Omitted Royalties and Seller Proceeds: What the Factory Invoice Leaves Out

An accurate factory invoice can still leave part of the customs value unaccounted for. The buyer pays for a mold, owes a royalty to obtain the goods, or promises the seller a share of later sales. The factory gets paid, finance records the cost, and the broker’s packet can still tell only part of the story. For someone in licensing, engineering or finance, the missing value may be a payment they already understand.

Under customs valuation law, the calculation starts with the price paid or payable and includes required additions for packing, selling commissions, assists, royalties and seller proceeds. The additions need accurate amounts and belong in the calculation to the extent they are outside the price already counted. That is why the supplier invoice and the customs value can be different numbers for the same goods.

Customs Valuation Royalties Depend on What the Buyer Must Pay

Royalties and license fees tied to imported goods belong in customs value when the buyer must pay them, directly or indirectly, as a condition of the sale. The contract matters because it explains whether the buyer can obtain the goods without making that payment.

In its Customs Value guidance, U.S. Customs and Border Protection puts the focus on the condition of sale, the recipient and the circumstances of payment. A royalty paid to someone other than the factory still raises those questions. What does the payment buy, who receives it, and how is it connected to the imported goods?

A royalty condition of sale omitted from customs value can sit in a license agreement that never reached the import team. The agreement and payment records connect that obligation to the price declared. Licensing sees the obligation. Finance sees the payment. Customs needs the value attached to the goods.

The Seller’s Share of Resale Proceeds Counts Too

When a seller receives resale proceeds not included in import value, the later payment supplies the missing part of the calculation. Customs includes proceeds from the subsequent resale, disposal or use of imported goods that accrue directly or indirectly to the seller. The relevant amount is the seller’s share of those proceeds.

The resale agreement and the payment trail explain what the seller receives from the imported goods after the original sale.

An Indirect Supplier Debt Offset Is Still Payment

An indirect supplier debt offset leaves customs undervaluation evidence in the accounts as well as the invoice. In CBP’s worked example, a buyer pays $1,850 for toys after the seller reduces its price by $350 to cancel a debt it owes the buyer. CBP puts the transaction value at $2,200. Part of the price was paid by canceling the debt.

The invoice shows the reduced cash payment. The debt record explains the rest. Following only the bank transfer would miss the value the seller received through the offset.

What Is an Assist in Customs?

Undeclared customs assists are qualifying buyer-supplied production inputs left out of customs value. An assist is something the buyer supplies free or at reduced cost for making the imported goods. The producer uses it even though its value sits outside the factory invoice.

The categories include materials and components incorporated into the goods, tools and molds used to make them, materials consumed during production, and qualifying engineering, development, artwork and design. Tooling supplied free to an overseas factory to make the imported goods belongs in customs value even though the factory never charged for it. The manufacturer received something the buyer paid for elsewhere.

Eos Energy Storage admitted undervaluing imports and leaving out costs. In its August 2022 settlement announcement, the Department of Justice described omitted value involving components supplied for battery manufacturing, packing and transportation.

Eos agreed to a $1.02 million settlement. An assembler’s invoice could show its charge while leaving out production inputs supplied to it.

Omitted Mold Costs in Customs Entry Value

Omitted mold costs in customs entry value concern both the cost of the mold and the goods to which that cost belongs. The valuation guidance starts with acquisition cost when the buyer purchases the assist from an unrelated party, or production cost when the buyer makes it, and includes transportation to the production site. The value is then allocated to the imported merchandise.

The useful connection runs from the tooling purchase or production cost to the goods made with it and the entry calculation. Finance has the cost. Compliance has the entry value. The production records connect the two.

U.S. Design Work Versus Foreign Design Customs Assists

For design and engineering assists, the location of the work matters. The category covers qualifying work performed outside the United States for production of the imported goods.

An overseas product design assist not declared to Customs calls for the project records linking the work, its location and the imported products.

Renaming a Charge Can Hide the Price

A separate design or service invoice can hold part of the actual merchandise price. The connection between the charge and the imported goods matters more than the heading on the bill.

