January, 2016
Further Thoughts on First Sale for Export
Mark K. Neville, Jr.
While first sale for export (First Sale) has been eliminated from the EU, with full effect from December 31, 2017,1 it is still alive in the United States. As a result, it is worthwhile to revisit First Sale and to refresh recollections about how it works. It still has the potential to deliver significant savings to the importer.
All of this seems a dream for the importer and, indeed, First Sale can deliver big savings IF the strict conditions for its application are met. Make no mistake, the rules allowing the use of an earlier sale are clear and unambiguous. Moreover, the burden of establishing eligibility for First Sale is squarely on the shoulders of the importer. As a result, the burden on Customs and Border Protection is actually quite manageable. In the US, the conditions under which customs valuation might be based upon an earlier sale in successive sales were formulated in two court cases, Nissho Iwai American Corp. v. United States,3 and Synergy Sport International, Ltd. v. United States.4 Administrative guidance took the form of a Treasury Decision issued by the US Customs Service, CBP’s predecessor, on 13 December 1996 (“TD 96-87”).5
To be clear, CBP begins the customs valuation process with a rebuttable presumption that the price paid or payable by the importer is the basis for the transaction value. This presumption can be rebutted by any importer who would furnish an earlier sale as the qualifying “sale for export” on which to base transaction value. An aspiring importer must prove that, at the time of this earlier sale transaction, the goods were “clearly destined for the USA” and that the sale price in that transaction was an arm’s length price. Thus, amongst the information that the importer must provide is the following:
Over the course of more than twenty years, CBP has issued scores of published rulings which amplify its administrative guidance and demonstrate the pervasive use of First Sale.
As an example of a losing importer effort, one might refer to ruling no. 547155 (Mar. 22, 2001) where the claim for first sale was rejected for insufficient information. In a 2012 ruling, no. H221835 (Aug. 13, 2012) an importer’s claim for first sale was also rejected. The conclusion points to the process employed by CBP:
If First Sale still looks attractive, it may be helpful to look at some questions that come up when considering First Sale.
A. Obtaining First Sale is neither a “walk in the park” as some would suggest nor an impossibility as others would maintain. Instead, it is safe to say that it is an exercise that may be worthwhile but will require a lot of preparation. Before embarking down the path, an importer should conduct a rigorous review to determine whether the expected savings are worth the effort and whether the information and supporting documentation will be available. A fully cooperative vendor and sometimes a fully cooperative factory are essential factors for success.
Q. Can the middleman buyer/reseller be a U.S. company?
A. As explained fully below, there is no reason why a US-based company cannot act as a bona fide middleman (buyer/reseller) in a valid FSFE appraisement. There is no legal reason why an importer could not use First Sale with US-based middleman supplier. Such a factual occurrence is somewhat atypical but it is not at all unheard of.
There is no ruling which I have studied in which CBP has stated that First Sale is not available because the middleman was based in the US. Nor have there been any rulings in which CBP has expressly cited to US residence as a positive factor in First Sale. But I can cite to rulings in which First Sale was discussed with a US-based middleman, which creates the inference that it is permitted. In ruling no. 545612 (5/25/95), for example, First Sale was successfully claimed by Sears Roebuck on luggage imports from China, Thailand and Taiwan where the middleman was York Luggage, a New Jersey company. In ruling no. 546316 (5/29/95) the importer of Absolut Vodka was a US company, Delaware Importer, the middleman was the House of Seagram, which was termed the “US Supplier,” and the foreign supplier was V&S Vin and Spirits, a Swedish company that was termed the “foreign seller.” CBP determined that First Sale applied to the price paid by the US supplier to the foreign seller.
Similarly, in ruling no. 545804 (2/27/96) the middleman was the US subsidiary of a Japanese company, and one of the questions was whether the documentation supported the premise that the US importer placed an order on the middleman or on the Japanese parent company. In ruling no. 546253 (7/9/97) the middleman was a US distributor. In ruling no. 547436 (8/10/00) the recitation of facts suggests that the middleman was a US-based company. This is because the middleman was a marketer and distributor of various types of products, implying a US presence, and the facts refer to the “foreign supplier.” Other rulings in which the middleman is implicitly US-based include ruling nos. 547642 and 547643 (12/1302) (middleman is AMC, described as a “US apparel sourcing company,” deals with “foreign vendors”), 548526 (1/5/05) (middleman deals with a “foreign manufacturer”) and 548494 (1/26/05).
