A recent trend in the application of first-sale valuation by U.S. Customs and Border Protection highlights the importance for importers to conduct regular reviews of their first-sale transactions to ensure the compliance with CBP’s ever stricter 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 products originating in China, the use of first-sale valuation is not only an essential means of reducing exposure to customs duties, but also a growing necessity to remain cost-competitive in today’s inflationary market.
First sale is a legal way for importers purchasing goods in a 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 US importer, which is traditionally the case. Simply put, by declaring the lowest price or “first sale” price at the time of entry, the importer saves duty on the difference, resulting in significant landed cost savings.
To import goods under a first sale, three main conditions must be met: (1) the goods must be clearly intended for export to the United States, (2) there must be two sales of good faith between the parties and (3) the first sale value must be at arm’s length. Although CBP has the right to challenge an importer’s compliance with any of these requirements, it has recently focused on whether there is a bona fide sale between the manufacturer and the intermediary. – in particular, if the intermediary has taken title and assumed the risk of loss for the underlying assets in the context of the transaction.
An instructive example is CBP Headquarters’ decision H316892 regarding a US importer’s attempt to use the first sale between its related intermediary supplier in Hong Kong and an unrelated factory in China to establish the taxable value of the goods. The Incoterms® between the middleman and the importer was “FOB – international date line” while the Incoterms® between the factory and the middleman was “FOB – port of export”, indicating that the middleman was seeking to assume the risk of loss for the goods when they have been loaded onto the export vessel and to transfer that risk to the US importer when the goods have reached the international deadline while on the vessel.
Nonetheless, 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 Dateline, (2) the intermediary never took title or assumed risk of loss for the goods in connection with the transaction, and (3) the intermediary therefore did not serve as a bona fide buyer or seller in part of the transaction. As a result, CBP held that the importer could not use the first selling price at the time of entry, but instead must value the goods based on the price he paid to the middleman.
While it is not clear whether the importer will seek to challenge this decision in court, one thing is clear: importers using the first sale rule at the time of entry should take extra care to ensure that the good faith of their first sales transactions is confirmed. in form and substance to survive potential CBP challenges. Annual maintenance reviews with ST&R’s expert legal team of how your first sale transactions are documented are critical to determining your compliance with CBP’s increasingly stringent interpretation of first sale requirements and are consistent with your obligation as an importer to exercise due diligence when assessing imported goods.
For more information on first sale and ST&R recommended maintenance services, please contact sales attorneys Mark Segrist or Mark Tallo or click here to register for the November 2 ST&R webinar.
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