August 27, 2008
In a notice published August 20, 2008, CBP issued guidance to the importing community on satisfying the requirement that importers using the “first sale” value when declaring the value of goods provide a declaration by entering an "F" next to the declared value at the line level on CBP Form 7501 or the electronic filing equivalent.
This notice may be accessed at: http://www.cbp.gov/trade/entry-summary/first-sale-declaration-requirement/grace-period.
CBP has also said that in order to permit the trade sufficient time to comply with the requirements in the First Sale Declaration, and thereby ensure the integrity of the data collected on importations, it will delay the enforcement of the First Sale Declaration Requirement for 30 days. Thus, CBP will commence the enforcement of the data collection requirements contained in the First Sale Declaration on September 20, 2008. Entries subject to the First Sale Declaration Requirement made between August 20 and September 19th will require a post entry amendment.
Background: Proposed Elimination Of The First Sale Rule
In January 2008, CBP proposed to eliminate the use of the First Sale rule for purposes of determining the imported value for certain types of import transactions (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).
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 U.S. 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 the 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 court decisions and resulting administrative practice, if, in a multi-tiered import transaction, the sale between the foreign manufacturer and the foreign middleman “caused the imported goods to be exported to the United States,” then that “first 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. This results in a lower declared import value.
In its proposed rule, CBP proposed a new interpretation of the phrase “when sold for exportation to the United States” when the goods were the subject of a series of sales prior to importation. CBP wanted it to be the “price paid in the last sale occurring prior to the introduction of the goods into the United States”, explaining that the transaction value will normally be determined on the basis of the price paid by the buyer in the United States.
Legislative Response: The Farm Bill And The First Sale Declaration
Because of the significant opposition by the importing and legal community, Congress got involved; and as a part of the Food, Conservation, and Energy Act of 2008 (the Farm Bill), included Section 15422, which barred CBP from making any changes to the interpretation of the phrase ‘‘when sold for exportation to the United States” before January 1, 2011.
In so doing, however, Congress included a section that requires importers that base their imported value on the “first sale” of a multi-transaction sale, to disclose this to CBP at the time of entry. Subparagraph (a) of Section 15422, provides:
(a) Requirement on Importers-
(1) IN GENERAL- Pursuant to sections 484 and 485 of the Tariff Act of 1930 (19 U.S.C. 1484 and 1485) . . . U.S. Customs and Border Protection shall require each importer of merchandise to provide to U.S. Customs and Border Protection at the time of entry of the merchandise the information described in paragraph (2).
(2) INFORMATION REQUIRED- [A] declaration as to whether the transaction value of the imported merchandise is determined on the basis of the price paid by the buyer in the first or earlier sale occurring prior to introduction of the merchandise into the United States.
Using this information, CBP is to submit monthly reports to the United States International Trade Commission on the number of importers using “first sale”, the HTS of the goods, and the value.
The effective date of the declaration requirements in the Farm Bill was 90 days from the date of enactment. The Farm Bill was enacted on May 22, 2008 (becoming Public Law No: 110-234). Therefore, the requirement for importers to provide a first sale declaration was August 20th.
Due to a number of factors CBP was not prepared to implement its declaration requirements in sufficient time to allow importers to meet the August 20th deadline. As a result, CBP is postponing the first sale declaration requirement for 30 days until September 20, 2008.
Impact of New Declaration Requirements
The impact of the new declaration requirements may be significant for importers that make use of the First Sale rule. Prior to this requirement CBP did not have visibility as to which importers were making use of the rule. Now, CBP will be able to identify and target these companies for follow-up and quick review audits to ensure that importers are properly complying with the requirements for using the first sale rule. T.D. 96-87 sets forth the documentation and information needed to support a determination that transaction value should be based on a sale not involving the U.S. importer in a multi-tiered transaction. It requires an importer to provide (1) a detailed description of the roles of each of the parties involved in the multi-tiered transaction and (2) a complete paper trail relating to the imported merchandise that shows the structure of the entire multi-tiered transaction. Specifically, T.D. 96-87 requires an importer to have documentary evidence that establishes (1) that the alleged sale of the imported merchandise was a bona fide sale; (2) that the merchandise was clearly destined for exportation to the United States; and (3) that the alleged sale between the middleman and foreign manufacturer was at arm’s length.
In order to establish that merchandise is clearly destined for exportation to the United States in a multi-tiered transaction, there must be a complete paper trail relating to the imported merchandise that shows the structure of the entire multi-tiered transaction. This would include invoices, sales contracts, purchase orders, proof of payment, shipping contracts or other documentation for each individual transaction involved in the multi-tiered transaction with consistent prices, dates, parties and merchandise.
Importers that do not have the appropriate documentation and other evidence available to support use of the first sale rule may have their goods re-appraised at a higher value, face additional duties, and possible 1592 penalties for negligence, or a Quick Response Audit.
More information on the first sale rule can be found in Customs Informed Compliance Publication on Bona Fide Sales & Sales For Exportation To the United States at: http://www.cbp.gov/sites/default/files/documents/icp010r2_3.pdf.
We would be pleased to assist in explaining how this rule may affect your company.
For more information regarding these issues, contact George Tuttle, III at (415) 986-8780 or email@example.com.
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.
Copyright © 2008 by Tuttle Law Offices.
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