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Additional Tariffs or Not, You Might Already Be Paying Too Much in Duties

As apparel and textile companies seek ways to mitigate trade uncertainty, the practice of first sale is gaining renewed attention as an option.

First sale enables importers to reduce the dutiable value of their products by using the “first sale” price as the one on which duties are assessed upon entry into the U.S., rather than the “second sale” price that incorporates the markup from the middle man.

For example, a factory selling goods valued at $8 million to a middleman, who then sells the goods to the importer for $10 million, and those goods have a duty rate of 15 percent, the importer would pay $1.5 million without first sale, explained Nicole Bivens Collinson, president, international trade and government relations, at Sandler, Travis & Rosenberg, PA (STR). But under first sale, this would drop down to $1.2 million because the duty liability would be based on the initial $8 million.

The gap between the factory price and the importer price—and on the duty rates assessed—will determine how much can be saved, said Collinson, who noted that STR has regularly had companies save 12 percent to 20 percent of owed duties.

Every first sale program is tailored to meet the needs of the importer, Collinson said. “Virtually all import transactions are either already capable or can be structured to support first sale appraisement.”

Michael Gilson, CEO of Cormac Advisory Services, who has been familiar with the practice since his days at May Company, said the trade war has companies looking for ways to reduce costs, which has put first sale top of mind.

“Companies are looking at it to mitigate their exposure to the increase in the additional China tariffs. I would always say you should be doing it anyway. You should be doing it today,” Gilson said.

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But no matter the reason for the renewed interest, Gilson said it’s worth investigating. He’s currently working with a footwear client, which has sales in the $150 to 250 million range, that has recently decided to implement first sale. While Gilson characterized the implementation costs for the company as “fairly substantial,” he anticipates it will save between $200,000 and $250,000 a year once it’s in place.

Attractive as the savings may be, he said, the headache of going style by style through your assortment doesn’t make sense for commodities that already have lower duties.

Correctly valuing goods when they leave the factory, Gilson said, “means stripping out inland freight, stripping out the margin, stripping out all kinds of stuff that’s not dutiable.…That’s what creates the big angst for the importers and vendors because you literally have to go in and audit the factory’s books, and many vendors don’t like that idea.”

Further, there are some requirements surrounding the practice, including fair pricing between the middleman and factory if the parties are related; a transaction structure of three legal entities and two sales, with documentation indicating this; and documentation demonstrating that the goods are destined for the United States.

Harold M. Grunfeld, a partner at Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, described it as a process that requires some care. “You have the meet a host of customs criteria to qualify, and oftentimes you’re dealing with factories that aren’t necessarily geared toward providing the data that’s necessary.”

And while larger companies may have more leverage with the factories to retrieve this information, “the notion that it costs factories more is somewhat overblown by the factories that generally don’t like to do this,” he said. “At the end of the day, once the system is put into place, the additional amounts of clerical work on the part of the factories is really minimal. I think they do exaggerate how complicated it is.”

Perhaps the biggest benefit of completing that initial lift is that first sale will continue to serve as an advantage despite the current macro-environment factors.

“It’s been strong advice for the last 20 years,” Grunfeld said. “It’s not only a benefit in these times when tariffs are being implemented, but also it’s a gift that keeps giving because it continues for years forward.”