Revised Guidance Shares an Extensive Document List that May be Required to Verify Value

With importers increasingly relying on the use of the multi-tier "first sale" to a middleman for value declarations, U.S. Customs and Border Protection (CBP) is reminding the trade community that audits are well within their jurisdiction and that penalties may ensue for anyone misusing or abusing the rule. On July 9, 2014, CBP circulated a draft amended Informed Compliance Publication (ICP) entitled Bona Fide Sales and Sales for Export to the United States, and requested comments from importers on the updates.

The most important update is the inclusion of Appendix I, which boasts an extensive list of documentation that CBP may request in order to substantiate the importer's declaration of the first sale value. The list includes, but is not limited to:

  • Purchase orders and sale confirmations;
  • Documentation concerning price negotiations;
  • Transportation and freight records;
  • Insurance for the imported merchandise from the factory door to the port of importation;
  • Inventory records, including the middleman's inventory and storage of the merchandise prior to importation;
  • Proof of payment to manufacturer, suppliers of assists, etc.;
  • Proof of payment of commissions to agents;
  • Importer's, middleman's, manufacturer's, and parent's accounting and financial records;
  • Cost sheets and product specification sheets;
  • Industry pricing and marketing studies;
  • Supplier manuals, vendor guidelines, and records relating to quality control; and
  • Correspondence records.

ICP Prompts Importers to Review First Sale Rules

All goods imported into the United States are appraised in accordance with CBP's regulations at 19 C.F.R. Part 152. The preferred method of appraisement is "transaction value," defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus certain statutory additions. In a 1992 seminal case, the Court of Appeals for the Federal Circuit ruled that when there is more than one sale in the supply chain, the first sale transaction value is acceptable under the valuation statute provided that sale is negotiated at arm's length, free from any non-market influences, and of goods clearly destined for the United States. See Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (Ct. Int'l Trade), reversed in part, 982 F.2d 505 (Fed. Cir. 1992). CBP has stated that in order to benefit from the first sale value in a multi-tier transaction, an importer must demonstrate that the first sale price meets this standard. In auditing such declarations, CBP considers "the circumstances of the transaction" including passage of title, assumption of the risk of loss, payment of consideration, ability of the buyer to instruct the seller, ability of the buyer to resell the merchandise at any price to any customer, and the ability of the buyer to order merchandise for the buyer's own account, when assessing whether the requisite factors are present.

Is Revised ICP Signaling a New First Sale Audit "Trend?"

Unlike a statutory amendment or agency rulemaking, ICPs cannot effect substantive regulatory change. At first blush, the reissued ICP appears to inform compliance by reiterating and clarifying existing regulatory requirements and enforcement practices. Through this latest revision, CBP formalizes and publicizes its audit requirements when determining whether an asserted "first sale" is viable for its value declaration.

CBP's focus and audit practices regarding first sale reviews have been evolving over the years. Previously, importers and counsel relied on CBP rulings, court holdings, and informal guidance to identify or confirm such "trends." For example, in prior CBP Ruling HQ H008101 (Oct. 9, 2012), CBP noted that "the courts, based on the cases previously discussed, no longer focus on the relationship between the related parties, but instead focus on the consideration exchanged between them." The revised ICP attempts to increase transparency by highlighting such trends and priorities for importers in advance of an audit or ruling request.

Stronger Statements of Existing Policy May Signal a New Enforcement Push

Of particular interest among the "new" statements in the revised ICP is Question 22, "What documentation and information is needed to support a determination that transaction value should be properly based on a sale to which the importer is not the buyer?" CBP warns that the agency "maintains the same rights and responsibilities in verifying the transaction value declared in the first sale transaction as it does in a sale in which the importer is the buyer." Examples of documentation that CBP may require in support of transaction value are expressly stated in Appendix I. Relying upon the documentary standards originating from Treasury Decision 96-87, this Appendix lists an expansive catalogue of documentation transacted between and among the foreign manufacturer, middleman, and importer as well as that extending to third parties, such as freight forwarders, ocean carriers, and insurers. CBP's response to Question 22 directs that "no one set of documentation will suffice for all cases," because the level of documentation required to support the first sale claim depends on whether: (1) the manufacturer and middleman are related; and (2) the manufacturer and middleman are related but another non-U.S. party is the parent. Essentially, CBP may, in fact, require extensive records from all parties to the transaction from the ultimate consignee, importer, middleman, agent, and even the factory in order to adequately verify the first sale claim made.

While stakeholders may interpret the ICP as adding new obstacles to establishing a first sale, the reissued ICP may be more accurately characterized as CBP's friendly warning shot to industry, possibly signaling a renewed enforcement interest in existing regulatory requirements.

CBP has requested industry comment on the revised ICP.