Interesting First Sale Ruling

Dear Friends,

We wanted to make sure you saw a U.S. Customs and Border Protection (“CBP”) Headquarters Ruling involving first sale that was just recently published.  Since many companies rely on first sale for meaningful duty savings, this ruling should be of interest to you.

First Sale Recap

As you know, in certain multi-tiered transactions (for example, involving a factory, a middleman and a U.S. purchaser/importer), the “first sale” principle of customs valuation allows the importer to declare as the customs value the price the middleman pays to the factory, rather than the price the importer pays to the middleman.  A first sale is viable for customs purposes three conditions are satisfied:  (1) it is a bona fide sale; (2) the merchandise is clearly destined to the United States at the time of the sale; and (3) it is an arm’s length price.  It is this third requirement that can the most difficult to satisfy, particularly where the factory and the middleman are related parties.  

The Ruling (HQ H272520)

This ruling focused on the arm’s length requirement for the first sale.  If an importer wants to use a related party price as the customs value, the importer must be able to establish that the parties’ relationship did not influence the price.  There are a few established ways for an importer to accomplish this, but the most common way is using what CBP refers to as the “all costs plus a profit” test, which is derived from an interpretive note in the CBP regulations.

Succinctly, the “all costs plus a profit” test involves comparing the profitability of a factory (usually a subsidiary of the middleman) with that of middleman (usually the parent of the factory).  In such a case, CBP would take the view that the factory’s profit margin must be equal to, or greater than, the profit margin earned by the middleman in order to be considered to be arm’s length.

In this ruling, the outcome of the “all costs plus a profit” test was different in different years.  In some years, the test was satisfied (so first sale was deemed viable for entries from those years).  In another year, the factory did not have a profit equal to, or greater than its parent company, so first sale was not allowed.

Key Takeaways

There are two key takeaways from this ruling:

First, this ruling was issued in response to a request for internal advice from the Port of Los Angeles after the port issued a CBP Form 28 Request for Information to an importer.  This is significant because it shows that CBP at the port/CEE level is questioning first sale.  All importers who utilize first sale should be thinking of these issues and be ready to respond.

Second, companies that are relying on first sale as a duty savings strategy need to be focused on whether they have objective evidence that related-party first sales qualify as arm’s length sales.  If a factory covers its costs and earns a profit, that is some indication that the factory’s sales are at arm’s length, but it may not be sufficient to satisfy the “all costs plus a profit” test, as this ruling demonstrates.  Companies should ensure that they have performed adequate diligence of this issue before claiming first sale.

To that end, just because a factory’s profit isn’t high enough to satisfy the “all costs plus a profit” test doesn’t mean that first sale is categorically unavailable.  Under the statute, a related party first sale can be a valid customs value if the circumstances of sale indicate that the relationship did not influence the price.  As this ruling indicates, this is a question to be proved, not assumed.  Working in conjunction with our in-house team of economists, we have developed secondary economic analyses that are useful in precisely these circumstances—establishing economically sound, empirical data which support the conclusion that the sale between a related factory and middleman is arm’s length. 

We have produced these economic analyses for various clients, and would be happy to discuss these, or any other first sale issues with you further.  If such a discussion would be helpful, just let us know.

Best regards,



More Private Party-Initiated Trade Enforcement Actions

Dear Friends,

We wanted to bring to your attention two recent qui tam case settlements involving the underpayment of customs duties.  They are as follows:

  • Further to our message below where Z Gallerie agreed to settle with the U.S. Department of Justice (“DOJ”) for $15 million, the DOJ recently announced that Bassett Mirror Co. (“Bassett”) agreed to pay $10.5 million to settle allegations that it violated the False Claims Act (“FCA”) by underpaying antidumping duties.  Total settlements in this case have now reached $25.5 million.  The underlying complaint, initiated by a competitor, alleged that between January 2009 and February 2014, several companies deliberately misclassified wooden bedroom furniture as non-bedroom furniture on its official import documents to avoid paying antidumping duties.  A copy of the most recent DOJ press release is available here.
  • DOJ announced that a textile importer, American Dawn, and three company executives, agreed to pay more than $2.3 million to settle allegations that they violated the FCA by intentionally misclassifying goods in order to pay lower duty rates.  The underlying complaint, initiated by a former employee, alleged that for more than a decade American Dawn intentionally misclassified certain textile articles, including bath towels and shop towels, as polishing cloths in order to pay a lower duty rate.  The press release is available here.

