Well, maybe. As we lawyers like to say, it depends.
Let's start with the law because that is what we are supposed to do. The law says that transaction value should include:
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.
That seems relatively clear. If the buyer has to pay a royalty or license fee to get the goods, it is part of the value of the merchandise and should be reported. But, it is not at all clear. Why? Because Customs has a regulation that says:
Royalties or license fees for patents covering processes to manufacture the imported merchandise generally will be dutiable. 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. Payments made by the buyer to a third party for the right to distribute or resell the imported merchandise will not be added to the price actually paid or payable for the imported merchandise if the payments are not a condition of the sale of the merchandise for exportation to the United States.
For those of you who are really into this stuff, that is 19 C.F.R. § 152.103(f).
Traditionally, this was interpreted to mean that patent royalties were generally dutiable and copyright and trademark royalties were part of marketing expenses and, therefore, not part of the dutiable value of the merchandise.
Customs, however, was not satisfied with that relatively easy-to-apply test. In 1993, following a ruling issued to Mattel, Customs published a general notice to the trade explaining its thinking on royalties and license fees. Under its new approach, Customs looks at each situation individually and asks three questions:
- Was the imported merchandise manufactured under patent?
- Was the royalty involved in the production or sale of the imported merchandise?
- Could the importer buy the product without paying the fee?
On Passover, they toss in a fourth, but that is not relevant here.
If the answers to the first two are positive and the third negative, Customs will lean very heavily toward dutiability of the royalty.
Like most things written in the English language, this gives lawyers lots of room for disagreement and opportunities for arguments. Usually, this will focus on the third question. After all, there are plenty of people willing to sell you something whether or not you pay the required royalty to a third party.
Another issue that comes up a lot is whether the royalty was paid to the seller or someone unrelated to one of them. The theory is that a royalty paid to the seller might just be an indirect payment that is dutiable on separate grounds.
Like I said, it all depends. And that is why you hire competent customs managers, in-house lawyers and, when necessary, people like me.