In ruling no. H050895 (12/6/10), CBP had to consider whether Pro Line, a Wayne, New Jersey company, acted as a buying agent or as a middleman in an First Sale claim asserted by Bass Pro. CBP actually determined that the New Jersey company was neither a buying agent nor a verifiable buyer/reseller. But the important point is that CBP actually examined the facts and circumstances. Had the fact that the company was based in New Jersey been a disqualifying factor for First Sale, CBP would doubtless have made that point without expending any time on an examination of the facts. CBP’s silence on the point tells us that there is no such hard and fast rule against a US company playing a middleman role in First Sale.
As stated, none of the rulings ever make a point of addressing the country of residence or of business operations of these presumptively US-based companies beyond merely setting forth the factual recitations. My own belief is that the prerequisite for a valid middleman sales transaction in a First Sale context is that it must qualify as a “bona fide sale for export.” As there is no statutory or administrative qualification that the seller in a qualifying sale for export must be a foreign party, nor is there a rule against a US entity playing that role, a discussion of the seller’s residence is similarly misplaced in an First Sale appraisement.
Q. What is “flash title” and why should I care?
A. Flash title refers to a circumstance in which back-to-back sales show the same sales terms, such as “FOB Shanghai.” As an example, the factory-to-middleman sale is FOB Shanghai and the middleman-to-importer sale is also FOB Shanghai. If CBP sees a flash title scenario, they are likely to conclude that there are not two qualifying sales because the middleman has not definitely taken title and assumed risk of loss for the goods for a defined period of time. The middleman has taken title and assumed risk for an instant only. While there are some rulings in which CBP has accepted a flash title in the context of a First Sale claim9 their more usual approach is to deny that there were two qualifying sales for export.10 Absent special circumstances which would validate a “flash title” as not being inconsistent with a qualifying sale, importers are advised to steer clear of fact patterns where they will surface. This usually requires a change to the sales terms, so that there are differences between those supporting the two sales, and we must be mindful that there may reluctance to any such change.
Q. What about Section 1059A; does that cause a problem for an importer/taxpayer who claims First Sale?
A. Section 1059A normally sets a ceiling on the value at which goods imported by a related party taxpayer may be carried in its inventory. While this would normally preclude the affected importer from paying duty on a First Sale basis and then claiming its actual price paid to the middleman in accounting for its taxes, the IRS has held that there is no problem caused by Section 1059A.11
Q. Is there a problem if the factory and the middleman are related?
A. Yes. When the factory and the middleman are not related parties, the sale price is presumed to be at arm’s length. By contrast, a factory/middleman relationship creates an additional burden for the importer to meet, specifically, to not only show that there has been a bona fide sale but also to show that the first sale price has not been influenced by the relationship. In these efforts, the importer must rely on all of the devices which would be employed in a related party pricing scenario. These include transfer pricing studies to meet the circumstances of sale proofs. Of course, the complicating factor is that the sales transaction is a foreign-to-foreign sale.12
Q. How hard is it to show the goods were clearly destined for the US?
A. Normally it is not difficult to arrange the purchase so that it could be demonstrated that the goods that were the subject of the first sale were destined irrevocably for the US. Importers will normally look to track model or style numbers, quantities and other particulars in the POs and invoices, and will also insist on a drop shipment of the goods from the factory to the importer’s facility in the US. If it can be shown that the goods are made to US specifications and sizing and/or that the labels, hang tags and packaging are for designed for the importer, then that will help demonstrate the goods are destined for the US. As another planning point, not inspecting the goods after they leave the factory then that will show CBP that the goods cannot possibly be diverted from delivery to the US. One final point—if goods are delivered to a foreign trade zone (FTZ) in the US, then the importer must organize the movement with great care because CBP might conclude that the goods admitted into the FTZ might not be entered into the US upon their withdrawal. Such a diversion would disqualify the goods from First Sale treatment.
Q. What about an alternative to First Sale? Are there any alternatives in which the importer can make use of a middleman sourcing strategy?
A. As an alternative to First Sale, the importer could make use of a buying agency structure. In the latter approach, the importer would rely on an agency to coordinate its purchases from foreign vendors. The buying agent would earn a nondutiable commission and that is obviously a worthwhile benefit. The downside is that the commission rate, which would be subject to the same IRS transfer pricing scrutiny as the profit earned by a buyer/reseller middleman, will generally generate a lower compensation for the middleman than the profit that might be earned by a buyer/reseller (think functions, assets and risks).
