Background

A recent trend in U.S. Customs and Border Protection’s enforcement of first sale valuation highlights the importance of importers conducting regular reviews of their first sale transactions to ensure compliance with CBP’s ever more strict interpretation of first sale requirements.

For importers of goods subject to high rates of duty, such as apparel, footwear, and items currently subject to Section 301 duties on China-origin products, the use of first sale valuation is not only a critical way to reduce tariff exposure but also a growing necessity to remain cost-competitive in today’s inflationary market.

First sale is a lawful way for importers purchasing goods in a multi-tiered transaction to reduce the amount of import duty they pay by declaring the price charged between the manufacturer and the middleman rather than the price charged between the middleman and the U.S. importer, which is traditionally the case. Simply put, by declaring the lower or “first sale” price at the time of entry, the importer saves duty on the difference, leading to considerable landed cost savings.

To import goods under first sale, three primary requirements must be met: (1) the goods must be clearly destined for exportation to the U.S., (2) there must be two bona fide sales between the parties, and (3) the first sale value must be at arm’s length. While CBP has the right to challenge an importer’s compliance with any of these requirements, its recent focus has been on whether a bona fide sale exists between the manufacturer and the middleman – specifically, whether the middleman took title to and assumed the risk of loss for the underlying goods as part of the transaction.

An instructive example is CBP headquarters ruling H316892 concerning a U.S. importer’s attempt to use the first sale between its related Hong Kong middleman vendor and an unrelated factory in China to establish the dutiable value of the goods. The Incoterms® between the middleman and the importer were “FOB – international date line” while the Incoterms® between the factory and the middleman were “FOB – port of export,” indicating that the middleman sought to assume the risk of loss for the goods when they were laden on the export vessel and to pass that risk to the U.S. importer when the goods reached the international date line while on the vessel.

Nevertheless, CBP ruled that (1) the importer was the party actually responsible for the international ocean freight and insurance costs to get the goods from the port of export to the international date line, (2) the middleman never took title to, or assumed the risk of loss for, the goods as part of the transaction, and (3) the middleman thus did not serve as a bona fide buyer or seller as part of the transaction. As a result, CBP held that the importer could not use the first sale price at the time of entry but instead had to value the goods based on the price it paid to the middleman.

While it is unclear whether the importer will seek to challenge this ruling in court, one thing is clear: Importers utilizing the first sale rule at the time of entry need to take extra precaution to ensure that the bona fides of their first sale transactions are supported in both form and substance to survive potential challenges from CBP. Annual maintenance reviews with ST&R’s expert legal team of how your first sale transactions are documented are critical to determine your compliance with CBP’s increasingly strict interpretation of first sale requirements and are consistent with your obligation as an importer to exercise reasonable care in appraising imported goods.

For more information on first sale and ST&R’s recommended maintenance reviews, please contact trade attorneys Mark Segrist or Mark Tallo or click here to register for ST&R’s Nov. 2 webinar.

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