Dutiability of Certain Royalty Payments

HQ W544727 December 4, 1991 VAL CO:R :C :V W544727 pmh CATEGORY : Valuation Mr. Robert T. Stack Tompkins & Davidson One Whitehall Street New York, N.Y. 10004 RE : Dutiability of Certain Royalty Payments Dear Sir: This is in response to your letter of May 20, 1991, on behalf of your client, The May Department Stores Company and its divisions, May Merchandising Company and May Department Stores International, Inc. (hereinafter referred to as "May "), requesting a ruling on whether certain royalty payments are dutiable. FACTS: According to your submission, May makes payments to Rio Sportswear, Inc. (hereinafter referred to as "Rio") for the use of the trademark "Bill Blass" on certain imported apparel. The licensing agreement between May and Rio provides May with an exclusive license for limited use of the Bill Blass name and/ or label. The agreement specifically provides that May will have the exclusive right to design, produce, advertise and sell certain Bill Blass style merchandise and indicates those styles (e.g. warm-up suits, knit tops, outerwear). May is responsible for the designs of the styles, subject to approval of those designs by Rio. May is solely responsible for sourcing and producing tne merchandise (either abroad or domestically). Rio is never a party to the import transaction; that is, it is not a vendor in a "sale for exportation to the United States." The agreement further provides that in return for the right to use the name “Bill Blass," May will pay Ria a royalty on every unit that May sells that utilizes the name. The amount of the royalty is six percent of May's "first cost," i.e. the price May pays to its foreign manufacturer exclusive of enumerated additions. You note that although May will place on the market 150,000 units per twelve month period, no minimum dollar royalty amount has been set. Lastly, you state that neither May and Rio, nor May and the foreign vendors, nor Rio and the foreign vendors are related parties as that term is defined in 19 U.S.C. 1401a(g)(l). ISSUE: Whether the described royalty fee that May pays to Rio is dutiable as part of the transaction value of the imported merchandise. LAW AND ANALYSIS: The preferred method of appraising imported merchandise is transaction value which is defined in section 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)). This section provides, in pertinent part, that the transaction value of the imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States plus amounts for certain items enumerated in section 402(b)(1) of the TAA. Under 19 U.S.C. 1401{b)(1), the transaction value of imported merchandise includes ... "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." In addition, 19 CFR 152.103 (f) states: ...Royalties or license fees paid to third parties for use, in the United States, of copyrights and trademarks related to the imported merchandise generally will be considered selling expenses of the buyer and not dutiable. The dutiable status of royalties or license fees paid by the buyer will be determined in each case and will depend on (1) whether the buyer was required to pay them as a condition of sale of the merchandise for exportation to the United States, and (2) to whom and under what circumstances they were paid. In the scenario you have described, the royalty fee for use of the name "Bill Blass" is paid to a third party, Rio, and not to the sellers of the imported apparel. Furthermore, under the agreement, the royalty is not a "condition of sale" in the transaction between May and the foreign manufacturers of the apparel. That is, it does not appear that the royalty is connected to the ownership or the importation of the merchandise. Rather, it is paid only upon the sale of the merchandise in the United States. Consequently, under 19 U.S.C. 1401(b)(1) of the TAA, such royalty fees would not be added to the price actually paid or payable. ln fact, Customs has consistently held that under circumstances as those set forth above, the royalty fee constitutes a selling expense and is not dutiable as a "condition of the sale of the imported merchandise.'' (See e.g. , Headquarters Ruling Letters 543417, dated February 11, 1985; 543529, dated October 7, 1985; 543370, dated September 18, 1984.) HOLDING: On the basis of the written agreement between May and Rio and the additional information submitted in counsel's May 20, 1991 letter, we find that the royalty fees paid by May to Rio are not required as a condition of the sale of imported merchandise between May and the seller and, therefore, are not dutiable as part of the transaction value of the merchandise. Sincerely, John Durant, Director Commercial Rulings Division