Dutiability of license fee payments; Co-branding license agreement

HQ H312455 October 28, 2020 OT:RR:CTF:VS H312455 AP CATEGORY: Valuation Carrie Leer Weyco Group, Inc. 333 W Estabrook Blvd. Glendale, Wisconsin 53212 RE: Dutiability of license fee payments; Co-branding license agreement Dear Ms. Leer: This is in response to your June 1, 2020 submission, on behalf of Weyco Group, Inc. (“U.S. importer” and “licensee”), requesting a ruling regarding the dutiability of a license fee paid under a co-branding license agreement. A copy of the agreement was received with your ruling request. You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of Title 19, Code of Federal Regulations (“C.F.R.”), Section 177.2(b)(7), your request for confidentiality is approved. The information contained within brackets and all attachments to your request for a binding ruling, forwarded to our office, will not be released to the public and will be withheld from the published version of this ruling. FACTS: Weyco Group is a footwear company located in Glendale, Wisconsin that designs, markets, and distributes brand names including Florsheim, Nunn Bush, Stacy Adams, and BOGS. A few of its brands are exploring a co-branding license agreement with [ ], an unrelated U.S. company (“licensor”), to incorporate its eco-friendly resin into shoe insoles and other products. The eco-friendly resin containing algae is subject to a patent. The licensor owns the rights to several U.S. Patent and Trademark Office and World Intellectual Property Organization registered trademarks. The licensor and the licensee plan to collaborate on the commercialization of products for footwear, accessories, and fashion applications that include the licensor’s [ ] brand, ingredients and technology, and to jointly market the products. The licensor will sell the agreed upon quantities of resin to factories in China designated by the licensee. The factories in China, which are unrelated to the licensor and the licensee, will produce the finished products for the licensee. The licensee will serve as the U.S. importer of record and will import the finished merchandise into the United States. Under the one-year license agreement, the licensor will charge the foreign factories a base price at bonded warehouses in China, Vietnam and the United States subject to duties, taxes, and value-added tax. The licensee will pay the licensor a license fee per kilogram for the purchased resin. Ten percent will be paid 30 days from signing the agreement. The additional license fee will be invoiced in nine equal monthly payments with 30 day terms. The resin will not be released to the factories until the initial license fee is paid by the licensee. At the end of the agreement, the amount of the resin purchased will be reconciled with the amount under the agreement, and the license fee may need to be adjusted. If excess resin was purchased, an invoice will be issued for the additional license fee owed. If the resin purchases are under the amount agreed upon, the excess license fee will be credited toward a new co-branding license agreement. For the term of the license agreement, the licensee has the right to use the licensor’s brand, ingredients, and technology on each commercial product containing the resin. The licensor’s trademarks can be used on logos, hang tags, printed packaging, announcements, press releases, social media, website display, and advertising. The licensor has a commercialization office in China and offers support for pricing, sourcing, and technical discussions with Asian factories regarding the production of the commercial products for the licensee’s brands. You explain that the right to use the licensor’s technology includes access to the licensor’s technical office for help in using it in the licensee’s products. ISSUE: Whether the license fee paid by the licensee under the co-branding license agreement is dutiable and if it is dutiable, how the importer should declare it on multiple future importations. 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”). See 19 U.S.C. § 1401a. The primary basis of appraisement under the TAA is transaction value, which the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for enumerated statutory additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). One of the additions includes the value, apportioned as appropriate, of any assists. See 19 U.S.C. § 1401a(b)(1)(C). You advise that the instant license fee is not part of the price actually paid or payable for the imported merchandise. The payments are made by the licensee to the unrelated licensor, and are separate from the price. Therefore, we need to address whether the license fee payments constitute additions to the price actually paid or payable. Among the statutory additions described in section 402(b)(1) of the TAA are: (D) any … 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). With respect to the dutiability of license fees, the Statement of Administrative Action (“SAA”) to the TAA, H.R. Doc. No. 153, 96 Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981), at 48-49, states, in pertinent part: Additions for … 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, … 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 … 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 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 … 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. Whether license fees are a condition of sale is determined by applying the following three factors set forth in