Luchiano Visconti admitted significantly underreporting the value of imported menswear and routinely underpaying duties. In the Department of Justice’s August 2022 account, the practices included changing invoices and supplying brokers with manufacturer documents that omitted value. Payments described as design, preproduction, patent or other services formed part of the account of the true apparel price.

The company and its manager agreed to pay $3,641,157 after an admitted duty underpayment of more than $1.8 million.

The label gave the payment a different place in the paperwork. The imported menswear still had a price, and the broker’s documents understated it.

Does Customs Value Include Freight?

U.S. customs value excludes separately identified international freight and insurance for the shipment from the exporting country to the place of importation. Transporting a buyer-supplied mold to the production site is a different cost, included in valuing the assist. The journey a charge paid for matters, not just the word freight on an invoice.

Related Party Customs Undervaluation and the Price Behind the Invoice

Related party customs undervaluation puts the internal price itself in question. Under the related-party valuation rules, Customs examines the circumstances of sale to determine whether the relationship influenced the price. The pricing agreement, how the price was set and what the buyer actually paid connect the related-party import price to those circumstances of sale.

Customs test values provide another comparison when a related-party invoice discrepancy needs explaining. They include transaction values for identical or similar goods sold to unrelated buyers, or other accepted customs values for comparable goods. The comparison takes account of commercially significant differences, the goods, the industry and the import season.

First-sale pricing puts an earlier transaction in a chain at the center of the valuation. In its Miroglio settlement announcement, the Department of Justice described discounted textile transfers used to establish customs value. The U.S. subsidiary did not actually pay the Italian parent, which retained control over goods and customer transactions.

Miroglio accepted responsibility for the valuation practice and agreed to pay $650,000. The customs price rested on a sale its own subsidiary never paid for.

What Evidence Is Needed to Prove Fraud?

For omitted value, the customs fraud evidence connects the declared amount to the payment or production input left out, and to the people who knew about it. Supplier invoices, payment records, license agreements and tooling records each show a different part of that value.

A physical inspection has a different job. The whistleblower’s complaint against furniture importer Homestar North America alleged paired invoices with different prices, then explained why opening the container would not expose the alleged scheme:

The same distinction makes internal payment records valuable in an omitted-value case. The goods can be sitting in plain sight while the rest of their price sits elsewhere.

Why a Tax Price Needs a Customs Explanation

A transfer-pricing analysis can look at profits across a group of transactions while customs valuation examines the imported transaction and its required additions. A 2020 study in the Gazi Journal of Economics and Business explains how that difference leaves royalties and assists outside an unbundled price:

The paper also describes the timing difference between valuing goods at importation and reviewing prices later for income tax. A year-end price adjustment can leave the tax calculation and the customs entries reflecting different prices for the same goods.

Who Knew the Customs Value Was Incomplete?

A customs fraud whistleblower inside the business can connect the missing value to the decision that kept it out. Agreements, invoice versions, payment records, production records and broker instructions show different parts of that decision. The strongest account brings them together around the same goods.

An internal warning and the response can reveal knowing customs fraud or deliberate ignorance. Later instructions, filings and payments show what the company did with that knowledge, including which known customs errors stayed uncorrected. Someone who knows why a payment was separated from the invoice can explain a choice that the entry alone does not reveal.

Why the Missing Value Matters to a Whistleblower

When duty is a percentage of value, a knowing omission cuts the duty payment. Taxpayers lose that revenue, and a competitor that declared the full value bears a cost the importer evaded. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

Sources

• U.S. Customs and Border Protection: Customs Value, July 2006
• Department of Justice: Eos Energy Storage customs undervaluation settlement, August 11, 2022
• Department of Justice: Luchiano Visconti menswear settlement, August 11, 2022
• Department of Justice: Miroglio textile valuation settlement, September 12, 2019
• Transfer Pricing and Customs Valuation Overlap: Is It Possible to Bridge Two Worlds?, Gazi Journal of Economics and Business, 2020

The Payment You Can Explain

If your work in licensing, engineering, procurement or finance involves value that never reached the customs entry, speak with our whistleblower experts about the missing payment or production input. We connect your knowledge of the contracts and costs to the decisions behind the omission, and bring in customs fraud whistleblower lawyers who understand valuation. We stand beside you from that first conversation through the case.