Are Royalties Dutiable? The CBP Test for License Fees in Customs Value

Are royalties and license fees part of customs value?

Sometimes. Under 19 U.S.C. 1401a(b)(1)(D), a royalty or license fee is added to transaction value only when it is "related to the imported merchandise" and 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."

How does CBP decide whether a royalty is a condition of sale?

CBP applies three questions from its 1993 Hasbro II General Notice: was the merchandise made under patent, was the royalty involved in its production or sale, and could the importer buy it without paying the fee. The answers come from your license and supply agreements, read together.

TL;DR

Royalties are dutiable when they are tied to the purchase of the imported goods, and not dutiable when they pay for the right to use a brand in the U.S. market after the goods arrive. The line is drawn in contracts, not invoices. For a trade compliance manager at a licensee importing 50 or more licensed SKUs, that means the entered value can be wrong in either direction for years without anyone noticing: a dutiable patent royalty left off every entry, or a non-dutiable trademark royalty added to every entry. CBP's own 7501 declaration asks the importer to disclose royalties, so a royalty review starts from the agreements, not the invoice, because that is where CBP looks.

Last updated: October 2026

What the statute says, and the second royalty provision most teams miss

Transaction value under 19 U.S.C. 1401a(b)(1) is the price paid or payable for the goods when sold for exportation to the United States, plus five enumerated additions: packing, selling commissions, assists, royalties and license fees, and proceeds of subsequent resale. Two of the five deal with money that moves after the goods are bought.

Bottom line: For trade compliance managers reviewing a license agreement for the first time, the question is not only "is this royalty a condition of sale" but also "does any of this money reach the seller", because a payment can be dutiable under (D), under (E), or as part of the price itself.

The statute adds a constraint that matters in practice. Each addition is made only to the extent it "is not otherwise included" in the price and "is based on sufficient information." If the information is not available, the transaction value "shall be treated, for purposes of this section, as one that cannot be determined." A royalty you cannot quantify does not disappear; it can push the entry off transaction value entirely.

CBP's regulation, 19 CFR 152.103(f), states the two default positions:

"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 same paragraph says the answer "will be determined in each case." The defaults are where the analysis starts, not where it ends.

What are the three Hasbro questions?

CBP's working test comes from the General Notice, Dutiability of Royalty Payments, 27 Cust. B. & Dec. No. 6 (February 10, 1993), usually called the Hasbro II notice. As restated by CBP in HQ H309127 (August 3, 2020), the three questions are:

1. Was the imported merchandise manufactured under patent?
2. Was the royalty involved in the production or sale of the imported merchandise?
3. Could the importer buy the product without paying the fee?

"Affirmative answers to questions one and two, and a negative answer to question three suggest that the payments are dutiable. Otherwise, the payments are non-dutiable." In HQ 548489 (August 4, 2004), CBP added that question three "goes to the heart of whether the payment is considered to be a condition of sale."

CBP does not answer the questions in the abstract. HQ H309127, citing HQ 547148 (September 12, 2002), lists the considerations it weighs:

• The type of intellectual property. Patents covering processes to manufacture the goods lean dutiable.
• Who receives the payment. Payments to the seller or a party related to the seller are more likely dutiable than payments to an unrelated third party.
• Whether the purchase and the royalty are "inextricably intertwined." Signs include provisions for both in the same agreement, a license that requires purchase from the licensor, and termination of one agreement triggering termination of the other.
• Whether the royalty is paid on each and every importation.

When is a royalty a condition of sale? Four rulings that show the line

Each ruling below applies only to its own facts; read the full text before relying on any of them.

Bottom line: For finance and tax teams at licensee importers managing several license agreements, the pattern is consistent: a royalty for using a brand in the U.S. market sits on the safe side, and a royalty that controls whether the goods can be made or bought sits on the dutiable side, regardless of who receives it.

Three details from these rulings catch most teams by surprise.

Paying an unrelated licensor is not a safe harbor. In HQ 548489, the licensee argued the royalties went to two unrelated technology companies, not to the Chinese factory that sold the goods. CBP answered that "royalties will be dutiable even if paid to third parties if they constitute a condition of sale for exportation," because the license gave the licensee the right "to make, have made, use, sell, offer for sale and import" the product, and "none of the described activities could occur if LICENSEE were not obligated to pay a royalty."