General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (Feb. 10, 1993) [hereinafter General Notice]: Was the imported merchandise manufactured under patent? Was the royalty involved in the production or sale of the imported merchandise? and, Could the importer buy the product without paying the fee? Affirmative answers to questions one and two, and a negative answer to question three suggest that the payments are dutiable. Otherwise, the payments are non-dutiable. The first question is whether the imported merchandise is manufactured under patent. The answer to the first question of the dutiability test is yes because our research revealed that the eco-friendly resin is subject to a patent. The second question is whether the license fee is involved in the production or sale of the imported merchandise. In this case, the licensee fee is paid for the rights associated with the process to manufacture the imported merchandise. The license fee payments are for use of licensor’s brand name, ingredients, and product technology in connection with the manufacture and sale of the merchandise in the United States for the duration of the license agreement. The licensor sells the agreed upon quantities of resin to unrelated foreign factories designated by the licensee to produce the finished merchandise that will use the eco-friendly resin and the licensor’s brand name, ingredients, and product technology. Thus, the license fee is linked to the production process of the merchandise and the answer to the second question of the dutiability test is yes. See Headquarters Ruling Letter (“HQ”) 547226, dated July 27, 1999 (concluding that payments for the use of licensed characters were related to the imported goods and were involved in the production and sale of the goods). The third question is whether the importer could buy the imported co-branded merchandise utilizing the eco-friendly resin without paying the license fee. If license fee 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 pursuant to 19 U.S.C. § 1401a(b)(1)(D). See HQ H034062, dated Mar. 3, 2007. Here, the importer cannot buy merchandise utilizing licensor’s sustainable resin without paying a license fee to the licensor. The licensee pays the licensor a license fee per kilogram for the purchased resin. If the licensee does not pay the initial license fee to the licensor, the resin will not be released to the factories and the co-branded merchandise will not be produced. If excess resin is purchased, an invoice will be issued to the licensee for the additional license fee owed. If less resin is purchased, the excess license fee will be credited toward a new contract with the licensor. Thus, the third question yields a negative response. In sum, based on the affirmative answers to questions one and two, and a negative answer to question three, the subject license fee is dutiable under 19 U.S.C. § 1401a(b)(1)(D). You further ask us to determine how you should declare the license fee on multiple future importations since not all the imported merchandise will contain the eco-friendly resin. The license fee is calculated per kilogram of the purchased eco-friendly resin. The total license fee is estimated to be $[ ] and may be adjusted if excess material is purchased. Title 19, C.F.R. § 152.103(e)(1) provides: The apportionment of the value of assists to imported merchandise will be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. The method of apportionment actually accepted by Customs will depend upon the documentation submitted by the importer. If the entire anticipated production using the assist is for exportation to the United States, the total value may be apportioned over (i) the first shipment, if the importer wishes to pay duty on the entire value at once, (ii) the number of units produced up to the time of the first shipment, or (iii) the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles. If the anticipated production is only partially for exportation to the United States, or if the assist is used in several countries, the method of apportionment will depend upon the documentation submitted by the importer …. As provided above, the apportionment of the license fee calculated per kilogram of the purchased resin must be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles (“GAAP”). The importer may apportion the license fee over the first shipment, the number of units produced up to the time of the first shipment, or the entire anticipated production of the merchandise containing the sustainable resin. See 19 C.F.R. § 152.103(e)(1). The importer may also request another method of apportionment as long as the apportionment is in accordance with GAAP. See id. Consistent with 19 C.F.R. § 152.103(e)(1), the apportionment method actually accepted by U.S. Customs and Border Protection (“CBP”) will depend upon the documentation submitted by the importer. HOLDING: Based on the information presented, the license fee paid to the unrelated U.S. licensor is dutiable and constitutes an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D). The apportionment of the license fee must be made in a reasonable manner appropriate to the circumstances and in accordance with GAAP. The method of apportionment actually accepted by CBP will depend upon the documentation submitted by the importer. Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a [CBP] field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is 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, Monika R. Brenner, Chief Valuation & Special Programs Branch