These cases and settlements are interesting for a few reasons.

First, both cases were initiated by whistleblowers under the FCA.  In Bassett/Z Gallerie, a competitor initiated the court action and, in American Dawn, it was a former employee.  The whistleblowers in these cases with receive a sizeable portion of the settlements.  This incentive will continue to feed the trend of there being an increasing number of private-party initiated trade enforcement actions.

Second, DOJ appears to be settling these cases for less than is available to it under applicable laws.  Under the FCA, maximum liability includes the unpaid duties, three times the unpaid duties, $11,000 for each false claim (i.e., each import entry), plus attorneys’ fees.  In addition, under the Tariff Act of 1930, maximum penalties include the full value of the imported merchandise (because the government alleged intentional evasion of duties, rather than negligence or gross negligence).  Considering that the PRC-wide rate for wooden bedroom furniture is ~216%, the importers could have been liable for many millions more than the government ultimately agreed to settle for.  It is unclear why the government would agree to what could be considered “generous” settlements , particularly since they appear to be “global” in nature (they resolve not just the FCA liability, but the liability imposed under the Tariff Act of 1930, as well), but it is unlikely that such generous terms would be afforded by CBP in an stand alone administrative proceeding.

Finally, in both press releases, government agencies restated their commitment to protecting the economy by investigating alleged evasions of customs duties.  For example, in the American Dawn settlement announcement, the director of the CBP field office in Atlanta stated, “[t]his settlement agreement is another example of CBP’s day to day collaborative efforts between U.S. Customs and Border Protection Officers at ports of entry, Import Specialists with the Centers of Excellence and Expertise, and Immigration & Customs Enforcement Homeland Security Investigations to protect the American public and the U.S. economy.”

In light of this, all importers should make sure that they effective internal controls in place over customs matters that include a mechanism for employees to raise legitimate compliance-related concerns.  In our experience, companies can generally protect themselves from enforcement actions (FCA or otherwise) by having reasonable internal controls.

We hope this is helpful.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,


Customs Conference Update

Dear Friends,

Yesterday, I had the privilege of speaking at ACI’s Advanced Forum on Customs & Trade Enforcement here in Washington, DC.  I spoke on a panel with an attorney from US Customs and Border Protection (CBP) Headquarters about the interplay between transfer pricing and customs valuation.  I have attached the slides from our presentation here for your reference.

I also wanted to pass along a tidbit I picked up from one of the other panels that addressed CBP audits.  As we have advised previously, CBP is conducting more audits, but fewer of those audits are traditional Focused Assessments (FA’s).  Instead, with the transition of enforcement responsibilities to the Centers of Excellence and Expertise (CEE’s), CBP is conducting many more “targeted” or “single-issue” audits (e.g., quick response audits, survey audits, etc.).  These focused audits are aimed at issues of perceived non-compliance, rather than at the internal controls the company has in place over one or more areas (like a traditional FA).  Also, the CBP speaker on the audit panel made it clear that, while the primary benefit of the Importer Self-Assessment program (ISA) is being removed from the CBP audit pool, that means being removed from the FA audit pool only.  Stated differently, ISA member can be (and frequently are) the subject of the targeted audits being directed by the CEE’s and conducted by Regulatory Audit.  If CBP is conducting fewer FA’s, and more targeted audits, this calls into question whether ISA members are really getting much benefit from the ISA program.

We hope this is helpful.  If you have any questions about either intercompany customs valuation or the audit issues discussed above, please let us know. 

Best regards,



Increase in CEE-Driven Enforcement Activities

Dear Friends,

We wanted to share with you some developments we are seeing with regard to U.S. Customs and Border Protection (CBP) enforcement activities.  Specifically, we are seeing an increased focus on antidumping/countervailing duty issues, and an increase in the number of “commercial fraud” investigations being initiated.  In both cases, the Centers of Excellence and Expertise (CEEs) are playing prominent roles.

