Importers today are typically being told they're buying directly from the factory, that it's the manufacturer who is selling to you. In fact, you're usually buying through multiple parties, each that's taking its own markup on the goods, adding to the amount of duty paid once the goods arrive in the United States. As a result, importers are trying to reduce U.S. duties by using a "first sale" concept.
Simply stated, the First Sale Rule allows the value entered to U.S. Customs to be based on the purchase price between the middleman and the factory, rather than the middleman and the importer. Importantly, the First Sale Rule may also apply to U.S. imports where the middleman is related to the importer and/or the factory or when there are multiple levels of middlemen. Working back to the price between the actual manufacturer and the immediate buyer substantially reduces the amount of duties, provided that all the appropriate requirements of the customs valuation statute are satisfied. This concept currently may be utilized in both the U.S. and the European Union.
It's not always possible to work backward from your immediate seller to the actual manufacturer. Sometimes the parties in the transaction are afraid of giving away too much information about their markups or are concerned about revealing too much about the parties they do business with. However, even working back one level in the sales transaction can result in significant duty savings. While at times it seems almost impossible to penetrate the wall of silence and obtain the needed pricing information, experience shows that your suppliers are key to overcoming this problem.
When a vendor related to the overseas factory is producing the goods, looking closely at the way they work together and share expenses can reveal additional duty savings beyond those available through the first sale concept. With the hypothetical savings in the equations below as a guide, plug in your own figures to find out your potential savings:
- $5 million in U.S. imports from a vendor that currently earns a 15 percent margin on its purchase from a related factory = $750,000 X 20 percent U.S. duty rate = $150,000 annual duty savings.
First Sale and Cost Shifting
- $5 million in U.S. imports from a vendor X 20 percent margin to related factory = $1 million X 20 percent U.S. duty rate = $200,000 in annual duty savings.
As is usually the case, it's critical that a first sale transaction be carefully developed. However, with careful planning and coordination with your overseas suppliers, it's a goal that can be achieved. It's an incredible opportunity to create both duty and tax savings and something that every company importing into the U.S. should be considering.