Duty on royalty payments.

• Author: Curran, Dennis J.

Organizations that pay royalties on merchandise imported into the United States may face a significant duty liability based on a new U.S. Customs Service (Customs) interpretation. Earlier this year Customs issued a long-awaited notice, holding that certain royalty payments are a part of customs value of imported merchandise and thus subject to customs duty. This change applies to merchandise entered with Customs on or after May 11, 1993 (90 days from the date of publication of the notice in the Customs Bulletin) and may have far-reaching implications for companies on a worldwide basis.

Importers should reexamine their royalty and license fee agreements and be prepared to support or reconsider any position inconsistent with this new interpretation. In any event, importers should take steps to ensure proper customs values are declared on their filings with Customs made on or after May 11, 1993. Two years ago, Customs issued Ruling 544436 (Customs Service Decision (C.S.D.) 91-6, 2/4/91), which involved a determination of whether certain royalty payments associated with imported merchandise would be subject to customs duty. This ruling reversed a series of earlier Customs rulings that generally held that royalties paid by the importer, based on the resale of the merchandise in the United States, were not subject to duty. After Ruling 544436, Customs also issued a notice soliciting public comments on whether royalties of various types were properly included in customs value. A Feb. 10, 1993 notice provides an analysis of the received and confirms the determination set forth in the 1991 ruling. In addition, the notice established certain criteria for evaluating the treatment of royalties for customs purposes.

Generally, Customs's position had been that royalty or license fee payments based on sales in the United States or other post-importation events were not subject to customs duty. Customs Ruling 544436 determined that while these types of royalty payments may not be subject to duty as royalty payments, they may be subject as "proceeds of the subsequent resale, disposal or use" of the...