Key Takeaways
- Senators Bill Cassidy (R-LA) and Sheldon Whitehouse (D-RI) introduced the “Last Sale Valuation Act” to eliminate the legal duty minimization principle under the customs valuation statute called the “first sale for export” (“first sale”), which allows United States (U.S.) importers to calculate duties based upon the first bona fide sale for exportation to the U.S. instead of the last bona fide sale for exportation.
- The first sale for exportation principle has been an established legal process under the transaction value method for many decades, as early as the late 1980s.
- The bill would define the term “sold for exportation to the U.S.” as “the price actually paid or payable by the buyer in the United States to the seller located in another country for the merchandise” and, in the case of a series of sales, would limit the price actually paid or payable by the buyer in the last sale that introduces the merchandise into the United States. The statutory term “when sold for exportation to the United States” has heretofore been undefined in the customs valuation statute, and it is this statutory term that gave rise to the judicially created principle of “first sale”.
- If this bill is signed into law, importers would be precluded from using the first sale and would have to declare the value on which duties are ordinarily assessed based upon the last sale to the United States.
- Elimination of the “first sale” principle would result in U.S. importers, who otherwise would qualify for this duty minimization principle, to pay duties, fees, and taxes on the higher value that is associated with the last sale to the United States. Given the extraordinarily high duty burden that importers face today (e.g,. International Emergency Economic Powers Act (IEEPA) tariffs, Section 232, reciprocal tariffs), the elimination of the first sale would impose a costly increase on importers, downstream customers, and consumers in the United States.
Background
The “first sale” doctrine allows a U.S. importer using multi-tier transactions to use the price of the first sale for export to the United States as a basis for calculating customs duties, as long as the importer can establish that the sale on which duty is based was a sale for exportation to the United States.
The “first sale” principle as we know it today results from a decision by the Court of Appeals for the Federal Circuit in Nissho Iwai American Corp. v. United States.1 This case established that the statute (19. U.S.C. § 1401a) permits two bona fide sales for exportation. Sale values are often marked up as they progress towards exportation, so the ability to establish dutiable value based on an earlier price can substantially lower the value reported to U.S. Customs and Border Protection (CBP).
The “first sale” doctrine is not common in other countries, and Senators Cassidy and Whitehouse assert that closing the “‘first sale’ loophole” will provide parity to U.S. small businesses, which do not have the “advantage” of multinational corporations (multi-tiered transaction flows). The “Last Sale Valuation Act” is not the first attempt to eliminate the duty minimization principle.
In 2008, CBP proposed to eliminate “first sale for exportation” method of valuation for transactions that involved a series of sales. They sought to require that the price actually paid or payable for the imported goods when sold for exportation to the United States be the price paid in the last sale occurring prior to the introduction of the goods into the United States, rather than the first (or earlier) sale.
Following publication of this proposed rule change, industry raised its concerns with lawmakers on Capitol Hill, who ultimately shut down CBP’s rulemaking, commissioned an International Trade Commission study and imposed a “first sale” declaration requirement on entry.
How First Sale Works
Generally, in circumstances where there are multiple sales of imported merchandise and the importer hopes to base transaction value on the price between the middleman and the seller, the importer must establish this “first sale” is a (1) bona fide sale that (2) was negotiated at arm’s-length; and (3) involves goods clearly destined for the United States.2
To support a first sale transaction value, CBP requires a “complete paper trail of the imported merchandise showing the structure of the entire transaction.”3 Accordingly, the importer should maintain (or be able to produce on request) the purchase orders, invoices, and any other related transactional documents for each sale in the multi-tiered transaction.
If an importer meets the above listed requirements, provides CBP with sufficient documentation and declares use of first sale on entry, they may claim an earlier transaction as the price actually paid or payable for the merchandise when sold for exportation to the United States.
Implications of Eliminating First Sale
Eliminating an importer’s ability to base transaction value on the first bona fide sale will result in increased duties, taxes, and fees for the importers currently relying on this duty minimization principle. Under U.S. law, the primary method of valuation for merchandise is “transaction value”, which is the price actually paid or payable – whether direct or indirect – by the buyer to the seller when goods are sold for export. This value serves as the basis for all duties paid to CBP upon entry.
If the principle of “first sale” is eliminated, companies that currently use a “first sale” as the basis of transaction value and qualify for this duty minimization principle would be forced to pay duties, fees and taxes on the higher value that is associated with the last sale to the United States
If passed, the Last Sale Valuation Act would preclude importers from using the first sale as the basis of transaction value, and they would have to declare the value on which duties are ordinarily assessed based upon the last sale to the United States. This is most likely would result in a higher price as the basis of duties for products imported to the United States. Elimination of the “first sale” principle would likely result in a significant increase in duties owed by importers currently utilizing “first sale” upon entry of items into the United States.
Akin is forming a coalition to defend the use of first sale and to ensure as best as possible that this legislation never becomes law. Please contact your lawyer who represents you at Akin for more information.
1 Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992)
2 Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992); Synergy Sport International, Ltd., 17 C.I.T. 18 (1993).
3 Determining Transaction Value in Multi-Tiered Transactions, Treasury Decision (T.D.) 96-87 (Jan. 2, 1997).