Future of First Sale Rule in Question
On March 1, 2021, the Court of International Trade (CIT) denied Meyer Corporation’s claim for duty-free treatment under its attempted use of the first sale valuation and the Generalized System of Preferences (GSP), in Meyer Corporation, U.S. v. United States, Court No. 13-00154 (Meyer). This case sent a ripple through the trade-community as many speculate whether the decision signals an end of first sale for non-market countries.
The CIC rejected a kitchen-appliance importer’s (Meyer Corp.) first sale claim:
This test case considers valuation under 19 U.S.C. §1401a of 125 different sets of cookware (pots and pans) imported from the People’s Republic of China and the Kingdom of Thailand, a beneficiary developing country (“BDC”). Its focus is (1) the “first sale” rule articulated by Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed.Cir. 1992); (2) preferential treatment of entries from Thailand under the Generalized System of Preferences (“GSP”), 19 U.S.C. §2461 et seq.; and (3) whether circular metal “blanks” imported into Thailand from the People’s Republic of China (“PRC”) underwent a “double substantial transformation” as required by Customs and Border Protection (“CBP”) interpretation of the GSP for purposes of both of those valuation issues.
Although stakeholders worry about the future of first sale rule following the Meyer Corp. decision, experts remain confident that it will persist. The one major point of change, however, may be in a heightened burden of proof for the valuation of goods from China:
“I don’t think courts will throw out first sale just because a non-market economy is involved — and I hope this case is appealed to clear this issue up. In the interim — the burden of proof is rising when CBP/courts see China involvement,”
What is First Sale?
First Sale is a commonly used practice to mitigate the impact of duties in multi-level transactions involving various countries. In short, rather than the importer paying duties on a sale from a middleman, the duties are paid on the first sale: the transaction between the manufacturer and the middleman.
Pursuant to the Customs Modernization Act, the importer of record (IOR) must use “reasonable care” when providing the value of the goods to Customs and Border Protection (CBP). All merchandise imported into the United States is subject to valuation or appraisement. The Trade Agreements Act of 1979, codified at 19 U.S.C. § 1401a, sets forth a hierarchy of methods for the appraisement of imported merchandise. Under the Trade Agreements Act of 1979, the transaction value of imported merchandise is the primary or preferred method for determining the value of imported merchandise. Generally, the transaction value is the price actually paid or payable for merchandise when sold for exportation to the United States, plus certain statutorily enumerated additions
Importers who wish to implement first sale programs are responsible for accurately reporting the value of transactions in order to establish the amount of duties owed. In the case at hand, in 120 pages, the CIC essentially critiqued the importer’s argument that the importer specific to the first sale issue, the court criticized the importer’s arguments that it met it properly assessed the value of its first sale claim.
CBP’s Informed Compliance publication entitled, “BONA FIDE SALES & SALES FOR EXPORTATION TO THE UNITED STATES” discusses the two elements required to qualify for the first sale program.
Typically, when considering the value of the merchandise that is being exported to the United States, the importer must establish 1) Bona Fide Sale and 2) a Sale for Exportation of merchandise to the United States that has occurred; if these two elements are present, the transaction value requirement is satisfied.
Further, case law provides that importers must meet certain factors to avail themselves of the benefit of First Sale Valuation. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court addressed the question of how to determine transaction value in a multi-tiered transaction. The Court held that the transaction value of the imported goods can be based on the first sale price between the manufacturer and the middleman (as opposed to the price the importer paid to the middleman). To determine whether the first sale value can represent the transaction value of the merchandise, the following must apply:
- The first sale must be a bona fide sale from the manufacturer/seller to the middleman;
- Merchandise must be clearly destined for the United States at the time of the first sale;
- The first sale price must be an arm’s length price; and
- Statutory additions to the price actually paid or payable must be included in the first sale price.
The court’s rejection of Meyer Corp.’s claim signaled potential changes in the assessment of future first sale valuations. A change in the court’s evaluation would affect much of the trade community, especially those importers attempting to mitigate the effects of Section 301 tariffs, among others.
Specifically, in relation to China, the court held that”the United States has yet to recognize that [China] has attained ‘market economy’ status” under its World Trade Organization agreement, and therefore China “presumptively remains a non-market economy.”
Effectively this decision could open the door to future rejections of first sale claims relating to goods from China, due to its non-market status. This direction would hamper importers, forcing many to pay duties on transactions that previously would have been accepted and mitigated under the first sale rule.
For more information on using middlemen in transactions and how to lower your customs value, review our previous blog on first sale and contact Diaz Trade Law today at firstname.lastname@example.org or 305-456-3830.