We are seeing Import Specialists tied to various CEEs issue an increasing number of Requests for Information (CF-28s) focused specifically on antidumping/countervailing duty order compliance (e.g., whether an imported article should have been entered as a Type 03 entry subject to an order).  These CF-28s have most often involved the AD/CVD orders with broad, ambiguous scopes (e.g., orders on aluminum extrusions, steel products, various orders on pipe, etc.).  The same Import Specialists are issuing CF-28s to multiple importers, which (we believe) demonstrates that the CEEs are working as intended – as an Import Specialist learns that one importer may have an issue, he/she wonders whether other importers in the same industry also have that issue and starts issuing CF-28s to other companies covered by the CEE, etc.  Given the potential exposure for failing to deposit estimated AD/CVD upon importation, we recommend that all importers re-confirm that they are properly declaring any such imports.

On a related note, we are seeing an increasing number of formal investigations being initiated by CBP; again, driven primarily by the CEEs.  The number of formal “commercial fraud” investigations declined dramatically following the split of the U.S. Customs Service into CBP and U.S. Immigration and Customs Enforcement (ICE) in 2003.  Since most of the enforcement personnel went with ICE and began focusing on different issues, the number of commercial fraud investigations declined.  While there have been blips of activity since then (e.g., the issue several years ago of Import Specialists including investigation language in routine CF-28s), formal investigations were not very frequent.  That may now be changing.  In recent months, we have seen several CEE-based Import Specialists launch formal investigations into different matters (e.g., antidumping/countervailing duty issues, NAFTA and other preference claims, etc.).  Some, but not all, of these investigations were preceded by a CF-28.  As a result, it is important to pay close attention to any CF-28s you receive, and to recognize the investigation risk (and prior disclosure opportunity) they represent.

We hope this is helpful.  If you have any questions, please let us know.

Best regards,



Are you importing articles subject to AD/CVD? Are you sure?

Dear Friends,

We are writing to let you know that US Customs and Border Protection (CBP) is continuing to place significant emphasis on antidumping/countervailing duty enforcement.  For many years, AD/CVD enforcement has been a top priority for CBP, and statistics from FY 2015 indicate that this trend is continuing.  Last year, CBP identified $29 million in AD/CVD noncompliance, and imposed $45.5 million in penalties on imports of steel products alone.  The agency conducts enforcement activities through a combination of targeted inspections and entry summary reviews, but also reports increased involvement on the part of the Centers for Excellence and Expertise (CEEs), as well as collaboration with the private sector.  CBP increasingly looks to the domestic industry protected by AD/CVD orders to educate CBP officials and to monitor the marketplace for instances of potential noncompliance.

It also bears noting that the stakes are growing for companies which intentionally seek to evade lawful antidumping and countervailing duties.  The Customs Reauthorization Bill (which was finally passed by Congress today—more on this later) includes significant substantive provisions targeting AD/CVD evasion.

In light of all this, we recommend that importers periodically review the orders that are in effect to ensure that in-scope merchandise has not gone unnoticed—particularly for some of the wider ranging orders, such as those on aluminum extrusions and various steel products.

If you would like to review a summary of the products and countries covered by current AD/CVD orders, just let us know—we are happy to forward a summary chart.

Best regards,



CBP’s Centers of Excellence and Expertise (CEE)

Dear Friends:

U.S. Customs and Border Protection (CBP) recently issued a “trade process document” on its Centers of Excellence and Expertise (CEE) program that contained a number of interesting points (“Centers of Excellence and Expertise Trade Process Document:  Responsibilities and Procedure for Participating Accounts and Their Brokers, Agents or Filers” (March 2014) copy available here).  Given that the CEE program is CBP’s preferred (eventually, mandatory?) model for the future, we thought all importers should be aware of these points, so have summarized them for you below.

* Importers must apply and be approved to participate in the CEE test program.

* The CEE’s are meant to meant to be centralized, industry-specific groups that bring additional experience/expertise to entry transaction review (i.e., by grouping resources by industry, the goal is to do better with less) and increased uniformity for importers (i.e., reduce the chances of getting different treatment at different ports).

* There are currently 10 CEE’s [(1) Agriculture & Prepared Products – Miami; (2) Apparel, Footwear  & Textiles – San Francisco; (3) Automotive & Aerospace – Detroit; (4) Base Metals – Chicago; (5) Consumer Products & Mass Merchandising – Atlanta; (6) Electronics – LA; (7) Industrial & Manufacturing Materials – Buffalo; (8) Machinery – Laredo; (9) Petroleum, Natural Gas & Minerals – Houston; and (10) Pharmaceuticals, Health & Chemicals – New York].  Importers can apply for the CEE that best fits their business.

