In a letter dated July 22, 2010, United States ("U.S.") Customs and Border Protection (“CBP”) Commissioner Alan Bersin said that CBP will formally abandon its proposal to determine the customs value of imported merchandise in a series of sales transaction based on the last sale prior to importation of the merchandise (the “last sale rule”). This announcement ends over two and a half years of uncertainty and discontent in the trading community and on Capitol Hill in response to CBP’s 2008 proposal to switch from the first sale rule to the last sale rule to determine the customs value of imported merchandise involving a series of sales. CBP expects to publish a formal withdrawal within thirty days.
The first sale rule was established in E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988). The first sale rule allows the entered value of merchandise involved in a series of sales prior to importation into the U.S. to be based upon the purchase price between the middleman and the factory rather than on the price paid by the importer to the middleman. Because the price charged to the middleman by the factory is typically lower than that charged by the middleman to the importer, use of the first sale rule allows importers to enter merchandise at lower customs values which results in substantial duty savings.
The first sale rule has been cited in dozens of CBP rulings and in CIT decisions. CBP’s proposed adoption of the last sale rule threatened to disrupt decades of customs rulings and jurisprudence and create uncertainly regarding the customs value of imported merchandise that is involved in multiple transactions prior to its importation into the U.S. In this respect, CBP’s formal revocation of the last sale proposal is a particularly welcome development for U.S. importers.
On January 24, 2008, CBP published a notice in the Federal Register (73 Fed. Reg. 16, 4254) indicating its intent to stop using the first sale rule, and instead, to base the customs value of imported goods in a multi-tiered transaction on the price paid in the last sale prior to the introduction of the goods into the U.S.
Major segments of the importing community and Members of Congress vigorously opposed CBP’s proposal over concerns that it would disrupt the long-settled use of the first sale rule and the many customs rulings and CIT cases that have applied it, would lead to uncertainty for importers, and would result in higher customs values and duty assessments.
In February 2008, a coalition of almost 100 industry group including the American Apparel & Footwear Association, the American Association of Exporters & Importers and the National Association of Manufacturers sent a letter to Department of Homeland Security Secretary Chertoff objecting to the underlying legal analysis of CBP’s proposal and indicating that the proposal would result in significantly higher duties on U.S. imports leading to higher prices for U.S. consumers. In April 2008, seventeen Senators and fifty-one House Members sent Secretary Chertoff separate letters asking him to withdraw the CBP proposal, claiming, among other things, that it was an “abuse of discretion and contrary to law for an Executive Branch agency to use the administrative rulemaking process to abrogate the judicial interpretation of a U.S. statute.”
In May 2008, Congress inserted a “sense of the Congress” provision into the 2008 Farm Bill (P.L. 110-234, Sec. 15422) which instructed CBP not to implement its proposed change regarding the first sale rule before January 1, 2011, and not without consulting with Congress and the Commercial Operations Advisory Committee, and only with the express approval of the Secretary of the Treasury. Congress also mandated that CBP track the use by importers of the first sale rule and report its use the International Trade Commission (“ITC”). The ITC was required to report to Congress on importers’ use of the first sale rule, the tariff classification of the imported merchandise and the aggregate transaction value of the imported merchandise. The ITC Report, published in late 2009, found that 2.4 percent of the value of total importations was entered using the first sale rule. Groups representing importers noted that this represents about the same volume of trade that utilizes popular trade programs including the Generalized System of Preferences.
Although CBP followed Congress’ admonition to delay implementation of the first sale proposal, it never formally withdrew the proposal which caused the trade community continued uncertainty. Therefore, Commissioner Bersin’s commitment to withdraw the last sale proposal will finally resolve the trading community’s concerns.
For more information on use of the first sale rule or any import customs compliance matter, please contact:
Richard Abbey, firstname.lastname@example.org, 202-626-5901
Daniel Wendt, email@example.com, 202-626-5898
Saskia F. Zandieh, firstname.lastname@example.org, 202-626-5560