Trade Compliance Flash: Can Importers Still Use the "First Sale" Rule to Value Goods from China?
Yesterday, the U.S. Court of International Trade (CIT) issued a decision in Meyer Corporation, U.S. v. United States, Court No. 13-00154 (Meyer), available here. The decision casts doubt on using the "First Sale" rule to reduce ordinary customs duties and Section 301 tariffs on goods imported from China.
The First Sale rule allows importers to use the price paid for the goods in a sale occurring earlier than the last sale of the goods prior to them entering the United States. By cutting out the "middleman" transaction for purposes of U.S. customs valuation, importers can report a lower value as the basis for determining ordinary duties and Section 301 tariffs. Applying the rule generally results in the importer paying less in duties and Section 301 tariffs.
Although it can be burdensome to establish that the first sale price is appropriate for customs valuation, importers have been using the First Sale rule for decades to lower the amount of customs duties they pay on imported goods. Use of the First Sale rule has risen since 2018, when Section 301 tariffs increased the cost of acquiring many Chinese goods by 25 percent.
Nissho Iwai American Corp. v. United States, 982 F.2d 505, 509 (Fed. Cir. 1992) (Nissho Iwai) has served as one of the leading cases on the First Sale rule. In Nissho Iwai, the importer sought to apply the First Sale rule and use the price paid to the foreign manufacturer by the middleman, rather than the price paid to the middleman by the importer, as the basis for U.S. customs value. The court determined that the price paid by the middleman could be used for the customs value, if:
- the goods were clearly destined for export to the United States;
- the sale to the middleman was at arms' length; and
- there was "an absence of any non-market influences that affect the legitimacy of the sales price."
For years, U.S. Customs and Border Protection (CBP) has allowed importers to use the First Sale rule in valuing goods from China. However, the Meyer decision calls this practice into question. The Meyer court held that the importer failed to establish that the sale price between the Chinese manufacturer and the middleman could be used as the customs value under the First Sale rule, in part because "the United States has yet to recognize that [China] has attained 'market economy' status" under its World Trade Organization agreement, and therefore China "presumptively remains a non-market economy." The court further stated that it "has doubts over the extent to which, if any, the 'first sale' test of Nissho Iwai was intended to be applied to transactions involving non-market economy participants or inputs."
At the very end of its lengthy Meyer decision, the CIT invited the U.S. Court of Appeals for the Federal Circuit to "provide clarification" on the use of the First Sale rule in transactions involving non-market economies such as China. We will be watching closely to see whether the Meyer decision is appealed and whether CBP's thinking on the permissibility of the use of the First Sale rule in transactions involving Chinese manufacturers evolves.
*Former Miller & Chevalier attorney
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