First Sale, Settled Law and CBP

In today's Federal Register, Customs and Border Protection is proposing to modify the interpretation of the phrase "sold for exportation to the United States" to effectively eliminate the use of so-called first sale valuation by U.S. importers.

Some history is in order here. Transaction value is defined as the price paid or payable for the merchandise when sold for export to the United States. There is a long line of court decisions stating that the sale for export to the United States can be a sale between parties other than the U.S. buyer and its immediate seller. Usually, this involves a middleman who buys from the factory and resells to the U.S. buyer. When the buyer can show that the first sale was destined for the U.S. and can get documents proving the sale price, that can serve as the transaction value for appraisment. I wrote about this previously here.

As far back as 1988, the Federal Circuit upheld middleman pricing as an appropriate interpretation of the value statute. In McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), made-to-measure suits were being exported from Hong Kong to the U.S. The U.S. buyer would order from a Hong Kong distributor, who then purchased the suits from tailors. The tailors made the suits specifically to the U.S. customers' measurements. Accordingly, the Federal Circuit held that the first sale from the tailor to the distributor was the sale for export to the U.S. An even earlier case, United States v. Getz Bros. & Co., 55 C.C.P.A. 11 (1967) reached the same conclusion although under an earlier valuation statute. In McAfee, the Federal Circuit held that the change in the law was not significant enough to change the result.

Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), involved another serial transaction. In that case, the Federal Circuit held that Customs had to use the sale from the manufacturer to the middleman as the sale for valuation because the sale was at arm's length and the goods were clearly destined for the U.S.

All of that should have resulted in what we like to call "settled law." With settled law, everyone knows what is expected of them. It allows importers to exercise reasonable care. It meets the requirements of "informed compliance." In other words, settled law is a good thing. More on that below.

CBP correctly noted that more recent cases have refused to apply decisions from the the old valuation statute to the current law. Most notable is VWP of America, Inc. v. United States, 175 f.3D 1327 (Fed. Cir. 1999) in which the Federal Circuit said that the correct standard for deciding value issues is the current law rather than the prior law. Keep in mind, however, that VWP did not involve the question of which of two sales was the sale for export to the United States. Also, it is important to know that the phrase "sale for export" appeared in both the old and the current statute.

In addition to VWP, Customs notes that the Technical Committee on Customs Valuation issued a commentary on the question. The Committee noted that the Value Agreement does not define the phrase "sold for export to the country of importation." The Committee concluded that the Agreement assumes that the buyer for purposes of valuation is in the country of importation. That means, according to the Committee, that the sale for valuation should be the last sale, not the first. Customs also correctly noted the difficulty importers have in establishing the details of the first sale and the difficulty CBP auditors have in verifying them. This is "considerable fact finding" that the Courts and legislative history agree were not anticipated under the revised value law.

Based on all of this, CBP concludes that it is consistent with the WTO Agreement and with the statutory text to re-interpret the value law consistent with the Committee decision. In other words, "first sale" will become "last sale."

This raises a ton of important questions. First and foremost is whether the Federal Circuit will agree. The problem for Customs is that the Federal Circuit has already ruled on the interpretation of "sale for export to the U.S." That interpretation stands until it is overturned either by the Supreme Court or by the full Federal Circuit sitting en banc. It is difficult to predict what happens in litigation, but I very much doubt that the Federal Circuit is going to like having its precedent given so little respect. On the other hand, there have been several cases recently in which international obligations have been used as a lever to push the interpretation of statutes in certain directions. So, Customs is not without ammunition.

The other question is frankly this: What is going on? Why is so much law becoming unsettled?

The current leadership at Customs seems to be taking a very hard look at a number of policies and exercising its administrative discretion in ways that are antagonistic to the trade. For example, in a January 9 Bulletin Notice, CBP proposed to modify rulings interpreting HTSUS item 9801.00.20. The proposal would greatly reduce the ability of importers to use 9801.00.20 to avoid paying duties again on the re-importation of goods previously imported, duty paid, and exported pursuant to a lease of similar agreement. In the past, CBP has been very liberal in construing "similar arrangements." That was the settled law. Under the proposal, the similar agreement must have a "use" similar in nature to a lease. While I can see the point, the question remains, Who was clamoring for this change? Who benefits by taking this position? This has no relation to cargo security and it does not facilitate legitimate trade. What's the problem? It is not enough just to say that CBP is trying to properly enforce the law because it is an executive agency with discretion in how it enforces the law.

