A Change Of Custom For Customs: The Proposed Change To The First Sale Rule
U.S. Customs and Border Protection ("Customs") is proposing a change to the First Sale Rule that, if made, will force U.S. companies to pay millions of dollars in additional duties on the products they manufacture in foreign countries and import to the U.S.
For the past 20 years, duties have been calculated based on the First Sale Rule, which provides that the value of an item may be set at its first price in the supply chain. Usually, this is the sale from the factory to the wholesaler. As a result, the mark-ups that occur as an item advances through the supply chain are not included in the calculation, and duties are kept relatively low. An importer is allowed to use the value under the First Sale Rule if the sale was negotiated at arm's length and involved goods clearly destined for export to the United States. Synergy Sport International, Ltd. v United States, 17 C.I.T. 18 (1993).
Customs cites many difficulties with the application of the First Sale Rule as the reasons for the proposed change. These difficulties include the need for extensive fact-finding to determine whether the goods are "clearly destined" for export to the U.S., lack of information to determine whether the sale was a bona fide arm's length transaction, and lack of access to books and records for purposes of post-entry audits, verifications and declarations.
The proposed change to the Rule would result from a new interpretation of the phrase "sold for exportation to the United States." Customs is proposing that the value of the duties should be calculated based on the price of an item in the last sale prior to the introduction of the goods into the U.S. Generally, this is the actual wholesale value. Therefore, if the proposed change is accepted, duties on these items will increase, cutting into company profits.
Additionally, the change will likely prompt many industries to redesign their models of international trade so that they introduce their goods into the U.S. at an earlier point in the supply chain. That way, the determination of the duties they must pay will be based on a lower price than under the current model.
Many apparel and textile importers who will be seriously impacted by a change to the First Sale Rule, have been longtime partners with Customs on many voluntary security initiatives. Some feel betrayed by this proposal, which has the potential to jeopardize their profitability.
Before Customs decides whether to actually implement the change, it set a public comments period on the proposal ending April 23, 2008. Several apparel brands and retailers are urging a withdrawal of the proposal. After the comment period, Customs will review the comments and follow up with a notice in the Federal Register of its decision.
