obligors) will pay the license fee
into the Trust who in turn will pay the Licensors. (As reflected
in the submitted documents, previously, the Licensee issued the
license fee invoice to the importer/buyer and the importer/buyer
paid the Licensee directly).
You have submitted three license agreements between various
Licensors and the Licensee, KidNATION, the terms of which are
described below. Each agreement provides for the payment of
license fees relating to licensed trademarks or other graphic
representations on certain footwear. Although these fees will
actually be paid by the importer/buyers, you indicate that there
is no written agreements regarding the payment of such fees
between the importer/buyers and Licensee or the Licensor.
Relationship of the Parties
The Licensee, KidNATION, the seller and SRA are related
parties. Each is a subsidiary of the Brown Group International,
Inc. The importer/buyers are not related to the Licensee, the
Licensors or the sellers. The Licensors are not related to any
of the other parties. The status of the Trustee will be
The Trust Agreement
In order to facilitate the payment of license fees from the
importer/buyers to the Licensors, a trust was established by an
Agreement entitled "Footwear Trademarks License Fees Trust" dated
September 4, 1996 (Trust Agreement) . The parties to the Trust
Agreement are The First National Bank of Chicago (Trustee);
Clayton License, Inc., KidNATION, Inc. and Pagoda Trading
Company, Inc. Under the terms of the Trust Agreement, KidNATION
and Clayton are referred to as the Trademark Licensees and
Pagoda, the Data Facilitator. The Trademark Licensees grant the
Trustee all the property described (the Trust Estate): all
monies paid into the Trust by License Fees Obligors
(importer/buyers), Trademark Licensees and any and all other
parties. Section 2.02 of the Trust Agreement provides that the
Data Facilitator shall send invoices to the License Fees Obligors
(i.e., importer/buyers) requiring that they pay all license fees
when due into the Trust Account, and the Data Facilitator shall
account for and keep all necessary and desirable records in
respect of the same. This section further provides that the Data
Facilitator shall be entitled to receive fees for the performance
of its duties. Section 1.01 of the Trust Agreement provides that
the Trustee shall pay from the Trust Account all Trust Monies due
and owing to the License Fees Beneficiaries (i.e., Licensors).
You indicate that in all instances the license fee invoice
is issued well after the seller's commercial invoice. (39-68
days afterwards on the sample documents). You indicate that
depending on when the goods are shipped and the end of a
particular quarter for which KidNATION has to remit license fee
payments to various Licensors, there may be instances where the
license fee invoice is not paid before KidNATION's obligation to
pay the Licensor arises. You also indicate that if a U.S.
customer goes into bankruptcy it does not in any way affect
KidNATION's obligation to remit license fee payments.
Copies of three license agreements were submitted which you
indicate are typical license agreements. Although there are three
different Licensors, in each case, KidNATION is the Licensee.
The agreements are similar in most respects. In each case, the
Licensor grants the Licensor a license to use certain licensed
property (i.e., certain footwear containing trademarks or other
graphic representations) in connection with the manufacture, sale
and distribution of the licensed property through the specified
territory and/or distribution channels. In each case, the
Licensee must obtain the Licensor's advance approval to use third
party manufacturers and the Licensee must provide the Licensor
with an agreement signed by it and the manufacturer agreeing to
the terms of the license agreement. Each license agreement
contains various provisions whereby the Licensor will exercise
control over the manufacture and sale of the licensed products.
In addition to approving the manufacturer, the Licensor also has
the right to visit the manufacturer, obtain pre-production
samples of the licensed products, review prototypes, designs,
etc. In one agreement, the Licensor specifies that the Licensee
will only sell to certain types of buyers. Another agreement
provides certain conditions regarding the price at which the
Licensee shall sell the licensed product. Finally, each
agreement provides for the payment of continuing royalties based
on a specified percentage of the invoice price (less certain
deductions) from the Licensee to its customers (i.e., the
importer/buyers). Each agreement also has a provision for
minimum guaranteed royalties; and two agreements provide for the
payment of advance royalties.
Counsel claims that under its proposed arrangement, the fees
paid by the importer/buyers to the Trust are not dutiable as part
of the price actually paid or payable because they are being paid
to a party who is not related to the seller. In addition,
counsel claims that the fees are not dutiable as an additional to
the price actually paid or payable as royalties because they are
not related to the imported merchandise and are not a condition
of the sale of the imported footwear.
The scope of this ruling is limited to the transactions
covered by the submitted documents, but including the proposed
method of payment of the royalties, i.e., through the Trust..
Whether payments made by the importer/buyers to unrelated
Licensors through the Trust are an addition to the price actually
paid or payable as a royalty or license fee.
Whether payments made by the importer/buyers to unrelated
Licensors through the Trust are part of the price actually paid
or payable of the imported footwear.
