Some readers may be aware that Customs, through a proposed rulemaking, attempted to abolish the first sale rule in 2008. The first sale rule is a method of determining transaction value, or the price paid or payable, for valuation and appraisement purposes. The rule provides that a U.S. importer may base the valuation of an imported product that was the subject of several transactions according to the products’ value in the first sale for export to the United States, rather than the last one.
An example of the first sale rule at work would be a transaction that involved a sale from a Chinese producer to a Hong Kong middleman to a U.S. importer. The first sale rould would allow the U.S. importer to declare the value of its goods as the goods’ transaction value in the first sale, that is, the sale from the Chinese manufacturer to the Hong Kong middleman, so long as certain conditions are met. One condition is that the first sale must be a bona fide sale, and not a sham transaction. It must be conducted at arm’s length. Another is that the goods must have been clearly destined for the U.S. at the time of the first sale.
In 2008, CBP attempted to abolish the first sale rule. The agency ran into stiff opposition from members of Congress and U.S. industry. Congress stepped in and passed legislation that prevented CBP from taking steps to abolish the first sale rule until January 1, 2011 and requiring importers to provide certain data regarding the use of the first sale rule so that the International Trade Commission could study its use. The ITC published the results of its study at the end of 2009, and we will touch on several of its findings here. The ITC studied data collected from September 1, 2008 through August 31, 2009. It found that:
* 23,520 importing entities, or 8.5% of all importing entities, utilized the first sale rule.
* Of $1.63 trillion in imports during the study period, $38.5 billion was imported using the first sale rule.
* The first sale rule was used most often by importers of machinery and computers classified under Chapter 84. 16% of first-sale imports consisted of these goods.
* Importers of electrical machinery under Chapter 85 comprised 14% of first-sale imports.
* Importers of textiles and apparel under Chapters 62 and 61 comprised 10% of first-sale imports.
Overall, the study showed that few importers employ the first sale rule to reduce their applicable duty rates. Whether this adds to CBP’s determination to do away with the rule remains to be seen.
While the rule remains, importers may want to evaluate whether using the rule would lead to duty savings. Take the China-Hong Kong-U.S transaction discussed above. Were the good to be dutiable at 15%, and the last sale be valued at $100, the importer would owe CBP $15. If the first sale to the middleman, however, were $80, and this were declared as the transaction value at entry under the first sale rule, duty would be $12, for a $3 savings. Multiply this by hundreds or thousands of transactions and one can see the beauty of the first sale rule. It pays to consider its use.