January 29, 2008
In a notice published January 24, 2008, Customs is proposing (Proposed Interpretation of the Expression ‘‘Sold for Exportation to the United States’’ for Purposes of Applying the Transaction Value Method of Valuation in a Series of Sales) (73 Federal Register page 4254, January 24, 2008) to eliminate the use of the First-Sale rule for purposes of determining transaction value for certain types of import transactions.
Transaction Value (which is defined as the “total price paid or payable for imported merchandise when sold for exportation to the United States”) is the preferred method of valuation of imported merchandise for Customs purposes. Transaction value will always be used unless it is determined that there is no sale, or there exists circumstances that preclude the application of transaction value (an example of this might be a related party transaction where the relationship affects the price).
For Transaction Value to apply, there must be a sale of the goods subject to the customs entry process, and that sale must have caused the exportation of the goods to the United States.In a traditional single tier import transaction, the purchaser of the goods is located in the U.S. and is also acting as the importer of record. The exporter is a foreign party and the seller of the goods. If the parties are unrelated and there are no other circumstances that affect the purchase, the Customs value of the goods will be the price paid by the purchaser to the foreign seller for the imported merchandise.
Sometimes, however, the foreign seller of the goods purchases the goods from another party and then resells those goods to the U.S. purchaser. This is often referred to as a multi-tiered transaction, with the reseller acting as a middleman between the actual manufacturer and the U.S. purchaser.
Based on a number of existing court decisions and resulting administrative practice, if, in a multi-tiered import transaction, the sale between the foreign manufacturer and the middleman “caused the imported goods to be exported to the United States,” then that sale can be used as the reported value for customs purposes, rather than the selling price between the foreign middleman and the U.S. purchaser/ importer.See Nissho Iwai American Corporation vs. U.S., 16 CIT 86,786 F. Supp. 1002 (1992); rev’d., 982 F.2d 505 (1992); and, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993). This is referred to as the “First-Sale” rule.
In Synergy Sport International, Ltd., the court addressed the dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman and an ultimate U.S. purchaser.The middleman in this case was the importer of record. The issue was which of the two sales, one being the sale between the foreign manufacturer and the middleman and the other being the sale by the middleman to the U.S. purchaser, should be the basis of transaction value for appraisement purposes. The Court determined that the price actually paid or payable by the middleman/importer to the foreign manufacturer was an acceptable transaction value. Under the “First-Sale” rule, the Court concluded that the importer could utilize the lower of the two values for Customs valuation purposes if the sale between the foreign manufacturer and the middleman was:
- Negotiated at arm's length, and
- Involve goods clearly destined for export to the United States.
CBP is proposing to eliminate the use of the “first-sale” ruling, citing numerous difficulties with its application, including:
- The need for extensive review of documents and fact-finding to determine whether fungible goods are clearly destined to the U.S. when they are sold to the intermediary;
- Lack of information as to whether a particular first sale transaction is a bona fide arm’s length transaction, especially when some or all of the parties involved are related;
- Post-entry audit verification issues due to the fact that CBP lacks direct access to the books and records relevant to the first transaction, including accounting records;
- Difficulty for an importer to meet its obligations under 19 U.S.C. 1484 to use reasonable care to properly declare the value of imported merchandise since the importer may not have access to all the transaction documents and the surrounding details, and, without knowledge of all the particulars surrounding that sale, can not attest to the truthfulness of the value declaration as required by 19 U.S.C. 1485(a).
In its notice, Customs proposes a new interpretation of the phrase ‘‘sold for exportation to the United States’’ for purposes of applying the transaction value method of valuation in a series of sales importation scenario. CBP proposes that the price actually paid or payable for the imported goods when sold for exportation to the United States should be the “price paid in the last sale occurring prior to the introduction of the goods into the United States”. Customs says that under this proposal, transaction value will normally be determined on the basis of the price paid by the buyer in the United States.
In support of this new interpretation, CBP points to a 2007 commentary by the World Customs Organization (WTO) Technical Committee on Customs Valuation as set forth in “Meaning of the Expression ‘Sold for Export to the Country of Importation’ in a Series of Sales.” (Commentary 22.1). Wherein, it was noted that while the “[Valuation] Agreement does not define or otherwise directly address the meaning of the expression ‘‘sold for export to the country of importation,” the opinion of the Technical Committee was that:
[T]he underlying assumption of Article 1 is that normally the buyer would be 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 Technical Committee concludes that in a series of sales situation, the price actually paid or payable for the imported goods when sold for export to the country of importation is the price paid in the last sale occurring prior to the introduction of the goods into the country of importation, instead of the first (or earlier) sale. This is consistent with the purpose and overall text of the Agreement.
Customs is also justifying its new interpretation of the language “sold for exportation to the United States” on court decisions that have previously considered the relevance of the Valuation Agreement as interpreted by the Committee on Customs Valuation to the proper legislative and statutory interpretation of the Value law (19 U.S.C. 1401a), and the need to maintain an interpretation that is consistent with U.S. obligations under the WCO Valuation Agreement. As such, CBP proposes to change its current position with regard to the determination of transaction value in a series of sales context and to adopt the conclusions in Commentary 22.1.
Impact Of The Proposed New Interpretation
While impact of the proposed interpretation on the general importing public will be small, it will have a significant impact on import transactions involving Non-Resident importers from Canada, the Far East, and elsewhere, that make use of the First-Sale Rule.
The rule could also affect Synergy Sport type transactions, where the middleman is the importer of record, and presumably CBP would still have access to the necessary documentation to support the claim.
The proposed change may also effect certain import transactions where the U.S. purchaser has a just-in-time inventory program and a DDP type contract with its supplier. In such a case, the declared value might have to be the selling price between the importer and the end customer rather than the importer and the supplier. In HQ 542930, dated March 4, 1983 (TAA No. 59) CBP said that the fact that title to merchandise may pass at some time subsequent to its importation into the United States does not preclude a sale for exportation to the United States, which may be used to establish transaction value. (By contrast, in three other rulings involving "just-in-time" or "supplier-managed" inventory systems, CBP found that sales for exportation did not exist where title to the imported merchandise passed after importation. (See HRL 548574, supra; HRL 548236, dated March 27, 2003; and HRL 548273, dated April 17, 2003.)
Comment Period Open Until March 24, 2008
CBP is soliciting formal comments on the proposed interpretation until March 24, 2008.
Importers who are making use of the First-Sale Rule, whether for import transactions involving a non-US middleman, a U.S. resident middleman, or a DDP type transaction should evaluate the impact of this proposed interpretation and consider submission of comments. While this may ultimately need to be resolved by legislation or court action, affected importers need to weigh in on this issue with meaningful objections.
For those interested, we would be pleased to assist in explaining how this proposed change may affect how your company declares its import values and prepare comments and objections to this controversial proposal. We would also be pleased to discuss what options might be available should this proposed interpretation become effective.
For more information regarding these issues, contact George Tuttle, III at (415) 986-8780 or firstname.lastname@example.org.
George R. Tuttle, III is an attorney with the Law Offices of George R. Tuttle in San Francisco.
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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