No. 17Financial Terms
Reserve Against Returns
Also called royalty reserve, reserve withholding, returns reserve
The label withholds a percentage of earned royalties in case physical products are returned, even long after streaming dominates.
Watch closely
Reserves delay payment of earned royalties without business justification in digital formats.
- Appears in
- Recording Agreement, Distribution Agreement
- Topic
- Royalties
- Jurisdiction
- United States
- Reviewed
- July 2026
In plain English
Labels withhold a 'reserve' from royalty payments to cover potential product returns from retailers. Originally designed for physical media, reserves of 25–50% are still applied in many contracts regardless of whether the artist sells any physical product. The reserve is supposed to be liquidated (paid out) over subsequent accounting periods.
Why it matters
In the streaming era, a 35% reserve on digital income has no logical basis: you cannot 'return' a stream. Yet the clause often persists in standard contract templates unchallenged.
Where it can land
The same clause is drafted three ways. These are the positions we see, worst first, so you can tell at a glance which one is in front of you.
- Reserve applies to digital and streaming income at the same rate as physical
- Reserve not liquidated for 4+ accounting periods
- No cap on reserve percentage
- Reserve above 25% for physical formats
- Liquidation schedule unclear or subject to label discretion
- Reserve limited to physical product sales only, no reserve on digital
- Reserve capped at 25% and liquidated within two accounting periods
The language
The drafting language and the negotiation moves for this clause are part of the workspace.
You have read what the clause means and where the risk sits. The rest is the side-by-side of how it reads when it is against you and when it is not, plus the specific moves that get it there.