How the royalty is calculated does not decide the question. The same ruling rejected the argument that royalties computed quarterly on U.S. net sales were a condition of the U.S. resale, not the export sale. CBP quoted the Hasbro II notice: "the method of calculating the royalty, e.g., on the resale price of the goods, is not relevant to determining the dutiability of the royalty payment." It also held that paying the same royalty on domestically made units does not, by itself, make the import royalty non-dutiable.

Royalties paid to the seller start presumed dutiable. HQ 547148 states that "there is a presumption that royalties paid to the seller are included in transaction value unless the importer can show otherwise." HQ W563354 extends the reasoning to a related licensor: payments to a party related to the seller are treated as indirect payments to the seller, citing Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990).

Quotable insight: The royalty question is decided in documents the entry filer rarely sees. The license agreement sits with legal, the royalty accrual sits with tax and finance, and the broker files from a commercial invoice. In HQ 548489 the royalties were, on the licensee's own account, "not linked in any way to invoices for imported licensed product," and CBP still found them dutiable. That gap is where both kinds of royalty leakage live: dutiable fees never declared, and brand fees declared on every entry for years.

Does it matter whether the royalty is for a trademark or a patent?

Yes, as a starting presumption. The Statement of Administrative Action to the Trade Agreements Act of 1979, quoted in HQ H309127 and HQ W563354, says trademark and copyright royalties paid to third parties "will generally be considered as selling expenses of the buyer and therefore will not be dutiable," while process patent royalties generally will be.

The presumption can flip on the facts. HQ H309127 cites HQ 545194, where license fees paid to licensors related to the sellers were part of the total payment for the goods. Mixed agreements are the hardest case: in HQ W563354, one license covered trademarks and patents, and CBP looked through the label to the rights that controlled manufacture and import.

The regulation also carves out a related charge that is not dutiable at all. Under 19 CFR 152.103(h), charges for the right to reproduce the imported merchandise in the United States are not added to the price.

What are proceeds of subsequent resale under 1401a(b)(1)(E)?

Subsection (E) is a separate addition. It reaches "the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller." Unlike (D), it applies only when the money ends up with the seller.

19 CFR 152.103(g) gives the standard example. A buyer pays the seller $1 per unit at purchase and agrees to pay another $1 per unit when each unit sells in the United States. If the resale can be determined in a reasonable time, transaction value is $2 per unit. If it cannot, "the transaction value could not be determined for want of sufficient information." The regulation adds that dividends and other payments that "do not relate directly to the imported merchandise will not be added."

CBP checks (E) as a fallback. In HQ H309127, after clearing the trademark royalty under (D), CBP found it was not proceeds either, because the licensor "does not produce or sell the imported merchandise." A royalty that clears (D) but flows back to the factory or its parent can still be caught here.

How do you declare a dutiable royalty, including through Reconciliation?

The obligation runs to the importer of record. CBP's Customs Value informed compliance publication (revised July 2006) notes that the entry summary declaration requires the declarant to state that the entry "fully discloses the true prices, values, quantities, rebates, drawbacks, fees, commissions and royalties," and warns that failing to coordinate with departments such as research and development "might be considered a failure to exercise reasonable care."

Royalties create a timing problem: a fee computed on U.S. net sales is not known when the goods are entered. Importers generally handle that in one of these ways.

Bottom line: For compliance managers at importers paying royalties on net sales across hundreds of entries a year, Reconciliation is the mechanism CBP built for declaring an amount that does not exist yet at entry, and the flag has to be on the entry summary when it is filed.

On the Reconciliation route, CBP's program page sets the deadline for value issues at "Twenty-one (21) months from the date of entry summary of the oldest entry summary flagged," adds that "No extensions will be allowed," and notes that CBP "will no longer apply blanket flags to underlying entries," so blanket flagging now runs through the broker's software. Our guide to flagging entries for customs reconciliation covers the four flaggable issues, the bond rider and the no-file liquidated damages risk. A 2020 Federal Register notice on the ACE prototype, 85 FR 39576, confirms that value issues are among the issues that may be flagged.

For past entries where a dutiable royalty was omitted, the exposure sits under 19 U.S.C. 1592, which prohibits entering goods by means of a material false statement or "any omission which is material," through fraud, gross negligence or negligence. The prior disclosure mechanics are covered in our guide to prior disclosure under 19 CFR 162.74.

Where do royalties create duty leakage?

