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U.S. Customs Could Hinder Importers’ Use of First Sale Rule

U.S. Customs and Border Protection (CBP) has proposed changes to its First Sale Rule that could make it more difficult for importers to avoid higher duties under the cost-saving program.

According to international trade and customs law firm Sandler Travis & Rosenberg (STR), the changes to the existing Informed Compliance Publication CBP announced Wednesday could present obstacles in substantiating first sale claims as Customs may impose additional requirements and request further documents from importers to prove eligibility for first sale benefits.

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.

One of the more “onerous” proposed provisions, according to STR, is that in conducting a first sale review, CBP could likely request access to exhaustive financials including charts of account, general ledgers and tax returns for all parties in a first sale transaction: the manufacturer, the middleman and the parent companies.

Tom Travis, managing partner of STR said, simply put, the proposed changes would mean, “An unjustified tax increase in the form of higher customs duties to the detriment of US importers and consumers of apparel, footwear and other goods.”

Duty savings under first sale can be substantial. For example, if the entered value of a transaction under first sale was $8 million, with a 15% duty rate the importer would pay $1.2 million in duties. If the entered value was based on a second sale, between the vendor and the importer, and totaled $10 million, a 15% duty rate would yield $1.5 million in duties paid. The annual duty savings on that transaction alone would therefore be $300,000.

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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 CBP proposal did not outline an appropriate use of the requirement checklist for auditors and officials, raising concerns that the list will be deemed mandatory and that CBP officials will require all of the documents to determine first sale eligibility regardless of whether they validate the transaction under scrutiny.

“These draft guidelines by their very nature encourage overactive enforcement in a program that has not seen misuse. It is like punishing ALL importers for the alleged sins of a few,” Travis said.

STR, which established the First Sale Rule in litigation more than 25 years ago, noted that if CBP issues the exhaustive checklist, it could have a chilling effect on apparel and footwear manufacturers who incorporate the rule into their business models, the majority of whom are conducting business legitimately and legally.

“When the Government calls a special meeting just to announce there is NO CHANGE in its First Sale policy, importers justifiably become wary,” Travis said. “When after that meeting, CBP releases draft guidelines that effectively change the rules for all first sale importers this becomes A POLICY CHANGE. When this policy change is viewed in the context of CBP’s failed 2008 attempt to eliminate first sale, such action is not only a policy change, but another threat to a court sanctioned and congressionally approved doctrine,” he added.

Travis said the current and legitimate use of first sale must be preserved, and STR will be submitting comments to Customs challenging any attempts to limit the rule’s use.

View the draft revised Informed Compliance Publication here.