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First Sale for Export Doctrine
The doctrine derives from the statutory definition of Transaction Value, which is the preferred basis of appraisement for articles imported into the United States.2 It is based on the price actually paid or payable when the goods are sold for export to the US. Thus, customs valuation in over 95% of imports is based on a qualifying “sale for export” to the US. But what if there is more than one potential sale, as when an importer buys goods from a foreign vendor who, in turn, buys goods from another party to fill the US customer’s order? In essence, there are back-to-back sales. Which of the sales can—or must—be used as the basis for setting transaction value? With the application of the First Sale doctrine, even though the importer pays the vendor for the goods, if there is an earlier qualifying sale, the importer can elect to pay duty on that earlier sale. In essence, the markup of the vendor, who is the middleman in a chain of sales, is taken out of the tax basis for the imported goods. What is anomalous is that the importer is not a party to the first sale, between the middleman and the factory or other seller of the goods.All of this seems a dream for the importer and, indeed, First Sale can deliver big savings IF the strict conditions for its application are met. Make no mistake, the rules allowing the use of an earlier sale are clear and unambiguous. Moreover, the burden of establishing eligibility for First Sale is squarely on the shoulders of the importer. As a result, the burden on Customs and Border Protection is actually quite manageable. In the US, the conditions under which customs valuation might be based upon an earlier sale in successive sales were formulated in two court cases, Nissho Iwai American Corp. v. United States,3 and Synergy Sport International, Ltd. v. United States.4 Administrative guidance took the form of a Treasury Decision issued by the US Customs Service, CBP’s predecessor, on 13 December 1996 (“TD 96-87”).5
To be clear, CBP begins the customs valuation process with a rebuttable presumption that the price paid or payable by the importer is the basis for the transaction value. This presumption can be rebutted by any importer who would furnish an earlier sale as the qualifying “sale for export” on which to base transaction value. An aspiring importer must prove that, at the time of this earlier sale transaction, the goods were “clearly destined for the USA” and that the sale price in that transaction was an arm’s length price. Thus, amongst the information that the importer must provide is the following:
- The roles of all parties in the successive transactions must be described in detail and documents provided for each transaction that was involved in the exportation of the goods to the US. Such documentation would include purchase orders, invoices, contracts, proof of payment and additional documents (e.g., correspondence) that demonstrate how the parties dealt with each other. These documents must support the claim that the goods were clearly destined for the US (direct shipment, US specifications or labeling, etc.).
- Any information on the so-called “statutory additions” to transaction value should be provided (packing costs, selling commissions, assists, royalties / license fees and proceeds of subsequent resale)6 for the subject transaction.
Over the course of more than twenty years, CBP has issued scores of published rulings which amplify its administrative guidance and demonstrate the pervasive use of First Sale.
As an example of a losing importer effort, one might refer to ruling no. 547155 (Mar. 22, 2001) where the claim for first sale was rejected for insufficient information. In a 2012 ruling, no. H221835 (Aug. 13, 2012) an importer’s claim for first sale was also rejected. The conclusion points to the process employed by CBP:
Although [the importer] satisfied two tiers of the Nissho Iwai test for three out of the four protests, i.e., its goods were clearly destined for the United States and the transactions were at “arm’s length,” the available evidence for all four protests does not establish that the transactions between [the factory] and [the middleman] were bona fide sales. Therefore, the merchandise should be appraised based on the prices paid by BMC.
* * *
There is insufficient and inconsistent evidence to substantiate a bona fide sale between [the factory] and [the middleman]. As such, the merchandise cannot be appraised based on the “first sale” price.8
If First Sale still looks attractive, it may be helpful to look at some questions that come up when considering First Sale.
Frequently Asked Questions
Q. How hard is it to obtain First Sale status?A. Obtaining First Sale is neither a “walk in the park” as some would suggest nor an impossibility as others would maintain. Instead, it is safe to say that it is an exercise that may be worthwhile but will require a lot of preparation. Before embarking down the path, an importer should conduct a rigorous review to determine whether the expected savings are worth the effort and whether the information and supporting documentation will be available. A fully cooperative vendor and sometimes a fully cooperative factory are essential factors for success.
Q. Can the middleman buyer/reseller be a U.S. company?
A. As explained fully below, there is no reason why a US-based company cannot act as a bona fide middleman (buyer/reseller) in a valid FSFE appraisement. There is no legal reason why an importer could not use First Sale with US-based middleman supplier. Such a factual occurrence is somewhat atypical but it is not at all unheard of.