The Ford case is over, but it reeks of the same issues. Why did CBP decide to pursue Ford for NAFTA records it could have secured from the exporter. Someone made that decision for some policy reason. Happily, the case was dropped. But, at this point, we still have no idea what the current policy is.

The same goes for the Informed Compliance Publication on transfer pricing. Customs had the opportunity to facilitate legitimate trade by telling importers that getting (and following) a fancy accounting firm transfer pricing study is sufficient to establish reasonable care. Instead, it told importers that the study is not sufficient. Who benefits from that position?

Compliance is easier to establish and maintain in an environment where we know the rules and they don't change without reason. Assuming there is good reason for these changes in policy, it would be nice if CBP were more transparent about it.

Everytime CBP has a decision to make like this, one hopes some one in the process asks, "Do we have to do this? Is it required?" If not, the next question should always be, Why are we doing this?


Anonymous said…
Customs should stop using the term "first sale destined to the US". The whole term is nothing but confusing, subject to a variety of interpretations, and not really founded in sounded legal principle...

Rather than using the above term, Customs should identify which has been the "bona fide sale" to determine the value for customs purpose. In other words, did the middle man had title over the importer goods?. That is, (i) did he have control as to the final destination of the goods?, (ii) was he in the position of transfering title to the importer?, (iii) Did he bear "risk of loss" before the sale to the importer was perfected?. If the answer is yes, then all evidence would point to the fact that the middle man was the owner of the goods and that as such his sale can be used to determine the value of the imported goods. If the answer is no, then the middle man was merely an agent. In this case, his "sale' to the importer should regarded merely as a scheme to artificially lower the customs value of the imported good.

Best Regards,

Cross-Border Nightmares.
Anonymous said…

Before I became so enamored with legal precedent, when I more readily questioned authority basic on more pure logic, I thought the “first sale” doctrine didn’t make much sense. Sometimes things that came about in another place and time lose their logic in today’s world, and we’re left wondering, “What were they thinking?” The Second Amendment, for example, but that’s a topic for a different blog.

And legal precedent can be a slippery slope. Two wrongs (or two dozen wrongs) don’t make a right. “That’s the way we’ve always done it” doesn’t always score points with me when new technologies offer us better, albeit different, ways to do it.

So, putting legal precedent, if not clich├ęs, aside, I find myself agreeing with CBP. A transaction from a supplier in Germany to a middleman in Italy doesn’t cause the export to the United States nearly so much as the transaction from the middleman in Italy to a buyer in the United States.
Larry said…

I completely agree. If I were a judge looking at first sale on a clean slate, I would likely defer to CBP and find its statutory interpretation to be reasonable.

In fact, when I was a CIT clerk, my judge had that very issue. He decided that Customs' then-prevailing test by which the sale for value was the sale that most proximately caused the importation, was allowable. That was a case called Brosterhouse. In deciding Nissho, the Federal Circuit overturned Brosterhouse.

My concern is that we are now a long way past the time when this should be an issue; unless there is some overriding need to revisit the question. Customs has not identified any such need. Companies have built business plans and vendor relationships around Nissho and first sale. (Not to mention the accounting firms who turned first sale into a product in and of itself.) Why are those being threatend? As the wise man (i.e., Batman) likes to ask, "Who benefits?"

In my view, being right about the law is not always as important as making sure everyone knows what the law is.
Anonymous said…
Do you know whether any other countries formally allow the use of the "first sale"? I don't believe our trade stats are adjusted to reflect "first sale" transactions like they are to reflect FOB vs. CIF transactions--CBP doesn't collect the data and I've never seen this in Census trade data. If that's the case, aren't our trade stats significantly distorted?

A proper adjustment would probably result in a significant increase in the value of our imports with no change in the value of our exports if other countries aren't using the first sale rule. As a result there would be a substanial increase in our trade deficit.

I wonder what would happen politically if our adjusted trade deficit with China suddenly increased by 10%. What are your thoughts?
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