H307034

HQ H307034 September 29, 2020 OT:RR:CTF:VS H307034 JW CATEGORY: Valuation Mr. Richard A. Mojica Miller & Chevalier Chartered 900 16th Street NW Washington, DC 20006 RE: Dutiability of Certain Royalty Payments; Trademarks and Copyrights Dear Mr. Mojica: This is in response to your letter dated November 18, 2019, on behalf of your client [[XX XXXXXXXXXX]], in which you requested a ruling letter from U.S. Customs and Border Protection (“CBP”), pursuant to 19 C.F.R. Part 177, regarding whether certain royalty payments are dutiable. CBP requested additional information on February 26, 2020 to issue a ruling letter. You provided additional information dated August 6, 2020. 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 19 C.F.R. § 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: Your client is a subsidiary of [[XXXXXXXXXXXXXXXXX]] (the “Licensee” or “licensee”). Your client serves as the United States importer of record for merchandise imported according to sales contracts executed by the licensee. The merchandise is printed or graphic T-shirts. The Licensee proposes to purchase T-shirts from unaffiliated sellers/vendors located outside of the United States under sales contracts based on the Licensee’s Master Purchase Agreement. You indicate that the Master Purchase Agreement does not discuss or refer to any specific agreements related to intellectual property protections, licenses, or the payment of royalties, including the Sample License Agreement 1 and Sample License Agreement 2 discussed below. Then the Licensee proposes to arrange for printing of graphics onto these T-shirts either (a) within the United States by the licensee or a separate vendor; or (b) outside of the United States by the seller/vendor from which the Licensee purchased the T-shirts from. The printed graphics will have intellectual property (“IP”) in the form of trademarks or copyrights. The Licensee proposes to execute separate license agreements for use of this IP with third-party licensors that are based in the United States and not affiliated with either the Licensee or the sellers/vendors of the T-shirts. These license agreements will provide for the payment of royalties or license fees for use of the IP and will be modeled after one of two forms: (1) Sample License Agreement 1; or (2) Sample License Agreement 2. Sample License Agreement 1 will be executed with a U.S. third party licensor (generally, the ultimate rights holder) with no affiliation to either the Licensee or the seller/vendor of the T-shirts. Under Sample License Agreement 1, the royalties will include (i) a fixed or “guaranteed” amount regardless of sales; and (ii) a variable or “percentage” amount calculated based on the total net sales or retail sales, as applicable, of the licensed products in the United States. Sample License Agreement 1 grants from licensor to licensee “the non-exclusive right and license to use the Copyrights and the Trademarks in connection with the manufacture, distribution, sale, and advertising of the Licensed Products. . . .” Sample License Agreement 1 states that “[t]he Licensee shall have the right to arrange with another party to manufacture the Licensed Products or components thereof for exclusive sale, use, and distribution by the Licensee.” However, the “Licensor shall have the right at any time, to require that the Licensee not use a manufacturer.” Moreover, while Sample License Agreement 1 does not specifically refer to the Master Purchase Agreement, it requires that “[p]rior to manufacturing any Licensed Products or any components thereof, the Licensee agrees to enter into a written agreement with such manufacturer, in addition to any other agreement Licensee enters into with such manufacturer, in the form of Exhibit C attached hereto and made a part hereof (or such other form as is approved by Licensor in writing) (the ‘Manufacturer Agreement’).” (emphasis in original). If the licensee breaches these provisions related to manufacturers or if, inter alia, licensee fails to submit royalty statements and/or royalty payments, the “Licensor shall have the right to terminate this Agreement immediately. . . .” Exhibit C of Sample License Agreement 1, i.e., the Manufacturer Agreement, states with respect to the sale of licensed products that “[t]he Manufacturer agrees not to manufacture, print, sell, or distribute the Licensed Products or any components of the Licensed Products except as expressly permitted by the terms of this Agreement and pursuant to specific written instructions and purchase orders from the Licensee.” The Licensee “shall” have the right to terminate the Manufacturing Agreement if, inter alia, the agreement (i.e., Sample License Agreement 1) which licensee has with licensor covering the use of copyrights or trademarks on the licensed products is terminated. It is further stated that “[t]he Manufacturer recognizes that the manufacturing rights granted to it by the Licensee under this Agreement are based on the rights granted the Licensee by Licensor under their agreement, and that on the termination of their agreement this Agreement shall automatically terminate. . . .” Sample License Agreement 2 will be executed with a U.S. third party licensor (generally, another licensee that has been authorized to sublicense the IP) with no affiliation to either the Licensee or the seller/vendor of the T-shirts. Sample License 2 is an agreement that “shall govern and control all Design Services [defined as any and all work, designs, marks, logos, or images that have been licensed for use on the Licensee’s products] provided by Licensor to [the Licensee].” Further, as part of this agreement “Licensor agrees to sublicense to [the Licensee] certain Licensed Properties for use on [the Licensee’s] products for sale within the Territory as part of the Program [defined as the Design Services and the production, marketing, and sale of certain Licensed Properties by [the Licensee] in the Territory.]” Under Sample License Agreement 2, the fees are defined to include: a royalty at a specified rate, and a “Design Fee” based on a percentage of the “Landed Cost of Licensed Product” (collectively, “Fees”). “Landed Cost of the Licensed Product” is not specifically defined in Sample License Agreement 2, however you state that it is in essence, “the invoice price of the product plus transportation fees, customs duties, import taxes, tariffs, etc.” Ruling Request at 7. The Licensee “shall pay Licensor all undisputed Fees within sixty (60) days of the end of the most recent calendar quarter.” Sample License Agreement 2 further provides that “[a]t its own expense, Licensor shall be solely responsible for the performance of all trademark, copyright, patent or other searches and clearances for all aspects of the Licensed Properties. Licensor shall secure in a timely manner in writing and pay for all licenses, consents, rights of publicity, approvals and/or permissions for the Licensed Properties necessary for the Licensee to: (1) manufacture or have manufactured the Licensed Products; (2) distribute and sell the Licensed Products in the Territory; (3) advertise and promote the Licensed Products by any means. . .; and (4) use, copy and publicly display any Licensed Properties provided by Licensor to advertise and promote the Licensed Products in the Territory. . . .” With respect to termination of Sample License Agreement 2, the agreement provides that it will continue until the first to occur of the following: a specific date; termination by convenience by the Licensee; or termination for cause by either party. Sample License Agreement 2 

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 basis of appraisement under the TAA is transaction value, defined in Section 1401a(b)(1), as 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. Imported merchandise will be appraised under transaction value only if the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value approximates certain test values. 19 U.S.C. § 1401a(b)(2)(A)-(B). In the instant case, based on the information submitted, the seller of the merchandise is not related to the buyer, hence we assume that transaction value is the appropriate basis of appraisement.We will additionally assume, based on the information submitted, that the royalty payments are not part of the price actually paid or payable for the imported merchandise as they do not appear to be a part of the total payment, directly or indirectly, made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller. See, § 402(b)(4)(a) TAA. In the absence of evidence to the contrary, where, as here, the payments are made by the buyer to a party unrelated to the seller, such amounts are considered as separate from the price. See also e.g., HQ H174030 citing 19 U.S.C. § 1401a(b)(4)(A) (noting that “the royalty payments are not part of the price actually paid or payable for the merchandise by the buyer to, or for the benefit of, the seller.”). Therefore, in this decision, the issue to be addressed is whether the subject payments are included in transaction value solely from the perspective of whe