Royalties or Royalty?

Who is royalty? In the eyes of US Customs, no one is royalty.

And, despite the upcoming marriage of Prince William and Kate Middleton for which I recently saw had no “price tag” despite England’s weakened economy, this blog post is not about royalty, but royalties. (Ah, shucks… I know)

What are royalties? Generically speaking, a royalty is a fee paid by a party (known as a “licensee”) for usage of another’s (licensor’s) right. An example of this would be a payment made by an apparel importer (the licensee) for use of the recording artist “Justin Bieber’s” image on a t-shirt it imports. For those of you who don’t know, Bieber is a young Canadian R&B pop singer who is very popular with “tweens” – at least that’s what I’ve been told!

In this example, either Bieber, who is presumably the exclusive license holder, or the company that has merchandising rights relating to the use of his name or “likeness,” (which in everyday language essentially means, his image) would be entitled to payment – normally a percentage of the sales price of the good – upon the sale of the t-shirt. The terms setting forth what amount will be paid varies, and can run the gamut from 2% to 16% or much more.

So what do royalties have to do with international trade?

When it comes to figuring out how much to pay in duties, “transaction value” is one method (the preferred one actually) to use for determining an amount. As provided in 19 USC 1401a(b)(1),

“The transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts equal to -. . . 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 . . . .”

Therefore, under certain circumstances (not all – it depends on the nature of the licensing agreement and the relationship of the buyer, seller, and license holder), royalty amounts should be added to the transaction value. To determine the dutiable status of royalties, two (2) factors should be examined:

(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 (i.e., not the seller or a company related to the seller either usually) 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.

And just what is a “condition of sale?”

To figure this out, the initial questions to answer this inquiry should be:

1) Whether the imported merchandise was manufactured under patent;

2) Whether the royalty was involved in the production or sale of the imported merchandise, and;

3) Whether the importer could buy the product without paying the fee.

Given that licensing agreements are all written differently and can involve multiple related and unrelated parties using various payment structures, figuring out the dutiability of royalty payments is not necessarily a “cut and dry” issue. In fact, it can be quite complicated.

For more reading on US Customs rules regarding transaction value, check out their Value publication.

Questions/comments? Post below or email me at clark.deanna@gmail.com