Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt Llp

Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt llp

Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt llp

counselors at law

399 Park Avenue
25th Floor
New York, New York 10022-4877
(212) 557-4000
Fax: (212) 557-4415

January 25, 2008

Additional information on cbp’s proposal to eliminate the first sale rule of appraisement

By: Alan R. Klestadt and Erik D. Smithweiss

On January 24, 2008, U.S. Customs and Border Protection (CBP) published a proposed interpretation of the customs valuation laws that would result in the elimination of the so-called first sale rule of appraisement. This memorandum provides additional information concerning CBP’s proposal.

CBP is accepting comments on the proposed interpretation up through March 24, 2008. It is imperative that the trade community participate in the submission of comments to CBP. Parties interested in filing comments are encouraged to contact our office

Background

“Transaction value” is the primary basis of appraising imported merchandise for purposes of assessing customs duties and fees. “Transaction value” is defined under the valuation law as “the price actually paid or payable for merchandise when sold for exportation to the United States,” plus certain additions to that amount. In multi-tiered sales transactions, there is more than one sale that might qualify as a “sale for export to the United States.” In a typical scenario, a U.S. company purchases merchandise from a foreign vendor (“middleman”). The middleman, in turn, purchases the merchandise from a factory located either in the same country or a third country. The goods may be shipped by the factory directly to the U.S. purchaser, or to the middleman’s warehouse, where the goods are sorted, consolidated, etc. In this scenario, there are two sales of the merchandise. The “first sale” is the sale from the manufacturer to the middleman. The second sale is the sale from the middleman to the U.S. purchaser. If the first sale is a “sale for exportation to the United States,” then the price paid in the first sale (plus certain additions) can be declared as the transaction value of the imported merchandise Shortly after Nissho Iwai American Corp v. United States, 982 F.2d 505(Fed. Cir. 1992) was decided, U.S. Customs accepted first sale appraisement where: (1) the transaction between the factory and the middleman is a “sale” of merchandise; (2) this sale is an arm’s length transaction , and (3) the goods are clearly destined for export to the United States as a result of this sale. In Treasury Decision (“T.D.”) 96-87, CBP set forth the evidentiary requirements to be satisfied in order for Customs to accept the first sale as the transaction value of the imported merchandise. There have been subsequent judicial decisions and numerous administrative rulings confirming that the “first sale” may be declared as transaction under the U.S. valuation law.

The current United States valuation law, codified in 19 U.S.C. §1401a, was enacted in 1979, and was intended to implement Article VII of the General Agreement on Tariffs and Trade, the predecessor to the 1994 World Trade Organization (“WTO”) Agreement on Customs Valuation. Under the WTO Valuation Agreement, a Technical Committee on Customs Valuation was established at the World Customs Organization (“WCO”). One of the Technical Committee’s roles is to provide guidance on interpretation of the WTO Agreement for the purpose of achieving uniformity in interpretation and application at the technical level. The Technical Committee’s guidance documents come in the form of advisory opinions, commentaries, explanatory notes, studies or reports. These guidance documents are not binding on members of the WTO, and they do not have the force of law within any member country to the extent that those decisions are not incorporated into the national laws of a WTO member country. As noted above, United States federal courts have ruled on several occasions that 19 U.S.C. §1401a permits first sale transaction value appraisements. Neither U.S. law nor the International Valuation Agreement has been amended since those decisions.

The Revised Interpretation

In July 2007, the Technical Committee of the WCO published a commentary containing an interpretation of the phrase “sold for export to the country of importation.” In this commentary, the technical committee examined a two-tiered sale in which a manufacturer sold goods to a middleman, and the middleman sold the goods to a U.S. purchaser. The Technical Committee concluded that only the last sale prior to importation of the goods (the sale from the foreign middleman to the U.S. purchaser) could satisfy the requirement of transaction value. The Technical Committee reached this conclusion based upon its interpretation of various parts of the Agreement, and based upon its view that it is difficult to verify facts supporting the first sale when the middleman is located in a foreign country. The Technical Committee’s commentary is a non-binding interpretation of the existing WTO Agreement. Significantly, the WTO Agreement did not amend the definition of transaction value which had been in effect since 1979.

In the January 24, 2008 Federal Register notice, CBP proposes to adopt the interpretation of the WCO Technical Committee. Under this interpretation, only the last sale occurring prior to the introduction of the goods into the country of importation would ordinarily qualify as the transaction value of imported merchandise. CBP’s proposal would reverse nearly 16 years of administrative practice and would be directly contrary to federal court decisions such as Nissho Iwai. CBP’s Federal Register notice sets forth a number of justifications for CBP’s revised interpretation. We have reviewed CBP’s proposal and find that the reasons cited by CBP are either legally flawed or factually inaccurate.

For example, CBP argues that the precedent in Nissho Iwai should no longer be followed because that decision had relied to some extent on previous cases decided under the old export value statute. CBP cites the more recent decision in VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), which had criticized the trial court for relying on the “freely offered for sale” standards under the old law.[1] VWP, however, did not involve the phrase “sold for exportation to the United States.” Moreover, the VWP court upheld the first sale as a valid transaction value over the government’s objection.

CBP’s proposal relies heavily on the text of Article 7 of the WTO Valuation Agreement. Article 7 states that under no circumstances can the customs value of imported goods be based upon “the price of goods on the domestic market of the country of exportation.” CBP asserts that the first sale doctrine conflicts with this prohibition because the first sale doctrine often involves a producer selling to a local distributor in the country of exportation. The assertion was also made by the WCO Technical Committee in its commentary. CBP’s argument is factually and legally incorrect. Under the first sale standards established in Nissho Iwai, the first sale within the country of export must be sale “clearly destined for export to the United States.” A sale “on the domestic market” of the country of export is not an export sale, and thus could never qualify as the transaction value under the first sale doctrine. Clearly, Article 7 and the first sale doctrine are fully compatible. Both preclude foreign domestic sales as a basis for customs valuation.

In addition to its misinterpretation of the WTO Valuation Agreement and the decisions issued thereunder, CBP raises many of the same arguments that the courts rejected in reaching their decisions in E.C. McAfee and Nissho Iwai.

Impact on current or planned importations

Companies currently using, or contemplating the use of, first sale appraisements have expressed concern over how quickly CBP’s revised interpretation could be applied to importations. We do not anticipate any short-term change as a result of this proposal. At this time CBP is merely accepting comments on its proposal. Although we cannot predict how CBP at local ports of entry will react to the proposal, there should be no immediate change to the appraisement of imported merchandise. CBP at the ports of entry remain bound by the first sale rule as reflected in T.D. 96-87 until such time as CBP issues a final revocation of the T.D. and similar rulings. This process requires notice, comment, and a delayed effective date of at least 60 days after publication of a final decision. Should CBP adopt its proposed interpretation, it is probable the issue would be contested in the U.S. Court of International Trade.

Companies that are currently relying on the first sale rule, or contemplating using it in the immediate future, should carefully evaluate their individual situations in order to determine how best to manage their transactions while this proposal is pending.

Our office is available to answer questions.

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[1] CBP’s quotation of the VWP case is not correct. CBP lifted unrelated portions of the opinion and re-ordered them to appear as if they are a direct quote from the court.