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The "first-sale-for-export" rule initially looked like a victory for importers, but Customs & Border Protection has significantly restricted its applicability
Nine Years ago, I wrote about the then-still recent Federal Circuit decision in Nissho-Iwai American Corp., 982 F.2d 505 (CA-F.C., 1992), which enabled importers into the U.S. to lower the dutiable value of their imported goods by taking out a foreign middleman seller's markup from dutiable value.1 In light of some Customs & Border Protection (CBP)2 actions to restrict its applicability in the interim, it is a good time to revisit the first-sale-for-export (FSFE) strategy that was validated by the appellate court in Nissho-Iwai. In those nine years, direct imports from China into the U.S. have exploded. Many of those imports are of built-to-order goods, with a mushrooming network of so many middleman and factories that FSFE is a real opportunity. This article aims to assess CBP's changed administration of the law and to marshal importers' possible reactions to CBP to serve as a way forward.
The First-Sale Strategy Defined
The basic principle underlying the strategy is grounded in the definition of "transaction value" (TV), the preferred methodology for the customs valuation of imported goods. The TV method is applied by the U.S. and the customs authorities of all other contracting parties to the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade ("Valuation Agreement").3 Article 1.1 of the Valuation Agreement defines "transaction value" as "[t]he price actually paid or payable when sold for exportation to [the country of importation]."4 As a general rule, CBP presumes that the price paid by the importer to its vendor is for the qualifying sale for exportation to the U.S. (i.e., the appropriate basis for determining transaction value), and the burden is on the importer to rebut this presumption.5
In a successful FSFE arrangement, the importer can point to the presence of a foreign middleman or to a tiered series of foreign sales. Thus, one would expect to see the following structure:
Typically, the buyer/importer would place an order with the middleman, who would then fulfill that order with a covering or back-to-back purchase order placed with one or more other vendors or directly with a factory. The strategy tracks the way...