Industry News
First Sale Not Sustained by Contract Clause
TweetMay 3, 2022
By:
Chaney A. Finn
The price of goods subject to multiple transactions before sale to the end consumer increases with each transaction. This effectively increases import duty amounts when declared to Customs since import duty is based on the entered value of the merchandise. Current law allows importers to reduce their import duty payment amounts by declaring the earlier value of the goods before markup costs are added by intermediary parties. The criteria necessary to utilize the first sale valuation method include: the goods being destined for export to the U.S. at the time of the first sale, at least two “bona fide sales” prior to import, and the parties involved must be unrelated or conducted at “arm’s length.” Approximately 2.4% of merchandise imported to the U.S. benefits from utilizing the “first sale” method in determining the transaction value.
U.S. Customs and Border Patrol (CBP) published ruling H321162 in response to an Application for Further Review of a protest challenging the denial of the “first sale” valuation of imported merchandise. The importer, Woodcraft Supply, LLC, issues purchase orders to unrelated middlemen, Shanghai Woodriver and Asia Woodriver, who then select appropriate factories and issue other purchase orders to for the products to be imported to Woodcraft. Woodcraft argues that the Master Sales and Purchase Agreement (MSPA) between itself and the Woodriver entities serve as the basis of the transactions as provisions specify agreed standard markups over the Woodriver entities’ factory costs and controls when risk of loss and title transfer occur at each step of the transaction. These factors, together, are intended to demonstrate that a bona fide sale is occurring between the manufacturers and the Woodriver entities.
A “sale” for purposes of the valuation law takes place when there is a transfer of title between two parties and some value is exchanged for the goods. Proving that there is a transfer of title and that value was exchanged are important elements of proving that a genuine, or “bona fide” sale has taken place.
CBP found that the MSPA did not provide sufficient evidence that a bona fide sale existed between the manufacturer/factory and the Woodriver entities, only between Woodcraft and Woodriver. Despite the factories being referenced in the MSPA’s, they did not control the sale between the Woodriver entities and the manufacturers, therefore, did not provide actual proof of the facts of that sale. CBP stated “Merely including a clause within the contract that attests to certain facts about a sale taking place between the middleman and the manufacturer does not provide actual proof of the facts of that sale or whether risk of loss and title actually transfer to the Woodriver entity (middleman) before it enters into the transaction with the importer, Woodcraft. As Woodcraft provides no other evidence to support its claim that risk-of-loss and title transfer from manufacturer to the Woodriver entity (middleman), it has failed to show that the manufacturer and the Woodriver entities were functioning as buyer and seller.” CBP determined that the MSPA’s are not sufficient proof of bona fide sales between the manufacturers and middlemen, denying Woodcraft's protest and rejecting the first sale valuation of the imported merchandise.
If you have any questions or would like more information about first sale valuation, do not hesitate to contact any attorney at Barnes, Richardson & Colburn, LLP.