Monday, March 19, 2007

Comment Responses

I asked for thoughts on things to address here in the blog and I received three very thoughtful responses. I'll address them here.

First, Roly P wants the low down on the first sale rule. For those of you who might be unaware, this is the legal principal that lets importers in multi-tiered transactions report the value of merchandise based on the first bona fide sale of the merchandise to the United States. If there is a middleman in your transaction, the middleman is getting some profit and, therefore, increasing the total landed cost. Under the first sale rule, you don't need to pay duty on the middleman's sale to you. Rather, you can report value based on the transaction from the vendor to the middleman.

Seems easy, but its not. If the parties are related, Customs will make it extraordinarily difficult to prove that the first sale price is a legitimate sale to the United States. That's your rock. If the parties are unrelated, it is very unlikely that the middleman will want to disclose the factory price and, therefore, its profit. That's your hard place.

It can be done. I discussed this is a prior post. The benefit is reduced duty liability. But Roly also wants to know if there are risks associated with using first sale. Sure there are. First, you are going to complicate any Focused Assessment or audit. Your paper trail for each first sale transaction is going to have to be much more detailed than just the invoice and proof of payment. You'll need some way of getting the manufacturer to vendor price verified. In a lot of these cases, it is hard enough verifying whether there is or is not a relationship between the parties. This is particularly true in the textile trades where there are many small companies involved and lots of complicated familial and business relationships that are not always documented or obvious.

Second, your risk of an audit is increased. This is particularly true if you just decide to switch to first sale valuation without informing Customs & Border Protection. There will be a change in your valuation and that might be enough to trigger a CF-28 Request for Information or even a Quick Response Audit. There are a few ways to avoid this. First, you could seek a prospective ruling asking permission to value the goods based on the first sale. Essentially, this means gathering up a model document package and arguing to CBP that is shows a bona fide sale to the U.S. An alternative, is to make entry as usual and file a protest with a full model document set. This might be slower, but it lets you avoid the "prospective only" issue with rulings.

It used to be that everyone trying to use first sale valuation tried to get a ruling for every vendor. You can thank the accounting firms for that practice. It's not necessary. All that is necessary is that you exercise reasonable care in reporting your value. A ruling (or approved protest) is a good way to show reasonable care, but it is not always required. Talk to your lawyer about your circumstances.

The third danger is that your cash flow might get messed up. If you report the middleman value and CBP ultimately rejects it, you might be stuck paying a big bill at one time. You might even be hit with a penalty if it looks like you arrived at your reported value without exercising reasonable care. So, look at your potential savings. If there are big dollars involved, you are more likely to want to get a ruling.

Next, the mysterious Lady X asked a very practical question: Why does it take CBP forever to finalize regulations? Truthfully, I have no earthly idea. I'd be thrilled if someone from OR&R (or is it OT?) would chime in.

Finally, Celia Dávila left a well-reasoned and finely crafted comment consisting of a list of phrases related to the smoking of cannabis. I'd like to thank her for that.

4 comments:

Nick Herndon said...

Larry, here's another topic: whether CBP can or should require documentation such as manufacturing, production, or plant records as necessary backup to FTA Certificates of Origin. CBP would love to make it mandatory (and it makes sense from an audit standpoint) but in reality, what petroleum refinery or textile manufacturer is going to share its production secrets with 3 or 4 (or more) companies in a multi-tiered transaction?

Larry F. said...

Nik:

I love this topic. I wrote about it a bit in this post: NAFTA Upside Down.

I will, however, do another post more specifically on your point.

Anonymous said...

Larry, on a lighter note, I would like to point out a minor error in your blog. You wrote, and I quote, "...first sale rule. For those of you who might be unaware, this is the legal principal..."

There is a difference between legal principal and a legal principle! I got a kick out of this especially because this is coming from an attorney!

Nick said...

Larry, here's a new question for you: who should be considered the Manufacturer on the CF 7501? The invoicing party (i.e. supplier) or the original manufacturer? Instructions for the 7501 state:

"BLOCK 13) MANUFACTURER ID (MID)

This block is provided to accommodate the manufacturer/shipper identification code. This code identifies the manufacture/shipper of the merchandise by a constructed code. The method for deriving the code can be found in Appendix 2. For the purposes of this code, the manufacturer should be construed to refer to the invoicing party or parties (manufacturers or other direct suppliers). The name and address of the invoicing party, whose invoice accompanies the CBP entry, should be used to construct the MID. The manufacturer/shipper identification code is required for all entry summaries and entry/entry summaries, including informal entries, filed on the CBP Form 7501."

Does it even matter whether the producer or supplier is used? Personally I think that the supplier (invoicing party) should be used, but this can create a problem when Country of Origin is crucial (e.g. in a FTA duty free situation).