Customs wants to eliminate “first sale rule”By Peter A. Buxbaum, AJOTIn January, US Customs and Border Protection proposed a new regulation, which would prohibit the use of the “first sale rule” in determining the transaction value of imported merchandise. The proposed change could result in increased duties for US importers. The rule was established in a 1992 federal court case, which allowed the value of a transaction for customs purposes to be based on the purchase price between a vendor and the factory rather than the importer and the vendor. In other words, the middleman’s markup to the importer is not included in the dutiable entered value. Experts say use of the first sale rule lowers the levels of duty paid on imports and saves consumers money. Opponents of the rule change also assert that it would be an unlawful overturning of US legal precedent. But CBP counters that the change is necessary in order to harmonize US practice with international norms, an assertion that opponents dispute. Merchandise imported into the US is appraised, and the preferred method under the customs valuation statute is transaction value. Transaction value is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States.” First sale valuation effectively lowers the value of a product on which duties are assessed and reduces the amount of duty paid. Under the first sale rule, a US importer can achieve lower duty payments in a multi-tiered transaction as long as it meets certain requirements and can produce the original invoice covering the first sale. “By working back to the price between the actual manufacturer and the party to whom it sells, the amount of duties paid is substantially reduced,” said Cecilia Castellanos of Western Overseas Corporation, an international freight forwarder and customs broker based in Los Angeles. “The manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm’s length,” added Dan Curry, a New York-based customs broker. The first sale rule is often used as part of a tax strategy, by using a related foreign middleman, as the seller to the US importer. “The value for duty purposes is based working back, where possible, to the actual manufacturer’s price, while the US importer pays for the goods based on the price between itself and the related seller,” Castellanos explained. “There are many variations on this theme, but the bottom line is a significant duty savings.” In order to make it happen, a first sale transaction must be carefully developed, planned, and documented. “It is not always easy to satisfy local Customs officials regarding its application in a particular transaction,” said Castellanos. Opponents of the rule change have organized into a coalition led by the international trade law firm of Sandler, Travis & Rosenberg (ST&R). The coalition, which includes over 100 retailers, industry associations, and freight forwarders, sent a letter on February 11 to Secretary of Homeland Security Michael Chertoff protesting the proposed rule change. Opponents of the rule change site a number of reasons for their position. “Revoking the first sale rule would hit US businesses and consumers with a new tax on a broad range of products and increase their costs at a time when the domestic economy is already struggling,” said ST&R’s Larry Ordet. The proposed change would also involve an inappropriate reversal of legal precedent, Ordet argued. “US courts have repeatedly recognized the first sale rule as a viable appraisement tool,” he said. “CBP may not simply ignore unambiguous court decisions, which are interpretations of US laws and may only be repealed by legislation or further judicial review.” Limiting the applicability of court precedent, Ordet added, “would result in uncertainty and unpredictability for US businesses engaged in import activity.