In early 2008, U.S. Customs and Border Protection proposed changing the way import calculations are made to determine duties by basing the transaction value on the last sale to the U.S. importer instead of the first sale from an overseas factory to a middleman supplier. Under the 'first sale' doctrine, importers must be able to produce documentation proving the transaction is done at arm's length and the goods were intended for export to the United States from the outset. The attempt to redefine how imports are valued for tax purposes led to a storm of protest by industry groups who argued it would significantly increase costs and contradicted 20 years of precedent allowing importers to legally lower import duties.
The last sale raises the value of goods for duty purposes because it includes the middleman’s profit.
In the May 2008 Farm Bill, Congress blocked CBP from changing 'first sale' until 2011 and instructed that it collect data for one year on how frequently importers declare entries under the method to determine how much money is at stake.
During the 12-month period beginning Sept. 1, 2008 a total of 23,520 unique importers of record reported using the 'first sale' rule, accounting for 8.5 percent of all importers, according to the ITC's analysis of the data.
The value of the imports using 'first sale' was $38.5 billion, or 2.4 percent of the $1.63 trillion in total U.S. imports.
“First sale” use is not always associated with high tariffs, the ITC said. For example, importers reported using “first sale” when no duties would ordinarily be paid. These include about $8.1 billion of imports from Canada, Mexico, and the U.S. Virgin Islands, accounting for 21 percent of all “first sale” imports. There are also numerous cases of “first sale” use for products that are unconditionally free of duty from all countries with normal trade relations status. It is unclear how or why “first sale” is being used in these instances, the ITC said.
The law firm Sandler, Travis & Rosenberg (ST&R) said in its daily newsletter, World Trade/Interactive, the use of 'first sale' on duty-free goods suggests that certain non-tariff characteristics may be important determinants of the method's use.
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The most common products entered under 'first sale' included machinery and computers, electrical machinery, woven and knit apparel and mineral fuels.
More than 86 percent of total U.S. imports use the transaction value method, which is based on the price actually paid by a buyer for goods minus fees such as commissions, royalties, packing and licensing fees.
'The relatively small share of U.S. imports that are valued using the First Sale Rule could be used to support or oppose the continued use of this valuation methodology,' ST&R said. 'On the one hand, CBP could conceivably be more inclined to make another attempt to revoke First Sale and Congress may not be as sympathetic to industry opposition because of the limited use of First Sale by U.S. importers. At the same time, the concentration of First Sale use in some sectors (e.g., textiles, apparel and footwear) suggests that the elimination of First Sale would have a negative impact on consumers and businesses at a time of economic uncertainty.'
The full ITC investigation is available here.
' Eric Kulisch
