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.

Read next

• Accounting PeriodsHow often the label calculates and pays royalties, and how long they have after each period to actually pay.
• Recording Royalty RateThe percentage of sales revenue paid to the artist after deductions.
• Audit RightsYour right to inspect the label's financial records to verify royalty calculations are correct.