License Fee Paid to Use Patented Resin in Manufacture of Shoes Is Dutiable, CBP Says

A license fee paid to an unrelated company for the right to use an eco-friendly resin in the manufacture of shoe insoles and other fashion accessories is dutiable, and should be added to the price paid or payable for customs valuation purposes, CBP said in a recent ruling. The license fee paid by Weyco Group to an unnamed company meets the requirements of the three-factor test for dutiability, CBP said in HQ H312455, issued Oct. 28.

Weyco, a footwear company that distributes Florsheim, Nunn Bush, Stacy Adams, and BOGS shoes, requested the ruling as part of its exploration of a co-branding license agreement to incorporate the unnamed company’s algae-containing resin in its products. The resin is subject to a patent, CBP said.

Under the agreement, the unnamed company would ship the resin to unrelated factories in China that make Weyco’s shoes. Paid over a year in 10 installments, the license fee’s first installment would have to be paid before any resin is shipped to China. Weyco would have “the right to use the licensor’s brand, ingredients, and technology on each commercial product containing the resin,” CBP said.

License fees must be added to the price paid or payable of merchandise only when they are a condition of sale, CBP said. License fees that are not a condition of sale, such as those paid to third parties for use of copyrights and trademarks, are generally not dutiable, it said. When considering whether a license fee is a condition of sale, CBP employs a three-part test: 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?

In the case of the license fee paid by Weyco, CBP found that the license fee is a condition of sale, and is a dutiable royalty that should be added to the price paid or payable. The resin is manufactured under patent. The payment is directly related to the right to produce any merchandise that contains the resin. And Weyco cannot buy any merchandise containing the resin without paying the license fee, CBP said.

“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,” CBP said. “The apportionment of the license fee must be made in a reasonable manner appropriate to the circumstances and in accordance with [generally accepted accounting principles (GAAP)]. The method of apportionment actually accepted by CBP will depend upon the documentation submitted by the importer,” CBP said.