On January 24, 2007, the Bureau of Customs and Border Protection (CBP) published a notice in the Federal Register proposing to overturn a 15 year “first sale” valuation policy that allows imports of product subject to multi-tiered sales arrangements to be valued for duty purposes based on the “first sale” transaction between the foreign producer and a middleman. The new proposal would require valuation in all cases to be based upon the price paid by the buyer in the “last sale” prior to importation. Because this price is generally higher than the “first sale” price, the proposed change in policy is expected to result in increased duty bills for many importers.

Summary of Proposal

At the core of today’s proposal is a new interpretation of the phrase “sold for exportation to the United States,” to be used in applying the “transaction value” method of valuing imported merchandise in the series of sales context.1 “Transaction value” is defined under U.S. law as “the price actually paid or payable for merchandise when sold for exportation to the United States.”2 Under CBP’s current interpretation, derived from a landmark 1992 Federal Court of Appeals decision (Nissho Iwai American Corp. v. United States), in a situation involving multiple parties and multiple sales, transaction value may be based on the price paid by the buyer in the first sale of the merchandise, even if that sale was between a foreign manufacturer and a foreign middleman, so long as that sale was at arm’s length and the merchandise was clearly destined for the United States. CBP’s proposed new interpretation, by contrast, would base transaction value on “the price paid in the last sale occurring prior to the introduction of the goods into the United States,” normally the price paid by the U.S. buyer, rather than the price paid in any earlier sale of the merchandise.

CBP bases its new definition on a recent interpretation of the WTO Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (Valuation Agreement). Under the Valuation Agreement, the transaction value is the primary basis for customs valuation and is defined as “the price actually paid or payable for the goods when sold for export to the country of importation.” In April 2007, the Technical Committee on Customs Valuation, established under the Valuation Agreement, concluded that the proper definition of “price actually paid or payable for the imported goods when sold for export to the country of importation” is “the price paid in the last sale occurring prior to the introduction of the goods into the country of importation, instead of the first (or earlier) sale.” The CBP notice states that this interpretation is consistent with the interpretations applied by most WTO members.

In addition to bringing its definitions in line with the views of the Technical Committee, CBP argues that the new interpretation reduces the extensive fact-finding required under the “first sale” approach to determine whether the goods were destined for the United States and whether the first sale was at arm’s length. These determinations often involve examination of foreign records that are not easily accessible either to CBP or to the importer. The proposed interpretation “establish[es] a transparent standard for determining transaction value that is easily applied and based on the price paid in the United States.”

What This Means For Importers and U.S. Purchasers

Importers into the United States that have been relying on, or considering, the “First Sale” strategy to minimize the dutiable value of its imported merchandise should consider commenting on this proposal. Besides the obvious negative affect of possibly having to redetermine the dutiable value of the goods based on the (usually higher) price of the goods in last sale prior to importation, this proposal can also result in the inclusion of certain payments made to your middleman or distributor in your customs value determination that previously were not required to be included, Thus, it is likely that in many, if not all, cases application of this proposal to transactions currently enjoying “first sale” benefits will result in increased duties.

U.S. purchasers can also expect to pay more for the products they buy, as importers pass along higher duty costs in the market place. Thus, companies that do not import themselves, but purchase goods that have been imported (or even goods that compete with imports) could face higher prices through higher duties working their way into the market.

Although it is expected that any change in current practice will be applied prospectively, CBP does have the authority to apply such changes “prospectively” to entries not yet liquidated. Hence, it could affect transactions entered months ago – or even years ago – if the liquidation of such entries has been extended or suspended beyond the 1-year period for normal liquidations.

Opportunity for Comments

Comments are being accepted by CBP through March 24, 2008. Please feel free to contact us if you have any questions concerning the above information, or if you wish to discuss preparing comments regarding this proposed change in interpretation or its application and effective date.