Royalty errors run in both directions, and each direction costs money.

Take an illustrative case. A licensee imports 100,000 units a year at $8.00 each, so $800,000 of entered value. It pays a royalty of $1.00 per unit on U.S. sales, $100,000 a year. Assume a 6% ad valorem duty rate for the arithmetic only; this is not the rate for any particular HTS line.

• If the royalty is dutiable and never declared, the entered value is short by $100,000 a year and duty is short by $6,000 a year (6% of $100,000). Over five years that is $30,000 of unpaid duty, before interest or any penalty, and the omission repeats on every entry.
• If the royalty is a non-dutiable trademark fee but has been added to every entry, the importer has overpaid the same $6,000 a year. Getting it back requires a filing, and the protest window on each entry closes 180 days after liquidation.

The second case is the one finance rarely looks for, because conservative declaration feels safe. GingerControl identifies and documents the opportunity; your licensed broker or counsel files.

Royalties also touch neighbouring valuation questions. Royalties paid to a group IP company bring in transfer pricing and customs valuation. HQ H309127 ran the royalty analysis alongside a first sale claim. And the valuation governance guide for related-party manufacturers shows how assists, royalties and transfer price fit into one program.

What a defensible royalty determination looks like on audit

A defensible file shows the question was asked, with the documents CBP would ask for:

1. The license agreement and every purchase or supply agreement, because CBP requires both in a royalty ruling request.
2. A written answer to each Hasbro question, with the clause that supports it.
3. The nearest CROSS rulings by fact pattern, read in full, with the distinctions noted. Our walkthrough of how to search CROSS covers the search mechanics, which work the same way for valuation rulings.
4. A check under 1401a(b)(1)(E) for any part of the payment that reaches the seller.
5. The declaration method (per entry, Reconciliation flag, or no addition) and who owns the true-up each quarter.

GingerControl builds trade compliance AI: its HTS Classification Researcher reasons through GRI with CROSS ruling citations, and its Tariff Calculator returns the full tariff stack with each component broken out. Our Trade Advisory work covers duty mitigation and CBP audit response, and it is not legal counsel. The royalty determination on your own agreement belongs with your licensed broker or counsel.

Putting royalty review into your valuation audit

The evidence for a royalty determination already exists inside the company, in license agreements the trade team has often never read. Book a compliance audit with the GingerControl team and bring the agreements.

References

1. 19 U.S.C. 1401a, Value (GovInfo, United States Code 2024 edition)
   Data cited: transaction value definition, additions (D) and (E), sufficient information rule
   Source: 19 U.S.C. 1401a
2. 19 CFR 152.103, Transaction value (eCFR)
   Data cited: paragraphs (f) royalties, (g) proceeds, (h) right to reproduce
   Source: 19 CFR 152.103
3. CBP HQ H309127, August 3, 2020
   Data cited: Hasbro II three questions, SAA language, considerations list, (E) analysis
   Source: HQ H309127
4. CBP HQ 548489, August 4, 2004
   Data cited: third-party patent royalty dutiable, calculation method not relevant
   Source: HQ 548489
5. CBP HQ 547148, September 12, 2002
   Data cited: presumption for royalties paid to the seller, intertwined agreements
   Source: HQ 547148
6. CBP HQ W563354, October 27, 2010
   Data cited: royalties to a related licensor as part of price paid or payable and as (D) addition
   Source: HQ W563354
7. CBP, What Every Member of the Trade Community Should Know About: Customs Value (revised July 2006)
   Data cited: entry summary royalty declaration, reasonable care coordination
   Source: Customs Value ICP
8. CBP, Reconciliation program page (last modified June 1, 2023)
   Data cited: 21-month filing deadline, no extensions, CBP no longer applies blanket flags
   Source: CBP Reconciliation
9. 85 FR 39576, July 1, 2020, Modification of the NCAP Test Regarding Reconciliation
   Data cited: value issues among flaggable Reconciliation issues
   Source: 85 FR 39576
10. 19 U.S.C. 1592, Penalties for fraud, gross negligence, and negligence
    Data cited: material false statement or material omission
    Source: 19 U.S.C. 1592
11. 19 CFR 162.74 and 19 CFR 174.12 (eCFR)
    Data cited: prior disclosure definition; 180-day protest period
    Source: 19 CFR 162.74 and 19 CFR 174.12