17 Jan 2019
First Sale Rule Enforcement Increasing in Section 301 Environment
The use of the first sale rule has increased dramatically over the past several months as companies seek to lessen the impact of the additional Section 301 tariffs on imports from mainland China. At the same time, U.S. Customs and Border Protection is scrutinising imports that use this valuation methodology more closely as part of a broader increase in enforcement efforts.
Under the first sale rule, the entered value of a qualifying transaction may be based on the purchase price between the middleman/vendor and the manufacturer rather than the importer and the middleman/vendor. This rule was established in litigation by Sandler, Travis & Rosenberg over 30 years ago, and its legality and importance to the U.S. economy and trade community was reaffirmed by legislation first proposed by ST&R and enacted in 2008. At a time when volatility in trade policy has left some traditional methods of lowering costs unavailable and is threatening to eliminate others, importers are continuing to use the first sale rule to save millions of dollars in import duties each year.
U.S. importers have scrambled to mitigate the Section 301 duties of up to 25 percent on goods from mainland China using a variety of methods, including first sale valuation. The speed at which these additional duties were imposed has forced many companies to quickly implement a first sale programme, often without sufficient time to perform an adequate review of the underlying transactions. Knowing this, CBP (which has always had an uneasy relationship with the first sale rule and has attempted several times to eliminate it or make it more difficult to use) is targeting the use of first sale for goods subject to Section 301 tariffs to verify that companies using this methodology are doing so properly.
“For example,” said ST&R Member Mark Tallo, “CBP is now targeting the use of first sale by industries that have previously been subject to very low or no duty and focusing on the proper transfer of title and risk of loss to ensure middleman companies are bona fide buyers and sellers of imported goods. CBP is also continuing to scrutinise related party pricing to confirm that any first sale price between related parties is not influenced by that relationship and is otherwise conducted at arm’s length.” Tallo said other issues frequently reviewed include assist valuation (i.e., validating that all declared first sale prices are “fully costed” and reflect the true value of the imported goods) and supplemental payments (i.e., ensuring that no such payments to the foreign seller are missing from the first sale price).
“Despite this trend, companies can still have successful first sale programmes,” said ST&R Member Mark J. Segrist. “The key is to take proactive steps to ensure that multi-tiered transactions meet first sale requirements and that there are internal controls and procedures in place to sufficiently document compliance if and when CBP comes knocking.” Because information is often retained by different partners in the supply chain, Segrist said, “it is particularly important for importers to communicate with them to define their responsibilities for keeping and producing records, as the failure to meet first sale requirements may be construed as a lack of reasonable care and lead to penalties.”