The First Sale Doctrine: A Strategic Tool to Reduce Import Values & Lower Tariffs with U.S. Customs | Cozen O’Connor

The first sale doctrine is an important principle in U.S. customs law that allows importers to use the price of the first sale in a series of transactions as the basis for calculating customs duties. This doctrine can be strategically leveraged to reduce the import value of goods to minimize tariffs, thus presenting significant benefits for businesses engaged in international trade. As tariffs are expected to increase with the new administration, this tried-and-true strategy should be implemented by importers when applicable without hesitation.

How the First Sale Doctrine Works

To utilize the first sale doctrine effectively, the following conditions must be met:

Multiple Sales: There must be at least two sales involved — one being the initial sale from the manufacturer (or foreign producer) to an intermediary and the other being from the intermediary to the U.S. importer. There may, of course, be other intervening sales.

Arm’s Length Transactions: The sales must be conducted at arm’s length, meaning that the parties involved are independent, and the price reflects realistic commercial value without manipulation.

Documentation: Importers should keep and maintain thorough documentation to support the claimed first sale price, which should include, at a minimum, sales contracts, invoices, and proof of payment.

Watch Out for Assists: An assist is a service or item that is supplied to the buyer of imported merchandise at a reduced cost or for free. It is used in the production or sale of merchandise for export to the United States and is considered a valuation enhancement. Examples of assists could include: engineering, development, artwork, design work, plans, sketches, and certain molding and framing. Identifying assists is important because the value of an assist is added to the transaction value of the merchandise when it is valued for entry. This transaction value, again, is the price paid or payable for the merchandise when it is sold for export to the United States and the basis in which tariffs and duties are based.

Additional Benefits of Using the First-Sale Doctrine

As discussed above, by using the first sale price, importers can often significantly reduce the value declared to U.S. Customs and Border Patrol at the time of entry into the United States market. This reduction will generally lead to lower tariffs or duties. As such, the benefits of use of the first sale valuation system include:

Cost Savings: Importers can save substantial amounts in duties, especially for high-value goods, translating into more competitive pricing or increased profit margins. Such cost savings generally do not work for lower-value imports. 

Pricing Flexibility: Reduced duty payments provide importers with the flexibility to adjust their pricing strategies in a competitive market landscape. In other words, if you are successfully using first sale valuation, and your competitors are not using it for the same or similar products, you have an automatic pricing advantage. 

Cash Flow Improvement: By decreasing the overall tariff burden, companies can improve profits, allowing for reinvestment in other areas of the business, or the general reduction in product pricing.

Challenges and Considerations

While the first sale valuation offers significant advantages, it also comes with challenges that importers must navigate. 

Regulatory Compliance: Importers must declare the use of first sale at the time of first entry and they must ensure compliance with all applicable regulations. Most importantly, it is the duty of the importer to, in good faith, accurately assess their own supply chain to determine eligibility for using the first sale valuation. 

Documentation and Recordkeeping: The burden of proof lies with the importer to provide adequate documentation supporting the use of the first sale value. This requires careful recordkeeping and process management.

Potential for U.S. Customs Scrutiny: U.S. Customs may scrutinize first sale claims, particularly in cases of perceived undervaluation. This generally leads to expensive and time consuming audits and potential penalties. No one can guarantee that U.S. Customs will not take a different approach to your claimed valuation or the structure of the sale stages.

The first sale doctrine serves as a powerful mechanism for businesses looking to reduce their import values and associated tariffs when importing goods from abroad into the United States. By leveraging this legal and important tool, importers can gain a competitive edge in the market, improve their financial profitability, and more efficiently navigate the complexities of international trade. However, adherence to compliance obligations and diligent documentation practices are essential to fully capitalize on the potential benefits while minimizing risks. Importers considering this strategy should consult with experienced legal counsel and trade compliance experts to ensure proper application of the first sale doctrine within the framework of U.S. Customs regulations.

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