First Sale in crosshairs

First Sale in crosshairs

First Sale in crosshairs

 
The First Sale rule has never been popular with U.S. Customs and Border Protection and is under assault again.
    In July, the agency proposed amendments to its internal compliance publication, which guides enforcement personnel on how to do their jobs, essentially forcing importers to keep extra documentation to verify their claim of first sale privileges and substantially increasing their record-keeping burden.
    The rule allows a company to base the value of an imported finished good, for purposes of determining the duty rate, on the cost of the product at the first sale in the supply chain rather than the value at the point of importation.
    It is common for importers, especially in the textiles and footwear industries, to set up first sale programs because they often buy merchandise from middlemen. First sale allows them to pay duty on the price the middleman paid the factory for the goods rather than the price the importer paid the middleman.
    In the apparel and footwear industries duty rates reach 18 percent or higher and companies want to avoid paying duty on the middleman’s overhead and profits, which can result in substantial savings. Importers usually exert great care to make sure all the required elements of value, such as raw materials, labor and intellectual property, are included in the first sale price.
   When Customs audits a transaction it wants to see the records to make sure there have been no additional payments or assists—something of value provided to the vendor such as tooling, packaging or parts that would bring down a factory’s production costs—that should be added to the first sale price.
    Increasingly, CBP import specialists have been attempting to gain access to the books and records of the foreign middleman and suppliers to confirm the transactions are legitimate.
    International traders are very sensitive about CBP’s intentions since the agency tried to eliminate first sale at least twice last decade. But the courts over a quarter century have upheld the legality of first sale and Congress in 2008 passed legislation instructing CBP to preserve the rule.
    Agency officials insist they are not making any policy changes, simply clarifying what documents field officers should obtain.
    Importers and their trade associations have reacted vigorously, complaining CBP is trying to make it so difficult to use first sale that some will give up.
   Comments were due Aug. 4, but some say the changes are significant enough that the agency should go through a rulemaking process because with the informal way there is no economic impact study or the same level of transparency.
    Tom Travis, managing partner of Sandler, Travis & Rosenberg, and chief executive officer of the law firm’s trade advisory services unit, told me the scope of the document request—such as accounts, general ledgers, and tax returns—from business partners in foreign countries is extremely difficult to comply with for an importer.
    Besides, he added, an importer can get most of the documents when requested and most are able to validate their transactions. The problem is that no self-respecting foreign company is going to open its books to a U.S. importer and potentially open itself up to antitrust and confidentiality concerns by provide sensitive information to multiple customers who are competitors. Foreign laws, in some cases, prevent such disclosures.
    CBP’s proposal is “a solution in search of a problem. It’s an overreach of record keeping and sets a new standard for reasonable care that’s artificial and impossible to meet,” Travis said.
    Essentially, Customs is trying to gain access to detailed records which are not controlled by the importer, and not necessarily prepared in English or according to Generally Accepted Accounting Principles, as if they were auditing a U.S.-based company.
   In its official comment to Customs, the American Apparel & Footwear Association said questions raised by a handful of audits do not justify a change in practice for an entire industry. Most verification problems could be fixed with better training of auditors as to how and when to request specific documents, and there should not be a pre-determined checklist of documents required because companies will feel compelled to obtain all the documents and have them at the outset, it said.
    “Some of the documents identified are most likely unavailable to the majority of companies engaged in First Sale transactions and others are not necessary to substantiate a First Sale claim. Factory books and records, for example, are likely not available to the unrelated U.S. importer and are currently not used in First Sale validations because they have little relevance to verify the first sale transaction that cannot be attained by other less intrusive documents.
    “The cost to add, generate, and store additional paperwork, even if those documents are never requested, cannot be underestimated. This cost magnifies if these documents begin to form the basis of other examinations or routine inquiries beyond audits. Such costs are especially painful given the fragile state of our economic recovery” and would undermine the competitiveness of U.S. firms, the trade association said.
    What really doesn’t make sense is that Customs has made great strides the past four years to reduce regulatory barriers to trade and simplify customs procedures in an effort to facilitate economic growth. The agency has placed great emphasis on industry partnership programs. It is considering merging Customs-Trade Partnership Against Terrorism and the Importer Self-Assessment programs and recently established the Centers for Excellence and Expertise to help streamline post-entry processes. As the AAFA noted, it goes against the principle of partnership and account-based treatment.
    Travis and others said they are hopeful CBP will take industry’s objections seriously and withdraw the proposal.

This column was published in the September 2014 issue of American Shipper.

The demise of small trucking companies is very similar to the demise of mid-scale farms, and it’s a serious concern especially as owners of these smaller trucking companies age out of the system.

The Port of Virginia handled 240,035 TEUs in March, which was its second-busiest March despite a 4.8 percent year-over-year decrease.

Most Popular
Latest News
Social Media

Loading...

Robots to soon help in airplane manufacturing

Robots to soon help in airplane manufacturing

Embed this story

Share Code Version 1

This version will embed the story headline and includes HTML fallback protection, ensuring the story will display even if some users decide to disable javascript in their browsers.

Copy & Paste the following code to embed this story on your website:

Preview

First Sale in crosshairs

on Aug 17, 2014AmericanShipper.com

Share Code Version 2

This version will embed the story headline without any styling applied. Use this version if you will use your own custom styling on your website. This version also includes HTML fallback protection.

Copy & Paste the following code to embed this story on your website:

Preview

First Sale in crosshairs

on Aug 17, 2014AmericanShipper.com