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“First Sale” Duty Savings Opportunities and Challenges

By Brian Murphy, Miller & Company

Although around for three decades, there has been renewed interest by US importers in Nissho Iwai “First Sale” customs valuation since the Trump Administration levied additional Section 301 duties on most China products and Section 232 steel/aluminum duties. While “first sale” valuation represents a potential duty-savings opportunity to declare a lower customs value, there are both practical and legal challenges which require a carefully structured and diligently-validated system to reduce the risk of non-compliance by US importers.

“Normal” Customs Value

First some background. Most US imports are valued based on “transaction value,” the total price paid or payable for imported merchandise sold for exportation to the US, plus any amounts for certain items not in the price such as “assists.” Fundamental is a sale for exportation to the US, with US Customs considering the passage of title and risk of loss for the goods clearly destined for export to the US.

For instance, an importer buying $100 China-origin goods from a foreign vendor may declare on its Customs paperwork the $100 value for the goods (applying “transaction value”) to calculate duties owed. If China goods are subject to 5% regular and 25% Section 301 duty rates, the importer owes $30 in duties.

What is a First Sale?

What if that foreign vendor was a middleman/trading company purchasing from a China factory for $60 – earning a $40 mark-up? Rather than the $100 “second sale,” could the U.S. importer declare the “first sale” $60 – resulting in $12 duty savings ($30 - $18)?

Nissho Iwai First Sale?

Yes, under the 30-year-old Nissho Iwai court decision, but only if the importer can rebut US Customs’ presumption that it’s the $100 it paid, by proving the “first sale” is a bona fide, arm’s length sale for exportation for goods clearly destined to the US. That depends on the “complete paper trail” including all POs, invoices, payments, transportation documents, etc., which presents two primary challenges.

First, why would a middleman share its mark-up and records with the importer? Second, are all the records consistent with “first sale” value? Do all records consistently demonstrate two sales transactions with title transfer and risk of loss? Is the middleman merely acting as the factory’s or importer’s agent? What are the transactions Incoterms, and is there “flash” title transfer? Did the middleman supply free materials or machinery, or make additional payments, to the factory? Does the middleman provide instructions to the factory? Is the middleman free to resell to anyone at any price desired? Who is responsible for canceled orders or nonpayment? Who pays freight and cargo insurance? Are the parties acting at “arm’s length” if “related”? Are goods shipped directly to and marked for the US market?

US Customs is skeptical of “first sale” transactions and will very closely scrutinize the “paper trail” for inconsistencies. In short, “first sale” is a potential duty-savings opportunity, albeit a tricky one for importers to structure to withstand intense scrutiny.

Brian Murphy
Brian Murphy

Brian J. Murphy is a Partner at Kansas City-based Miller & Company P.C., a law firm that serves a diverse clientele exclusively in the area of Customs, international trade, and foreign-trade zones law. In doing so, the firm represents international manufacturing, distribution, and logistics companies, and various governmental and economic development entities. The firm participated in the founding of the National Association of Foreign-Trade Zones (NAFTZ) and serves as General Counsel for the organization. Mr. Murphy’s practice focuses on tariff classification, customs valuation, origin marking, special trade programs, trade remedies, Customs penalties and prior disclosures, other government agency requirements, foreign trade zones, trade security initiatives, Census AES, and Customs audits. In doing so, he often helps companies develop internal import compliance programs and manuals, conducts import/export training sessions, obtains Customs administrative rulings, prepares prior disclosures, and manages Customs audits.

He is a frequent lecturer at Customs and international trade functions throughout the United States for such organizations as the U.S. Association of Importers of Textiles and Apparel (USA-ITA), Women in International Trade, Los Angeles, 1997 World Apparel Conference (Hong Kong), Western Cargo Conference (WESCCON), L.A. Customs Brokers and Freight Forwarders Association, American Chamber of Commerce in Hong Kong, Los Angeles County Bar Association, Los Angeles Customs Brokers & Freight Forwarders Association, Greater Kansas City Chamber of Commerce, International Trade Council of Greater Kansas City (ITCGKC), and client functions. He previously practiced 10 years at an international trade boutique law firm in Los Angeles and 4 years at a Hong Kong-based firm concentrated on international trade and commercial law. He was the Chair of Customs Law Committee of the L.A. County Board Association from 2001 to 2003 and currently serves on the ITCGKC Board.

Mr. Murphy received his B.A. in English Literature from University of California, Los Angeles and his J.D. from the Santa Clara University School of Law where he was an Articles Editor of the Santa Clara Computer and High Technology Law Journal. He is currently admitted to practice in Missouri, California, District of Columbia, and before the U.S. Court of International Trade.


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