Savings Strategies: First Sale Rule
There are a number of duty savings strategies companies can use to conserve cash, lower customs duties and tariffs, and seek refunds. These strategies are always a high priority for businesses involved in international trade, but particularly so during this difficult period.
This is the first in ST&R’s series of articles examining these strategies in more detail and covers first sale valuation, a proven tool that can be used to not only mitigate the impact of tariffs at present but also lower costs well into the future. If you would like to discuss this and other savings opportunities to determine if they might apply to your company, please contact ST&R.
Under the first sale rule, the dutiable value of a qualifying transaction may be based on the purchase price between the middleman/vendor and the manufacturer rather than the price paid by the importer to the middleman/vendor, resulting in a lower duty bill. Various criteria must be met to use this method, including ensuring that the first sale price reflects a sale clearly destined to the U.S. and conducted at arm’s length. This rule was established in litigation by Sandler, Travis & Rosenberg more than 30 years ago, and its legality and importance to the U.S. economy and trade community were reaffirmed by legislation first proposed by ST&R and enacted in 2008.
First sale has long been useful to industries subject to high U.S. tariffs, such as apparel and footwear, which use it to save millions of dollars in import duties each year. Its utilization has increased dramatically over the past few years as companies seek to lessen the impact of the Section 301 tariffs on imports from China; Section 201 and 232 tariffs on steel, aluminum, and other products; and tariffs on European Union goods imposed in a long-running World Trade Organization dispute on aircraft subsidies. Additional tariffs also remain a possibility on imports from France (due to its digital services taxes) and automobiles and auto parts from many countries (following a Section 232 national security investigation).
Moreover, even normal duty rates are posing a challenge as companies forced to curtail or shut down operations due to the COVID-19 pandemic deal with reduced cash flow.
The time-tested first sale rule could help ease the burden of these measures, particularly at a time when volatility in trade policy has left some traditional methods of lowering costs unavailable and is threatening to eliminate others. Beyond the current trade tensions and economic uncertainty, however, first sale can also serve as a type of long-term annuity; i.e., even once additional tariffs expire and businesses return to full operation, use of first sale valuation would, if properly maintained, continue to provide a lower declared value and thus reduce the regular duties assessed on a company’s products.
At the same time, companies must take care to ensure compliance with first sale requirements. U.S. customs authorities are scrutinizing imports that use this methodology more closely as part of a broader increase in enforcement efforts. The key is to take proactive steps to ensure that multi-tiered transactions meet first sale requirements and that there are internal controls and procedures in place to sufficiently document compliance.