Valuation of Assists and Royalties
An importer buys specialized equipment from a foreign seller for $250,000. The importer also supplies, free of charge, engineering drawings and a custom mold to the seller; these items cost the importer $30,000 and are used in producing the imported equipment. Separately, the importer pays a royalty of 4% of the resale price to a third party for a patent that covers the equipment. Expected resale price is $400,000, so the royalty is $16,000. The seller's invoice does not mention the mold or the royalty. The importer's customs broker must declare the customs value and decide whether to add these amounts. The importer argues the mold is its own property and the royalty is paid to a third party, so neither should be included.
1. Determine whether the mold and the royalty must be added to the customs value, explaining the tests.
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Mold (assist). Goods or services supplied free or at reduced cost by the buyer for use in producing the imported goods are assists and must be added to the price actually paid or payable, to the extent not already included. The mold and drawings cost $30,000 and were provided free of charge, so they are an assist. The fact that the importer owns the mold is irrelevant; the test is whether the buyer supplied it for production of the imported goods. The apportioned value should be added. If the mold benefits multiple shipments, the $30,000 should be apportioned over the expected production or shipments rather than added in full to one entry.
Royalty. A royalty is added if it relates to the imported goods and is a condition of sale of the goods. A 4% royalty on the resale price for a patent covering the equipment relates to the goods. The key question is whether the seller required the buyer to pay it. If payment is a condition of sale, it is dutiable even though paid to a third party. If it is not a condition of sale, it may be excluded. The file should confirm the contract terms.
2. Assuming both amounts are dutiable and the mold is apportioned entirely to this shipment, compute the declared customs value and explain the treatment of the royalty base.
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Price paid or payable = $250,000. Add the assist = $30,000. Add the royalty = $16,000. Declared customs value = $296,000.
The royalty is calculated on the resale price ($400,000 x 4% = $16,000). The resale price itself is not the customs value; only the royalty amount is added. The importer should not add the full $400,000.
If the mold is used for future shipments, the $30,000 should be apportioned, which would lower the value on this entry and spread the balance over later entries. The broker should document the apportionment method and apply it consistently.
The importer's argument fails on both points: ownership of the mold does not matter, and payment to a third party does not exclude a royalty that is a condition of sale. The broker should record the basis for the additions and advise the importer of the duty effect, which at an illustrative 5% rate would be $1,480 on the added $46,000.