U.S. Customs and Border Protection ("CBP") published a notice in the Federal Register on January 24, 2008 (73 Fed. Reg. 4254) proposing to eliminate the "first sale" rule. CBP is proposing a new interpretation of the phrase "sold for exportation to the United States," which is contained in the definition of "transaction value" in 19 U.S.C. §1401a. Specifically, CBP is proposing that, in the context of a series of sales, the price actually paid or payable for the imported goods when sold for exportation to the United States is the price paid in the last sale occurring prior to the introduction of the goods into the United States. CBP's proposed interpretation is based largely on the recent WCO Technical Committee on Customs Valuation findings in Commentary 22.1 entitled, "Meaning of the Expression 'Sold for Export to the Country of Importation' in a Series of Sales." The Commentary expresses a preference for the use of the "last sale" as the transaction value where there is a series of transactions causing the importation of merchandise. The Commentary notes that the transaction value buyer is normally located in the country of importation and that the price actually paid or payable would be based on the price paid by this buyer.
The proposed interpretation directly affects valuation methodology currently available under the first sale rule, where transaction value is based on the price paid by the buyer in the first sale (e.g., sale between the manufacturer and the intermediary) as long as the importer can establish that the transaction was an arm's length sale and the merchandise was clearly destined for exportation to the United States at the time of the first sale. The proposal would eliminate the first sale rule that has been available in the United States since the Federal Circuit decisions in E.C. McAfee Co. v. U.S., 842 F.2d 314 (Fed. Cir. 1988) and Nissho Iwai American Corp. v. U.S., 982 F.2d 505 (Fed. Cir. 1992).
In support of its proposed interpretation, CBP cites two court decisions that indicate a departure from the export value law that was applied in McAfee and Nissho Iwai. CBP also discusses in its notice the difficulties in administering the first sale principle in a series of sales. The difficulties include review of numerous documents (e.g., inventory records, paper trails, etc.) and fact-finding to determine if the first sale is a bona fide arm's length sale. CBP also discusses the problems associated with post-entry audit verification and the importer's difficulty in meeting its obligation to use reasonable care when the first sale rule is used.
Comments on CBP's proposal are currently due March 24, 2008. We understand, however, that a request for an extension of time to submit comments has been filed with CBP. Importers using the "first sale" basis of valuation should review the financial impact of the proposed CBP change and make their objections known to CBP. We understand that the EU, which is one of the few jurisdictions that also permits the transaction value in multi-tested sales to be based on the first sale value, is aware of the U.S. development, but has not yet suggested it will change its use of the "first sale" basis of valuation.
In our view, CBP's reasoning is incorrect both as a matter of law and practice. The intent of the Customs Valuation Statute is to do what the title implies, i.e. establish a value of imported goods for duty assessment and statistical purposes. In a multi-tiered transaction, it is often the case that the "factory price" (the "First-Sale") is the best indicia of that value and that subsequent sales, while normally increasing the "price" of the goods, have (or should have) no effect on the "value" of the imported goods. To the extent that the differential is attributable to factors that have dutiable consequences - perhaps the most obvious would be dutiable assists - the statute already provides a mechanism to add the value of assists and other such elements of value (royalties for example) to the dutiable value calculation.
Similarly, for multi-national corporations in particular, the corporate structure, typically driven by tax rather than customs considerations, often establishes multi-tiered sales. It is common for such companies to have the ownership of their global intangibles in corporate entities that do not fit neatly into the customs valuation structures and that problems may exist whether or not the "First Sale" strategy is used. That is why it has been the policy of CBP to require that importers (not CBP) take responsibility for their valuations and declarations. The requirement that importers exercise reasonable care, along with the penalty regime, places the onus on the importers, not CBP, to appraise their goods correctly. Thus most of the practical considerations cited by CBP exist with or without the First Sale strategy.
Simply put, in most cases we believe that the First Sale strategy makes sense. Not surprisingly, the Customs Valuation Statute, promulgated in 1980, may not be the ideal vehicle to deal with the commercial realities that exist today. There are clearly transactions that are more complex than others and each importer may have differentials between factory prices and the price in the "last sale" that have to be analyzed in order to determine the correct dutiable value. In our view, these are not reasons to abandon the First Sale strategy, but may require, instead, more sophistication on the part of the CBP officials charged with the interpretation and implementation of the statute.
There may also be other available strategies that yield the same result as "First Sale", e.g. under other bases of appraisement, the use of which may be encouraged by the CBP notice. This would only exacerbate the problem that CBP is trying to solve. Neither CBP nor importers should find an incentive in the abandonment of Transaction Value, but that is one possible result of this proposed change. Other strategies that may be even less transparent to CBP may also be encouraged by this proposed change as many importers seek to maintain their competitiveness in these challenging economic times.
For these reasons, and others, we believe that the proposal is incorrect and should be opposed, but also recommend that importers analyze their position vis-à-vis the First Sale strategy in a manner that takes into account their particular situations. If you would like to discuss how this proposal may affect your imports or filing comments on CBP's proposal, please contact one of the partners identified in this Alert.
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.
