The U.S. Court of International Trade (CIT) has called into question the “First Sale Rule” tariff mitigation strategy deployed by an increasing number of companies to reduce Section 301 tariffs on China-sourced goods. In Meyer Corp. v. U.S., No. 13-00154, Slip Op. 21-26 (March 1, 2021), the CIT questioned whether the First Sale Rule should be used in matters involving imports from non-market economy (NME) countries like the People’s Republic of China (PRC). While the CIT declined to expressly rule on that issue (but, in an unusual step, suggested that the U.S. Court of Appeals for the Federal Circuit do so in a future ruling), the CIT potentially increased the burden on importers seeking approval for First Sale Rule consideration. Companies utilizing the First Sale Rule should closely monitor actions by U.S. Customs and Border Protection (CBP) in the wake of this decision, as CBP is the approving authority for First Sale Rule use.
The First Sale Rule is a common strategy used to reduce the value of goods sold through multiple parties (i.e., “middlemen”) and targets the customs valuation on the “first sale”, typically between the foreign producer and distributor. This initial sale reduces the value of the goods for customs purposes as that first transaction does not include the distributor’s mark-up and other associated costs. If approved in advance by CBP, the importer will pay duties on the reduced value of the good, lowering the overall duties paid.
Pursuant to Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the “first sale” rule requires (1) bona fide sales that are (2) clearly destined for the United States (3) transacted at arm’s length and (4) absent any distortive nonmarket influences. CBP has interpreted the Nissho Iwai test to require an importer to provide (1) a detailed description of the roles of each of the parties involved in a multi-tiered transaction; and (2) a complete paper trail relating to the imported merchandise that shows the structure of such transaction. See Determining Transaction Value in Multi-Tiered Transactions, T.D. 96-87, 30 Cust.Bull. 52 (Jan. 2, 1997).
In the CIT case, Meyer Corporation, via its various entities located in Thailand, the PRC (including Hong Kong and Macau) and a HoldCo in the British Virgin Islands, produced kitchenware (including the popular Rachael Ray-labeled and Paul Deen-labeled products) and distributed those products globally, including the United States. Meyer, via PwC, provided detailed requests for First Sale Rule authorization to CBP that were approved. Later, however, CBP audited the determinations and declined to apply the First Sale Rule because Meyer could not demonstrate arm’s length transactions between the parties since its Chinese “parent” did not provide the financial information CBP requested in discovery. Litigation ensued.
In the CIT decision, the court stressed that U.S. importers have consistently ignored the fourth part of the Nissho Iwai test — “absent any distortive nonmarket influences.” Beyond questioning whether the First Sale Rule could even apply in matters involving PRC-sourced goods, the CIT potentially raised the burden for importers (and their consultants) to provide direct evidence that the various transactions are not affected by NME status. The CIT queried whether parties must provide evidence demonstrating factors such as: an absence of restrictive stipulations associated with an individual exporter’s business and export licenses; any legislative enactments decentralizing control of companies; other formal measures by the government decentralizing control of companies; the ability to set export prices independently of the government; the authority to negotiate and sign contracts and other agreements without the approval of a government authority; the possession of autonomy from the government regarding the “selection” of management; and the ability to retain the proceeds from sales and make independent decisions regarding the disposition of profits or financing of losses. The CIT also opined that “first sale” documentation may not always rest with the producer but with holding companies that may need to provide documentation and transparency.
The CIT ultimately based its decision on the lack of evidence provided by the importer on these key factors and the apparent “resistance” from Meyer’s “parent”, a non-party, to CBP’s discovery request concerning non-market influences. U.S. importers, however, should closely monitor CBP’s interpretation of this decision and review any use of the First Sale Rule in its tariff mitigation strategies to account for these potential changes.