A U.S. company is being filed $1.3 million for improperly using the first sale rule in an attempt to lower its import duty burden.
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According to the Department of Justice, the company at issue purchased goods from foreign vendors that in turn contracted with overseas factories to manufacture the goods. In December 2015, after U.S. Customs and Border Protection had detained many of the company’s shipments due to concerns that the declared values were fraudulent, the company decided to transition its business model. Instead of purchasing the goods on landed duty paid terms – meaning the company paid the vendors a price inclusive of all costs associated with importing the goods – the company began purchasing the goods on free on board terms – meaning it assumed importation responsibilities, including declaring the value of the imported goods and paying the associated customs duties.
As the importer of record the company was permitted to use the first sale rule to declare the value of the imported goods based on the price the vendors paid the factories rather than the price the company paid the vendors. However, this could only be done if the goods were the subject of a bona fide sale between the vendors and the factories, the goods were clearly destined for export to the U.S., and the factories and the vendors dealt with each other at arm’s length in the absence of any non-market influences that affected the legitimacy of the sales price.
In this case, however, the company instructed the vendors on how to calculate and report the prices that were ultimately used to declare the dutiable values to CBP, meaning the prices were not based on a bona fide sale between the vendors and factories and were not the result of arm’s length negotiations between those parties.
The DOJ explained that in transitioning from LDP to FOB terms the company developed a formula that worked backward from a previously-negotiated LDP price to calculate what the company wanted the FOB price and first sale price to be and then used that first sale price to declare the values of 67 shipments. As a result, the prices used by the company for customs reporting purposes were determined after the orders had been placed, after the pricing structure had been negotiated, and after the goods were in production. The value of the sales were thus underreported and the duties paid on those sales were significantly lower than they should have been.
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