US Customs Now Requires Importers to Declare When Using “First Sale” Valuation

On August 25, 2008, US Customs and Border Protection (“CBP”) published a notice that US importers will be required to declare when they are using the “First Sale” method for import valuation.  Importers must now instruct their customs brokers to include a code on the Entry Summary Form when declaring the entered value of merchandise using the price between foreign parties, without the mark-up(s) applied by intermediate supplier(s) outside the United States.  Any importer that uses First Sale valuation, but does not include this new code, or does so without sufficient supporting documentation, may be subject to unexpected duty increases, shipment delays, and even substantial penalties.

The First Sale rule for import valuation has been the subject of significant controversy in 2008.  For many years, CBP has accepted the First Sale rule to value imports and assess duties on merchandise purchased from a foreign distributor or other foreign middleman.  The First Sale rule allows importers to declare the price paid by a foreign middleman to the foreign manufacturer as the US import value of the goods, rather than declaring the price paid by the US importer to the middleman.  To use this rule, the importer must have the documents to show that the sale from the manufacturer to the middleman was made at arm's length with the merchandise clearly destined for the United States.  Over the past twenty years, this rule has been approved repeatedly by US courts and CPB.  Numerous importers rely on the rule to reduce entered value and, thus, reduce import duties calculated as a percentage of that value.

In January 2008, even though there had been no change in US law or the relevant court decisions, CBP published a notice declaring its intention to eliminate the First Sale rule.  CBP argued that it has had significant difficulties in interpreting and applying the rule and that eliminating it would make the US practice consistent with other countries.  This proposal would have required US importers to declare only the price paid by the importer to the last foreign seller before importation, and prohibited the use of any earlier price in the supply chain.  Thus, entered values on imports that had been using First Sale would have increased, as would the duties owing as a percentage of those values.

Many importers opposed CBP’s proposal to eliminate the rule, as did several members of Congress.  Accordingly, the recent Farm Bill (the Food, Conservation, and Energy Act of 2008, Public Law 110–234, 122 Stat. 1547), included a “sense of Congress” provision that CBP should not eliminate the First Sale rule before January 1, 2011.  Congress further stated that CPB may only eliminate the rule at that time if it consults in advance with Congress and industry representatives.  The law also requires CBP to collect a declaration from importers identifying when the First Sale rule is being used.  Finally, CBP is instructed to relay the collected data to the US International Trade Commission (“ITC”) so that the ITC can prepare a report to Congress.  CBP’s August 25 notice implements these requirements.

In light of CBP’s notice, importers must instruct their brokers to insert a letter “F” on the Entry Summary Form 7501 beside each individual entry line for which the First Sale rule is being used to calculate the value of that merchandise. 

CBP’s notice is an “interim rule” meaning that it is effective immediately.  CBP will accept comments filed by October 24, 2008 and review those comments to see if changes in the rule are warranted, before publishing the final rule.

CBP announced that it is delaying its full enforcement of the First Sale declaration requirement until September 20, 2008, in order to give importers time to adjust their systems.  However, CBP also stated that entries “will require amendment” if made between August 20 and September 19 without the First Sale declaration.  CBP expressed that it would provide further guidance shortly on how these amendments can be made.  Accordingly, importers have a strong interest in working with their suppliers and brokers immediately to implement the First Sale declaration and minimize the need for revised entries.

Failure to make the First Sale declaration, or to have supporting documentation for the First Sale value submitted, would carry the same potential for CBP enforcement  as any other import paperwork error, such as surprise duty increases, penalties and seizures.  However, since this is a new rule on an issue that has been the subject of significant controversy over the past several months, CBP is likely to pay additional attention to compliance with this rule and may look to make early examples of some importers.

CBP’s August 25, 2008 full notice is available here.

CBP’s detailed instructions on how brokers should insert the First Sale code in the electronic entry summary form are available here. 

CBP’s press release announcing a grace period for enforcement is here.

If you have any questions on US Customs or import procedures, please contact Greg McCue at 202.429.6421.