U.S. Customs and Border Protection (CBP) is in the process of revising one of its Informed Compliance Publications (ICP) and this should be of interest to every company that utilizes the “first sale” valuation principle for customs purposes. CBP is revising its ICP on “Bona Fide Sales & Sales for Export to the United States” to clarify what documentation CBP expects to be available in order to validate the use of the first sale value. The draft revised ICP (in track changes) is attached for your reference.
The requirements to use the first sale value were established by judicial precedent and are relatively straightforward. While CBP has never been a fan of first sale (and unsuccessfully tried to eliminate the principle entirely back in 2008), its use has not historically gotten a great deal of attention by the field. CBP often simply accepted what was put in a company’s “first sale notification letter”. In many cases, however, those letters were not entirely accurate, overreached, or became out of date over time (i.e., a program that was in compliance originally, drifted out of compliance over time). In recent years, CBP has started taking a closer look at these programs. We have seen CBP recently issue rulings denying first sale treatment, as well as an increase in enforcement/scrutiny by CBP Regulatory Audit and import specialists. Two of the most common problems we have seen with first sale programs are: (1) the terms of sale used in the transactions do not establish that there is a bona fide sale to the middlemen (e.g., the terms either indicate that a “flash transfer” of title occurs, or the parties are not actually abiding in practice by the terms set forth in the documents); and (2) whether first sale transactions between related factories and middlemen can be supported by financial documentation evidencing that those sales are arm’s length. See attached for details. These are the two issues the revised ICP attempts to address.
According to CBP, the impetus behind revising the ICP is concern from industry that CBP auditors are requiring unnecessary documentation to establish first sale eligibility. CBP Headquarters is attempting to address that concern by explaining the requirements in detail and identifying the documentation that needs to be available to substantiate a first sale claim. The draft ICP summarizes recent CBP first sale rulings and includes an extensive Appendix that provides examples of the types of documentation CBP believes an importer should be able to provide. We recommend reviewing the revised ICP, and the Appendix, in particular.
Clients familiar with our first sale audits and first sale set-ups will not be too surprised by the draft ICP, as it emphasizes a “totality of the circumstances” approach that is consistent with recent administrative precedent. That being said, we believe that the list of documentation included in the draft Appendix should be refined and qualified, in some instances. History has shown that the lists like the one included in the Appendix, without further qualification, could be misconstrued by the field as a mandate to demand all of the identified records (regardless of whether they are applicable or necessary in every instance). We understand that CBP Headquarters recognizes this concern and will be reaching out to industry and interested stakeholders over the coming weeks for comments on the draft ICP.
Regardless of what you think of CBP’s efforts, the bottom line is that companies that utilize first sale should expect CBP to be taking a closer look at their programs. The first sale principle is here to stay, but the bar is going to be raised. Companies should be reviewing their first sale programs and making any necessary changes now. Companies who have robust first sale programs, and use it where appropriate (which, unfortunately, is likely not with every vendor), should be ok. Companies who overreach, will likely have issues.
We have devised first sale programs for a number of companies and leveraged our global footprint to offer in-country vendor/factory set-up and initial transactional testing to clients. We have also audited existing first sale programs for compliance and advised clients on how to improve their programs. If the list included at the Appendix looks unfamiliar to you, there are proactive strategies that you can adopt to protect yourself from increased duties and penalties in the event first sale claims are denied.
If you have questions concerning the draft ICP, questions concerning the establishment/audit of first sale programs more generally, or if you are interested in submitting comments on the draft ICP, please let us know.