CBP Increasing First Sale Rule Enforcement
Importers are being advised to review transactions taking advantage of the first sale rule to ensure they are consistent with U.S. Customs and Border Protection’s requirements. CBP is scrutinizing imports using this valuation methodology more closely as part of a broader increase in enforcement efforts.
Under the first sale rule, the entered value of a qualifying transaction may be based on the purchase price between the middleman/vendor and the manufacturer rather than the importer and the middleman/vendor. This rule was established in litigation by Sandler, Travis & Rosenberg 30 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. At a time when volatility in trade policy has left some traditional methods of lowering costs unavailable (such as the Generalized System of Preferences) and is threatening to eliminate others (such as NAFTA), importers are continuing to use the first sale rule to save millions of dollars in import duties each year.
CBP has always had an uneasy relationship with the first sale rule and has attempted several times to eliminate it or make it more difficult to use. With these efforts having been unsuccessful, CBP has instead frequently turned its attention to ratcheting up efforts to verify that companies using this methodology are doing so properly.
For example, said ST&R member Mark Tallo, in recent months CBP has focused on the proper transfer of title and risk of loss to ensure middleman companies are bona fide buyers and sellers of imported goods. CBP is also looking at related party pricing to confirm that any first sale price between related parties is not influenced by that relationship and is otherwise conducted at arm’s length. Other issues include assist valuation (i.e., validating that all declared first sale prices are “fully costed” and reflect the true value of the imported goods) and supplemental payments (i.e., ensuring that no such payments to the foreign seller are missing from the first sale price).
Despite this trend, said Mark Segrist, managing member of ST&R’s Chicago office, companies can still have successful first sale programs. 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 if and when CBP comes knocking.” Since information is often retained by different partners in the supply chain, Segrist said, it’s particularly important for importers to communicate with them to define their responsibilities for keeping and producing records. Failure to meet first sale requirements may be construed as a lack of reasonable care and lead to penalties.
For more information on the first sale rule, including ST&R’s First Sale Portal that can aid importers in substantiating claims, please contact Mark Segrist at (312) 279-2834, Mark Tallo at (202) 730-4968, or Sally Peng at (852) 9535-6034.