Use of the "First Sale Rule" for
Customs Valuation of U.S. Imports

April 5, 2022


The preferred method of appraising merchandise imported into the United States is “transaction value.” 19 USC § 1401a(b). Transaction value is defined as the “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain statutory additions (i.e., assists, etc.).

An item imported into the United States often may have been the subject of multiple sales, with each interim buyer adding an amount for profit and expenses to the price ultimately paid by the U.S. importer. For example, an item may be produced in China, sold to a middleman in Hong Kong, and, in turn, sold to a buyer/importer in Los Angeles. Current law allows U.S. importers, under certain conditions, to base the Customs valuation of a product entering the United States on the first, or earliest sale, when there is a series of transactions, rather than on the last one. This is known as the "first sale” rule, and it can be used to determine the transaction value of imported goods in certain circumstances. In our example, the "first sale rule" would allow the U.S. importer to declare the product's value for import duty purposes at the price of the original China-Hong Kong transaction rather than the price the U.S. importer paid to the Hong Kong middleman.

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) the Court of Appeals for the Federal Circuit (CAFC) reviewed the standard for determining transaction value when there is more than one sale of the article for exportation to the United States. In so doing, the court reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988) that the manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard, the court stated that in a multi-tiered distribution system, the manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and the manufacturer and the middleman deal with each other at arm's length, absent any non-market influences that affect the legitimacy of the price. Id. at 509. See also, Sport International, Ltd. v. United States, 17 C.I.T Slip op. 93-5 (Ct. Int'l. Trade January 12, 1993).

The CAFC’s decision in Nissho Iwai established a 3-part test for determining if the first sale rule applies:

  • The goods are clearly destined for export to the United States,
  • The manufacturer and the middleman deal each other at arm's length, and
  • There is the absence of any non-market influences that affect the legitimacy of the sales price.

The Nissho test presupposes that a bona fide sale exists and that the use of transaction value is not otherwise precluded pursuant to the valuation law (e.g., restrictions on the disposition or use of the merchandise; conditions or considerations for which a value cannot be determined; lack of sufficient information concerning an enumerated statutory addition to the price actually paid or payable, or unsupported related parties’ price).

When is a Sale Considered to have been Conducted at “Arm's Length?”
In general, Customs will consider a sale between unrelated parties to have been conducted at “arm's length.” However, if the parties are related, a sale will be considered “arm's length” only if an examination of the “circumstances of sale” of the imported merchandise indicates that the relationship between the buyer and seller did not influence the price actually paid or payable (the circumstances of sale test). Other factors may affect the price, such as non-market influences (governmental subsidies or control over the one or more of the parties).

When is a Sale Clearly Destined for Export to the U.S.?

Although such a determination can only be made on a case-by-case basis, Customs will consider a sale to be clearly destined for export to the U.S. based on evidence such as invoices, contracts and purchase orders; shipping contracts or other documentation; manufacture, design, and other unique specifications or characteristics of the merchandise (often manifest in samples) made in conformity with the U.S. buyer's standards; labels, logos, stock numbers, bar codes and other unique marks; and marking, visas, warranties or other types of certification or characteristics required for entry or operation in the U.S

Flash Title and Lack of a Bona Fide Sale

Transaction value presupposes that a bona fide sale occurred. Many multi-tiered transactions, however, involve flash title transfers, meaning that the middleman holds title to the goods for an instant or not at all. While CBP recognizes that bona fide sales may occur in instances of flash title, such transactions generally are viewed with greater scrutiny so as to determine whether the middleman truly is an independent buyer/seller of goods or is acting as an agent on the part of one of the other parties. See Headquarters Ruling Letter (HQ) H097616, dated November 21, 2011, and HQ W563605, dated November 19, 2009.

What Documentary Evidence is Needed to Establish that Transaction Value is Properly Based on a Sale Not Involving the Importer?

Before an importer declares a value to Customs based on a transaction to which it is not a party, an importer should be satisfied that such transaction meets the criteria discussed above and be prepared to submit supporting evidence described in General Notice (T.D. 96-87), - Determining Transaction Value in Multi-Tiered Transactions, Vol. 30/31, Customs Bulletin No. 52/1 (January 2, 1997). The documents may include, but are not limited to, purchase orders, invoices, proof of payments, contracts, and any additional documents that establish how the parties deal with one another. T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.

CBP, in its ICP on Determining the Acceptability of Transaction Value for Related Party Transactions, explains that an importer who declares a value to Customs without the necessary supporting documentation would not be exercising reasonable care and could be subject to penalty or other enforcement or compliance action. 

For additional information on this or other Customs matters, contact George R. Tuttle, III at or 415-986-8780 .

The information in this article is general in nature and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence and may not be considered as such.

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Information has been obtained from sources believed to be reliable.  However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information.



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