There is no ruling which I have studied in which CBP has stated that First Sale is not available because the middleman was based in the US. Nor have there been any rulings in which CBP has expressly cited to US residence as a positive factor in First Sale. But I can cite to rulings in which First Sale was discussed with a US-based middleman, which creates the inference that it is permitted. In ruling no. 545612 (5/25/95), for example, First Sale was successfully claimed by Sears Roebuck on luggage imports from China, Thailand and Taiwan where the middleman was York Luggage, a New Jersey company. In ruling no. 546316 (5/29/95) the importer of Absolut Vodka was a US company, Delaware Importer, the middleman was the House of Seagram, which was termed the “US Supplier,” and the foreign supplier was V&S Vin and Spirits, a Swedish company that was termed the “foreign seller.” CBP determined that First Sale applied to the price paid by the US supplier to the foreign seller.
Similarly, in ruling no. 545804 (2/27/96) the middleman was the US subsidiary of a Japanese company, and one of the questions was whether the documentation supported the premise that the US importer placed an order on the middleman or on the Japanese parent company. In ruling no. 546253 (7/9/97) the middleman was a US distributor. In ruling no. 547436 (8/10/00) the recitation of facts suggests that the middleman was a US-based company. This is because the middleman was a marketer and distributor of various types of products, implying a US presence, and the facts refer to the “foreign supplier.” Other rulings in which the middleman is implicitly US-based include ruling nos. 547642 and 547643 (12/1302) (middleman is AMC, described as a “US apparel sourcing company,” deals with “foreign vendors”), 548526 (1/5/05) (middleman deals with a “foreign manufacturer”) and 548494 (1/26/05).
In ruling no. H050895 (12/6/10), CBP had to consider whether Pro Line, a Wayne, New Jersey company, acted as a buying agent or as a middleman in an First Sale claim asserted by Bass Pro. CBP actually determined that the New Jersey company was neither a buying agent nor a verifiable buyer/reseller. But the important point is that CBP actually examined the facts and circumstances. Had the fact that the company was based in New Jersey been a disqualifying factor for First Sale, CBP would doubtless have made that point without expending any time on an examination of the facts. CBP’s silence on the point tells us that there is no such hard and fast rule against a US company playing a middleman role in First Sale.
As stated, none of the rulings ever make a point of addressing the country of residence or of business operations of these presumptively US-based companies beyond merely setting forth the factual recitations. My own belief is that the prerequisite for a valid middleman sales transaction in a First Sale context is that it must qualify as a “bona fide sale for export.” As there is no statutory or administrative qualification that the seller in a qualifying sale for export must be a foreign party, nor is there a rule against a US entity playing that role, a discussion of the seller’s residence is similarly misplaced in an First Sale appraisement.
Q. What is “flash title” and why should I care?
A. Flash title refers to a circumstance in which back-to-back sales show the same sales terms, such as “FOB Shanghai.” As an example, the factory-to-middleman sale is FOB Shanghai and the middleman-to-importer sale is also FOB Shanghai. If CBP sees a flash title scenario, they are likely to conclude that there are not two qualifying sales because the middleman has not definitely taken title and assumed risk of loss for the goods for a defined period of time. The middleman has taken title and assumed risk for an instant only. While there are some rulings in which CBP has accepted a flash title in the context of a First Sale claim9 their more usual approach is to deny that there were two qualifying sales for export.10 Absent special circumstances which would validate a “flash title” as not being inconsistent with a qualifying sale, importers are advised to steer clear of fact patterns where they will surface. This usually requires a change to the sales terms, so that there are differences between those supporting the two sales, and we must be mindful that there may reluctance to any such change.
Q. What about Section 1059A; does that cause a problem for an importer/taxpayer who claims First Sale?
A. Section 1059A normally sets a ceiling on the value at which goods imported by a related party taxpayer may be carried in its inventory. While this would normally preclude the affected importer from paying duty on a First Sale basis and then claiming its actual price paid to the middleman in accounting for its taxes, the IRS has held that there is no problem caused by Section 1059A.11
Q. Is there a problem if the factory and the middleman are related?
A. Yes. When the factory and the middleman are not related parties, the sale price is presumed to be at arm’s length. By contrast, a factory/middleman relationship creates an additional burden for the importer to meet, specifically, to not only show that there has been a bona fide sale but also to show that the first sale price has not been influenced by the relationship. In these efforts, the importer must rely on all of the devices which would be employed in a related party pricing scenario. These include transfer pricing studies to meet the circumstances of sale proofs. Of course, the complicating factor is that the sales transaction is a foreign-to-foreign sale.12
