I got the feeling that something ain't right,
I'm so scared in case I fall off my chair,
And I'm wondering how I'll get down the stairs,
Clowns to the left of me,
Jokers to the right,
here I am,
Stuck in the middle with you.
Remember that transaction value is the price paid or payable for the goods when sold for export? Well, what happens if there are two or more sales for export? Believe it or not, that happens a fair amount. The most common scenario is where the U.S. customer buys from a reseller who, in turn, buys from the manufacturer. Generally speaking, the price from the manufacturer to the middleman will be less than the sale from the middleman to the importer. So, for customs valuation purposes, guess what the importer wants to use as the sale for transaction value? By the same token, guess what sale Customs wants to use? The answer is that Customs is often quite happy to apply duty to the middleman's profit which is usually the difference between the prices.
Happily, the courts have given importers a path to the lower priced "first sale" for valuation purposes. That path is in the case Nissho Iwai v. United States. In Nissho, the NYC subway folks needed to buy some subway cars from Kawasaki in Japan. Rather than walk into a Kawasaki dealership in Paramus, the Metro went to a Japanese trading company called Nissho Iwai America. Nissho Iwai America bought the cars from Nissho Iwai Japan, which bought them from Kawasaki in Japan. When the goods arrived, Customs wanted to asses duty based on the highest sales price in this chain of events; and that was the price from Nissho Iwai America to the Metro.
The Metro, of course, said, "Wait a minute. The sale from Kawasaki Japan to Nissho Iwai Japan is a sale for export to the U.S. Use that as transaction value."
Low and behold, the U.S. Court of Appeals for the Federal Circuit agreed. The Court said that any sale in the chain that is at arm's length and clearly destined for the U.S. can serve as the basis for transaction value. For subsequent importers trying to apply this decision, the hard part is in proving the facts.
Basically, a transaction is at arm's length if there is no relationship between the parties. When there is a relationship, it can still be at arm's length if the importer can prove that the relationship did not affect the sales price. See the post Relatively Speaking for more on that.
Customs has a laundry list of things it will consider as evidence that the goods were destined for the U.S. at the time of the sale. So, you might need to present purchase orders and bills of lading showing U.S. points of delivery. Technical specifications might show, for example, that the goods were produced to U.S. governmental standards (e.g., left side steering wheels or U.S.-style wall plugs). Product labeling, stock numbers, bar codes, etc. can all be evidence of intent to sell to the U.S. But, Customs will look at these things on a case-by-case basis and, if possible, shoot holes in your theory.
One big giant gaping hole that usually comes up is that there really is no sale at all between the middleman and the manufacturer. This commonly happens when the vendor and middleman are related or the middleman is really an agent for the buyer. Customs looks for a couple things to show that a sale has taken place (although no one of these is necessary):
- a change in who has title to the property
- a change in who has the risk of loss
- a payment made in exchange for the goods
- possession of the goods
As I have said before, this can all get complicated. For example, usually the merchandise is shipped directly from the vendor to the importer, even if there is a sale through a middleman. In that case, there might be an simultaneous transfer of title with possession never going to the middleman. Is that a real sale? Could be, it all depends on what facts you can muster to make your case.
The real killer in this process is the fact that the middleman almost never wants to turn over the pricing information from the vendor and, thereby, disclose its profit. That's where is pays to come up with clever strategies to keep that information from the actual importer while at the same time making claims on their behalf.