The holidays are over and we hope everyone is well rested and ready to feast upon the customs and trade challenges of 2010. If you are looking for something to sink your teeth into, perhaps you will want to choose the First Sale Rule file that has been sitting on a shelf for the past year.

The U.S. International Trade Commission (USITC) released its report to the House Ways and Means and the Senate Finance Committees on December 23, 2009, concerning Use of the “First Sale Rule” for Customs Valuation of U.S. Imports. The report concluded the USITC’s review of the First Sale Rule as required by the Food, Conservation, and Energy Act of 2008.


In January 2008, U.S. Customs and Border Protection (CBP) published a Notice of Proposed Interpretation in the Federal Register to require that the price paid by the buyer in the U.S. to the foreign distributor shall be the basis for valuation in a series-of-sales importation scenario. This interpretation would have been a departure from current application of the valuation statute, allowing importers to use the price paid by an intermediary to a foreign manufacturer (the first or earlier sale) as the basis for determining the transaction value of merchandise involved in a series of sales, provided certain requirements are met.

After considerable opposition and pressure from the trade, the matter went to Congress, where legislators, via the Food, Conservation, and Energy Act of 2008 (the Act), directed the USITC to conduct a study using data collected by CBP from importers for a 12-month period (USITC Investigation No. 332-505), from September 2008 to August 2009. Congress also included a provision in the Act stating that it is the “sense of Congress”1 that CBP should not implement a change to the agency’s interpretation of the term “sold for exportation to the U.S.” for purposes of applying transaction value of imported merchandise in a series of sales before January 1, 2011.

On June 24, 2008, CBP announced in written testimony before the Senate Finance Committee that the agency had shelved its proposal to eliminate the use of its first sale principle for valuing transactions.

The USITC Report Findings

The USITC report provided to Congress contains information relating to the use of the First Sale method for appraising import transactions. Specifically, the report includes detailed tabulations of the number of importers using the First Sale Rule and the value of imported merchandise covered, in the aggregate, by tariff classification and on a sectoral basis, as well as descriptions and analysis of the frequency of such use.2

The following noteworthy highlights from the report are based on the data collected over the designated 12-month period:

  • A total of 23,520 unique importing entities reported using the First Sale Rule. These account for 8.5 percent of all importing entities.
  • With respect to frequency of use, of the $1.635 trillion in total U.S. imports over the period, only $38.5 billion (2.4 percent) was imported applying the First Sale Rule.
  • With respect to sectoral use of the First Sale Rule, only the textiles, apparel and footwear sector had both above-average First Sale use and an aboveaverage tariff rate. Generally, the number of importers that applied the First Sale Rule was widely distributed across sectors. Not surprisingly, however, one prominent characteristic of First Sale use was the increased application in those sectors with the highest average tariff.
  • First Sale was not always associated with high tariffs. Some importers reported applying First Sale when no duties would ordinarily be paid.3 There were also numerous cases of First Sale use for products that are unconditionally duty free from all countries with normal trade relations status. It was unclear how or why First Sale was being used in these instances, although there is the potential for import fee savings.
  • The USITC estimated that $1.411 trillion of U.S. imports used the transaction value method of appraisement for imports during this time period. CBP estimated that this method is used for approximately 86.4 percent of total U.S. imports. First Sale use is only authorized when the transaction value method of appraisement is appropriate at importation.
  • If the First Sale Rule was never used, the total customs value of U.S. imports could potentially increase. Because necessary data was unavailable (e.g., values importers would have reported had they used prices from the final, pre-import sales transactions), the USITC report could not calculate potential tariff revenue loss or customs value decrease in U.S. imports associated with First Sale use.

In addition to the above highlights, some other points of interest to note when attempting to draw conclusions from the data include the following:

  • The values and percentages in the reports are not necessarily definitive indicators of the extent to which importers applied the First Sale Rule to reduce customs value and duty liability.
    • Importers may have mistakenly indicated First Sale was used where there was only one sale.
    • Because the First Sale indicator required at entry was a new data element in the import declaration, there may have been a lag between when CBP added the exporting requirement to the entry declaration and when importers became fully aware of compliance – leading to underreporting.
    • Because data was collected at the time of entry, it may not include potential information subsequently submitted during value reconciliation.
  • Analysis of First Sale use across tariff classifications and particular sectors suggests that tariff rates can explain a portion of First Sale use (e.g., footwear and apparel where duty rates into the U.S. trend higher). There was, however, substantial First Sale use for many products not generally subject to duty. First Sale data collected did not address all potential characteristics used to determine use.
  • The discrepancy in percentages of use between the number of importers using the rule (8.5 percent) and the aggregate value of imports (2.4 percent) may indicate that most importers only applied the First Sale Rule, where applicable, to a portion of their imports. It could also indicate that importers using the rule had smaller import transactions on average. Further analysis of this discrepancy would require more specific data.

Global Considerations

As importers assess the report findings and consider strategies going forward, it will be important to keep in mind opinions with respect to this issue on the global stage. Actions by other customs administrations could have some bearing on how this plays out in the U.S., not to mention actions by the World Customs Organization (WCO) or World Trade Organization.

When CBP issued the initial Notice of Proposed Interpretation, it stated the Notice reflected the conclusions of the WCO’s Technical Committee on Customs Valuation as set forth in Commentary 22.1 – Meaning of the Expression “Sold for Export to the Country of Importation” in a Series of Sales. WCO Commentary 22.1 expressed a preference for the use of the “last sale” when there are a series of transactions that cause the importation of merchandise. A WCO Technical Committee Commentary is only advisory and would not by itself change current practice in jurisdictions with clear authority supporting First Sale customs valuation, such as the U.S. or EU.

With this in mind, it is also worth paying attention to actions from the EU with respect to this matter. Unlike in the U.S., the First Sale rule is implemented in EU customs legislation, Article 147 (1) of the Community Customs Code. The First Sale concept has been clearly recognized in EU customs legislation and explanatory guidelines from the European Commission. To remove the First Sale valuation method in the EU, the EU regulations would have to be modified. The European Commission recently adopted the Modernized Customs Code (MCC) that entered into force on June 24, 2008. It is anticipated that the Commission and the member states will develop a new Implementing Regulation to the MCC that will contain detailed rules regarding customs valuation. Development of this new Implementing Regulation gives the Commission and the member states the opportunity to rethink, and potentially eliminate, the concept of First Sale valuation. It is anticipated that a draft Implementation Regulation could be issued in early in 2010.

The Implementing Regulation must enter into force between June 24, 2009, and June 24, 2013, according to the MCC’s five-year time frame. In the meantime, the current code and its implementing rules have not been repealed and continue to apply.

Next Steps

In addition to the USITC report submitted to Congress, CBP will be conducting its own economic analysis regarding application of the First Sale Rule. The status of this analysis is unknown at this time. It is also unknown when Congress will take up this matter given other priorities currently on its agenda.

It should be noted that the Act also stated that it is the sense of Congress that beginning on January 1, 2011, CBP may propose to change or change its interpretation of the term “sold for exportation to the United States,” only if the agency first consults with appropriate congressional committees, the Commercial Operations Advisory Committee (COAC), and receives explicit approval of the Secretary of the Treasury prior to publishing a change. Final action on this issue likely will not occur until then.

Although the regulatory agenda has indicated to date that the First Sale Rule matter was a “long-term action,” it is possible that we will begin to see some activity now that the USITC report has been issued. For those companies using the First Sale Rule (or considering its use in the future), it would be wise to monitor activity by Congress, CBP and the EU over the coming months to discern what the future of First Sale may hold.