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First Sale Rule Appears Safe for Now

Thursday, September 11, 2014
Sandler, Travis & Rosenberg Trade Report

U.S. importers using the First Sale Rule can breathe a little easier after U.S. Customs and Border Protection reportedly halted potential changes that drew sharp opposition from the trade community. At the same time, CBP is likely to continue to closely scrutinize the use of this tool. Sandler, Travis & Rosenberg will conduct a webinar Nov. 17 to help companies using the First Sale Rule ensure they are in compliance with applicable laws and regulations.

The First Sale Rule is used by thousands of U.S. importers to legally save millions of dollars in import duties each year. Simply stated, the rule allows the entered value of a qualifying transaction to be based on the purchase price between the vendor and the factory rather than the importer and the vendor. The rule was established in litigation by Sandler, Travis & Rosenberg more than 25 years ago, and its legality and importance to the U.S. economy and trade community was reaffirmed by legislation first proposed by ST&R and enacted in 2008 in response to a previous effort by CBP to eliminate it.

CBP circulated July 9 a draft revised internal compliance publication that appeared to include additional requirements to substantiate the use of the First Sale Rule. Among these was that in conducting a first sale review CBP would likely request access to exhaustive financial detail (including charts of account, general ledgers and tax returns) for all parties to a first sale transaction, including the manufacturer, middleman and parent companies. The draft ICP also included, for the first time, a lengthy checklist of other documents that CBP could request to prove eligibility for first sale benefits.

Reaction from trade associations, law firms, service providers and individual companies was swift. There were concerns that CBP auditors would interpret the proposed checklist as mandatory and require all the specified documents for first sale claims regardless of their relevance to validating the transaction under scrutiny, an approach that many held was not necessary or desirable from a legal or business operational standpoint. As a result, the trade community has overwhelmingly called for the ICP to be left unchanged or, at the very least, for CBP to significantly scale back the revisions.

Following this outcry, CBP appears to have decided not to pursue them, although no official word has yet been given. 

Nevertheless, warned ST&R member Charles L. Crowley, who will be presenting the Nov. 4 webinar, CBP’s recent actions signal that first sale transactions are coming under increased scrutiny, and importers must be prepared. “Never before has it been more important to rigorously scrutinize your first sale transactions to make sure they comply with the legal and regulatory requirements of first sale.”

As the oldest international trade service provider working with clients on first sale matters, ST&R recommends that importers undertake an independent detailed analysis of each vendor and factory using the First Sale Rule each year. The firm offers a recertification and annual maintenance program that simulates a CBP Request for Information (CBP Form 28) by requesting all documentation and information necessary to qualify the transaction anew. This type of robust program is essential to protecting first sale duty savings. 

Importers thinking about utilizing the First Sale Rule in their transactions, or those already using the rule who want to ensure they fully comply with all relevant laws and regulations, should contact ST&R’s Chuck Crowley at (212) 549-0134.

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