* Once accepted, all consumption and ADD/CVD entries will be processed by the CEE.  Participants are “strongly encouraged” to file the entries with the CEE electronically.  The physical importations, however, can still move through the same ports of entries (i.e.., the supply chain does not need to be modified).

* All post-entry validations (including protests) for entries filed with a CEE will be handled by the CEE (revenue collection will continue to be handled by the port for the time being).

* Any Requests for Information/Notices of Action will be issued by the CEE and need to be responded to electronically.

* For entries subject to ADD/CVD (type 03 entries) that are filed with the CEE, the blanket certificates of non-reimbursement will need to be submitted to the CEE electronically.

* Protests will be processed by the CEE and can be filed electronically through ABI, or via paper with the Port.  If filed electronically, the CEE must be designated.  If filed via paper with the Port, then an electronic copy of the complete protest must be sent to the CEE.

* Reconciliation and drawback entries must continue to be filed with the authorized port of entry/drawback center.

* Enforcement actions will continue to be processed by the ports “until such time that automation allows for the Center to process FP&F actions.”  The CEE will likely play a leading role in most enforcement actions, however.

* Participants that file a prior disclosure can choose to file the disclosure with the CEE, rather than with the Port of Entry concerned (notwithstanding what the regulations currently say).

* Participation in the CEE program is voluntary and participants may withdraw at any time.

In general, the CEE idea is a good one.  There can be benefits to dealing with CBP Import Specialists who understand the industry, its products and issues.  Of course, there can also be downsides to such an arrangement (e.g., once an Import Specialist associated with a CEE sees an issue with one importer, it is easier for him/her to see if everyone in that CEE has the same issue, etc.).  As a result, you would want to have industry leading/well above average levels of compliance before choosing to participate in a CEE.

Also, given that participation is voluntary, we would recommend that you perform a high level cost-benefit analysis before applying.  If you are not experiencing significant delays, not receiving numerous CF-28’s/CF-29’s from different ports of entry, etc., then there may not be much benefit to you participating in the CEE program (there would, in our view, be heightened enforcement risk, however).  Conversely, if you are experiencing issues that can be addressed through having a single point of contact, then the benefits provided by the CEE program may outweigh the costs.

We hope this update is helpful.  If you have any questions about the CEE program, its pro’s/con’s or whether you should participate, please let us know.

Best regards,



CBP Import Trends Report (FY2012)

Dear Friends:

I thought that you might find US Customs and Border Protection’s recently-released annual Import Trade Trends Report for FY2012 to be of interest. The report (which can be found here) contains a number of interesting statistics about CBP’s FY2012 operations. For example, CBP:

• processed $2.38 trillion worth of imports (a 5% increase over FY2011);
• collected $39.4 billion in duties and fees (a 6% increase);
• collected approximately $400 million in antidumping and countervailing duties ($329 million in ADD, a 13% increase; $69 million in CVD a 160% increase).

The report also contains interesting information on the relatively new CBP Centers of Excellence and Expertise, which are processing an increasing percentage of entries in covered industries. Given that 4 additional CEE’s are scheduled to come on line in FY2013 (in addition to the 4 that are already up and running – Pharmaceuticals, Healthcare & Chemicals; Electronics; Automotive & Aerospace; Petroleum, Natural Gas & Minerals), this trend is likely to continue to grow.

In terms of voluntary programs, such as the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Importer Self-Assessment (ISA) programs, the report indicates that participation is relatively flat. The number and percentage of entry summaries filed by C-TPAT members was unchanged (with the value increasing by approx. 2%), as was the percentage of total entries accounted for by C-TPAT members (24% of all entries were filed by C-TPAT members). The numbers for ISA grew a bit more between FY2011 and FY2012, both in terms of the absolute and relative numbers.

One of the more interesting statistics included in the report relates to “net estimated undercollections”. While the report contains very little explanation, it states that CBP estimates that it failed to collect $484 million in required duties and fees in FY2012. This represents a more than 40% increase over the amount uncollected in FY2011. Given how large this amount is (again, both in absolute and relative terms), it is likely that revenue collection/enforcement will be a heightened priority for CBP.

The report contains a number of other interesting statistics and is certainly worth a quick read by anyone who is interested in understanding where CBP will be focusing its increasingly limited resources in FY2013 and beyond.

We hope you find this helpful. If you have any questions, please let me know.

Best regards,