U.S. Customs and Border Protection (CBP) has reportedly opted not to make changes to the First Sale Rule which would have made it more difficult for importers to save costs on customs duties under the program. The apparent halt on changes comes after the proposed revisions drew opposition from trade sector stakeholders.
The First Sale Rule stipulates that the entered value for qualifying transactions can be based on the purchase price between the middleman and the factory, rather than the between the middleman and the importer.
In July, CBP proposed changes to the existing Informed Compliance Publication that could have presented obstacles for importers using the rule as substantiating a first sale claim under those changes would have required an exhaustive list of documents to prove eligibility. CBP could likely have requested access to financials like charts of account, general ledgers and tax returns for all parties in a first sale transaction.
The proposal didn’t outline an appropriate use of the requirement checklist, leading to concerns that the list would be considered mandatory and that CBP officials would require all of the documents to determine eligibility for first sale, whether or not they validated the transaction under survey.
A legitimate use of the first sale rule constitutes declaring value on the first sale of a multi-tiered transaction where: A middleman serves as a buyer in the first sale, then as seller in a subsequent sale of good exported to the US; At time of first sale, the goods are destined for export to the US; and the foreign manufacturer/seller and middleman buyer are unrelated or, if related, conduct their transactions at “arm’s length.”
The first sale rule appears to be safe for now, but according to Sandler, Travis and Rosenberg (STR), CBP is likely to continue closely scrutinizing the use of this rule.
STR member practice leader for global first sale valuation Charles L. Crowley, said increased CBP scrutiny could mean importers will be denied first sale privileges immediately upon contact by Customs, or that imports could be exposed to penalties between 200 to 800 percent of the loss of revenue, up to the value of the goods, depending on how much care the first sale importer took in conducting and documenting the transaction.
According to Crowley, CBP has been contacting many importing companies at major ports that use the first sale program at the import specialist level. “Most of the importers that have been contacted thus far are in the retail, apparel and footwear industries, but we understand that companies in pharmaceuticals, electronics, home furnishings, food products and other industries have been contacted.”
The difference between CBP’s current scrutiny and that of past months has been threefold, Crowley said.
“Firstly, CBP in the past would normally ask about Customs Valuation in a broad based manner with questions concerning topics such as buying commissions, related party pricing, royalties, assists and other topics. Now the inquiries have been largely targeted to “First Sale” and eligibility for the program.” Secondly, he added, “CBP has centered its attention in the past few years upon major importers and the first sale program, but now a concerted effort seems to be targeted to larger importers and middle market companies. Lastly, in certain ports Customs has been arbitrarily deciding whether first sale is appropriate based upon very little analysis or training. First Sale is a complex area and most of the time one has to have an accounting and legal background to properly decide whether an importer is eligible for the program. Local Customs to a great extent seem to be including importers with well-established and reputable first sale programs with others that have first sale privileges without any substantive documentation or even alerting Customs that they import under the program.”
There is a sense that CBP will see that the majority of importers are doing their due diligence before adopting first sale, Crowley said, but use of the rule will need to be constantly reviewed both internally and externally with suppliers to ensure continued compliance.
“At the present time many excellent and responsible importers are being caught in a net created by CBP that should have been better designed to hook the irresponsible importers,” Crowley said.
The rule may be intact for now, but vigilance will be key for importers going forward. Those looking to use the first sale rule should be prepared to thoroughly support their first sale eligibility, and be ready to see an audit with questions that may involve other topics like: For example, does the importer annually perform an independent customs review of their Free Trade programs, classification and other items with regulatory oversight?
Crowley will lead a webinar Nov. 4 to help importers interested in First Sale Rule transactions understand the requirements and maintain compliance with the program.