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; 19 U.S.C. 1401a).
The preferred basis 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.
Are the fees dutiable as royalties under section 402(b)(1)(D)?
One of the additions to the price actually paid or payable
is for "any royalty or license fee related to the imported
merchandise 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" Section 402(b)(1)(D) TAA;
19 U.S.C. 1401a(b)(1)(D).. An addition is to be made only to
the extent these amounts are not included in the price actually
paid or payable. For purposes of this discussion we will assume
that the fees in question are not included in the price actually
paid or payable.
The Statement of Administrative Action (SAA), H.R. Doc. No.
153, 96 Cong., St. 1st Sess., reprinted in, Department of the
Treasury, Customs Valuation under the Trade Agreements Act of
1979 (October 1981), at 48-49, which forms part of the
legislative history of the TAA, addresses the dutiability of
license fees. It states 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 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: (1) 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 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 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 for the United States.
Although the SAA provides that determinations about the
dutiability of royalty payments are to be made case-by-case, it
is more likely that the royalty will be dutiable when the
licensor and seller are one and the same and the royalty is paid
directly to the seller. Under these circumstances, payment of
the royalty is more likely to be a condition of the sale for
exportation of the imported merchandise than when the royalty is
paid to an unrelated third party. See HRL 545361, July 20, 1995
(trademark royalties dutiable when paid to the seller/licensor
but not when paid to a third party unrelated to the seller).
However, the fact that the payments are made to an unrelated
third is not determinative. As indicated above, the SAA provides
that if the 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.
In determining whether royalties or license fees are
dutiable under section 402(b)(1)(D), Customs considers the
following three 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. An affirmative
answer to question 1 and 2 and a negative answer to question 3
points to dutiability. Question 3 goes to the heart of whether
the 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) ("Hasbro II ruling").
In this case, there is no indication that the licensed
footwear was manufactured under patent and we presume the answer
to question one is no. However, for the reasons discussed below,
we conclude that the royalty is involved in the production or
sale of the imported merchandise and that the importer could not
buy the products without paying the fees. Both of these
conclusions are consistent with a finding that the fees are
In the Hasbro II ruling, Customs determined that the
royalty, paid to the seller, was involved in the sale of imported
merchandise because the individual sales agreements and purchase
contracts were subject to the terms of the royalty agreement. In
HRL 544991, September 13, 1995, we held that a royalty was
involved in the sale of the imported merchandise payment of the
royalty was closely tied to the purchase of the imported product.
For example, in that case, the terms and conditions related to
the purchase of the imported products were set forth in the
license agreements. See also HRL 545380, March 30, 1995 (royalty
related to the production or sale of the imported merchandise
where under the terms of the licensing agreement, importer was
required to purchase components from the seller). Some other
factors which Customs has considered in answering questions two
and three are whether the purchase of products and the payment of
royalties is inextricably intertwined and whether royalties are
optional or whether they are paid on each and every importation.
See HRL's 544991, 545380; 545361; and Hasbro II, supra.
In this case, payment of the license fees is inextricably
intertwined with the sale for exportation of the imported
footwear. First, we note that the imported footwear is the
licensed product and the license fees are paid so that these
products may be manufactured, distributed for sale and sold to
the importer/buyer. In exchange for this right, the license fees
must be paid to the Licensors. Each of the License Agreements
contains provisions regarding the manufacture and sale of the
licensed products. (See note 5). In other words, the royalties
are related to the production and sale of the imported licensed
products. Second, it is the sale for exportation between the
seller and the importer/buyers which triggers the obligation to
pay the license fees. In fact, the amount of the fees is
determined based on the price paid by the importer/buyers.
Finally, the License Agreements link 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 exercise strict control over the
manufacture and sale of the licensed product.
For example, the License Agreements provide 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 has 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
provides 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 licensed products except under the
In addition, the payment of the requisite license fees by
the importer/buyers is not optional. Although there is no
written contract between the importer/buyers and the seller or
the Licensee regarding the payment of the license fees owed by
the Licensee, we conclude that it is an implied obligation. You
indicate that the importer/buyers are informed orally of the
requisite license fees prior to purchase and that after purchase,
they will receive a license fee invoice from the Data Facilitator
for these amounts to be paid to the Trustee. The Trustee in turn
will pay these fees to the Licensors. The fees to be paid by the
importer/buyers are the fees specified in the License Agreements.
And, as noted above, the amount of the continuing royalties is
based on a specified percentage of the invoiced price (less
certain deductions) to the importer/buyers. Thus, on each and
every sale of imported product between the seller and the
importer/buyers, the seller's related party is obligated to pay a
license fee to the Licensors, and such amount is actually paid by
the importer/buyers to the Licensors through the Trust. The Data
Facilitator will bill the importer/buyer the requisite amount.
