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US Customs to Importers: Higher Duties Should Apply on Purchases from Distributors

Date: 4/1/08

On January 24, 2008, US Customs and Border Protection ("CBP") proposed elimination of a longstanding rule of import valuation. If adopted, this proposal will increase the duties paid by importers that make their purchases through a foreign distributor or middleman instead of directly from a manufacturer. CBP has set April 23, 2008 as the deadline for comments on the proposed change. Consequently, companies have less than three months to consider the impact of this proposal on their business and to prepare their response.

Current CBP Practice: First Sale Rule
Currently, CBP applies the "First Sale" rule to value imports and assess duties on merchandise purchased from a foreign distributor or other foreign middleman for shipment to the United States. The First Sale rule allows importers to declare the price paid by the middleman to the manufacturer as the US import value of the goods, rather than declaring the price paid by the importer to the middleman. To use this rule, the importer documents that the sale from the manufacturer to the middleman was made at arm's length with the merchandise clearly destined for the United States. Over the past twenty years, this rule has been approved repeatedly by US courts and CPB and many importers rely on the rule to reduce import duty liability.

CBP Proposal: Last Sale Rule
CBP proposes to eliminate the First Sale option and instead to use only the last sale price before importation to determine the value of imported goods and the US duty owing. The example below illustrates the proposed change.

Snappy Soccer USA, Inc. orders 10,000 soccer ball bags from a Hong Kong ("HK") distributor. The bags are manufactured in China.
Price paid by the HK distributor to the Chinese manufacturer $100,000
Price paid by Snappy Soccer USA to the HK distributor $150,000
Soccer ball bags are subject to a U.S. import duty of 17.6%. Under the First Sale rule, CBP would calculate:
$100,000 x 17.6% = $17,600 duties owed

BUT, if CBP's proposed rule goes into effect, the same duty rate would be applied to $150,000, that is, the "last sale" price before importation:

$150,000 x 17.6% = $26,400 duties owed

Impact of CBP's Proposed Rule
As the example illustrates, the proposed "Last Sale" rule would significantly increase the U.S. duty owing. Snappy's duty liability has increased by $8,800 on this hypothetical shipment. Some analysts have estimated that most importers currently using the First Sale rule will face duty increases in the range of 8 to 15 percent, depending on the product and the foreign distributor's margin.

Affected Companies
Under this proposal, companies that import products from a foreign distributor or middleman would be required to pay the increased duty amount to CBP, regardless of whether the additional cost can be pushed back to suppliers or passed on to customers. Also, the proposed rule would put importers who use a foreign distributor at a commercial disadvantage against companies importing the same goods under a contract made directly with a foreign manufacturer. Whether due to their size or the nature of the products they are importing, companies that source directly from a manufacturer, without any intermediate sales, will not be affected.

Deadline for Action
Click here CBP's complete description of its proposal was published in the Federal Register on January 24, 2008.

In its announcement of the proposed rule, CBP requested comments and feedback from interested parties. Since that announcement, controversy surrounding the proposal has already caused CBP to extend the comment deadline to April 23, 2008.

Affected companies should consider action before the deadline. Two approaches have the best chance for shaping the outcome:

  1. File Comments with CBP. Comments can be filed by individual companies or through a coalition. Comments need not be lengthy or complex, and can cover any number of points from the legal authority to make the change to a description of the practical commercial impact of CBP's proposal.
  2. Ask Congressional representatives to contact CBP. The proposed new rule is not required by U.S. law and would be a change from twenty years of U.S. court decisions and CBP practice. In this environment, comments received at CBP from Senators and Congressmen are likely to make an impression on the agency.

If you have questions, you should contact your Customs attorney and/or government relations advisor. In light of the substantial potential impact of CBP's proposal, companies should make sure their views are heard while the opportunity exists.

Article By:
Greg McCue, Attorney
Steptoe & Johnson LLP

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