Q. How hard is it to show the goods were clearly destined for the US?
A. Normally it is not difficult to arrange the purchase so that it could be demonstrated that the goods that were the subject of the first sale were destined irrevocably for the US. Importers will normally look to track model or style numbers, quantities and other particulars in the POs and invoices, and will also insist on a drop shipment of the goods from the factory to the importer’s facility in the US. If it can be shown that the goods are made to US specifications and sizing and/or that the labels, hang tags and packaging are for designed for the importer, then that will help demonstrate the goods are destined for the US. As another planning point, not inspecting the goods after they leave the factory then that will show CBP that the goods cannot possibly be diverted from delivery to the US. One final point—if goods are delivered to a foreign trade zone (FTZ) in the US, then the importer must organize the movement with great care because CBP might conclude that the goods admitted into the FTZ might not be entered into the US upon their withdrawal. Such a diversion would disqualify the goods from First Sale treatment.
Q. What about an alternative to First Sale? Are there any alternatives in which the importer can make use of a middleman sourcing strategy?
A. As an alternative to First Sale, the importer could make use of a buying agency structure. In the latter approach, the importer would rely on an agency to coordinate its purchases from foreign vendors. The buying agent would earn a nondutiable commission and that is obviously a worthwhile benefit. The downside is that the commission rate, which would be subject to the same IRS transfer pricing scrutiny as the profit earned by a buyer/reseller middleman, will generally generate a lower compensation for the middleman than the profit that might be earned by a buyer/reseller (think functions, assets and risks).
Conclusion
Regardless of contrary developments in the EU or the WCO, it is important to remember that First Sale remains a valid option for importers into the US........................................................................................................................................
1. First Sale was eliminated as part of the new Union Customs Code implemented by the European Union. Art. 341of the Implementing Act preserves First Sale for “grandfathered” companies until the end of 2017. See Neville, “Initial Reflection on the New Customs Code in the EU,” 25 JOIT No. 9 at 21 (Sept. 2015).
2. 19 USC § 1401a (b).
3. 982 F.2d 505 (Fed. Cir. 1992).
4. 17 CIT 18 (1993).
5. This is set forth in US International Trade Commission, “Use of the “First Sale Rule” for Customs Valuation of U.S. Imports”, Investigation No. 332-505, USITC Publication 4121, December 2009, http://www.usitc.gov/publications/332/pub4121.pdf.
6. 19 USC §§ 1401a (b) (1) (A)-(E).
7. US International Trade Commission, “Use of the “First Sale Rule” for Customs Valuation of U.S. Imports”, Investigation No. 332-505, USITC Publication 4121, December 2009, http://www.usitc.gov/publications/332/pub4121.pdf.
8. See also ruling no. 240423 (July 31, 2013) (totality of circumstances leads CBP to conclude the “sale” between these parties is not an arm’s length sale).
9. See, e.g., ruling no. 546316 (5/29/95).
10. See, e.g., ruling nos. H097616 (11/21/11) and W563602 (9/4/07).
11. Priv. Ltr. Rul. 94006026 (11/15/93).
12. For an example of an importer’s losing effort, see ruling no. H215658 (6/11/12), aff’g no. H097035 (11/15/11).
2. 19 USC § 1401a (b).
3. 982 F.2d 505 (Fed. Cir. 1992).
4. 17 CIT 18 (1993).
5. This is set forth in US International Trade Commission, “Use of the “First Sale Rule” for Customs Valuation of U.S. Imports”, Investigation No. 332-505, USITC Publication 4121, December 2009, http://www.usitc.gov/publications/332/pub4121.pdf.
6. 19 USC §§ 1401a (b) (1) (A)-(E).
7. US International Trade Commission, “Use of the “First Sale Rule” for Customs Valuation of U.S. Imports”, Investigation No. 332-505, USITC Publication 4121, December 2009, http://www.usitc.gov/publications/332/pub4121.pdf.
8. See also ruling no. 240423 (July 31, 2013) (totality of circumstances leads CBP to conclude the “sale” between these parties is not an arm’s length sale).
9. See, e.g., ruling no. 546316 (5/29/95).
10. See, e.g., ruling nos. H097616 (11/21/11) and W563602 (9/4/07).
11. Priv. Ltr. Rul. 94006026 (11/15/93).
12. For an example of an importer’s losing effort, see ruling no. H215658 (6/11/12), aff’g no. H097035 (11/15/11).
Mark K. Neville, Jr., LL.M. (International Legal Studies), NYU, is a long-time member of the Board of Advisors. He is Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School. He is The Journal’s Customs & Trade correspondent.