Payment of the license fees is not contingent upon anything other
than the sale of the imported product from the seller to the
importer/buyers. Whether the importer/buyer's obligation to pay
the license fees arises from the language on the seller's invoice
or from an oral agreement between the parties is immaterial.
Clearly, it is understood that the importer/buyers are to pay the
requisite license fees specified in the License Agreements and
that such payments are not optional.
Based on the above considerations, we conclude that the
payment of royalties is closely tied to the production and sale
for exportation to the United States of the imported products and
that the answer to question two is yes.
Finally, we conclude that the payment of the license fees is
a condition of the sale for exportation to the United States.
Under the terms of the License Agreements, the license and the
requisite license fees enable the licensed products to be
manufactured and sold to the importer/buyers. Whether or not the
seller's invoices reference the royalty payment, we conclude that
the Licensee's related party would not sell the licensed products
to the importer/buyers unless there was an agreement (written or
oral) by the importer/buyers to pay the requisite license fees.
The issuance of license fee invoices for the amounts specified in
the License Agreements supports this conclusion. The fact that
the invoice for the license fee may be issued and payment made
after importation is immaterial. It is not the timing of payment
that is important, but the fact that the agreement to pay the
requisite license fees is a prerequisite to the manufacture and
sale of the licensed products to the importer/buyers. The
importer/buyers are notified by the seller of the requisite
license fees they must pay prior to purchase. Even though there
is no written agreement license agreement which obligates the
importer/buyers to pay the Licensors a royalty, we conclude that
the payment of royalties by the importer/buyers is in fact a
condition of the sale for exportation.
Based on the above considerations, we find that the license
fees covered by the License agreements are related to the
imported merchandise and must be paid by the importer/buyers as a
condition of the sale of the imported merchandise for exportation
to the United States. Therefore, we find that they are a proper
addition to the price actually paid or payable of the imported
merchandise under section 402(b)(1)(D) of the TAA.
Are the license fees part of the price actually paid or payable?
In HRL 545194, we ruled that the fees in question which were
paid to the Licensee, a party related to the seller, were part of
the price actually paid or payable. In concluding that such
payments related to the imported merchandise, the decision notes
that the sellers' invoices refer to the fact that license fees
were to be paid by the importer and that the fees paid by the
importer are based on the importer's purchase price for the
imported merchandise. The question to be addressed here is
whether a different result is warranted if the importer/buyers
pay the fees in question to the Trustee instead of the Licensee.
Counsel argues it is, based on its contention that the
importer/buyers and the Trustee cannot be considered related
parties. As such, counsel argues that the fees are being paid to
unrelated third parties and must be considered to be non-dutiable.
We disagree with counsel's conclusion that under its
proposal the fees in question cannot be considered to be part of
the price actually paid or payable. We conclude that the fees
can alternatively be considered to be part of the price actually
paid or payable whether or not the Trustee and the seller are
considered related parties under the TAA.
The price actually paid or payable is defined as the total
payment, whether direct or indirect made, or to be made, for
imported merchandise by the buyer to, or for the benefit of, the
seller. Title II of the SAA, provides that one example of an
indirect payment to a seller would be "the settlement by the
buyer, whether in whole or in part, of a debt owed by the seller.
In HRL 542984, April 8, 1993, Customs ruled that payment for
product liability insurance made by the buyer to a third party
insurer were part of the price actually paid or payable for the
imported merchandise as indirect payments, where a condition of
the sale required the seller to obtain suitable insurance and
bear the cost thereof. In HRL 544764, January 6, 1994, Customs
stated that where the payments are for the settlement of a debt
of a party related to the seller, such payments are also part of
the price actually paid or payable for the imported merchandise.
In that case, the payments by the buyer were to an unrelated
third party supplier for an expense incurred by the assembler, a
party related to the seller.
As discussed above, in this case, payment of the license
fees is a condition of the sale between the importer/buyers and
the seller. Under the terms of the License Agreements, the
Licensee is obligated to pay the license fees upon sale of the
licensed products to the importer/buyers. There is an implied
obligation that the importer/buyers will pay the fees covered by
the license agreements. The fees to be paid by the
importer/buyers through the Trust to the Licensors have the
effect of settling a debt owed by the Licensee, a party related
to the seller. Since the Licensee and the seller are related
parties, the payments to the Trust are for the settlement of a
debt owed by a party related to the seller and considered an
indirect payment to the seller.
In conformity with the foregoing, the licensee fees paid by
the importer/buyers are included in the transaction value of the
imported merchandise either as an addition to the price actually
paid or payable under section 402(b)(1)(D) of the TAA or as an
indirect payment and part of the price actually paid or payable.
International Trade Compliance Division