In today's competitive global market of high duty rates, companies are constantly seeking innovative ways to reduce duty paid by finding methods to declare a lower value. In theory, a lower value equals a lower amount on which the duty rate applies, which directly translates to cost savings. This intense pressure, however, has unfortunately led to a rise in fraud and false narratives being shared regarding customs valuation. The valuation method most discussed, and often misrepresented, is the "First Sale" valuation method.
Let's first clarify the simplest and most common approach to customs valuation: Transaction Value: Simple and Audit Proof. The primary, and most straightforward, method of declared value is simply the price paid – or payable – for the imported goods. If you purchased the goods directly from an unrelated supplier (i.e., not an inter-company purchase where parties have a shared interest), the price you paid is precisely what you declare. It really is as simple as it gets, offering a clear and easily auditable trail for CBP.
If the transaction value is so simple, why look for an alternative? The increased rate of duty in the United States, particularly due to various trade measures and tariffs, has been incredibly disruptive. Costs in many cases have doubled or even tripled for importers. With a well-established harmonized code/tariff classification and country of origin already locked in, finding a legitimate way to declare a lower value becomes a critical financial strategy worth exploring. And so, many companies have indeed begun investigating. The potential solution being widely discussed and considered is a concept referred to as "First Sale."
What is First Sale?
A First Sale valuation allows importers to declare the price paid in the first bona fide sale for export to the United States. This can be declared in lieu of a higher price paid to a middleman or later in the supply chain. If applied correctly, it can indeed lead to significant savings for importers, making it an incredibly attractive option for reducing landed costs.
Understanding the Complexities of First Sale Value. While the potential savings are appealing, First Sale is not just a one-step implementation. It's a nuanced and often complex process with strict requirements from U.S. Customs and Border Protection (CBP). Even with a true middleman transaction, the documentation requirements are burdensome and complex, demanding meticulous attention to detail.
Learn more: Methods of Valuation
The "First Sale Rule" is a complex area of customs valuation that U.S. Customs and Border Protection (CBP) actively scrutinizes, audits, and often denies on a case-by-case basis.
If a company incorrectly applies the First Sale Rule and CBP identifies the error, the consequences can be severe:
- Retroactive Duty Collection: CBP can assess additional duties, plus interest, on "undervalued" entries for up to five years prior.
- Significant Penalties that ranges from two times the unpaid duties to four times for gross negligence.
- The retroactive liability can lead to substantial, unforeseen financial burdens and significant business disruption.
Judicial Affirmation and Nuance of the First Sale Rule
Despite the risks, the First Sale Rule has been consistently upheld by trade courts since 1967 (beginning with United States v. Getz Bros. & Co.) and most recently reaffirmed in 2022 by the U.S. Court of Appeals for the Federal Circuit in Meyer Corp. v. United States. The courts view it not as a separate rule, but as an integral part of customs valuation statutes.
However, judicial decisions emphasize that the application of the First Sale Rule is highly fact-specific and not a blanket solution for all three-tiered distribution systems (manufacturer, middleman, purchaser). As stated in Nissho Iwai Am. Corp. v. United States, a mechanical application could lead to unfair outcomes if the manufacturer's price is artificially low. The courts have clarified that the rule merely restates the statutory requirements for transaction value, including the arm's-length requirement.
Recommendation for Importers
Given these complexities and the potential for significant penalties, importers should exercise extreme caution when considering the use of first sale appraisement. It is highly advisable to obtain a fact-specific binding ruling from CBP before implementing it. While the process for obtaining such rulings could be improved with clearer timelines and sufficient CBP resources, securing one is crucial for businesses to gain certainty and avoid future financial and operational disruptions.
Here are some critical considerations regarding compliance with this method of declaring a value:
Can you clearly demonstrate a legitimate multi-tier transaction where each party earns a reasonable profit, is an unrelated party, and that there is independent bargaining? This is the core of a compliant First Sale program. CBP wants to see a genuine commercial structure, not just a fabricated set of transactions.
A typical first sale-qualifying relationship/transaction looks like: Manufacturer → Middleman → U.S. Importer. This structure allows for the initial sale from the manufacturer to the middleman to be considered the "first sale for export to the U.S.," provided all other stringent conditions are met. This means the U.S. importer can legitimately declare the lower price paid by the middleman as the dutiable value, rather than the higher price they ultimately paid to the middleman.
Legitimate and well-documented processes are necessary. CBP is increasingly scrutinizing First Sale declarations to ensure they are not being used to artificially lower dutiable values through non-compliant means. Misleading advice often surrounds situations where the "middleman" is not truly independent, or where the "first sale" is not genuinely for export to the United States. CBP is looking for genuine commercial realities, not just paper transactions designed to bypass duties. They will examine the relationships, the profit margins at each tier, and the arm's-length nature of the transactions.
Understanding and implementing a compliant First Sale program requires expertise and meticulous attention to detail. As someone who helps customs brokers, 3PLs, and importers understand complex customs requirements, I can tell you that making it easy to implement scalable compliance solutions is paramount. Don't risk significant penalties, back duties, and reputational damage by relying on oversimplified or inaccurate advice. Ensure your First Sale valuation stands up to CBP scrutiny, safeguarding your supply chain and bottom line.
