Revisiting First Sale as a Basis for Declaring Customs Value as a Strategy to Reduce Duty Obligations under Section 301
May 30, 2019
As the trade war with China escalates and as the conflict appears likely to continue for the foreseeable future, importers, as well as their customers and suppliers are looking at ways to lessen the impact. A year into this standoff, more and more companies are looking at major, and probably irreversible, steps to lessen the impact of the Section 301 duties, including moving production to other Asian countries such as Vietnam, Cambodia, Philippines and Malaysia as well as Mexico. Others are looking more closely at products which may be assembled in China, but which incorporate significant non-Chinese components and subassemblies with the purpose of reviewing whether the finished article is, in fact a product of China, or whether a non-Chinese input may determine the country of origin.
While these two options are probably the ones being considered most frequently, there is another option that should be considered when the supply chain includes a middleman who resells the product to the U.S. importer at a mark-up. This is known as the “First Sale Rule” and allows an importer to declare a Customs value on its import documentation which represents the price of the first sale, that is, a sale from the manufacturer to the middleman, and therefore allows the importer to pay duty on the price paid by the middleman, which does not include the middleman’s mark-up. This will usually represent a reduction in value of somewhere between 10% and 20%, allowing the importer to pay less regular duties as well as less Section 301 duties for products of China.
The First Sale Rule has been followed in the United States since 1992 after a decision by the Court of Appeals for the Federal Circuit in Nissho Iwai American Corporation v. United States. That decision held that the price paid by the middleman to the manufacturer was the proper value to declare upon entry provided that the following three conditions were met:
1.) The sale between the manufacturer and the middleman was negotiated at arms-length;
2.) The relationship between the manufacturer and the middleman was free from any non-market influences; and
3.) The merchandise ordered from the manufacturer was clearly destined for the United States.
If the possibility of using the First Sale price exists, an importer must do a thorough examination of the transactions to ensure that the three conditions laid out by the CAFC are met and are well documented, before making any changes. In some cases, where there may be a more complex supply chain, such as one where there is a relationship between the middleman and the manufacturer, or where there are more than three parties in the supply chain, it may be advisable to seek a binding ruling letter from Customs to confirm that the First Sale Rule can be used. This would also be advisable when the products have been previously imported and the importer wishes to switch to a First Sale appraisement.
Please contact any of the attorneys at Barnes, Richardson & Colburn if you would like to discuss this further.