The First Sale for Export Valuation (“First Sale”) option, a method by which the price of merchandise in a multi-tier transaction is set by the party originating the sale – usually a factory/manufacturer – has been around for decades. First Sale is particularly relevant when there are multiple sales and purchases of merchandise between the original seller and the importer.
Historically, this valuation area did not receive much attention since it was only addressed by a few periodic U.S. Customs and Border Protection (“CBP”) rulings. In 1992, however, Nissho Iwai American Corp. v. United States provided more details on how First Sale could be used to declare a lower valuation on merchandise. Subsequently, First Sale has been the subject of several court cases, and CBP publishes rulings each year to respond to requests from importers to review their First Sale valuations.
The main requirements for valuing merchandise with First Sale are that the transactions must be bona fide sales for export, be clearly destined for shipment to the United States, and if the parties are related, the sales price must be set at arm’s length. Each of these requirements have been the subject of multiple CBP rulings and guidance and could be discussed in detail separately. The purpose of this article is to highlight another requirement from Nissho Iwai that has not received any attention until recently.
The United States Court of International Trade (“CIT”) issued on March 21, 2021 an opinion involving First Sale and the “nonmarket influences” requirement, Myers Corporation, U.S. v. United States, Slip Op. 21-26 (this requirement was initially included in Nissho Iwai).
Because CBP has in the past focused on the other three main requirements in Nissho Iwai (a bona fide sale, clearly destined for the United States and an arm’s length transaction), Myers Corporation has created a lot of discussion on the possible long-term impact of claiming First Sale.
This new court opinion is very detailed and includes factors related to each of the First Sale requirements. The underlying case is very complex and unique, where the entries claiming First Sale valuation were entered in September 2011 and were initially approved by the Port of Entry.
Traditionally, when considering First Sale, CBP takes the position of reviewing a “totality of the circumstances” to determine if the First Sale requirements have been met. However, the First Sale “totality of the circumstances” in Myers Corporation were not the normal set of factors:
The CIT ruled that First Sale requirements were not met, including that the requirement of no nonmarket influences was not established. In addition, the opinion includes much more detail on the three First Sale requirements as applied by CBP in the past. It is notable that the CIT also stated:
“… this court has doubts over the extent to which, if any, the “first sale” test of Nissho Iwai was intended to be applied to transactions involving non-market economy participants or inputs. In that regard, the Court of Appeals for the Federal Circuit could provide clarification.”
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We do not feel at this time that, based on Myers Corporation, there is any reason to panic or stop claiming First Sale. However, it is important to monitor how this situation develops in the Court of Appeals and CBP, especially if the parties involved in the First Sale transactions are related.
It remains to be seen when the Court of Appeals or CBP might provide further clarification on whether First Sale was intended to be claimed at all if nonmarket influences exist, or further define how to apply the requirement, and if any subsequent cases would make it to CIT for an opinion.
Since the nonmarket requirement has not been previously applied by CBP or the courts, further guidance would most likely be issued before the requirement is applied to First Sale claims. Nevertheless, Myers Corporation highlights the importance of a complete First Sale compliance process that should include:
Feasibility Review. A feasibility review should be done to identify the cost/benefits of implementing a First Sale program. Although not required, this step can help identify the amount of compliance resources to dedicate to the steps below, as well as the duty savings which can vary by importer and may be a factor in deciding whether to proceed.
Pre-Implementation Review. A reasonable number of ongoing transactions for each vendor/factory combination should be reviewed prior to claiming First Sale. All relevant information, documents, and financial statements (if applicable) should be analyzed to ensure all First Sale requirements are being met.
Post-Implementation Review – A reasonable number of recently claimed transactions for each vendor/factory combination should be reviewed, and on a regular on-going basis. This will ensure that all the parties remain aware of the requirements and related documentation. Supply chains are constantly changing, and the specific documents used in a multi-tiered transaction may also change. Importers must apply reasonable care to ensure all the requirements are met for each transaction. The amount of transactions to review will vary by importer and the level of risk.
CBP rulings on First Sale are issued on a regular basis, but most do not involve any substantially new considerations or requirements. As a result, some importers prefer to have a ruling in place to support their specific situation because each ruling has a different “totality of circumstances” where the factors considered do not directly relate to other importers.
Myers Corporation highlights the continued scrutiny given to First Sale and the need for an effective program to meet current requirements. What’s more, the case reminds us that it is critical to be aware how future clarifications of “nonmarket influences” may impact future First Sale claims.