Data presented by the U.S. International Trade Commission (ITC) shows that many U.S. importers are not taking advantage of duty savings opportunities offered by the “first sale rule.” As a result, they are potentially paying substantially more in duties than they should.
Under the “first sale rule” U.S. importers may lower duties by using the first sales price for goods, which are sold multiple times before importation, to determine duty liability. For example, an item may be produced in China, sold to a middleman in Hong Kong, and in turn sold to a buyer/importer in Los Angeles. The first sale rule allows the U.S. importer to declare the product’s value, for import duty purposes, as the price of the original China-Hong Kong transaction. Because the value attributable to earlier sales may be lower than that assigned to later sales, use of the first sale rule can lower the duties paid by importers. It is not uncommon for the first sale rule to reduce import duty payments by 50 percent.
The ITC found that:
- Of the $1.6 trillion in total U.S. imports, only 2% were imported using the “first sale rule,” suggesting that the overwhelming majority of imported goods are potentially paying much more in customs duties than they should.
- Most importers in each industry do not even use the first sale rule. The textile, apparel, and footwear industry is one that stands to save the most by employing the “first sale rule” as its goods are subject some of the highest duty rates. However, only 5% of its goods are imported using the “first sale rule.” Another industry with high duty rates is food and agriculture; however, only 5% of its goods employ the “first sale rule.”
What you need to know about the law:
In 2008, U.S. Customs and Border Protection (CBP) attempted to eliminate the judicially mandated first sale rule, but CBP’s efforts met significant industry and Congressional opposition. As a result of this opposition, the Food Conservation and Energy Act of 2008 (the Act) prevented CBP from taking further action to revoke the first sale rule until at least January 1, 2011, and required importers to provide import data on the use of the first sale rule to enable the ITC to complete its report.
The ITC issued its report on December 29, 2009, examining U.S. imports between September 1, 2008, to August 31, 2009. The data presented suggests that many importers may not be taking advantage of the potential duty savings opportunities offered by the first sale rule.
Despite the small percentage of importers using the first sale rule, eliminating this rule would adversely impact importers who currently use the rule, and deprive other importers of the duty saving benefits that this rule offers. Certain importers may not use the first sale rule because it is difficult to meet the legal requirements to comply.
The First Sale strategy can be implemented for most companies that purchase merchandise from an overseas vendor that, in turn, obtains the merchandise from either a related or unrelated third party manufacturer. The focus of the technique is on helping importers realize substantial savings by enabling them to pay duty on the “ex works” cost of the merchandise when it leaves the factory, rather than the higher “second price” charged by the vendor that sells the merchandise to the importer.